S.2(15) : Charitable purpose – Activities carried out by Trust for providing employment to rural poor cannot be held as commercial activities
The assessee-trust contemplates to organize milk societies for facilitating sale of milk; the underlying intention is to get good price for the milk sold by the villagers and also to encourage them to rear their own milch animals. The villagers can earn a decent livelihood by engaging themselves in rearing of milch animals and selling of milk without middlemen and exploitation, through the societies formed under the guidance of the assessee trust. This is the same case with other proposed activities like ginning, spinning, fruit processing etc., where labour of the village women-folk can be fruitfully deployed, to keep away exploitation. The Hon’ble Appellate Tribunal held that the economic activities in the above nature cannot be treated as activities in the nature of trade, commerce or business as contemplated in proviso to section 2(15). Therefore, we find that the Director of Income-tax (Exemptions) has characterized the activities of the assessee trust as commercial in nature without going into the circumstances in which the activities are contemplated to be carried on by the assessee trust. (ITA No. 2104 of 2013 dated 10-11-2014)
Thamizh Thai Seva Trust v. DIT (2015) 67 SOT 166 (URO) / 53 taxmann.com 215 (Chennai)(Trib.)
S. 2(15) : Charitable purpose – Advancement and development of trade, commerce and industry in India, income earned from incidental activities eligible for exemption under section 11. [S.11, 12A]
Assessee Association was set up for the purpose of promotion and protection of Indian Business & Industry and was registered u/s. 12A. The purpose for which the Assessee Association was established is a charitable purpose within the meaning of section 2(15). The assessee is carrying out activities which are incidental to the main object of the Association and which are conducted only for the purpose of securing the main object which is the advancement and development of trade and commerce and industry in India. The activities are not in the nature of business and there is no motive to earn profit. Thus, the incidental activities were well covered by the section 2(15) and were thus ‘charitable’ in nature. In such an eventuality, the application of the section 11(4A) which applies only to business activities stands absolutely negated Thus the income of the assessee is exempt from tax under section 11.(ITA No 1284 & 1491 dated 2-12-2014) (AY. 2008-09)
Indian Chamber of Commerce v. ITO(E) (2014) 52 taxmann.com 52 / (2015) 67 SOT 176 (URO) / 167 TTJ 1 (Kol) (Trib.)
S. 5 : Income – Accrual of income outside and in India – Stock option – Not-ordinary resident – Only that portion of stock awards and stock option transfer proceeds which are attributable to services rendered in India can form part of total income of the relevant assessment year of the assessee who is not ordinarily resident –DTAA – India-USA [S.9(1)(ii), 147, 148, Art 16]
Assessee is an individual employed with M/s. Microsoft India (R & D) Hyderabad. The Assessing Officer reopened the assessment under section 147 by issuing notice under section 148. In response to the notice the assessee filed a letter requesting to treat the return filed originally as a return in response to notice under section 148. The Assessing Officer made the addition of the amount of Rs. 1,49,80,713/- being the stock award / SOTP. The CIT(A) confirmed the addition made by the Assessing Officer.
The Tribunal remitted the matter to the Assessing Officer for taking a fresh decision and held that only that portion of stock awards and stock option transfer proceeds which are attributable to services rendered in India can form part of total income of the relevant assessment year of the assessee who is not ordinarily resident. (ITA No. 220/Hyd./2014 dated 21-1-2015) (AY. 2007-08)
Anil Bhansali v. ITO (2015) 168 TTJ 412 / 115 DTR 132/53 taxmann.com 367 (Hyd.)(Trib.)
S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Followed order of Co-ordinate Bench of Tribunal in the earlier assessment year – Amount received by assessee from providing data processing support service to an Indian bank – Taxable as ‘fee for technical service’- Matter remanded back to the Learned A.O. for disposal afresh [Art.12 of Model OECD Convention)
Assessee is a Hongkong based company entered into a contract for providing data processing support service to an Indian bank. The Hon’ble co-ordinate Bench of Tribunal in view of fact that question as to whether payment made by Indian bank for services amounted to ‘fee for technical service’ has been remanded back to the Assessing Officer in earlier years. Thus, following the said order of Tribunal for earlier year, the Hon’ble Appellate Tribunal remanded the matter back to the Assessing Officer for the present assessment year. (ITA No.7321 of 2012 dated 19-11-2014)(AY. 2009-10)
Atos Information Technology HK Ltd. v. ADIT (2015) 67 SOT 174 (URO / 53 taxmann.com 222 (Mum)(Trib.)
S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services On the basis of protocol to DTAA between India and Sweden, Swedish company can claim fee for technical services received from its Indian subsidiaries as tax-exempt, even if ‘make available’ condition is not satisfied on basis of India-Portuguese DTAA on the principle of most favoured nation clause – DTAA – India-Sweden [Ss. 5, 90, Art.12]
The assessee was a tax resident of Sweden and was not having Permanent Establishment in India. The dispute was in respect of the payment received by the assessee company from its Indian subsidiaries. The claim of the assessee was that the assessee received the said payment from its Indian subsidies for rendering the services which are in the nature of commercial, management, marketing and production services.
India entered into a DTAA with the Sweden which was notified vide Notification No. GR 705/E dated 17-12-1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b). It is a very conservative definition and there is no condition that the technical services should be made available.
India also entered into the treaty with Portuguese Republic which was notified vide Notification No. GR F42/E, dated 16th June, 2000. In the said Treaty, mode of taxation of the fees for technical services (FTS) between two countries is also provided in the Article 12 but instead of fees for technical services the expression used is “fees for included technical services”. As per the Article 12(4) fees for included services means payment of fees of any kind other than those mentioned in Articles 14 and 15 of the said treaty, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personal) if such services —
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment describe in para No. 3 is received or
(b) make available technical knowledge, expressions, skill, knowhow or process, or consist of the development and transfer of technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.
The argument was that considering the principle of most favoured nation (MFN) clause in treaty between India and Portuguese, unless a condition of make available the technical knowledge or skill or services is fulfilled, then said payment cannot be taxed in source country, i.e., India. [Para 9]
An MFN clause refers to a situation wherein two non-resident tax payers are given impartial treatment by the concerned country. In DTAAs, MFN clause find place when countries are reluctant to forego their right to tax some elements of the income. An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, the same category of matter or the same clause of the matter. The protocol attached to the treaty take care of a situation where in cases either of the contracting States enter into a bilateral agreement into the nature of DTAA with the another sovereign State and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax then the parties can claim the benefit on the recognized principle of MFN clause.
On the basis of the protocol to the DTAA between the India and Sweden, the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portuguese. Therefore, on the principle of the most favoured nation (MFN) clauses the payment received by the assessee – company from its Indian subsidies cannot be brought to tax.
ITA No. 1720 dt. 28-11-2014) (AY. 2007-08)
Sandvik AB v. DDIT (IT) (2014) 52 taxmann.com 211 / (2015) 67 SOT 297 (URO) / 167 TTJ 217 (Pune (Trib.)
S. 10A : Free Trade Zone – Total income – Deduction to be given at the stage of computation of profits and gains of business at the first instance – Order of CIT (A) allowing the loss was affirmed. [S.72]
The assessee had two STPI units eligible for claiming deduction u/s. 10A of the Act. The assessee set off total profit from domestic business against the loss from the non STPI unit and the balance loss was claimed as carry forward. The AO observed that the deduction u/s. 10A of the Act, should be restricted to the profit of the unit eligible for deduction u/s. 10A of the Act and the total income have been shown at nil instead of claiming of loss. This issue is covered by the Judgment of Hon’ble Jurisdictional High Court in the case of Commissioner of Income-tax v. Black & Veatch Consulting (P.) Ltd. (348 ITR 72), wherein it was held that section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in Hindustan Unilever Ltd. v. Dy. CIT  325 ITR 102 / 191 Taxman 119 (Bom.). The deduction under section 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. (ITA No. 7033/Mum/2012, dt. 25-3-2015) (AY. 2007-08)
Aditya Birla Minacs Worldwide Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 10B : Export Oriented Undertakings – Unabsorbed depreciation – Deduction is available without setting off unabsorbed depreciation of other unit. [S.10A]
The revenue has filed the appeal before the Tribunal and raised the question that the Hon’ble DRP erred in directing the Assessing Officer to allow deduction under section 10B of the Act in respect of its Goa unit without setting off unabsorbed depreciation of another eligible unit. The revenue prayed that the order of DRP be set aside and the order of Assessing Officer be restored.
The Tribunal followed the decision of Hon’ble Bombay High Court in the case of CIT v. Black & Veatch Consultancy Pvt. Ltd. (2012) 348 ITR 72 (Bom.) where it was held that the brought forward unabsorbed depreciation and losses of the unit the income which is not eligible for deduction under section 10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under section 10A of the Act. The Tribunal dismissed the appeal filed by the Department. (ITA No. 1565/Mum./2014 dated 9-1-2015) (AY. 2009-10)
Dy. CIT v. Watson Pharma P. Ltd. (2015) 168 TTJ 281 / 38 ITR 97 / 115 DTR 65 / 54 taxmann.com 88 (Mum.)(Trib.)
S. 11 : Property held for charitable purposes – Business income – Trade associations – Receipts from specific services to members without any profit motive entitled to exemption. [Ss. (2(15), 28(i)]
Assessee Association undertook activities like conducting Environment Management Centres, meetings, conferences and seminars and issuance of certificate of origin. The revenue authorities denied assessee’s claim for exemption of income under section 11 for the reason that the activities of assessee association was hit by the newly inserted proviso by the Finance (No. 2) Act in section 2(15) with effect from 1-4-2009 and thereby falling under section 28(iii) being profit of business. It was held that where the main object of the Institution was ‘charitable’ in nature, then the activities carried out towards the achievement of the said, being incidental or ancillary to the main object, even if resulting in profit and even if carried out with non-members, were all ‘charitable’ in nature. The basic principle underlying the definition of ‘charitable purpose’ remained unaltered even on amendment in the section 2(15) with effect from 1-4-2009, though the restrictive first proviso was inserted therein. Assessee Association was eligible for exemption u/s 11.(ITA No. 1284 & 1491 dated 2-12-2014) (AY. 2009-10)
Indian Chamber of Commerce v. ITO(E) (2014) 52 taxmann.com 52/(2015) 67 SOT 176 (URO)/167 TTJ 1 (Kol) (Trib.)
S. 12A : Registration – Trust or institution – Fee charged – Entitle registration. [S.2(15)]
The assessee is a welfare and non-profitable organization set up by the Indian Army. The assessee was denied the registration on the ground that the assessee is charging fee from the members who register themselves with assessee. It is purely a commercial activity and violation of section 2(15) of the Income-tax Act. The Tribunal found that the fees for registration is a one time fee and it is barely enough to meet even partial costs of running this establishment and the fact that such a nominal fee is charged from the registrars cannot change the fundamental character of this charitable activity. The Tribunal held that the assessee is entitled to registration under section 12A. (ITA No. 2996/Delhi/2011 dated 22-1-2015)
Army Welfare Placement Organisation v. DIT (E) (2015) 168 TTJ 588 /53 taxmann.com 442 (Delhi)(Trib.)
S. 12A : Registration – Trust or institution – Assessee’s plea that poor patients do not come forward to avail of free medical treatment is not believable. The overall conduct of the assessee suggests that it is conducting its affairs in a commercial manner & not in a charitable manner – Cancellation of registration was held to be justified. [S. 2(15), 11, 12AA]
The Tribunal had to consider whether the DIT(E) was justified in canceling the registration of the assessee u/s. 12A on the ground that it was not carrying out its main objects and that the objects that were being carried out were not charitable in nature but were commercial in nature. HELD by the Tribunal upholding the cancellation:
(i) The assessee could not demonstrate before us that it has undertaken any research work as per the main object. The assessee could not even establish that it has undertaken activities in consonance with the objects incidental or ancillary to the attainment of the main object as detailed in the memorandum of association. The registration for exemption under section 12A is granted by the DIT(E) on the basis of objects as detailed in the memorandum of association. The assessee is bound to carry on its activities in accordance with the objects. In case the assessee, at a later date, after the registration granted to it, considers it expedient to undertake some other activity which is charitable in nature, it is obliged under the law to amend its objects clause in accordance with law and to submit the same before the DIT(E). No such exercise was undertaken by the assessee of amending its main object by the assessee-society. As the assessee has not undertaken its activities in accordance with the objects, it is not entitled to the benefit of exemption under section 12A of the Act and the exemption was rightly cancelled by the DIT(E).
(ii) On merits, the assessee has not undertaken any activity worth the name, which can be said to be charitable activity. The assessee obtained prime land in an expensive area on perpetual lease at a nominal rent on the condition of providing 10% totally free indoor treatment and 20% free OPD for the weaker sections of the society. Admittedly, the assessee could not comply with this condition and has not provided the required number of beds to the poor and weaker sections of the society. The plea of the assessee that the poor people do not come forward and avail free medical services, the assessee could not be blamed, is not sustainable. It is a matter of common knowledge that the poor patients are not given admission for treatment by private hospitals as they cater to only the elite class of the society. These private hospitals have been made in a five star style and they do not allow even the entry to the poor people in its corridors. In the government hospitals, the poor patients are lying in verandahs and in open space in wait for their turn for admission for days together and it is not believable that they will not come forward for treatment in the hospital providing all modern facilities free of cost.
(iii) Also, the assessee could not make charity to a commercial organisation, although not connected with it, by paying exorbitant amounts totalling to about Rs. 40 crores in a year and should have spent the amount in a charitable manner for the deserving sections of the society. The conduct of affairs of the assessee-society are not on charitable lines and were clearly on commercial lines. The rate schedule of its charges from the patients for diagnosis, treatment or indoor facilities including surgery etc. are exorbitant and one of the highest in the metro capital city of New Delhi. We have to see the overall conduct of the assessee and, in this case, the overall conduct of the assessee leads to the only conclusion that the assessee-society is not running its affairs in a charitable manner.(ITA No. 1027/Del/2012, dt. 31-3-2015)
Devki Devi Foundation v. DIT(E) (Delhi)(Trib.); www.itatonline.org
S.12AA : Procedure for registration – Trust or institution – Objects – larger number of objects in trust deed – not disentitled assessee from claiming status of a charitable trust.[S.2(15)]
The Hon’ble Appellate Tribunal held that the Assessee shall not disentitle from claiming status of a charitable trust merely because larger numbers of objects are stated in the trust deed and it is only sufficient to look into whether actual activities carried on by the assessee trust are coming under any of the objects stated in its trust deed. Thus, the present ground raised by the Director of Income-tax (Exemptions) is not sustainable in law.(ITA No. 2104 of 2013 dt. 10-11-2014)
Thamizh Thai Seva Trust v. DIT (2015) 67 SOT 166 (URO)/53 taxmmann.com 215 (Chennai)(Trib.)
S. 12AA : Procedure for registration – Trust or institution – Assessee complied with all conditions necessary for grant of registration under section 12AA – assessee is only a single entity but consisted of different colleges/institutions, operating under such single entity, registration under section 12AA is to be granted.[S. 2(15), 12A]
Assessee, a private limited company, applied for registration under section 12AA. The Ld. DIT(E) held that as per statutory Form No. 10A and also under sections 12A and 12AA Assessee has to be single institution i.e, single entity and since name of assessee-company indicated a cluster of institutions, registration is refused. The Hon’ble Appellate Tribunal held that once Commissioner is satisfied about genuineness of activities of trust and objects of trust, he shall grant registration. Since Assessee had complied with all conditions necessary for grant of registration under section 12AA and since ‘institutions’ was used as singular noun rather than to bring more than one entity and also that assessee is only a single entity but consisted of different colleges/institutions operating under such single entity, therefore the Ld. DIT(E) is directed to grant registration to Assessee company under section 12AA.(ITA No. 1338 of 2014 dt. 28-11-2014)
Mahindra Educational Institutions v. DIT (2015) 67 SOT 169 (URO)/53 taxmann.com 156 (Hyd.) (Trib.)
S. 12AA : Procedure for registration – Trust or institution – Cancellation of registration was held to be not justified. [S. 2(15), 12A]
The assessee filed appeal before the Tribunal challenging the cancellation of the registration granted to it under section 12A by the Director of Income Tax (Exemption) vide his order passed under section 12AA(3) r.w.s. 12A of the Act.
The Tribunal held that the twin conditions mandatorily required for invoking the jurisdiction under section 12AA(3) to cancel the registration granted under section 12A do not exist in this case as the director himself has accepted in his order that the assessee is carrying on an activity of ‘general public utility’. The revenue has not disputed the charitable nature of the activity of the assessee. The Tribunal also held that the receipts (booking charges, health club charges, sponsorship money, sale of tickets, advertisements) are intrinsically related, interconnected and interwoven with the charitable activities and these receipts resulted in subsidizing the cost of the assessee and there is no profit motive. The Tribunal quashed the order cancelling the registration under section 12AA(3). (ITA No. 3095/Del./2012 dt. 13-1-2015)
Delhi & District Cricket Association v. DIT (2015) 168 TTJ 425/115 DTR 217 (Delhi)(Trib.)
S. 12AA : Procedure for registration – Trust or institution – Charitable purpose – Appellate Tribunal – Rectification of mistake – The issue of withdrawal of S. 11 exemption in the light of S. 2(15) amendment is contentious and requires decision by larger Bench of the ITAT – Matter referred to Honourable President to constitute a larger Bench. [S.2(15), 11, 12A, 254(2), 255(4)]
The assessee’s case was that the sole and the only reason for the Revenue in withdrawing its registration u/s. 12A of the Act as a charitable institution, granted on – 22-7-2002, with effect from assessment year (AY) 2009-10, is the invocation of section 2(15), i.e., read with proviso thereto, effective from the said assessment year, contending that the proviso to section 2(15) is applicable to it and, therefore, it is no longer a charitable institution. The assessee appealed thereagainst, contesting the said withdrawal (u/s.12AA(3)) on both counts. Firstly, the proposition per se that informs the withdrawal under reference, so that an application of proviso section 2(15) would itself operate to be a ground for the withdrawal of registration (per Gd. #1). HELD by the Tribunal:
We may next proceed to decide the assessee’s Ground #1, raising the issue of the legal consequence/s of the applicability of proviso to section 2(15) on the registration of an entity as a charitable institution. The arguments of both the parties stand listed in detail at paras 3.1 to 3.4 of the order dated 31-12-2013, which would continue to hold, and shall therefore form part of this order, as indeed shall the other parts of this order, save as not specifically modified or withdrawn per this order. Both the parties have, as shall be evident therefrom (refer paras 3.1 & 3.4) relied on several decisions by the Tribunal. No doubt, the assessee has relied on one decision by the Hon’ble High Court [CIT v. Sarvyodaya Ilakkiya Pannai  343 ITR 300 (Mad)], but then the said decision stands also considered by the Tribunal in the case of Entertainment Society of Goa v. CIT  23 ITR (Trib.) 636 (Panaji), relied upon by the Revenue, holding, with reference to decision by the Hon’ble jurisdictional High Court in CIT v. Thane Electricity Supply Ltd.  206 ITR 727 (Bom), the decision by the non-jurisdictional high court as not binding. The rule of precedence, in case of conflicting views by the High Courts, none of which is jurisdictional, is for the Tribunal to follow that which appeals to its conscious. In our considered opinion, therefore, the appropriate course under the circumstances, even as indicated during the hearing in the instant proceedings – to no objection by either party, is that the matter be referred to the Hon’ble President of the Tribunal for constituting a larger bench of the Tribunal to decide the highly contentious issue raised by the assessee’s Ground No.1, decided differently by different co-ordinate benches of this Tribunal, for uniform application across the Tribunal, of course after hearing the parties. The statement of the case for the purpose of the said reference, is in our view as listed per para 3 of the Tribunal’s order dated 31-12-2013, delineating the respective cases of both the sides. The larger bench of the Tribunal, in the case the reference made hereby is accepted by the Hon’ble President, shall, apart from the other arguments and case law as may be canvassed before it by the parties, consider the same. We support our decision for the reference aforesaid, apart from the clear provision of section 255(4) of the Act, on the settled law on precedence as explained by several celebrated decisions in the higher courts of law, as for example in the case of CIT v. B.R. Constructions  202 ITR 222 (AP)(FB). Matter referred to the Hon’ble President for constituting a larger Bench to decide the ground No. 1.(ITA No. 625/M/2012, dated 10-4-2015) (A. Y. 2009-10)
Mumbai Metropolitan Region Development Authority v. DIT(E) (Mum.)(Trib.); www.itatonline.org
S. 14A : Disallowance of expenditure – Exempt income – Book profit – Adjustment of income was held to be not justified.[S.115JB]
The Tribunal held that the assessee may have accepted disallowance u/s. 14A but once it was settled in light of the law laid down by High Court in CIT v. Holcim India Pvt Ltd [2014 TIOL 1586 HC DEL IT], that there cannot be any disallowance under section 14A unless there is corresponding exempt income and assessee had no such exempt income, adjustment under clause (f) of Explanation to section 115JB (2) could not indeed be made. The adjustment had to meet tests of law and what cannot be considered to be ‘expenditure relatable to exempt income’ under law, cannot be subjected to adjustment either. there is no estoppel against law. The fact that mere assessee had accepted this disallowance affects that disallowance only and nothing more than that; it does not clothe such an adjustment, in computation of book profit under section 115JB, with legality. There was no dispute that there was no corresponding tax exempt income. Therefore, adjustment in question was indeed unsustainable in law. Hence it is directed to AO to delete impugned adjustment. (dated 9-1-2015) (A.Y. 2009-10)
Minda Sai Ltd. v. ITO (2015) 167 TTJ 689/ 114 DTR 50 (Delhi)(Trib.)
S. 14A : Disallowance of expenditure – Exempt income – Growth mutual funds do not yield dividend and so s. 14A/ Rule 8D does not apply – Disallowance for administrative expenses cannot exceed allocable expenditure debited to P&L A/c.[R.8D]
Tribunal held that (i) Growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds.
(ii) As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly, the AO is directed to reconsider the disallowance u/s. 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debited by the assessee in the P&L Account which can be allocated in relation to earning the exempt income. (ITA No. 4761/Mum/2013, dated 25-3-2015) (A. Y. 2008-09)
Manugraph India Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 22 : Income from house property – Renting of terrace – Amount received from cellular companies for renting out of the terrace for installation of mobile antenna – Assessable as income from house property and not as income from other sources.[S.56]
Allowing the appeal of the assessee Tribunal held that the rent was not for antenna but for space for installation of antenna . Therefore what was relevant was the space which had been rented out and the space was part of building ,hence the rent was to be assessees as income from house property and not as income from other sources. (ITA No. 3976/Del/2013 dated 6-1-2015)(AY. 2009-10)
Manpreet Singh v. ITO (2015) Chamber’s journal-February – P. 82 (Delhi)(Trib.)
S. 24 : Income from house property – Deduction – Interest – Interest payable to sundry creditors who supplied material for construction of property is an allowable deduction.[S. 22, 24(b)]
Allowing the appeal of the assessee the Tribunal held that the true nature of relationship has to be considered and restrictive meaning cannot be assigned to the term “borrowed capital” in section 24(b) of the Act. If there is direct nexus between the interest payment and construction of property, which in the present case was through creditors because they had supplied material for construction, the said interest would come within the ambit of section 24(b) of the Act and interest paid to sundry creditors who supplied material for construction of property was an allowable deduction under section 24(b) of the Act. (ITA No. 1824/ 3473/Del/2010 dt. 31-10-2010(AY. 2005-06, 2007-08)
Jyoti Metal & Allied Industries (P) Ltd. v. ITO (2015) Chamber’s Journal-February- P. 82 (Delhi)(Trib.)
S. 28(i) : Business income – Income from house property –Developing malls and business centre on property owned by it – Letting out the same also providing various facilities in the said business centre – Assessable as business income. [S. 22]
Dismissing the appeal of revenue the Tribunal held that merely because income is attached to a property it cannot be sole factor for assessing the income as income from house property, it has to be seen that as to what was the primary objective of the assessee while exploiting the property, if the property is let out simply the income is assessable as income from house property. However, if the property is exploited in a commercial manner then the income therefrom is assessable as business income. In the present case the assessee had developed shopping malls/business centres on properties owned by it and let out the same by providing various services/facilities /amenities in the said mall/business centres, it can be said the basic intention of assessee was commercial exploitation of its properties by developing them as shopping centres. Thus, the income was assessable as business income. (ITA No. 4891/M/2008/6635/M/2009/ 126-128 /M/ 2010/7636 /M/2012 dated 21-1-2015) (AY. 2001-02, 2002-03, 2004-05, 2006-07 & 2009-10)
ACIT v. Steller Developer (P) Ltd. (2015) Chamber’s Journal-March – P. 141 (Mum.)(Trib.)
S. 32 : Depreciation – Using vehicles for transporting goods on hire – Entitled for depreciation at rate of 30 per cent according to CBDT Circular No. 609 dated 29-7-1991
Assessee is engaged in the business of transportation of municipal waste. During the impugned assessment year assessee claimed depreciation at rate of 30 per cent on vehicles used for commercial purposes. The Assessing Officer allowed depreciation at 15 per cent as against 30 per cent claimed by the assessee. The Hon’ble Appellate Tribunal held that when there is commercial exploitation of vehicles for transporting goods on hire, the nature of assessee’s business has been fall under ambit of Circular No. 609 dated 29-7-1991. Thus the assessee is entitled for depreciation at rate of 30 per cent. (ITA No. 261 of 2014 dt 21-11-2014) (A.Y.2009-10)
C.V. Bhanumurthy Reddy v. DCIT (2015) 67 SOT 154 (URO)/53 taxmann.com 110 (Bang) (Trib.)
S. 40(a)(ia) : Amounts not deductible – Deduction at source – Merilyn Shipping 136 ITD 23 (SB) should be followed in view of approval by Allahabad HC and dismissal of SLP by Supreme Court. In any event as two views are possible, view in favour of assessee should be followed. Amounts already paid without TDS cannot be disallowed
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. The ITAT Chennai Benches have taken into consideration the decision of the ITAT Special Bench in the case of Merilyn Shipping & Transport 136 ITD 23 (SB), the order of which was suspended by the High Court but at the same time there was a subsequent judgment 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 v. M/s. Eskay Designs – ITA No.1951/Mds/2012 dated 9-12-2013. ii. ITO vs. Theekathir Press – ITA No. 2076/Mds/2012 & CO No. 155/Mds/2013 dated 18-9-2013. 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. Hon’ble Allahabad High Court in the case of CIT v. 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 2-7-2014 in CC No.8068/2014 have dismissed the SLP. In view of above discussion, the decision relied upon by learned 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. (ITA No. 2293-2294/Mum/2013, dt. 4-3-2015) (AY. 2005-06, 2006-07)
Jitendra Mansukhlal Shah v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 40(a)(ia) : Amounts not deductible – Deduction at source – If an amount becomes taxable due to a retrospective amendment, payments prior to the amendment cannot be disallowed for want of TDS – DTAA – India-China-Singapore.[S. 5A, 9(1)(i)(vii), 195, Articles 8, 12]
It is an undisputed fact that the Finance Act, 2010 received the assent of the President on 8-5-2010 and all the payments have been made by the assessee to the non-resident party prior to receiving of assent of the President making the retrospective amendment by adding explanation to sec. 9(1). At the time when the assessee made the payment there was no provision u/s. 9(1) making the technical fees deemed to accrue or arise in India whether or not (a) the non-resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. It is not disputed by the learned DR that the non-resident did not have residence or place of business or business connection in India. The non-resident has also not rendered services in India. The source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the assessee made the payment as there was no provision under sec. 9(1), the income received by the non-resident as per the existing law at the time when the assessee made the payment, in our opinion, was not taxable in India under the Income-tax Act. Prior to the insertion of explanation to sec. 9(1) by the Finance Act, 2010 with retrospective effect, the professional and consultancy services even though rendered outside India were not deemed to accrue or arise in India irrespective of the fact whether the party who rendered the services is having place of residence or place of business in India. It is only due to the retrospective amendment made by the Finance Act, 2010 that the position has become clear. If the income was not taxable in India it cannot be made taxable in view of the tax treaty. This is a fact that as argued by the learned AR the retrospective amendment brought by the Finance Act, 2010 was not in existence at the time when the assessee had made the payments. The assessee cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged.(ITA No. 145/PNJ/2014, dated 16-3-2015) (AY. 2010-11)
ACIT v. Ajit Ramakant Phatarpekar (Panaji)(Trib.); www.itatonline.org
S. 40(a)(ia) : Amount not deductible – Deduction at source – Paid or payable – Merilyn Shipping 136 ITD 23 (SB) cannot be followed but Question whether the second proviso to s. 40(a)(ia) is retrospective or not requires to be considered by the AO – Matter remanded. [S. 201(1)]
Though the issue as to whether disallowance u/s. 40(a)(ia) can be made only in respect of amounts that are “payable” as at the end of the year or whether it can also be made for amounts “paid” during the year has to be decided against the assessee (as the Special bench verdict in Merilyn Shipping and Transport Ltd. 136 ITD 23 (SB) has not been approved by some High Courts, the legal argument that the second proviso to section 40(a)(ia) of the Act (which was inserted by the Finance Act, 2012 w.e.f. 1-4-2013 to provide that the disallowance u/s. 40(a)(ia) of the Act would not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act) is retrospective in nature as it has been introduced to eliminate unintended consequences which may cause undue hardships to the taxpayers requires to be restored to the file of the Assessing Officer for consideration.(ITA No. 1372/PN/2013, dt. 18-3-2015) (AY. 2010-11)
ACIT v. Bhavook Chandraparakas Tripathi (Pune)(Trib.); www.itatonline.org
S. 43(5) : Speculative transaction – Derivative – Foreign currency and call/put options – Derivatives include foreign currency and call/put option transactions of derivative markets which cannot be termed as speculative in nature.[Securities Contracts (Regulation)Act, 1956, S. 2(ac)]
On appeal by the assessee the Tribunal considering Rajasshree Sugar & Chemicals Ltd v. Axis Bank Ltd. [AIR (2011) Mad 144] has held that term derivative to include foreign currency as underlying security of the derivative. It also considered meaning of term ‘derivative’ as explained in the section ‘Frequently Asked Questions’ on the website of SEBI. On going through the copes of the contract notes, it found that the assessee had entered in to either a call option or put option and on the settlement day, the transaction has been settled by delivery. Either assessee has paid US Dollar on the settlement day or has taken delivery of the US Dollar. Accordingly the Tribunal held 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. Loss incurred by the assessee was held to be not speculative in nature. (ITA No.4798 /Mum/2012 B. “A”) dt. 13-2-2015) (AY. 2009-10)
IVF Advisors Pvt. Ltd. v. ACIT (2015) March-BCAJ –P. 28 (Mum.)(Trib.)
S. 44BB : Mineral oils – Computation – Assessment – Revised figures of contract receipts – AO was directed to determine the correct receipts from contracts. [S. 143]
The assessee revised the figures of receipts from two contracts during the assessment proceedings. The Assessing Officer rejected the assessee’s claim against receipts from ONGC on technical ground and did not go into the question of correct receipts. The Assessing Officer refused to accept the downward revision of receipts from the contract and accepted upward revision of receipts from the contract. The Tribunal set aside the order and directed the Assessing Officer to determine the correct receipts from the contract and thereafter apply section 44BB. (ITA No. 3348/Delhi/2013 dt. 19-12-2014) (AY. 2010-11)
ADIT v. Global Geophysical Services Ltd. (2015) 168 TTJ 265/68 SOT 86 (URO)/54 taxmann.com 166 (Delhi)(Trib.)
S. 45 : Capital gains – Short- term gains – Business income – Investment in shares – Consistently showing the shares as investment – Assessment as short-term gains was held to be justified. [Ss. 2(42C), 28(i), 48]
The decision to hold shares as Rs.Investment’ or Rs.Stock-in-trade’ depends on a host of factors. There can be no single criteria to decide the nature of shares purchased. In fact, it is the cumulative effect of all the relevant factors, which is taken into consideration for reaching a conclusion as regards the nature of shares and the resultant income arising from their transfer. There may be some factors indicating the purchase of shares as investment, while others may point towards stock-in-trade. It is the holistic consideration of all such factors which is kept in view while deciding as to whether the shares purchased by the assessee constituted stock-in-trade or investment. On facts, the factors in favour of holding the purchase of shares as investment are:
(i) The argument of the DR that the assessee entered into such shares at a time when they were at the lowest price and hence there could be no possibility of making Investment, cannot be considered as decisive for holding such shares as stock-in-trade. A person may think of making investment in the shares of a company at a price which is quite low and, then, maintain position in it for a period by allowing it to prosper. There is no rule of purchasing shares as investment only when the price of shares of a company is at the peak.
(ii) The assessee firstly purchased all the shares of Satyam Computers over a period of time and, thereafter, started their disposal. There is no frequent in and out of these shares.
(iii) It is manifest that the assessee had the initial intention to hold these shares as Rs.Investment’ which is discernible from the fact that these were entered into the Rs.Investment register’ maintained u/s. 372A(5) of the Companies Act, 1956 at the time of their purchase. This is another reason to show the assessee’s intention of holding shares in Satyam Computers as investment ab initio.
(iv) Another factor which is of paramount importance is the assessee’s contention that these shares were purchased out of the assessee’s own funds without making any borrowing.
(v) It is an undisputed fact that the assessee took delivery of such shares after making full payment and it was not a case of settling the transaction of purchase and sale of such shares during the settlement period itself. This is another reason to indicate that the intention of the assessee to hold them as Investment.
(vi) Another factor which needs to be mentioned is that the assessee was consistently holding some other shares as investment over a period of time and was regularly earning income from their sale by declaring profit as ‘Short-term capital gain’ or ‘Long-term capital gain’ depending upon the period of their holding. There is no doubt that shares of Satyam Computers were not purchased or treated as Investment in any of the earlier years, but at least this factor shows that the assessee was also engaged in the purchase of shares as Investment and showing profit from their sale under the head Rs.Capital gains’.
(vii) The assessee has placed on record a copy of the assessment orders for immediately preceding assessment year in which there was ‘Short-term capital gain’ of Rs. 17.21 crore which has been accepted by the AO. Similarly, there is an order passed u/s 143(3) for assessment year 2006-07 accepting that the assessee was engaged in the business as well as in investment of shares. It is manifest that there is no alteration in the character of income shown by the assessee. The principle of consistency in terms of the assessee holding shares as stock-in-trade as well as investment, cannot be lost sight of. Order of CIT(A) assessing the gains as short term gains was affirmed.(ITA No. 106/Del/2014, dt. 10-3-2015) (AY. 2010-11)
DCIT v. Rajasthan Global Securities Ltd. (Delhi)(Trib.); www.itatonline.org
S. 56 : Income from other sources – Company – Book profit –Deemed dividend – Gift received by company – Company, if authorized by the memorandum of Association and Articles of Association are competent to make and receive gifts. Natural love and affection is a not necessary requirement for a gift. The gift is neither taxable as income s. 56 (pre-amendment) nor as capital gain nor as income u/s.2(22)(e) nor u/s.115JB [S.2(22)(e), 2(24), 45, 115JB]
(i) As per the provisions of law prevailing during the year under consideration, the gift received by one corporate body from another corporate body do not come under the ambit of income as contemplated u/s. 2(24) of the Act or any other provisions of the Act. The gift received are a voluntary payments made by the donors to the assessee. Neither the assessee has any legal right to claim the gift from the donor nor donors have any legal or contractual obligations to give gift to the assessee. The gifts received by the assessee was a voluntary payments made by the donor, without consideration to the assessee. The gift received has nothing to do with the business of the assessee so as to constitute its income from business or a revenue receipt in the nature of income.
(ii) The suspicion of the AO that the transaction of gift is dubious and to bring into books any unaccounted money is contrary to the facts on record. Insofar as admittedly the gifts have been received on account of dividend by the donor companies from the Reliance Industries Limited. The Reliance Industries Ltd. have also paid dividend distribution tax, therefore, such money received by the assessee is not unaccounted money. The AO has not brought any evidence on record contrary to the claim of the assessee. Even during appellate proceeding, the CIT(A) has given opportunity to the AO, in the remand report also, the AO could not rebut the claim of the assessee on the basis of any contrary evidence on record. Hence, the claim of assessee cannot be rejected merely on the basis of doubt or suspicion.
(iii) With regard to AO‘s objection regarding motive behind the transaction, the A.O. has stated in para 8 of the assessment order that it could not ascertain the exact nature or motive behind the transaction because of limited time and resources available, whereas, the case was remanded to the A.O. by CIT(A) and an opportunity was again given with the specific direction to find out the nature and motive behind these transactions or gifts, whereas, A.O. could not find out any other motive behind such transactions and merely stated in the remand report that assessee has not furnished any clear and distinctive motive with regard to these transactions and the exact nature and motive is best known to the assessee. But merely blaming the assessee that it is not furnishing the correct motive is putting the cart before the horse. Whereas case of the assessee is that it has received these amounts as gifts, therefore, it is for the AO to bring on record any other contrary motive and if he fails to do so then there is no alternative but to accept the claim of the assessee that these are gifts.
(iv) With regard to the AO‘s objection regarding gift deed, we found that the A.O. has held that these transactions cannot be treated as gifts because there are no gift deeds and because they have not been specifically accepted, whereas, there is no such legal requirement for making a gift. Even by simple delivery the gift can be made of an amount or cheque or other movable property. Whereas, in the case of the assessee, letters certifying the gifts with corresponding resolution of their board have been furnished before the A.O. During appellate proceedings before CIT(A), assessee has also filed affidavits from all the four donor companies, certifying the gifts. Assessee has also filed its affidavit for certifying the receipt of gifts. Receipt of gift as well as making of gift are authorized by respective Memorandum and Articles of Association of the companies and the assessee. Gifts have been accepted by the assessee by adopting a resolution by the Board of Directors. After sending all these documents to the AO, the CIT(A) had called a remand report from AO, therefore, this is no violation of rule 46A also. Thus, it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance.
(v) Now, coming to the contention of AO that company cannot make a gift and that there is a lack of natural love and affection in case of gift by the company. This issue is squarely covered by the decision of the co-ordinate bench in the case of D.P. World Pvt. Ltd. vs. DCIT ITA No. 3627 and 3841/Mum/2012, Mumbai ‘D’ Bench, order dated 12/10/2012 and Redington (India) Limited, ITA No. 513/Mds/2014. Companies are competent to make and receive gifts and natural love and affection are not necessary requirement. Only requirement for company is to make gifts as per respective Memorandum and Article of Association, which authorize the company for the same. Applying the proposition of law laid down in the above decision to the facts of the instant case, we found that the assessee and the donor companies are authorized in this regard for receiving and making gifts respectively by their Memorandum and Articles of Association.
(vi) As per sections 56(2)(viia) and 56(2)(viib), gift of certain kind of shares received by a company in which the public are not substantially interested are taxable and, therefore, it is clear that the Income-tax Act, itself provides that companies can receive gifts, of course, gifts of only shares of certain kind received by certain category of companies are taxable. (The provisions of sections 56(2)(viia) and (viib) are applicable w.e.f. 1-6-2010 and 1-4-2013 respectively). Therefore, it cannot be said that the assessee could not have received such gifts from other companies. It is also clear from the Transfer of Property Act that companies can receive and make gifts and there is no requirement of any natural love and affection for making or receiving a gift by companies. Even the Income-tax Act by way of sections 56(2)(viia) and 56(2)(viib) provides that gifts of certain kind of shares are taxable in the hands of certain category of companies.
(vii) Three elements are essential in determining whether or not a gift has been made, a) delivery. b) donative intent, and c) acceptance by the donee. All the above essentials stated by the AO are duly been fulfilled by the assessee and all the four donors of gifts. With respect to delivery of gift, the dividend has actually been received by the assessee in its bank account which conclusively prove the delivery of the gift from donor to donee. With respect to intent of donor, all four donors have passed a resolution in the meeting of share holders and board of Directors that they intend to transfer the dividend on shares of Reliance Industries held by them to the assessee donee as gift. Thus, the donative intent to transfer the dividend as gift is clear from the resolution passed by the donors. With respect to acceptance by the donee, the assessee has duly passed a resolution in the meeting of share holder and board of directors duly conveying their acceptance of the gift. Thus all the essential requisites of gifts stated by the AO in assessment order have been duly fulfilled by the assessee and no adverse conclusion can be drawn in the case of the assessee.
(viii) The AO has limited power of making increase or reduction as provided in the Explanation to the said section. Furthermore, the Explanation to section 115JB of the Act is applicable only if the item of expense or income is debited or credited to the Profit & Loss Account. However, when the item of expense or income is not debited or credited to the Profit & Loss Account, Explanation to section 115JB of the Act cannot apply and hence no adjustment is required under that section to the books profit. In the case of the assessee gift of Rs. 161,86,77,034/- was received from corporate bodies were not credited to the Profit & Loss Account and hence no adjustment is required to the book profit declared by the assessee u/s. 115JB of the Act. (ITA No. 2662/M/2013, dt. 11-3-2015) (AY. 2009-10)
DCIT v. KDA Enterprises Pvt. Ltd. (Mum.)(Trib); www.itatonline.org
S. 56(2)(vi) : Income from other sources – Portfolio management scheme – Income cannot be assessed in the hands of assessee
Assessee was given Rs. 25 lakhs by Z in pursuance of a general power of attorney for the purpose of making investment in portfolio management scheme on his behalf. Purchase and sale of mutual funds were made by the assessee on behalf of Z and there is no evidence to establish that the investment was made from the funds of Z. The Tribunal held that the assessee never became the beneficiary of the said amount. Therefore the same cannot be assessed under s. 56(2)(vi), more so as the amount was eventually returned back along with profit after liquidating the investment in mutual fund.(dt. 17-12-2014) (AY.2008-09)
Sannidhi C. Patel (Miss) v. ITO (2015) 114 DTR 300 (Mum.) (Trib.)
S. 68 : Cash credits – Share capital – Even if the issue share capital is bogus, no addition can be made in assessee’s hands if identity of share holder is established – Assessee is not required to show source of share holder’s funds.
Hon’ble Supreme Court of India in the case of CIT v. Lovely Export ( ) 299 ITR 261 (SC) which has confirmed the order of Hon’ble Delhi High Court has held that once the identity of the share holder have been established, even if there is a case of bogus share capital, it cannot be added in the hands of company unless any adverse evidence is not on record. The documentary evidence filed by the assessee shows that the assessee has provided confirmations from all the parties as well as various evidences to establish the genuineness of the transaction. In Nemi Chand Kothari v. CIT 264 ITR 254 (Guwauhati) (HC), it was held that it is a certain law that the assessee is to prove the genuineness of transaction as well as the creditworthiness of the creditor must remain confined to the transactions which have taken place between the assessee and the creditor. It is not the business of assessee to find out the source of money of creditors. Similar observation has also been given in the case of Hastimal ( ) 49 ITR 273 (Madr) and Daulatram Rawatmal (1973) 87 ITR 349 (SC). Accordingly order of CIT (A) deleting the addition as cash credits was confirmed. (ITA No. 2821/Del/2009, dated 1-4-2015) (AY. 2006-07)
ITO v. Neelkanth Finbuild Ltd. (Delhi) (Trib.); www.itatonline.org
S. 68 : Cash credits – Sale of shares – Despite documentary evidence and broker’s confirmation, genuineness of penny stock transactions has to be determined on the basis of ‘preponderance of human probabilities’. If assessee is unable to explain ‘intriguing’ facts and circumstances, genuineness of transaction cannot be accepted – Addition was confirmed as cash credits
AO has made the addition as cash credits in resect of sale of shares treating the same as non-genuine. On appeal considering the various documents produced by the assessee deleted the addition. On appeal by revenue, allowing the appeal the Tribunal held that:
(i) The issue before us is whether the documents furnished by the assessee, including averments made by him, or even his broker, satisfy the test of preponderance of human probabilities. In our view if the assessee has reasonably explained the ‘intriguing’ facts and circumstances as pointed by the AO, and on the strength of which the genuineness is assailed by him, and which further agree with that observed in the case of a penny stock company, no case for treating the transaction as not genuine shall arise. The onus u/s. 68 though is on the assessee, so that his explanation would, however, require being substantiated or proved.
(ii) Firstly, documentary evidences, in the face of unusual events, as prevailing in the instant case, and without any corroborative or circumstantial evidence/s, cannot be regarded as conclusive. Two, the preponderance of probabilities only denotes the simultaneous existence of several ‘facts’, each probable in itself, albeit low, so as to cast a serious doubt on the truth of the reported ‘facts’, which together make up for a bizarre statement, leading to the inference of collusiveness or a device set up to conceal the truth, i.e., in the absence of credible and independent evidences. For a scrip to trade at nearly 50 times its face value, only a few months after its issue, only implies, if not price manipulation, trail blazing performance and/or great business prospects (with of course proven management record, so as to be able to translate that into reality), while even as much as the company’s business or industry or future programme (all of which would be in public domain), is conspicuous by its absence, i.e., even years after the transaction/s. The company is, by all counts, a paper company, and its share transactions, managed. We, accordingly, reversing the findings of the First Appellate Authority, confirm the assessment of the impugned sum u/s.68 of the Act. We decide accordingly.(ITA No. 4906/Mum/2011, dated 27-3-2015) (AY. 2006-07)
ITO v. Shamim M. Bharwani (Mum.)(Trib.); www.itatonline.org
S. 69C : Unexplained expenditure – Bogus purchases – Hawala dealers – Addition towards bogus purchases cannot be made solely on the basis of statements of seller before Sales Tax authorities. The AO has to conduct own enquiries and give assessee opportunity to cross-examine the seller – Order of CIT(A) deleting the addition was confirmed. [S.143(3)]
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. The 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 v. 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 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). The CIT(A) has analysed the issue in all angles and applied the ratio laid down by the High Courts and Tribunals in deciding this issue. Appeal of revenue was dismissed.(ITA no. 5920/Mum/2013, dated 17-3-2015) (AY. 2010-2011)
ITO v. Deepak Popatlal Gala (Mum.)(Trib.); www.itatonline.org
S. 69C : Unexplained expenditure – Assessment – Bogus purchases – Hawala dealers – AO is not entitled to treat all purchases as bogus merely because Sales Tax department has called the seller a “Hawala dealer”. The AO ought to have verified the bank details of the assessee and the seller and other evidence before treating the purchases as bogus.[Ss.44D, 143(3)]
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 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 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 Rs. 32.05 crores, 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 account 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 back 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.(ITA No. 2959/Mum/2014, dated 28-11-2014) (AY. 2010-11)
Ramesh Kumar & Co. v. ACIT (Mum.)(Trib.); www.itatonline.org
S. 69C : Unexplained investments – Bogus purchases – Hawala dealers – Fact that suppliers names appear in the list of hawala dealers of the Sales Tax dept. and that assessee is unable to produce them does not mean that the purchases are bogus if the payment is through banking channels & GP ratio becomes abnormally high. [S.143(3)]
Dismissing the appeal of revenue, the Tribunal set out the finding of CIT(A) as under “I have also taken into consideration the decision of jurisdictional High Court and ITAT i.e. The CIT v. Nikunj Eximp Enterprises Pvt. Ltd. Appeal No ITA No. 5604 of 2010 (Hon. Mumbai High Court) and Balaji Textile Industries (P) Ltd. v. Income Tax Officer (1994) 49 lTD (Bom) 177. While in the case of Nikunj Eximp Enterprises, the Hon’ble Bombay High Court in its latest judgment has held that once the sales are accepted, the purchases cannot be treated as ingenuine in those cases where the appellant had submitted all details of purchases and payments were made by cheques, merely because the sellers/suppliers could not be produced before the A.O. by the assessee. Further, I have also gone through the judgment in case Balaji Textile Industries (P) Ltd. v. Income Tax Officer by Hon. ITAT, Mumbai (1994) 49 lTD (BOM) 177 which was made as long back as 1994 and which still holds good in which was held that – “Issuing printed bills for selling the textile goods to the assessee-company at Bhiwandi was not a conclusive proof but it was a prima facie proof to arrive to a correct conclusion that the assessee purchased certain goods from certain parties at Bhiwandi. The assessee sold those goods to ‘S’ and adjusted the sale proceeds against the loan taken by it from that party. The assessee’s books of account and the books of account of ‘S’ in which the entries of sale and adjustment were made, could not be discarded merely by saying that they were not genuine entries though neither the Assessing Officer nor the Commissioner (Appeals) opined anything in respect of those entries. Further, the purchase of the goods in the month of March 1985 did not make any difference. The assessee might not have carried on any business activities prior to March 1985, but that did not mean that the assessee was not entitled to carry on the business activity in March 1985. They could not be compelled to carry on the business activity throughout the year. There were no good reasons to disbelieve the sales made by the assessee to ‘S’. No sales were likely to be effected if there were no purchases. A sale could be made if the goods were available with the seller. From all these facts on record, a reasonable and convincing inference which could be drawn, was that the assessee purchased the textile goods, sold them and adjusted the same towards the loan taken by it. Therefore, the assessee was entitled to get the entire deduction.” I have also taken into consideration, the G.P Ratio/G.P. Margin of the appellant in the previous A.Y. as well as subsequent Assessment Year. If the addition made by the A.O. is accepted, then G.P. Ratio of the appellant during the present A.Y. will become abnormally high and therefore that is not acceptable because it is onus of the A.O. by bringing adequate material on record to prove that such a high G.P. ratio exists in the nature of business carried out by the appellant. Further, it has to be appreciated that (i) Payments were through banking channel and by cheque, (ii) Notices coming back, does not mean, those parties are bogus, they are just denying their business to avoid sales tax/VAT etc., (iii) Statement by third parties cannot be concluded adversely in isolation and without corroborating evidences against appellant, (iv) No cross examination has been offered by AO to the appellant to cross examine the relevant parties (who are deemed to be witness or approver being used by AO against the appellant) whose name appear in the website www.mahavat.gov.in and (v) Failure to produce parties cannot be treated adversely against appellant. “Accordingly the Tribunal dismissed the appeal of revenue.(ITA No. 5246/Mum/2013, dated 5-3-2015) (AY. 2010-11)
ACIT v. Ramila Pravin Shah (Mum.)(Trib.); www.itatonline.org
S. 92C : Transfer pricing – Arm’s length price – Bank guarantee commission paid close to rate charged by ICICI Bank – Is at arm’s length – Loan – Interest rate charged was higher than existing LIBOR Rates, said transaction was held to be at arm’s length
The assessee had provided corporate guarantees in respected of advances given to its A.E and had charged guarantee commission @ 0.5% p.a. from the AE. Assessee had an independent sanctioned LC arrangement where the assessee paid 0.6% p.a. guarantee commission to ICICI Bank. It was held that the transaction was at arm’s length and no adjustment was required.
Assessee had provided loan to Associated Enterprise and charged interest @ 7% p.a. The LIBOR rate for March 2008 was 2.6798 per cent. However the assessee had charged 7 per cent from its AE as per the internal CUP available. Since, the rate of interest charged was higher than LIBOR rates, it was held that the the said transaction of providing loan to AE is at arm’s length. Additions made by the Assessing Officer were accordingly set aside. (ITA No. 7073 dt. 25-9-2014 (AY. 2008-09)
Everest Kanto Cylinder Ltd. v. ACIT (2014) 52 taxmann.com 395/167 TTJ 204 (Mum.)(Trib.)
S. 92C : Transfer pricing – Transactional Net Margin Method-(TNMM) – Most Appropriate Method(MAM) – Notional interest – Receivable outstanding beyond 180 days – While an adjustment for working capital investment is required, the transaction of sale of goods and receivables arising therefrom can be aggregated. If the differential impact of working capital has been factored in the pricing of the transaction of sale, no further adjustment can be made – Appeal of assessee was allowed.
The Tribunal had to consider whether the AO/DRP is justified in enhancing the income of the assessee on account of notional interest charged on receivables outstanding beyond 180 days. HELD by the Tribunal:
(i) An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability.
(ii) The principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm’s length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines. As the assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio laid down by the Hon’ble jurisdictional High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd.
(iii) Any separate adjustment on the pretext of outstanding receivables while accepting the comparables and transfer price of underlying transaction i.e. sale of goods by application of TNMM is unjustified. The differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/ profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.(ITA No. 6814/Del/2014, dt. 26-3-2015) (A.Y. 2010-11)
Kusum Healthcare Pvt. Ltd. v. CIT (Delhi)(Trib.); www.itatonline.org
S. 92C : Transfer pricing – ALP of funds lent to AE should be as per LIBOR +2% as arm’s interest – ALP of corporate guarantee to be at 0.5% as guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE
Tribunal held that The ALP of loan granted by the assessee to its subsidiary, though from its internal accruals and without incurring any cost, has to be determined as per LIBOR and not the average yield rates considered by the TPO and the transaction of giving corporate guarantee to the bank, though held not to be an international transaction in Bharti Airtel Ltd. (ITA No. 5816/Del/2013) dated 11th March, 2014, the arm’s length guarantee commission charges can be considered at the rate of 0.5% as held by the Tribunal in a series of other decisions. (ITA No. 4761/Mum/2013, dated 25-3-2015) (AY. 2008-09)
Manugraph India Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 92C : Transfer pricing – Share application money cannot be treated as loan amount merely because there is a delay in issuance of shares – Adjustment made by the TPO was deleted
Though there was a delay in issuing the shares against the share application money given by the assessee to its AE, however, the assessee has duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money or by providing the fund by the assessee in the garb of share application money. The delay was due to obtaining necessary approval from the Securities and Exchange Commission, Philippines. Finally, the shares were issued as per the share certificate dated 25-5-2008 which has been produced by the assessee as additional evidence. Since the document of issuance of equity shares in the name of the assessee by the subsidiary/AE vide share certificate were not before the authorities below, therefore, to the extent of limited purpose of considering the said document, we set aside this issue to the record of AO/TPO to consider the same. As far as the re-characterization of the share application money as loan, we note that the Hon’ble Jurisdictional High Court in the case of DIT v. Besix Kier Dabhol S.A. vide its decision dated 30th August, 2012 in ITA No. 776 of 2011 has considered an identical issue. Accordingly, the share application money cannot be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assessee, which was duly explained by the assessee. Addition was deleted. (ITA No. 7033/Mum/2012, dt. 25-3-2015) (AY. 2007-08)
Aditya Birla Minacs Worldwide Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 92CA : Reference to transfer pricing officer – Reference to Transfer Pricing Officer, in absence of any proceedings pending before Assessing Officer, is unsustainable in law
In the case of the Assessee, no notice u/s. 143(2) was issued within the time limit i.e. 30-9-2008. It was only on 24-12-2009 that the Assessing Officer made a reference, under section 92CA(3), to the Transfer Pricing Officer for determination of arm’s length price of the international transactions entered into by the assessee with its associated enterprise. This reference to the TPO, and the resultant proceedings before him, culminated in the order dated 15-10-2010 proposing an arm’s length price adjustment of Rs. 2.81 crores. On the basis of TP Report, notices were issued u/s. 147 reopening the case. The assessee objected to this initiation of reassessment proceedings. It was contended that the time limit for issuance of notice under section 143(2) had expired. It was also pointed out that reference to the TPO was invalid as it was made before the initiation of reassessment proceedings under section 147, at a time when no proceedings were pending before the Assessing Officer.
As held by the Karnataka High Court, in the case of the CIT v. SAP Labs (P.) Ltd. in [IT Appeal Nos. 842 of 2008] and 339 of 2010, dated 25-8-2014, unless an Income-tax return, in respect of which notice under section 143(2) can be issued, is pending before the Assessing Officer, a reference to the Transfer Pricing Officer cannot be made by the Assessing Officer.
Guidance can be found from the Bombay High Court’s judgment in the case of CWT v. Sona Properties  327 ITR 592. That was a case in which the Assessing Officer had made a reference to the Departmental Valuation Officer after the end of the assessment proceedings and the reassessment proceedings were quashed for the short reason of illegality for reference
The assessee’s case was rather reopening of assessment on the consequence of the report obtained as a result of the reference
The reassessment proceedings were held to be legally unsustainable. (ITA No. 16 of 2013) (AY.2007-08)
XL India Business Services (P.) Ltd. v. ACIT (2014) 51 taxmann. com 549/ 67 SOT 117/167 TTJ 467 (Delhi )(Trib.)
S. 143(3) : Assessment – Additions made solely on the basis of AIR information are not sustainable in the eyes of law if the Revenue has not made any enquiries to find out whether the AIR information was correct or not
We find that addition in this case has been made solely on the basis of AIR information and without any corroborative evidence regarding the receipt of any interest by the assessee from the said M/s. Essar Oil Ltd. The assessee has specifically denied the receipt of such an interest income. The Revenue has not made any enquiries to find out whether the AIR information was correct or not. It has been held time and again by this Tribunal that the additions made solely on the basis of AIR information are not sustainable in the eyes of law. If the assessee denies that it is in receipt of income from a particular source, it is for the AO to prove that the assessee has received income as the assessee cannot prove the negative. Reliance can be placed in this respect on the decision of the Tribunal in the case of “DCIT v. Shree G. Selva Kumar” in ITA No.868/Bang/2009 decided on 22-10-2010 and another case in the case of “Aarti Raman v. DCIT” in ITA No.245/Bang/2012 decided on 5-10-2012. (ITA No. 5125/M/2013, dated 10-4-2015) (AY. 2009-10)
Kroner Investment limited v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 145(3) : Assessment – Retraction of statement – Modification to client code of client is not necessarily a mala fide act – Disclosure made in a statement recorded at unearthly hours cannot be given credence – If a voluntary disclosure is retracted, the AO has to make addition on the basis of documentary evidence
(i) The AO held the client code modifications to be mala fide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the Commodity Exchange, it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the mala fide intention. When the client code was modified on the same day, there cannot be any mala fide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be mala fide.
(ii) Moreover, the AO has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with mala fide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client code modification can be considered in the hands of the assessee.
(iii) In Kailashben Manharlal Chokshi v. CIT (2010) 328 ITR 411 (Guj), the High Court held that if a statement is recorded at midnight, much credence cannot be given to such statement because the person would not be in a position to make any correct or conscious disclosure in a statement recorded at odd hours. The ratio of the above decision of the jurisdictional High Court would be squarely applicable to the facts of the assessee’s case because the statement was recorded at the midnight of 25th and 26th March, 2008.
(iii) In Kailashben Manharlal Chokshi the Hon’ble High Court has noticed that when during the course of assessment proceedings the assessee has given the proper explanation for investment in various properties, the addition cannot be made on the basis of statement made at odd hours. Similarly, in the case of Ratan Corporation (2005) 145 Taxman 503 (Guj.), the Hon’ble jurisdictional High Court reiterated that when the statement made during the course of search has been retracted, then it is duty of the Assessing Officer to make further inquiries. Similar view is expressed by their Lordships of Hon’ble Jurisdictional High Court in the case of Radhe Associates (2013) 37 taxmann.com 336 (Guj.), wherein the Assessing Officer has made the addition by mentioning that there were clinching documentary evidences with respect to receipt of on-money. However, these clinching documentary evidences were not specified. In the case under appeal before us also, we find that the officer recording the statement of Shri Nayan Thakkar has mentioned that various defects and discrepancies have been observed from the papers and documents seized from the assessee’s premises. However, any defects or discrepancies were not specified. In view of the above, we are of the opinion that on the facts of the assessee’s case the decisions of the Hon’ble Jurisdictional High Court in the cases of Kailashben Manharlal Chokshi, Ratan Corporation and Radhe Associates would be squarely applicable. (ITA No. 615 to 618, 677 to 680, 813-817 of 2010, dated 19-3-2015) (AY. 2006-07 to 2008-09)
ACIT v. Kunvarji Finance Pvt. Ltd. (Ahd.)(Trib.); www.itatonline.org
S. 147 : Reassessment – Failure to comply with the procedure prescribed in G.K.N. Drive Shaft (India) Ltd. v. ITO 259 ITR 19 (SC) renders the assessment order invalid & void ab initio.[S.148]
In the first round of the appeal, the ITAT set aside the matter to the file of the AO with the direction to dispose of the objections raised by the assessee to the jurisdiction of the AO for issuance of notice u/s. 148 of the Act first by passing a speaking order in view of the decision of the Hon’ble Supreme Court in G.K.N. Drive Shaft (India) Ltd. v. ITO 259 ITR 19 (SC). However, though the assessee raised objection on the issue of jurisdiction for issuance of notice u/s. 148 of the Act, the AO while disposing of the said objection also proceeded to pass the reassessment order instead of restricting itself for the disposal of the objection passing a separate order. On appeal by the assessee to the Tribunal HELD:
The ratio of G.K.N. Drive Shaft (India) Ltd. v. ITO 259 ITR 19 (SC) and General Motors India Pvt. Ltd. v. DCIT 353 ITR 244 (Guj.) is that the Assessing Officer is mandated to decide the objection to the notice u/s. 148 of the Act and supply or communicate it to the assessee. Thereafter, the assessee gets an opportunity to challenge the order in a writ petition. Thereafter, the AO may pass the reassessment order. It is not open to the AO to decide the objection raised against notice u/s. 148 by a composite assessment order. Thus, the Assessing Officer was required to first decide the objection of the assessee filed u/s. 148 and serve a copy of the order on assessee. And after giving some reasonable time to the assessee for challenging his order, it is open to him to pass an assessment order. Since such compliance has not been made by the Assessing Officer in the present case, we hold the impugned assessment order as not valid and the same is held as void ab initio. (ITA No. 3061/Del/2012, dated 13-3-2015) (AY. 1997-98)
Suresh Chandra v. ITO (Delhi)(Trib.); www.itatonline.org
S. 147 : Reassessment – Recorded reasons – If the assessee does not ask for reasons and file objections before the AO, he is not entitled to challenge the reopening proceedings.[S.148, 149]
The Tribunal held that; Law does not provide or mandate that the Assessing Officer shall suo motu shall supply the copy of those ‘reasons to believe’ to the assessee. It is for assessee and if assessee chooses to ask for reasons then he/she can file objection thereto. Only when such objections are filed, it becomes the duty of the Assessing Officer to dispose of all those objections first by passing a speaking order and if the objections are rejected then it gives a cause to the assessee to challenge such order by filing an appropriate writ. This is the law laid down by Hon’ble Supreme Court in GKN Drive Shafts (India) Ltd. v. ITO – 259 ITR 19. In the instant case, the assessee did not ask for reasons to believe. The assessee participated in the reassessment proceedings. The reassessment order was passed. The assessee felt aggrieved to such order and filed the appeal before the CIT (A). The CIT (A) has passed an appropriate order on this issue. Thus, we hold that the assessment was reopened by issuing a legal and valid notice u/s. 148 of the Act. On the procedural aspect also, there is no infirmity in the notice. The notices u/ss. 143(2) and 143(1) were also properly served on the representative of the assessee.
(ii) Hon’ble Delhi High Court in the case of A.G. Holdings Pvt. Ltd. v. ITO reported in 352 ITR 364 has held that there is no requirement in section 147 of the Act or section 148 or section 149 that the reasons recorded for reopening an assessment should also accompany the notice of reassessment issued u/s. 148. The requirement in section 149(1) is only that the notice u/s. 148 shall be issued. There is no requirement that it should also be served on the assessee before the period of limitation. There is also no requirement in section 148(2) that the reasons recorded shall be served along with the notice of reopening the assessment. The requirement, which is mandatory, is only that before issuing the notice to reopen the assessment, the Assessing Officer shall record his reasons for doing so. Thus, the Assessing Officer is duty bound to supply the reasons recorded for reopening the assessment to the assessee, after the assessee files the return in response to the notice issued u/s. 148 and on his making a request to the Assessing Officer to that effect. In the case under consideration, even the assessee has not made any request for supply of the reasons. (ITA No. 4328/Del/2011, dated 11-3-2015) (AY. 2000-01)
Anil Kumar Chaudhary v. ITO (Delhi) (Trib.); www.itatonline.org
S. 147 : Reassessment – There must be something which indicates, even if not establishes, the escapement of income from assessment – Reopening an assessment on the ground that there is need of an inquiry which may result in detection of an income escaping assessment is not valid. [S. 148]
(i) The important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment, all that is necessary is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment (ITO v. Lakhmani Mewal Das [(1976) 103 ITR 437] followed);
(ii) On facts, all that the reasons recorded for reopening indicate is that cash deposits aggregating to Rs. 10,24,100 have been made in the bank account of the assessee, but the mere fact that these deposits have been made in a bank account does not indicate that these deposits constitute an income which has escaped assessment. The reasons recorded for reopening the assessment do not make out a case that the assessee was engaged in some business and the income from such a business has not been returned by the assessee. As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether the assessee could be said to be engaged in any business; all that is to be examined is whether the fact of the deposits, per se, in the bank account of the assessee could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs. 10,24,100 has escaped assessment of income because the assessee has Rs. 10,24,100 in his bank account but then such an opinion proceeds on the fallacious assumption that the bank deposits constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escaped assessment. (ITA No. 3814/del/2011, dt. 20-1-2015) (AY. 2008-09)
Bir Bahadur Singh Sijwali v. ITO (Delhi)(Trib.) www.itatonline.org
S. 151 : Reassessment – Sanction for issue of notice – Approval of commissioner – Merely stating “Approved” is not sufficient sanction of CIT and renders reopening void. [S. 147,148]
A simple reading of the provisions of Sec. 151 (1) with the proviso clearly show that no such notice shall be issued unless the Commissioner is satisfied on the reasons recorded by the AO that it is a fit case for the issue of notice which means that the satisfaction of the Commissioner is paramount for which the least that is expected from the Commissioner is application of mind and due diligence before according sanction to the reasons recorded by the AO. In the present case, the order sheet which is placed on record show that the Commissioner has simply affixed “approved” at the bottom of the note sheet prepared by the ITO. Nowhere the CIT has recorded his satisfaction. In the case before the Hon’ble Supreme Court (supra) that on AO’s report the Commissioner against the question “whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148 merely noted “Yes” and affixed his signature thereunder. On these facts, the Hon’ble Supreme Court observed that the important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Hon’ble Supreme Court further observed that the ITO could not have had reason to believe that income had escaped assessment by reasons of the appellant-firm’s failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore, invalid (ITA No. 3545/Del/2010, dated 25-2-2015) (AY. 2002-03)
Direct Sales Pvt. Ltd. v. ITO (Delhi) (Trib.); www.itatonline.org
S. 151 : Reassessment – Sanction for issue of notice – Sanction of CIT instead of JCIT renders reopening void – The error cannot be saved u/s. 292BB. [S. 50C, 147, 148, 292BB]
The Assessing Officer obtained sanction for issuance of notice under section 148 of the Income-tax Act, 1961 for reopening of assessment from the Commissioner of Income-tax instead of the Joint Commissioner of Income-tax (JCIT). Since the approval was not obtained from the competent authority, notice issued under section 148 of the Act is void ab-initio and the assessment framed consequent thereto is not a valid assessment. The error is fatal and cannot be saved under section 292BB. The assessment is annulled. (ITA No. 880/LKW/2014, dt. 13-3-2015) (AY. 2003-04)
Sardar Balbir Singh v. ITO (Lucknow)(Trib); www.itatonline.org
S. 153A : Assessment – Income of any other person – Search and seizure – Recording of satisfaction by AO of searched persons is a necessary precondition for initiation of proceedings – Assessment proceedings was quashed. [S. 153C]
Assessee submitted that AO of searched person has to record satisfaction that some documents belong to other persons and then hand over same to AO of such persons who again will record his satisfaction. It was submitted that first satisfaction by AO of searched persons has not been done in these cases and therefore assessment proceedings itself were not legal. The Tribunal held, copy of satisfaction note suggested that satisfaction note enclosed with letter was prepared by AO of other entities who had assumed jurisdiction by invoking provisions of section 153C, recording of satisfaction by AO of searched persons is a necessary precondition for initiation of proceedings u/s. 153C which was not done in present appeals, hence assessment proceedings quashed being illegal.(ITA No. dated 28-11-2014) (AY. 2003-04 to 2008-09)
DCIT v. Akash Arogya Mindir P. Ltd. (2015) 167 TTJ 578/ 114 DTR 61 (Delhi) (Trib.)
S. 153C : Assessment – Income of any other person – Search and seizure – no incriminating material belonging to assessee found during course of search – proceedings under section 153C were not valid.[Ss. 132A, 143(3)]
During the search conducted in the case of RD group, certain documents had been referred as ‘relating to’ the assessee, in the satisfaction note recorded by the Assessing Officer while initiating the proceedings under section 153C against the assessee.
It was held that the satisfaction of the Assessing Officer that the said documents ‘belong to’ the assessee is condition precedent to initiate proceedings under section 153C. In absence of such finding by the Assessing Officer, the notice issued under section 153C in the present case is held invalid. Besides there was no incriminating material found during the course of search and the assessment was not pending or abated to justify the assessment framed under section 132A, read with section 153C as well as section 143(3) against the assessee. The assessment in the question framed in furtherance to the said invalid notice and in absence of incriminating material is thus held as void. (ITA No. 4666 (Delhi) dated 6-1-2015 (AY.2004-05)
DCIT v. Qualitron Commodities (P.) Ltd. (2015) 54 Taxmann.com 295/167 TTJ 553 (Delhi)(Trib.)
S. 154 : Rectification of mistake – Cash credits – Credits of earlier year – Only credits received during the year can be assessed as unexplained cash credits. Credits of earlier years, even if unexplained, cannot be assessed. [S.68]
Section 68 stipulates that any unexplained sum found credited in the books of the assessee for any previous year, then the same may be taxed as income of the assessee for that previous year. Thus, section 68 can only be invoked if the loan has been taken or the sums have been credited in the books in the relevant previous year for which assessment is being made and not the loans taken in the earlier years. From the income tax records, it is evident that this loan is coming forward from last several years and is reflected in the balance sheet of the assessee filed for the earlier years along with the return of income. All these records are available with the assessing officer. The mistake apparent from record does not mean the assessment order itself but the records which are available with the Assessing Officer. Though the assessee could not furnish the confirmation of the loan and other evidences but such a loan could not have been added in the A.Y. 2005-06 as the same was taken in the earlier years and is being carried forward. In this year it is appearing balance of the current year. Thus, legally such an addition could not sustained in this year and therefore addition made by AO u/s 68 is a legal mistake, which can be rectified within the ambit and provisions of section 154.(ITA No. 1219/Mum/2013, dt. 25-3-2015) (AY. 2005-06)
Rita Stephen Pinto v. ITO (Mum.)(Trib.); www.itatonline.org
S. 189 : Firm – Dissolved – Discontinued – Assessability of post-dissolution income – Documents found from third party – No addition can be made when the firm was dissolved and necessary information was furnished
Assessee firm stood dissolved w.e.f. 31st March, 2002 and all necessary formalities for closure were completed. This is evident from the facts that the Asstt. Registrar of Firms has made changes in its records by making endorsement that the assessee-firm has been dissolved on 31st March, 2002. Assessee has taken a consistent stand before the AO as well as before the CIT(A) that no business was carried on after A.Y. 2002-2003 The Revenue also could not controvert the said factual submissions made by the assessee. The Tribunal held that as the assessee-firm having been dissolved w.e.f. 31st March, 2002 as evident from the endorsement made by the Asstt. Registrar of Firms in its records, the alleged unexplained income from the transaction found recorded in assessee’s name in the month of December, 2003 in a document recorded from a third party cannot be brought to tax in the hands of the assessee in A.Y. 2004-05. (dated 19-12-2014) (AY. 2004-05)
Mantri Developers v. ITO (2015) 114 DTR 361 (Pune)(Trib.)
S. 195 : Deduction at source – Non-resident – OECD Model Tax Convention – Usance charges paid to a non-resident through an intermediately bank – Liable to deduct tax at source. [Ss.2(28A), 5(2)(b), 9(1)(v)(b), 10(15(iv)(C), 40(a)(ia)]
Assessee was engaged in manufacture of wooden doors, frames, furniture etc. Assessee paid usance charges on import purchase. AO viewed that the usance charges incurred by the assessee was the income arising to the non-resident reckoning within the meaning of provisions of s. 5(2)(b) r.w.s. 9(1)(v)(b) and therefore the assessee was liable to deduct TDS in accordance with the provisions of sec. 195. Since the assessee had not deducted the TDS, therefore, disallowances was made by the AO u/s. 40(a)(ia) on account of non-deduction of tax at source u/s 195(1) on usance charges paid to a non resident through an intermediately bank. The CIT(A) deleted the addition relying on the explanation to s. 10(15)(iv)(c). The Tribunal held that in the case CIT v. Vijay Ship Breaking Corporation (Guj. High Court) had clearly held that usance interest paid by the assessee was not any part of the purchase price and was interest within the meaning of the definition of the term ‘interest’ u/s. 2(28A). The Supreme Court had not reversed the decision in the case of CIT v. Vijay Ship Breaking Corporation on the finding that the usance charges were not interest u/s. 2(28A) except where an undertaking was engaged in the business of ship breaking in view of explanation (2) to s 10(15)(iv)(c) inserted by the Taxation Laws (Amendment) Act, 2003 with retrospective effect. The decision of the Gujarat High Court had impliedly been approved by the Supreme Court in respect of assessees who were engaged in the business of ship breaking, the order of CIT (A) set aside and revenue’s appeal was allowed.(dt. 7-1-2015) (AY. 2008-09, 2009-10 & 2010-11)
ACIT v. Indian Furniture Products Ltd. (2015) 167 TTJ 668/ 114 DTR 25/67 SOT 433/38 ITR 174/53 taxmann.com 440 (Panaji) (Trib.)
S. 195 : Deduction at source – Non-resident – Income deemed to accrue or arise in India – Commission paid to the foreign agent on export sales – Not fall within definition of fee or Technical Services – No need to deduct tax at source while making payment. [(Ss.9(1)(i), 49(a)(ia), Article 7 & 12 of Model OECD Convention) I
The Hon’ble Appellate Tribunal held that the Commission paid by Assessee to its foreign agent on export sales made by it is not fall within definition of ‘fee for technical services’ and therefore, the assessee is not liable to deduct tax at source under section 195 of the IT Act while making payment. Thus, disallowance made under section 40(a)(ia) of the Act is deleted(ITA No. 541 of 2014 dated 26-9-2014) (AY. 2009-10)
ACIT v. Track Shoes (P.) Ltd. (2014) 52 taxmann.com 353/(2015) 67 SOT 172 (URO) (Chennai) (Trib.)
S. 206AA : Requirement to furnish Permanent Account Number even in the absence of PAN payer not required to deduct TDS at 20% if case covered by DTAA – DTAA overrides the provisions of Income-tax Act. [Ss.90(2), 195, 201(IA]
The ITAT had to consider whether section 206AA of the Act was applicable in cases which are governed by the DTAAs and whether section 206AA of the Act would override section 90(2) of the Act and therefore the tax deduction was liable to be made @ 20% in absence of furnishing of PANs by the recipient non-residents. HELD by the ITAT:
Section 206AA of the Act prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20%. In the present case, assessee was responsible for deducting tax on payments made to non-residents on account of royalty and/or fee for technical services. The assessee deducted the tax at source at the rates prescribed in the respective DTAAs between India and the relevant country of the non-residents. The case of the Revenue is that in the absence of furnishing of PAN, assessee was under an obligation to deduct tax @ 20% following the provisions of section 206AA of the Act. Section 90(2) provides that the provisions of the DTAAs would override the provisions of the domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee. It would be quite incorrect to say that though the charging section 4 of the Act and section 5 of the Act dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. Section 206AA of the Act is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. Therefore, where the tax has been deducted on the strength of the beneficial provisions of section DTAAs, the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act (ITA No. 792/PN/2013, dt. 30-3-2015) (AY. 2011-12)
DDIT v. Serum Institute of India Limited (Pune)(Trib.); www.itatonline.org
S. 221 : Collection and recovery – Penalty – Tax in default – Penalty cannot be levied for non-payment of S. A tax if the assessee has financial hardship
Dismissing the appeal of revenue, the Tribunal held that; the assessee claimed that it was having meagre cash and current balances and was in financial constraints during the year under consideration. If there is financial hardship to the assessee it has to be considered as sufficient cause in which event penalty cannot be levied. The Revenue was unable to point out as to whether the assessee had sufficient cash/bank balance so as to meet the tax demand and also could not point out as to whether any funds were diverted for non-business purposes at the relevant point of time so as to say that an artificial financial scarcity was created by the assessee. Accordingly, penalty u/s. 221(1) could not be levied (ITA Nos. 6440 & 6441/Mum/2013., dt. 25-3-2015) (AY. 2010-11 & 2011-12)
DCIT v. Aanjaneya Life Care Ltd. (Mum.)(Trib.); www.itatonline.org
S. 253 : Appellate Tribunal – Appeal – Penalty – Annual information return – Appeal is maintainable before Tribunal and not before CIT(A). [S. 271FA]
The order under section 271FA was passed by DIT who is equivalent in rank with CIT(A).Therefore, order of DIT cannot be challenged or assailed by filing an appeal before an Officer i.e. CIT(A), who is equivalent in rank with DIT. Hence, appeal could only be filed before a higher forum than forum whose order was to be challenged and higher forum was only ITAT and before it order of the Director of Income-tax could only be challenged by filing an appeal. Hence, appeal by assessee had been rightly filed before the Tribunal and the Tribunal was competent to adjudicate appeal on merit, hence revenue’s preliminary objection dismissed. (dated 16-1-2015) (AY.2012-13).
Raibareilly District Co-operative Bank ltd. v. DIT(2015) 114 DTR 321/ 38 ITR 27 /168 TTJ 274/54 taxmann.com 382 (lucknow) (Trib.)
S. 253 : Appellate Tribunal – Cross objection – Appeal by department-In a cross-objection, a new legal issue can be raised for the first time before the ITAT. [Ss.153A, 253(4), 254(1), Rules 22, 36A]
In the appeal filed by the department, the assessee filed a cross-objection in which it raised the ground for the first time that the assessment order passed u/s. 153A was not valid as satisfaction was not recorded, no incriminating material was recovered etc. The department objected to the cross-objection on the ground that the assessee was not permitted to raise issues before the Tribunal which were not raised before the lower authorities. HELD by the Tribunal rejecting the department’s plea:
There is no difference between an appeal and a cross-objection. In a cross-objection, a legal issue which has not been raised before the lower authorities can be raised. The C.O. need not be confined to the points taken by the opposite party in the main appeal (DHL Operations 108 TTJ 152 (SB)(Mum) followed).(Cross Objections Nos. 138 to 142/Del/2014, dated 23-9-2014) (AY. 2004-05 to 2007-08)
ITO v. Jasjit Singh (Delhi)(Trib.); www.itatonline.org
S. 253 : Appellate Tribunal – Stay – An appeal can be filed before the Tribunal against an order of the CIT(A) rejecting the stay application. [Ss.201(1), 250S]
During the pendency of an appeal before the CIT(A), the assessee filed a stay application. The CIT(A) dismissed the stay application. Against the said order, the assessee filed an appeal before the Tribunal. The Tribunal had to consider the preliminary point whether an appeal against a stay order of the CIT(A) is not maintainable. HELD by the Tribunal:
Section 253(1)(a) provides for an appeal to the Tribunal against an order passed by the CIT(A) under section 250 of the Act. The Act does not expressly provide power to the CIT(A) to grant stay of demand. However, it is well settled on the principle laid down in ITO v. M.K. Mohammad Kunhi 71 ITR 815 (SC) that the CIT(A) has inherent power to stay the demand when the appeal is pending for disposal before him. The term ‘order’ has not been defined under the Act. It is judicially understood that the word ‘order’ is a noun and has been held equivalent to or synonymous with the word ‘decision’. Therefore, having held that the CIT(A) has passed the order u/s. 250 of the Act, in our considered opinion, the appeal is clearly maintainable under clause (a) of sub-section (1) of Section 253 of the Act. (ITAT Nos. 1766 to 1768/Del/2015, dated 10-4-2015) (AY. 2011-12 to 2013-14)
Employees Provident Fund Organization v. ACIT (Delhi)(Trib.); www.itatonline.org
S. 253 : Appellate Tribunal – There is no judicial impropriety in the CIT filing an appeal before the Tribunal against his own order as CIT(A) deciding the appeal in favour of the assessee – Proportionate deduction in respect of housing project was allowed. [S.80-IB(10)]
The department filed an appeal before the Tribunal against the order of the CIT(A). The CIT, who sanctioned the filing of the appeal, happened to be the same CIT(A) who had allowed the assessee’s appeal. The assessee filed a C.O. claiming that the appeal was not maintainable as there was a violation of judicial propriety. It was claimed that the CIT(A) who had allowed the appeal could not, on becoming CIT, sanction the filing of an appeal against his own order as it violates the principle of “no man can be a judge in his own cause”. HELD by the Tribunal dismissing the cross-objection:
(i) The plea of the assessee that there was judicial impropriety in the case was not established because the present Commissioner of Income Tax Administration as Commissioner of Income Tax (Appeals) had passed the order and decided the issues on the basis of various case laws. However, when acting as Commissioner of Income Tax Administration and in view of the facts that there was no legal precedent by the Hon’ble Supreme Court or by the Hon’ble jurisdictional High Court on the said issue, directed the Assessing Officer to file appeal against the impugned order. It is not a case where the present person was setting in judgment of the earlier order passed by him but was acting in the capacity of administrator wherein the issues were put before higher forum to adjudicate the same.
(ii) The reliance by the learned AR for the assessee on the ratio laid down by the Allahabad High Court in the case of Mohd. Chand And Another (supra) is misplaced as in the facts before the Hon’ble High Court, the person who had passed the basic order was later sitting in appeal and was hearing the appeal against his own order. In such circumstances, the Hon’ble High Court held that the principles of natural justice that no man can be a judge in his own cause, was attracted. Further the learned AR for the assessee placed reliance on the ratio laid down by the Hon’ble Supreme Court in the case of Ashok Kumar Yadav and Others (supra) wherein also similar principle of jurisprudence that no man can be a judge in his own cause was looked into and it was observed that where there was a reasonable likelihood of bias then such decision should not be taken. The Hon’ble Apex Court held that the basic principle underlying in this rule is that justice must not only be done but must also appear to be done and this rule has received wide recognition in several decisions of the Court. It is also important to note that this rule is not confined to cases where judicial power strictosensu is exercised. It is appropriately extended to all cases where an independent mind has to be applied to arrive at a fair and just decision between the rival claims of parties.
(iii) The principle propounded by the Hon’ble Supreme Court was in respect of a decision between rival claims of the parties. However, in the facts of the present case, the situation was at variance where the CIT(A) had passed the impugned assessment order and then as Commissioner of Income Tax Administration had directed the Assessing Officer to file an appeal before the Tribunal against the said order and the decision on the rival claims of the parties had to be taken by the Tribunal and not by the Commissioner of Income Tax Administration. On merits proportionate deduction allowed by the CIT(A) in respect of housing project was affirmed.(ITA No. 583/PN/2013, dt. 31-3-2015) (AY. 2007-08)
ITO v. Paras Builders (Pune)(Trib.); www.itatonline.org
S. 255(4) : Appellate Tribunal – Third member – Binding precedent – Even if Third Member’s verdict is shown to be “unsustainable in law and in complete disregard to binding judicial precedents”, Division Bench has no choice but to give effect to it
On a question relating to the levy of penalty, there was a difference of opinion between the Judicial Member and the Accountant Member. The Third Member, to whom the difference was referred, agreed with the Accountant Member and confirmed the levy of penalty. At the stage of giving effect to the order of the Third Member, the assessee claimed that the said order could not be given effect to as it was “unsustainable in law and in complete disregard to binding judicial precedents”. The assessee claimed that the matter of whether effect could be given to such an order was required to be referred to a Special Bench. HELD by the Tribunal:
(i) A larger bench decision binds the bench of a lesser strength because of the plurality in the decision making process and because of the collective application of mind. What three minds do together, even when the result is not unanimous, is treated as intellectually superior to what two minds do together, and, by the same logic, what two minds do together is considered to be intellectually superior to what a single mind does alone. Let us not forget that the dissenting judicial views on the division benches as also the views of the third member are from the same level in the judicial hierarchy and, therefore, the views of the third member cannot have any edge over views of the other members. Of course, when division benches itself also have conflicting views on the issues on which members of the division benches differ or when majority view is not possible as a result of a single member bench, such as in a situation in which one of the dissenting members has not stated his views on an aspect which is crucial and on which the other member has expressed his views, it is possible to constitute third member benches of more than one members. That precisely could be the reason as to why even while nominating the Third Member under section 255(4), Hon’ble President of this Tribunal has the power of referring the case “for hearing on such point or points (of difference) by one or more of the other members of the Appellate Tribunal”. Viewed from this perspective the Third Member is bound by the decisions rendered by the benches of greater strength. That is the legal position so far as at least the jurisdiction of Hon’ble Gujarat High Court is concerned post CIT v. Vallabhdas Vithaldas [(2015) 56 taxmann.com 300 (Guj), but, even as we hold so, we are alive to the fact that Hon’ble Delhi High Court had, in the case of P C Puri v. CIT [(1985) 151 ITR 584 (Del)], expressed a contrary view on this issue which held the field till we had the benefit of guidance from Hon’ble jurisdictional High Court. The approach adopted by the learned Third Member was quite in consonance with the legal position so prevailing at that point of time.
(ii) At the time of giving effect to the majority view under section 255(4), it cannot normally be open to the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. In the case of dissenting situations on the division bench, the process of judicial adjudication is complete when the third member, nominated by Hon’ble President, resolves the impasse by expressing his views and thus enabling a majority view on the point or points of difference. What then remains for the division bench is simply identifying the majority view and dispose of the appeal on the basis of the majority views. In the course of this exercise, it is not open to the division bench to revisit the adjudication process and start examining the legal issues (B T Patil & Sons Belgaum Constructions Pvt. Ltd. v. ACIT (ITA Nos. 1408 and 1409/PN/2003; order dated 28th February, 2013 distinguished).(ITA Nos. 2850 and 2144/Ahd/2011, dated 24-4-2015) (A.Y. 1995-96 and 1996-97)
Juiter Corporation Service Ltd. v. DCIT (Ahd.)(Trib.); www.itatonline.org
S. 271(1)(c) : Penalty – Concealment – Disallowance of expenditure for failure to deduct TDS does not attract penalty. [Ss.40)(a)(ia), 194C]
In this case, the penalty has been levied for disallowance of expenditure u/s. 40(a)(ia) of the Act. It is not a case of furnishing of inaccurate particulars of income or concealment of income. The failure to deduct the TDS on the part of the assessee has resulted in disallowance of expenditure. The assessee had not furnished any inaccurate particulars of income or expenditure. The assessee has already faced the consequences by way of disallowance of expenditure for non-deduction of TDS as per the provisions of section 194C of the Act. It is not the case of the Revenue that the assessee had not incurred the expenditure claimed or that the claim of expenditure was bogus or incorrect. The disallowance of expenditure was attracted due to non-deduction of TDS and it cannot be said to be a case of concealment of income or furnishing of inaccurate particulars of income. The levy of penalty u/s. 271(1)(c) of the Act is not attracted in this case and the same is accordingly ordered to be deleted.(ITA No. 6684/Mum/2012, dated 4-3-2015) (AY. 2007-08)
Rushi Builders and Development v. ACIT (Mum.)(Trib.); www.itatonline.org
S. 271(1)(c) : Penalty – Concealment – Rental income – Income from house property – Business income – Disclosing income but classifying it under a wrong head amounts to furnishing inaccurate particulars and attracts penalty.[Ss. 22, 28(i)]
The assessee’s argument supra of the same being only a differential treatment of the very same, i.e., rental, income, so that there has been thus neither any concealment nor furnishing of inaccurate particulars of income, though appealing, is misconceived. The reason is simple. Yes, the assessee has apparently stated the quantum and nature of the income correctly. However, penalty u/s. 271(1)(c) is not only qua the misstatement of fact/s but also of law. When the law is clear and well settled, as in the facts of the present case, the so called ‘differential treatment’, which the law does not admit of, i.e., qua the admitted nature of the income, is only admittedly a wrong claim in law. This is more so where the said claim has tax implication. Income has to be necessarily computed under separate, mutually exclusive heads of income, allowing deductions as per the computational provisions of the respective head of income, and toward which the Assessing Officer (A.O.) has relied on United Commercial Bank Ltd. v. CIT  32 ITR 688 (SC) and CIT v. Chugandas and Co.  55 ITR 17 (SC). In fact, the ‘differential treatment’ would be rendered as of no consequence, so that no penalty could be levied, where it carries the same or a similar tax burden; the whole premise thereof being only a lesser tax liability, so that whole issue therefore boils down to whether it is the case of tax avoidance, which is legally permissible, or of tax evasion, which the law seeks to penalize, and which therefore has to be adjudged on the basis or edifice of the assessee’s explanation for its adopted treatment. The term ‘differential treatment’, which is thus to be examined on the touchstone of the validity or plausibility, or otherwise, of the legal claim, carries no legal meaning in itself. How could, one may ask, the assessee justify its’ claim of the declared nature of the income as ‘rent’, when it declares as it as ‘business income’, claiming all expenses thereagainst? That is, could it be said that the assessee has furnished accurate particulars of income when it, de hors settled law, claims all regular, business expenditure, including depreciation on building, thereagainst, so that the assessee’s claim of having stated ‘fact/s’ correctly is also highly suspect.(ITA No. 258/Mum/2011, dated 13-3-2015) (AY. 2005-06)
Shubhamangal Portfolio Pvt. Ltd. v. CIT (Mum.)(Trib.); www.itatonline.org
S. 271(1)(C) : Penalty – Concealment – Deemed income – Loans or advances – Deposit – Deeming provision and has to be strictly construed. Assessee can discharge onus by pointing to ‘preponderance of probability’ and if explanation is not found to be false then, even if amounts are assessed as ‘deemed dividend’, penalty cannot be levied. [Ss.2(22)(e), 271(1)(c), Explanation 1]
Dismissing the appeal of revenue, the Tribunal held that;
(i) It is an undisputed fact that assessee is major share holder in M/s. Exim Multi Media P. Ltd.; M/s. Edge Fine Print P. Ltd. and M/s. Shipping Times (I) Pvt. Ltd. From these companies, the assessee has received money for sums aggregating Rs. 1,01,00,000/- which has been contended to be in the form of refundable security deposits for letting the properties owned by the assessee to these companies for their business purpose. List of properties owned by the assessee and given for use to these company were filed before the authorities during the quantum proceedings. Along with these details, the assessee had also filed internal bank payment voucher by these companies which show that amount has been given as “deposit” for the use of the property. These bank vouchers mentions the cheque number, name of the assessee, the amount of deposits given and the detail of the property. All these evidences though filed in the course of the quantum proceedings, have not been taken into cognizance by any of the appellate authorities. It has been brought to our notice by the learned counsel that, assessee has not received any rent from these companies, instead she had received only security deposits.
(ii) In light of these facts, it cannot be conclusively held that the amounts given by these companies are in the form of loan or advance. This fact is further corroborated by the fact that, neither there is any entry of loan in the books of the assessee nor in the books of these companies. How such an amount received by the assessee is considered in the nature of loan is not borne out from the records. Be it that as may be, it is well settled proposition of law that the finding given in the quantum proceedings are quite relevant and have a provative value, but such a finding alone may not justify the imposition of penalty, because the considerations that arise in the penalty proceedings are separate and distinct from those in the assessment proceedings. Even though matter has been concluded in the quantum assessment proceedings, then also, they are not conclusive so far as penalty proceedings are concerned. The matter in the penalty proceedings has to be examined afresh from the angle whether the assessee is guilty of concealment of income or furnishing of inaccurate particulars of income. The assessee may adduce fresh evidence in the penalty proceedings to establish that the material and relevant facts goes to prove the bona fide of the claim or take a different plea upon the same existing material that there is no concealment of income or furnishing of inaccurate particulars. The degree of proof necessary under the Explanation 1 to section 271(1)(c) can be discharged by the assessee by pointing out the factors and the material in his favour, because explanation merely raises a rebuttal presumption to which assessee can always discharge his onus by pointing out the factors relating to preponderence of probability. Here in this case, the assessee’s explanation that the money received from these companies were in the nature of refundable security deposits received by the assessee in lieu of letting of the properties owned by her has not been found to be false and in fact has been substantiated by the evidence in the form of internal bank vouchers and the entries in the books of account of the assessee as well as of the companies. The revenue has no material to rebut such an evidence or that the assessee’s explanation is false based on material on record. The assessee’s onus in the penalty proceedings stands fully discharged. Once, it has been shown that the amount has been received not as loan but as deposits, the deeming fiction of 2(22)(e) cannot be stretched to hold that the payment made by a company to a share holder by way of deposit in lieu of usage of property for its business purpose is in the nature of loan. It is a trite law that the deeming fiction has to be strictly construed and such legal fiction cannot be extended for any kind of payment by a company to its share holder. Thus, on the facts and circumstances of the case, we find that the reasons recorded by the learned CIT(A) for deleting the penalty is legally and factually correct and accordingly the same is affirmed.(ITA No. 3767/mum/2012, dt. 25-3-2015) AY. 2006-07)
ITO v. Dipti Nikhil Modi (Mum.)(Trib.); www.itatonline.org
S. 271(1)(c) : Penalty – Concealment – Amounts not deductible – Mistake in claiming deduction of interest expenditure – Levy of penalty was justified. [S.43B]
Dismissing the appeal of assessee the Tribunal held that (i) The assessee’s case rests on its claim being an inadvertent mistake, and which stood corrected in the first instance. However, as pointed out by the Revenue authorities, the same cannot be said to be voluntary, but only on the Revenue making a specific enquiry in the matter. Further, the assessee’s contention of being constrained for want of necessary or relevant information is without substantiation. Why would not the bank give or share the relevant information with the assessee? It would rather be a contradiction in terms to suggest that while the assessee is in the know of the amount of the interest charged by the bank for the year, and for both its accounts, duly reflected as interest accrued and due in its balance-sheet as at the relevant year-end, it does not know if, or to the extent, the same is paid up;
(ii) The assessee is a regular assessee, well serviced by tax and audit professionals. The latter issuing a disclaimer for being unable to state the amount disallowable u/s. 43B in the absence of the relevant information, defeats its case of it being an inadvertent mistake. On what basis, then, one may ask, was the deduction claimed? The only course, in the absence of the information, was that the assessee seek leave to revise its return, which the law even otherwise extends, i.e., where subsequently it discovers a claim as arising in the facts of its case. A legal claim, in fact, could be pressed at any stage of the assessment proceedings;
(iii) The assessee’s plea of no loss to the Revenue is of no consequence in view of the clear provision of law defining the term ‘tax sought to be evaded’, under Explanation 4 thereto, and with reference to which the penalty is to be levied. (ITA No. 8125/Mum/2010, dt. 25-3-2015) (AY. 2003-04)
Trans Polyurethane Pvt. Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org
S. 271(1)(c) : Penalty – Concealment – Surrender of income after questionnaire does not mean it is not voluntary. If surrender is on condition of no penalty and assessment is based only on surrender and not on evidence, penalty cannot be levied. [S.69A, 132(4)]
From the record we found that at the very first instance share application money was surrendered by assessee with a request not to initiate any penalty proceedings. The AO passed order u/s.143(3) adding surrendered amount u/s. 69A on the plea that assessee has surrendered amount only after issue of notice. It is not disputed by the department that sum which was added u/s. 69A was one which was surrendered by the assessee itself. Neither there was any detection nor there was any information in the possession of the department except for the amount surrendered by the assessee and in these circumstances it cannot be said that there was any concealment. In case of CIT v. Suresh Chandra Mittal ( ) 251 ITR 9 (SC), Hon’ble Supreme Court observed that if the assessee has offered the additional income to buy peace of mind and to avoid litigation penalty u/s. 271(1)(c) of the Act cannot be levied. In the instant case, there was no mala fide intention on the part of the assessee and the AO had not brought any evidence on record to prove that there was concealment of income. At the time of surrender itself contention of not initiating any penalty proceedings was there. No additional matter was discovered to prove that there was concealment of income. The AO has included the amount of share capital in the total income of assessee merely on the basis of assessee’s declaration/surrender. The AO did not point out or refer any evidence or material to show that the amount of share capital received by the assessee was bogus. It is also not the case of the revenue that material was found at the assessee’s premises to indicate that share application money received was an arranged affair to accommodate assessee’s unaccounted money. Thus there was no detection by the AO that share capital was not genuine. The surrender of share capital after issue of the notice u/s.143(2) could not lead to any inference that it was not voluntary. Admittedly the assessee has offered the amount of share capital for taxation voluntarily and it was not the case of revenue that the same was done after its detection by the department. It is quite clear from the record that this entire transaction was not detection of the AO that the share capital was not genuine and that the assessee had offered the amount without any specific query. Even surrender of amount by the assessee after receipt of questionnaire could not be lead to any inference that it was not voluntary, in the absence of any material on record to suggest that it was bogus or untrue. The contention that in every case where surrender is made inference of concealment of income must be drawn under S. 58 of Evidence Act, cannot be accepted in view of the decision of Punjab & Haryana High Court in the case of Careers Education & Infotech (P) Ltd., (2011) 336 ITR 257 (P&H). Not an iota of evidence was narrated to support the addition made except the surrender made by the assessee itself. When no concealment was ever detected by the AO, no penalty was impossible. Recently, Hon’ble Punjab & Haryana High Court in the case of Siddharth Enterprises vide order dated 14th July, 2009 held after considering the decision of Hon’ble Supreme Court in the case of Union of India & Ors. vs. Dharamendra Textile Processors & Ors. (2008) 306 ITR (SC) 277 that the judgment of Hon’ble Supreme Court in the case of Dharmendra Textiles cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. What has been laid down is that qualitative difference between criminal liability under s. 276C and penalty under s. 271(1)(c) had to be kept in mind and approach adopted to the trial of a criminal case need not be adopted while considering the levy of penalty. Even so, concept of penalty has not undergone change by virtue of the said judgment. It was categorically observed that penalty should be imposed only when there is some element of deliberate default and not a mere mistake. This being the position, the furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax. Hon’ble Supreme Court in the case of CIT vs. Suresh Chandra Mittal 251 ITR 9 (SC) observed that where assessee has surrendered the income after persistence queries by the AO and where revised return has been regularized by the Revenue, explanation of the assessee that he has declared additional income to buy peace of mind and to come out of waxed litigation could be treated as bona fide, accordingly levy of penalty under s. 271(1)(c) was held to be not justified. (ITA No. 2292/Mum/2013, dated 8-4-2015) (AY. 200910)
Heranba Industries Ltd. v. DCT (Mum.)(Trib.); www.itatonline.org
S. 271D : Penalty – Accepts any loan or deposit – Cash received from wife for purchase of house property – Levy of penalty was deleted. [S. 269SS]
Tribunal held that the cash received from wife for purpose of acquisition of property jointly which was eventually returned to her for the reason that the deal could not materialize. It cannot be said to be a loan or advance covered under section 269SS and therefore penalty under section 271D is not leviable. (ITA Nos. 2252, 2258, 3034 & 3085/Del./2013 dated 16-1-2015) (AY. 2007-08 & 2008-09)
ACIT v. Inderpal Singh Wadhawan (2015) 168 TTJ 561 (Delhi)(Trib.)
S. 271D : Penalty – Accepts any loan or deposit – Journal entry – Penalty was deleted. [S.269SS, 271E]
Revenue has filed the appeal and the Tribunal confirmed the order of the CIT(A) deleting the penalty by giving following reasoning:-
1. There is only journal entry in the books of the assessee debiting the account of some other party and crediting the account of the creditor, it cannot be said that the assessee has accepted loan or deposits from the creditor in violation of section 269SS attracting penalty under section 271E.
2. When repayment is made through a pay order by writing the word only after the name of the payee then there is no violation of the provisions of section 269T and penalty under section 271E is not leviable.
3. It cannot be said that the firm has taken a loan or deposit from the partner when a cash receipt is credited in the account of a partner in the books of the firm. There is no contravention of section 269SS and penalty under section 271D is not leviable.
4. Payment for allotment of shares as share application money cannot be said to be repayment of loan or advance so as to violate provisions of section 269T and therefore penalty under section 271E is not leviable. (ITA Nos. 2253 & 2259/Del./2013 dt. 16-1-2015) (AY. 2007-08)
ACIT v. Vardaan Fashion (2015) 168 TTJ 561 (Delhi)(Trib.)
S. 271FA : Penalty – Annual information return – Failure to furnish – Appeal is maintainable before Tribunal and CIT(A). [S.253]
Assessee had preferred appeal against order of DIT passed u/s. 271FA before Tribunal. The revenue had raised preliminary objection on ground that appeal against an order passed under section 271FA can only be filed before CIT(A) and the Tribunal had no jurisdiction to entertain same. The Tribunal held, as per clauses (d) and (e) of section 253(1), if AO had passed an order with approval of the Principal Commissioner or Commissioner or pursuant to directions of the Dispute Resolution Panel, which comprises Officers in the rank of Commissioner, same can only be challenged before Tribunal. Though there was no specific reference of order passed under section 271FA of the Act by the Director of Income-tax in section 253(1) of the Act for the purpose of filing an appeal against the said order, but an analogy drawn from reading of section 253(1) of the Act is that the order passed by CIT or an Officer who is equal in rank can only be challenged before the Tribunal, which is higher in rank. The Tribunal further pointed out that, as per definition of appellate jurisdiction, appeals are to be filed before a forum which is higher in rank than forum which passed the impugned order. The order under section 271FA was passed by DIT who is equivalent in rank with CIT(A).Therefore, order of DIT cannot be challenged or assailed by filing an appeal before an Officer i.e. CIT(A), who is equivalent in rank with DIT. Hence, appeal could only be filed before a higher forum than forum whose order was to be challenged and higher forum was only ITAT and before it order of the Director of Income-tax could only be challenged by filing an appeal. Hence, appeal by assessee had been rightly filed before the Tribunal and the Tribunal was competent to adjudicate appeal on merit, hence revenue’s preliminary objection dismissed. (dt. 16-1-2015) (AY.2012-13).
Raibareilly District Co-Operative Bank ltd. v. DIT (2015) 114 DTR 321/ 38 ITR 27/168 TTJ 274/54 taxmann.com 382 (Lucknow) (Trib.)
S. 271G : Penalty – Documents – International transaction – Transfer pricing – No allegation of any specific non – compliance – Levy of penalty was held to be not justified. [S. 92D]
The assessee filed all the details in December, 08 but the copy of transfer pricing document were not filed and the same was filed as late as 20th July, 2009. For this default the Assessing Officer initiated penalty proceedings under section 271G of the Act. The CIT(A) deleted the penalty and the Revenue filed the appeal before Tribunal. The Tribunal followed the decision of Hon’ble Delhi High Court in the case of CIT v. Bumi Hiway (I) (P) Ltd. (2014) 110 DTR 321 (Delhi) and held that the penalty was rightly deleted by the CIT(A) as the documents were filed later on or not, there is no discussion on this aspect in the order passed by the Assessing Officer, imposing penalty. The assessee filed cross objection that the penalty proceedings are time barred. The Tribunal held that this question was not raised before the CIT(A) not the assessee has filed the appeal in the Tribunal. The appeal filed by the revenue and the cross objection filed by the assessee both dismissed by the Tribunal. (ITA No. 598/JP/2012 dated 16-1-15) (AY. 2006-07)
ACIT v. Gillette India Ltd. (2015) 168 TTJ 392/115 DTR 121/ 54 taxmann.com 313 (Jaipur)(Trib.)
S. 275 : Penalty – Bar of limitation – For penalty proceedings initiated on issues unrelated to assessment of income (such as for Ss. 269SS/ 269T & TDS defaults), time limit runs from date of initiation of penalty proceedings and not from date of CIT(A)’s order – Penalty order was held to be time barred. [Ss. 143(3), 269SS, 269T, 271E]
The AO initiated penalty proceedings as per assessment order passed u/s. 143(3) dated 28-12-2007. The AO passed a penalty order u/s. 271E dated 20-3-2012. The AO held that the time limit for passing of the penalty order had to be reckoned from the date of the passing of the order of the CIT(A) in the quantum appeal. The assessee claimed that the order of the CIT(A) was on a totally different issue and had no bearing on the issue on which penalty u/s. 271E was imposed. The CIT(A) accepted the assessee’s claim and held that the penalty order should have been passed within the financial year itself in which the penalty proceedings were initiated or within six months from the end of the month in which the penalty proceedings were initiated, whichever period expires later, and in the present case the penalty order could have been passed on or before 30-6-2008. He held that the penalty order passed u/s. 271E on 20-3-2012 is barred by limitation and deserves to be quashed on this ground alone. On appeal by the department to the Tribunal HELD dismissing the appeal:
In the present case, the penalty sought to be imposed on the assessee is for alleged violation of Section 269SS/269T of the Act. It is well settled that a penalty under this provision is independent of the assessment. The action inviting imposition of penalty is granting of loans above the prescribed limit otherwise than through banking channels and as such infringement of Section 269SS of the Act is not related to the income that may be assessed or finally adjudicated. In this view Section 275(1)(a) of the Act would not be applicable and the provisions of Section 275(1)(c) would be attracted. Since penalty proceedings for default in not having transactions through the bank as required under sections 269SS and 269T are not related to the assessment proceeding but are independent of it, therefore, the completion of appellate proceedings arising out of the assessment proceedings or the other proceedings during which the penalty proceedings under sections 271D and 271E may have been initiated has no relevance for sustaining or not sustaining the penalty proceedings and, therefore, clause (a) of sub-section (1) of section 275 cannot be attracted to such proceedings. If that were not so clause (c) of section 275(1) would be redundant because otherwise as a matter of fact every penalty proceeding is usually initiated when during some proceedings such default is noticed, though the final fact finding in this proceeding may not have any bearing on the issues relating to establishing default e.g. penalty for not deducting tax at source while making payment to employees, or contractor, or for that matter not making payment through cheque or demand draft where it is so required to be made. Either of the contingencies does not affect the computation of taxable income and levy of correct tax on chargeable income; if clause (a) was to be invoked, no necessity of clause (c) would arise (ITA no. 5443/Del/2013, dated 27-3-2015) (AY. 2005-06)
ITO v. JKD Capital & Finlease Ltd. (Delhi)(Trib.); www.itatonline.org