Figures of institution, Disposal and Pendency of Appeals as on 1-6-2015


No. of Benches

No.of Members




Smc Pendency




























































































Ranchi (Jharkhand) Circuit Bench





























































































J.D. Nankani
National President

Sr. No

Appeal No.

Name of the Assessee

Points involved




ITA No. 5568 & 5569/M/1995 & 6448/M/1994 A.Y. 1991-92 to 1993-94

DHL Operations B.V. Netherlands

“Whether, or not, on the facts and in the circumstances of the case and on a proper interpretation of Art. 5.5 and Art. 5.6 of the DTA (with Netherlands) and having regard to its activities, it can be said that Airfreight Ltd. was the agent of the assessee so that it can be held that the assessee had a PE in India? And if the answer is in the affirmative, whether or not the income from inbound shipments can be treated as attributable to the PE?”

Fixed on 27-7-2015


ITA 5996/M/93 ITA 1055/M/94 ITA 1056/M/94

GTC Industries Ltd.

Fixed on 13-7-2015



ITA No. 1976/Del/2006

M/s. C.L.C. & Sons Pvt. Ltd.

“Whether, on the facts and circumstances of the case, assessee is entitled to claim depreciation on the value of all intangible assets falling in the category of “any other business or commercial rights”, without coherence of such rights with the distinct genusis/ category if intangible assets like know how, patents, copyrights, trade marks, licences and franchises as defined U/s 32(1) (II) of the I.T. Act.”

Fixed after the disposal of Hon’ble High Court in the case of CLC Global Ltd. which is pending before Hon’ble High Court.


ITA No. 1999 & 2000/Del/2008

M/s. National Agricultural Co-op. Mkt. Federation of India, New Delhi.

“Whether on the facts and circumstances of the case, where claim of damages and interest thereon is deputed by the assessee in the court of law, deduction can be allowed for the interest claimed on such damages while computing business income.”

Adjourned sine-die


ITA No. 163/ASR/2003 A.Y.1998-99

Shri Tejinder singh (HUF)

“Whether on the facts and circumstances of the case, consideration claimed to have been received on account of sale of jewellery etc. relating to the disclosures made under VDI Scheme, 1997, can be considered to be the income of the assessee from undisclosed sources under any of the provisions of Income-tax Act, 1961?”

Block for 6th Months.


ITANo. 3827/Del/2009 A. Y. 2006-07

M/s. Suraj Overseas (Pvt) Ltd.

“ Whether on the facts and in the circumstances of the case, the commissioner of Income Tax(Appeals) erred in Law in holding that profit aggregating to Rs. 2,51,50,313/- earned by the appellant from sale of shares and securities held under discretionary assessable under the head “business income” as opposed to capital gains returned by the appellant ?”

Fixed on 6-7-2015.



ITA Nos.1548 & 1549/Kol/2009 A.Y.2003-04 & 2004-05

M/s. Instrumentarium Corporation Ltd.

1. “Whether, on the facts and in the circumstances of the case, no arm’s length rate of interest was required to be charged on the loan granted by the non-resident assessee-company to its wholly owned subsidiary Indian company M/s Datex Ohmeda(Indian) Pvt. Ltd.(Datex)?”

2. “Whether, in the given facts and circumstances of the case, CBDT Circular No. 14 of 2001 [252 ITR (St.) 104] and Taxation Ruling TR 2007/1 issued by Australian Taxation Office are relevant in the context of Transfer Pricing Regulations of India, in particular to the case of the assessee? 3. “Whether, setting off of loss with future profits and not assessing the interest income in the hands of the assessee on arm’s length price will cause real loss to the Govt. exchequer?”

Adjourned sine-die.



Int. T.A. 101 & 161/Mds/2003 A.Y. 1999-2000 A.Y.2000-2001

M/s Bharat Overseas Bank Ltd., Chennai

“Whether, the amount collected from the borrowers to meet the interest tax liability could be taxed as interest under the Interest-tax Act, 1974?”

Adjourned sine die


ITA No. 2055 & 2056/Chen/2014.

Virudhnagar Dist. Central Co-operative Bank Ltd.

“Whether a co-operative society carrying on banking business with approval of the Reserve Bank of India, is liable to deduct tax under section 194A on interest paid to is members?”

Fixed on 17-7-2015.



ITA 1952/AHD/2012

Shri Himanshu V. Shah, Ahmedabad.

“Whether deduction u/s 80-IA (4)(ii), which is available to BASIC Telecom Services Providers is also available to Franchisee of such Basic Service providers also, which is only putting EPBAX system without creating infrastructure in the field of telecom?”

Adjourned sine die


ITA Nos.2668,2669 & 2670/Ahd/2012 & C.O.Nos.10, 11, 12/Ahd/2012

The People’s Co-op. Credit Society Ltd., Deesa.

1.“Whether the assessee being a Co-operative Credit Society, in view of its function in providing credit facilities to its members, is into the business of banking and is it not being impeded or hit by the provisions of section 80P(4) of I.T. Act, 1961? Further, in view of section 5 of Banking Regulation Act, 1949 and section 2 of NABARD Act, 1981, whether this

Adjourned sine die

Co-operative Credit Society is carrying on the Banking Bank?” Business, and for all practical purposed acting like a Co-operative

2. “Whether a Co-operative Credit Society being providing credit facility to its members can be held as banking function, so as to deny the benefit of Section 80P(2)(a)(i) by invoking the provisions of section 80P(4)?”


ITA No. 498/AHD/2011

Claris life Science Ltd.

Whether an assessee is liable to Penalty u/s. 221(1) of the Act. In a case where though the Assessee has not paid the self assessment u/s. 140A while filing the return of Income but revises the income by filling revised return of income and pays the tax on the revised income at the time of filing of the revised return of income?”



ITA No. 18/H/2012

M/s Jagathi Publication Pvt. Ltd., Hyderabad.

To hear & decide entire appeal

Adjourned Sine die


ITA no. 417 to 419/hyd/2009

M/s. Matrusri education society Hyderabad.

“Whether collection of capitation fees/donation or any money by whatever name it is called i.e. donation, building fund. Auditorium fund etc. etc, over and above the prescribed fee for admission of students y the society which was accounted for and utilised for the propose of object of the society disentitles it from claiming exemption u/s 11 or u/s 10(23C) (Vi) of the IT Act.?”

Fixed on 10-7-2015. as part-heard


ITA 1845/hyd/2014

M/s. Progressive Construction Ltd. Hyderabad

“Whether on the facts and in the circumstance of the case, the expenditure incurred by the assessee on construction of road on BOT basis is Capital or Revenue? If it is Capital expenditure, whether the same is eligible for depreciation at the rate applicable to building or to an intangible asset as per S.32(1)(ii) ? And, if not whether the same being Revenue expenditure is liable to be amortised over the period of concession?

Fixed on 2-7-2015.




ITA 502/Del/2012

Vireet Inv.(P) Ltd. Delhi

“Whether the expenditure incurred to earn exempt income computed u/s. 14A could not be added while computing book profit u/s. 115 JB of the Act.

Heard on 4-6-2015

Disclaimer- This list has been made on the basis of information gathered from informal and formal sources and is neither sanctioned nor authorised by the ITAT. All care and diligence has been exercised in preparing this list. Any mistakes and omissions herein cannot be ruled out. Any mistake, error or discrepancy discovered may be brought to the notice of the administrator at [email protected]. Neither the publishers nor accept any liability for any loss or damage of any kind arising out of inaccurate or incomplete information in this list. It is requested that to avoid any doubt the reader should cross-check all the contents of this list with the ITAT.


Second appeal preferred before the Appellate Board on the ground that application for restoration filed by appellant before the appellate authority was rejected. The appellant was provided sufficient opportunity to present his case before the Appellate Authority. But, appellant failed to appear without assigning any reason for his continuous absence before the Appellate Authority. Therefore, Appellate Authority was justified in rejecting the restoration application.

In revision, the appellant revised grounds of appeal and contended that he should be heard on the same. However, the revenue raised an objection on the ground that in First Appeal, the said grounds were not raised and, therefore, the same cannot be raised before the Second Appellate Authority. The Board sustained the objection of the revenue and no fresh grounds were allowed for adjudication*.

*On going through the text of the order, it appears that the Board should have allowed fresh grounds of appeal and decided the matter on merit.

Uttam Dresses, Hoshangabad v. CCT, M.P. (2015) 27 STJ 70 (MP-Bd)


In inspection proceedings of the business place of the assessee shortage of 620.95 litres of Govt. sealed arrack and 620.95 litres of unsealed arrack was found. On this ground, assessment was reopened. Assessee contended that sealed arrack was filled in unsealed small bottles for convenience of supply. Authority presumed suppression and calculated turnover at 6 times of quantity detected. In appeal proceedings, assessment was modified by limiting addition by 3 times. HC confirmed the Orders of the Appellate Authority. The said finding was challenged before the Apex Court.

Considering the scheme of sections 16 and 19 of KGST Act, 1963 and after going through the judgments and orders passed by the First Appellate Authority, Tribunal as well as the HC, the Apex Court was of the considered opinion, none of these authorities have had committed any error whatsoever which would call for interference of this court. Accordingly, the appeal was dismissed.

Abraham Mathai v. State of Kerala (2015) 23 KTR 233 (SC)


Appellant’s registration was cancelled vide Order dt. 31-3-2009 for non-submission of returns and non-payment of tax to the tune of Rs. 6,67,588. First Appeal was also rejected by Order dated 24-4-2010. Thereafter, the Commissioner on an application of the appellant allowed him to pay the dues of Rs. 36.83 lakh in instalments. However, there was no record available to show that the Order of the Commissioner was complied with. Therefore, it needed verification. Accordingly, the Appellate Board partly allowed the appeal and remanded the case to the competent authority to verify the above facts and pass appropriate order thereafter.

Kable Mats India Ltd., Reva v. CCT, MP. (MP-Bd)


The Karnataka HC was seized of the matter whether ‘electrical insulated press board or high density board’ was a paper falling under the category of all kinds of papers under Entry No. 69 Schedule-III of the Karnataka VAT Act, 2003? The assessee claimed the questioned goods to fall under third schedule and liable to tax at 4% as applicable to paper. Authorities below held it was taxable at 12.5% under residuary entry. Hence, in Revision Application the question of law before the Court was : “whether electrical insulated press board commonly known as high density board is not paper and does not fall within the third schedule of Sl. No. 69 of KVAT Act?” While answering the question, the Court relied upon the judgment of the Supreme Court in
U.P. v. Kores (India) Ltd. and Encyclopedia of Science & Technology (Vol. 13 P 75) and held in favour of the revenue and against the assessee by holding “paper” in popular parlance is understood as meaning a substance which is used for bearing, writing or printing, or for packing, or for drawing on, or for decorating, or covering the walls.

Raman Boards Ltd. (Unit of ABB Ltd.) v. State of Karnataka (2015) NTN (Vol. 58) 106 (Kar.)


Arising out of determination proceedings as to the rate of tax applicable to above product, the issue before the HC was – “Whether the Image Runners (Multi-function Network Printers) sold by the assessee were required to be classified under Schedule-I Part-B, Entry-18(i) as claimed by the assessee or under Schedule-I, Part-C, Entry-13(i) as held by the Tribunal?” The Madras HC held that the questioned goods partake the character of “Peripheral” of a computer and, therefore, it required to be classified under Entry 18(i) of Part-B, Schedule-I of the TNGST Act, taxable @4% and not @12%.

Cannon India Pvt. Ltd. v. State of Tamil Nadu (2015) NTN Vol. 58 P 128 (Mad.)


In this case decided by he Apex Court, under the BST Act, 1959, following issues were the subject-matter for the consideration of the Apex Court:

  1. Partners liability to pay firm’s taxes u/s. 18,

  2. Interpretation of taxing statute and

  3. Equity in taxing statutes.

The Apex Court on the above law points ruled as under:

  1. Section 18 of the BST Act specifically provided that in respect of the dues of the firm, the liability of a partner is joint and several and, therefore, neither the State Minister of Finance nor the Commissioner could legally enter into any settlement regarding the liability of individual partner in respect of the dues of the firm. The entire liability therefore fell upon each partner of the firm which could not be segregated by such settlement.

  2. Letter of law has to be accorded utmost respect and strictly adhered to especially while interpreting a taxing statute. There ought not exist any scope for impregnating the interpretation by reading equity into taxing statutes.

  3. Equity was out of place in tax law in as much as, a particular income was either exigible to tax or it was not.

  4. In the facts and circumstances of the case, we are of the considered opinion that the HC has rightly examined the issues before it and the judgment and order passed by it did not suffer any error, and, thus, the civil appeal being devoid of any merit required to be dismissed with costs of Rs. 5,00,000.

Pradip Nanjee Gala v. STO And Ors. (2015) 51 PHT 209 (SC) (FB)

D. H. Joshi

Validity of Rules for Builders under MVAT Act/Rules

Q. In the case of L&T Ltd. (65 VST 1)(SC), Hon. Supreme Court has confirmed the liability on Builders and developers. As a follow up, Maharashtra Government has amended Rules about builders. The effect is that if specified certificates etc. are made available the deduction towards land and immovable portion prior to agreement will be given, otherwise it will be restricted as given in the Rules. Therefore there are chances of services/labour/land portion getting taxed which is unauthorised. Whether such compulsory Rules are legal?


The reference is to the Rules which are amended/inserted in the MVAT Rules about builders/developers in pursuance of observations of Hon. Supreme Court in the above referred judgment. The said Rules are reproduced below for ready reference.

“58(1A) In case of construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the time of the transfer shall be calculated after deduction of the cost of the land from the total agreement value. The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered. Provided that, after payment of tax on the value of goods, determined as per this rule, it shall be open to the dealer to prove before the Department of Town Planning and Valuation of the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995. On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.”

“58 (1B) (a) Where the dealer undertakes the construction of flats, dwellings, buildings or premises and transfers them in pursuance of an agreement along with the land or interest underlying the land then, after deductions under sub-rules (1) and (1A) from the total contract prices, the value of the goods involved in the works contract shall be determined after applying the percentage provided in column (3) of the following table depending upon the stage at which the purchaser entered into contract.


Sr. No. Stage during which the developer enters into a contract with the purchaser

Amount to be determined as value of goods involved in works contract

(1) (2) (3)
(a) Before issue of the Commencement Certificate
(b) From the Commencement Certificate to the completion of plinth level
(c) After the completion of plinth level to the completion of 100% of RCC framework
(d) After the completion of 100% RCC framework to the Occupancy Certificate.
(e) After the Occupancy Certificate
Nil %

(b) For determining the value of goods as per the Table of clause (a), it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying the date of completion of the stages referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant. (1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered, then the entire value of goods as determined after deductions under sub-rules (1) and (1A) from the value of the entire contract, shall be taxable. (2) The value of goods so arrived at under sub-rule (1), (1A) or, as the case may be, under sub-rule (1B) shall, for the purposes of levy of tax, be the sale price or, as the case may be, the purchase price relating to the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.”

It appears that due to above Rules there may be situation where in absence of required certificate etc. deduction will get restricted though actually it may be more. Therefore, such portion will get taxed.

The above issue was however contended before Hon’ble Bombay High Court. The validity of Rule was challenged. Hon. Bombay High Court has however upheld the validity of Rules. The relevant observation of Hon’ble Bombay High Court in Confederation of Real Estate Developers’ Association of India – Maharashtra & Others (Writ Petition No.4520 of 2014 & others dated 30-4-2015) can be referred as under:

“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of
“Larsen and Toubro Limited v. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property along with goods. Though Rule 58(1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The amended Rule 58(1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI / TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58(1)(h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.

6. The petitioners further contend that Rule 58(1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under Rule 58(1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under Rule 58(1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”

There were elaborate arguments, as well as deep consideration by Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. Hon’ble High Court recorded its reasons, amongst others in following words:

62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.

63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rules 58(1)(1A) and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules / formulae. Values and items as referred to under Rule 58(1), 58(1A) and 58(1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58(1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value. The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous Rule 58(1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.

64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……

67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require / press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods for as is being a long standing position that in our country levy has status of Constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58(1B) envisages a method of valuation of tax at the stages as have been referred to under the table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”

Thus, the situation is now that the Rules will prevail. Unless the certificates as contemplated are brought no higher deduction will be possible. Though, it may get justified by the above judgment, there will be certainly injustice to the builders and developers, who were otherwise also under doldrums and also further burdened by way of interest etc. The only solution can be that the legislature should once again consider about giving practical procedure about above deductions.

C. B. Thakar


Query No. 1: (Cash Gift u/s. 56 of the Income tax Act, 1961)

‘X’ has taken one lakh rupees as a Cash Gift from his own brother’s son, whether taxable or not?


Section 56(2)(vii) of the Income-tax Act, 1961 reads as under:

“Where an individual or a Hindu Undivided Family receives, in any previous year, from any person or persons on or after October 1, 2009 :-

a) Any sum of money, without consideration, the aggregate value which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

Provided further that this clause shall not apply to any sum of money or any property received –

a) from any relative; or

Explanation – for the purpose of this clause –

a) “Relative means –

i) In the case of an individual “

  1. Spouse of the individual

  2. Brother or sister of the individual;

  3. Brother or sister of the spouse of the individual

  4. Brother or sister of either of the parents of the individuals

  5. Any lineal ascendant or descendant of the individual

  6. Any lineal ascendant or descendant of the spouse of the individual

  7. Spouse of the person referred to in items (B) & (F).

Thus from the above, it is clear that a gift received from brother’s son (nephew) over Rs. 50,000/- is liable to tax in the hands of the ‘X’. As the gift is more than Rs. 50,000/-, the whole amount is liable to tax in the hands of ‘X’.

Query No. 2: (Deduction u/s. 43B)

Employee’s contribution unpaid is disallowable u/s. 43B?


Section 43B reads as under:

“Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under the Act in respect of –

(b) Any sum payable by the assessee as an employer by way of contribution of any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees, or ——

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.”

Section 36(1) provides that “the deduction provided for the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:

(va) Any sum received by the assessee from any of his employees to which the provisions of sub clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

Explanation – For the purpose of this clause “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order or notification issued thereunder or under any standing order, award, contract of service or otherwise.”

From reading both the sections, it is clear that section 43B overrides section 36 and therefore delayed payment of employee’s contribution by the employer is allowable under section 43B.

The aforesaid view has been approved by the Rajasthan High Court in
CIT v. Jaipur Vidyut Vitaran Nigam Ltd. [363 ITR 307], while dismissing the Department’s appeal, the High Court held that though the amount could not be paid on or before the due date under respective Acts, they were deposited on or before the due date for furnishing of income tax returns under section 139 of the Income-tax Act, 1961 and, therefore, in view of section 43B read with section 36(1)(via) of the Act the entire amounts were allowable.

Query No. 3: (Time limit for investments u/s. 54EC)

Investments made u/s. 54EC beyond time limit u/s. 139(1) i.e. before expiry of 139(4) time limit is eligible for exemption?


The exemption up to Rs. 50/- lakhs would be available under section 54EC, if the capital gains arises from the transfer of a long term capital asset, (being the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested in the long term specified asset.

So, no exemption is available, if the amount is not invested within a period of six months after the date of the original asset, whether it is u/s. 139(1) or u/s. 139(4).

Query No. 4: (Applicability of S. 14A from the share of profit from the firm)

An assessee is in receipt of interest & remuneration income from various partnership firms and claims interest & depreciation as expenditure from such income. Can a disallowance u/s. 14A be made by A.O.?


If the assessee has borrowed the amount and invested in the firm, where from he receives, remuneration and share of profit, then, the Assessing Officer is justified in making disallowance u/s. 14A proportionately.

This proposition has been confirmed by the Mumbai Tribunal in
Hoshang D. Nanavati v. ACIT [25 taxmann Com 141], wherein the Tribunal held that the assessee earned remuneration income as also profit share from the same activity of attending office, it would not be fair to treat all such incidental expenditure only for the purpose of earning remuneration income. Having regard to the smallness of the amount involved it would be justified to allocate these expenses in the same ratio in which these expenses were allocated by the Assessing Officer.

Companies Act, 2013

Query No. 5: (Auditor’s Responsibility)

What is the reporting responsibility of the auditor if company is not complying the law of deposit under new Companies Act, 2013?


The MCA has issued Companies (Auditor’s Report) Order, 2015 and notified on April 10, 2015 and it is applicable since then.

Clause (v) of the said report requires an auditor to report:

“In case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and rules framed thereunder, where applicable, have been complied with? If not, the nature of contraventions should be stated, if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal, whether the same has been complied with or not?”

Thus, it is the responsibility of the auditor to report under CARO, 2015.

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc., to AIFTP, having interest to the Members.

CA. H.N. Motiwalla

CESTAT’s Larger Bench has recently pronounced the judgment in the case of
M/s Larsen and Toubro Limited & M/s. Kehems Engg. Pvt. Ltd. [TS-86-CESTAT-2015-ST]
has opened a pandora’s box on the taxability of service element in composite works contract. Majority decision given by Members (Technical) upheld the levy under works contract pre-2007, where the services were classifiable under “Commercial or Industrial Construction”, “Construction of Complex” or “Erection, Commissioning or Installation”, as the case maybe. However, CESTAT President & Member (Judicial) dissented, concluding that prior to said date, composite contract, involving transfer of property in goods and rendition of services, could not be vivisected.

The 5 Member Bench of the Tribunal has held by majority (3:2) that even prior to June 1, 2007, service elements in a composite works contract involving transfer of property in goods and rendition of services are subject to levy of service tax under the categories of ‘commercial or industrial construction service’ or ‘construction of complex service’ or ‘Erection, Commissioning or Installation’, as the case may be.

At the outset, the judgment is relevant only for the period prior to June 1, 2007, and no fresh demands can now be raised by the Department, since even the longer limitation period has expired. The judgment would therefore only affect pending adjudication/appellate proceedings, which have already been initiated against assessees. In such pending cases, the fact of a 3:2 split between the Larger Bench may support the position that the issue is one of interpretation and the longer period of limitation ought not to be invoked. But the story does not end here, if the decision based on the analogy of the majority is adopted then whole of the turnover have to be assessed as taxable under Service Tax and there is bound to be double taxation on major portion of the valuable consideration for the works contract. The settled principle of law that transfer of property in goods can be subjected to tax under the general Sales Tax Law of the State becomes unsettled. Thus, plethora of judgment on this issue needed to be relooked if the analogy decided by the majority decision of the CESTAT is followed. This controversial decision of CESTAT at this juncture, certainly opens the pandora box of sustained litigation.

The genesis of the issue is the introduction of a specific category for levying tax on works contracts under section 65(105)(zzzza) of the Finance Act, 1994 with effect from June 1, 2007, which also seemingly includes ‘Commercial or Industrial Construction Service’ or ‘Construction of Complex Service’ or ‘Erection, Commissioning or Installation Service’ within its ambit.

In the case of GD Builders, the Delhi High Court categorically held that a WCT is liable to service tax prior to June 1, 2007 and that merely because no rules were framed for computation, it does not follow that no tax is leviable. The 5 Member Bench of the Tribunal had to primarily consider whether the GDB Ruling covered the issue referred.

All the 5 Members agreed that GDB Ruling did not arise out of concession by the taxpayer. Majority held that the GDB Ruling is not
per incuriam. Majority also held that the Rulings of Karnataka High Court in
Turbo Precision Engineering and the Madras High Court in Strategic Engineering
are different and distinguishable. However, this aspect has not been sufficiently dealt and in fact, the GDB Ruling does not refer to these High Court Rulings.

The Revenue’s appeals against the Larger Bench decisions in
Jyoti Limited and Indian Oil Tanking Limited have been admitted by the Supreme Court and are pending disposal. However, since the 5 member bench of the Tribunal has ruled on the reference following the GDB Ruling and held against the taxpayer, these Rulings would now prevail unless stayed and the issue has to be finally settled by the Supreme Court.

The 5 Member Bench of the Tribunal Ruling captures the entire legislative history on levy of tax on WCT including the legal fiction introduced by the 46th amendment to the Constitution of India and the catena of decisions on WCT taxation starting from the first
Gannon Dunkerley Ruling to the latest Ruling of the larger bench of the Supreme Court in
Prolab and others. This Ruling also contains a treatise on certain principles of interpretation including per-incuriam, sub silentio, stare decisis, ratio decidendi, dominant intention test, degree of enforceability test, relevance of budget speech, judicial discipline etc.

One of the interesting observations in the Ruling is that the legal fiction created by Article 366(29A) does not change the basic character of a works contract or a catering contract, both of which are service contracts. It is thus observed that a specific constitutional provision and machinery was required only for the State Government to tax the goods portion in a service transaction and not for charge of service tax by Central Government.

The issue dealt in this Ruling relates to pre-June 2007 and is not recurring, though the thesis on the provisions and principles would be very useful for future periods as well. While there is broad consensus on the taxability of WCT post–June 2007, debates on classification and valuation still continue. Some of the issues to ponder in the context of taxability of WCT include:

  • Levy of service tax pre–une 2007 on ‘turnkey projects’, which are recognised as a separate class of WCT as defined under section 65(105)(zzzza) of the Act;

  • Applicability of GDB Ruling and 5–member Bench of the Tribunal Ruling rendered in the context of ‘Commercial or Industrial Construction Service’ or ‘Construction of Complex Service’ or ‘Erection, Commissioning or Installation Service’ to such turnkey projects;

  • Resolution of the overlap of categories of Works Contract Tax, ‘Commercial or Industrial Construction Service’ or ‘Construction of Complex Service’ or ‘Erection, Commissioning or Installation Service’ and applicability of principles of classification post June 2007; and

  • Valuation mechanism for services categorised under ‘Commercial or Industrial Construction Service’ or ‘Construction of Complex Service’ or ‘Erection, Commissioning or Installation Service’ post June 2007.

The major WCT issue which is still debated and unresolved is whether multiple contracts for supply of goods and services with cross fall breach clause/umbrella contract together constitute a single composite WCT. Hope these complexities do not arise in a Goods and Service Tax (“GST”) regime and a separate and clear scheme of taxation is laid out for GST on WCT.

Placing reliance on the 46th Amendment to the Constitution and various Supreme Court judgments upholding bifurcation of composite contracts for levy of sales tax, the Larger Bench of Hon’ble CESTAT held that turnkey/construction contracts, entered into prior to June 1, 2007, would be chargeable to service tax under the pre-existing taxable service categories.

The majority judgment did not lay down specific guidelines with respect to how taxable value of such services would be determined and only made passing references to abatement notifications allowing deduction towards value of goods. In view of the same, valuation of such services during the relevant period may become a subject matter of fresh disputes especially where the composite contracts include land or free supplies etc.

The said judgment would not impact the cases where notices have not been issued and are barred by limitation.

CESTAT 5 Member Bench decision in the case of
Larsen & Toubro Ltd ( & T) vs. CST reinforces the complexity relating to taxation of “building contracts” under the aegis of construction, erection, installation, commissioning and like transactions. The aspects that will now need focus when the matter reaches Supreme Court are:

  • Was the coverage in the entries prior to specific entry of “Works Contract Service” different?

  • Could there have been services simplicitor in building contracts? If not, is it any different from a Works Contract, a contract involving goods and services/labour?

  • Is Entry 97 adequate to enable Central Government to impose tax on service element of such building contracts? Deliverable in a building contract is not “service” but immovable property.

That is the reason, a specific entry was needed to enable taxation of “goods” element where property in the goods is transferred in execution of such contracts. Do we not need such specific entry to deem service element of such contract as “deemed service” or will it suffice to say that “goods” element, which is in the taxation domain of States, is specifically carved out and the balance element is only that of service? If that be so, is it not more likely that the Larger Bench view of the CESTAT will find favour with Supreme Court?

The issue of leviability of service tax on composite transactions involving supply of goods and provision of services prior to 2007 (when the specific taxable category of “works contract services”) has been a vexed issue and has led to several, often contradictory, court decisions in the past. The recent decision of the 5-member Larger Bench of the CESTAT in the case of L&T has to be understood in the above backdrop.

The foremost argument by the majority was that a composite contract
in toto is a service contract and the Central Government has the Constitutional right to levy service tax on the gross value of the works contract i.e. inclusive of the value of goods supplied. Only for the deeming fiction created by Article 366 (29A) of the Constitution wherein the State Governments have been allowed to levy sales tax on goods supplied while executing such contracts, the Central Government has voluntarily allowed an exemption towards the supply portion to avoid dual taxation.

However, this does not seem to be very strong reasoning. It seems difficult to accept that a works contract is exclusively a service contract. If one concedes that it is composite contract, then it readily follows that to tax the service element in a composite contract requires Constitutional Authority in the way it has been done for sales tax.

The majority conclusion in this case was written by the Hon’ble Technical Members (in a 3:2 majority) which categorically held that composite transactions involving supply of goods and provision of services were indeed leviable to service tax prior to 2007. One cannot help but note, with greatest of respect, that this is a rare instance of clear dichotomy of views between the Judicial and Technical members.

While the majority view would hold the field for the time being, in my humble opinion, it does not appear to satisfactorily address the fundamental objections raised by the minority judgment; viz.:

  1. If Section 67 read with the Service Tax Valuation Rules provided for deduction of value of goods from the service tax taxable base, what was the need to provide for exemptions/ abatements under Section 93 of the Finance Act? Exemptions are in the nature of exceptions/largesse from the statutory mandate – if the statute itself envisaged the deduction, why resort to a largesse under Section 93; and

  2. It is a fundamental principle of statutory interpretation that no portion of the statute should be rendered superfluous – if composite transactions were already covered under the pre-existing service tax categories, what was the need to introduce a new category along with a specific valuation provision?

Clearly, this is not the end of this story. As noted in the order itself, this issue is already pending before the Hon’ble Supreme Court (in appeal against earlier CESTAT orders on this issue). For the sake of finality, the assessees would need to wait and watch as to how the Apex Court is going to decide on this matter.

[Source: Article published in Souvenir of National Tax Conference held at Ahmedabad on 11th and 12th July, 2015.]

Mukul Gupta

Background of Section 194IA

Memorandum explaining the provisions of Finance Act, 2013 stated that:-

  • Provisions of Section 139A of the Act r/w Rule 114B requires assessees to quote PAN in documents pertaining to purchase or sale of immoveable properties for value of Rs. 5 Lakh or more and information is to be furnished to the department in AIR by Registrar or Sub-registrar in terms of Section 285BA of the Act r/w Rule 114E in respect of transactions of Rs. 30 Lakh or more, but either PAN number is not quoted or invalid PAN is quoted in the documents.

  • Tax is required to be deducted by the transferee in respect of transfer by a non-resident.

  • Tax is required to be deducted in case of Compulsory acquisition of immovable properties.

In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time provisions of Section 194IA were inserted.

Section 194IA

  1. Any person, being a transferee, responsible for paying (Other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax thereon.

  2. No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty Lakh rupees.

  3. The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation – For the purposes of this section, –

  1. “agricultural land” means agricultural land in India, not being a land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;

  2. “Immovable property” means any land (other than agricultural land) or any building or part of a building.


  1. “Any person” would mean as defined in Section 2(31) i.e. Individual, HUF, Company, Firm, AOP, BOI, Local Authority or Artificial/Juridical Person. However, government is not covered.

  2. “responsible for paying
    (other than the person referred to in section 194LA)” – Section 194 LA provides for deduction of tax at source @ 10% on amount of compensation or enhanced compensation of account of compulsory acquisition under any law of any immovable property (other than agricultural land).

  3. “to a resident transferor”

    In case of Non-residents, provisions of Section 195 apply. Tax in their cases is required to be deducted @ 20% on the amount of Capital Gain.

  4. “any sum by way of consideration” i.e. the money payable for the transfer by the transferee to transferor.

  5. “for transfer” transfer would mean as defined in Section 2(47) of the Act.

  6. “of any immovable property” means any land or any building or part of a building.

  7. “(other than agricultural land)” – Agricultural land is as defined in Section 2(14) of the Act and has been excluded for the reason that Capital Gain thereon is exempt from tax.

  8. “at the time of credit of such sum to the account of the transferor or at the time of payment of such sum”.

  9. “in cash or by issue of a cheque or draft or by any other mode”

  10. “deduct an amount equal to one per cent of such sum as income tax thereon.”

  11. Deduction to be made where the consideration for the transfer of an immovable property is Rs. 50 lakh or more.

  12. The provisions of section 203A shall not apply and accordingly, deductor is not required to obtain TAN.

Comparison to provisions of Section 194LAA

Vide Finance Bill, 2012 Section 194LAA of the Act was proposed to be inserted for providing deduction of tax at source from consideration for transfer of immovable property similar to the provisions of Section 194 IA of the Act. Same was, however, withdrawn considering practical difficulties. The provisions of Section 194IA however have been inserted vide Finance Act, 2013 with following differences:-

  1. Section 194LAA provided for deduction of Tax at source on consideration of Rs. 50 lakh or more in specified cities and on consideration of Rs. 20 lakh or more in other cities;

  2. Deemed consideration on the basis of notified rates was to be considered for the purpose of deduction also.

  3. No registering authority shall register the document, unless the transferee furnished the proof of deduction of income tax and credit thereof to the Government.

Issues in Compliance to provisions of Section 194IA

Sl. No. Issue Possible View
1. Whether provision will apply on transfer of booking/right in the builder’s project?
Since the Section provides for TDS on consideration for transfer of immovable property, provisions will not apply on transfer of booking or right in the builder’s project, since booking cannot be said to be immoveable property.
2. Whether limit of Rs. 50 lakh is to be determined with reference to consideration, to be paid after 1-6-2013 or on the basis of total consideration including payments made before the above date?
In view of language of Section 194-IA total consideration for transfer of immoveable property is to be considered.
3. Whether tax is to be deducted only on the payments made after 1-6-2013 or also on the payments made prior to the above date?
Since as per this Section tax is to be deducted at the time of credit or payment, same will be deductible only on payments made after 1-6-2013.
4. Whether limit of Rs. 50 lakh is w.r.t. each joint transferor or with reference to immoveable property?
As per the section the limit is w.r.t. transfer of an immovable property. Accordingly, section will apply even if property is transferred by two or more joint transferors. In case, however, there are independent rights of transferors in the property and same are transferred by transferors through separate transactions, limit will apply w.r.t. each transfer.
5. Whether the limit of Rs. 50 lakh is applicable in case of joint transferees w.r.t. each transferee or w.r.t. immovable property?
As per the section the limit is w.r.t. transfer of an immovable property. Accordingly, section will apply even if there are two or more joint transferees. In case however there are independent transactions of transfer to two or more transferees, limit will apply w.r.t. each transfer.
6. Whether in order to determine the threshold limit Service tax and VAT is to be included and whether tax is also to be deducted on the amount of Service tax and VAT?
On a reasonable interpretation of the section Service tax and VAT should not be considered as part of consideration and tax thereon should not be deducted. There can however, be a difference of opinion.
7. Whether other payments to be made to the builder like EDC, Electricity line laying charges and other incidental charges will be covered as part of consideration and tax is to be deducted thereon?
Since all these payments will also be in the nature of consideration for transfer of property for the buyer, TDS thereon should be deducted. However, there can be difference of opinion in this regard also.
8. Whether tax will be deductible on payments made to the builder on account of maintenance deposit, club security deposit, car parking etc.?
Tax is deductible on payment of consideration for transfer of immovable property. Accordingly, car parking charges will be covered as same are part of consideration for transfer of immovable property but, deposits, may be for maintenance, club or for any other purpose will not be subject to TDS.
9. Whether the tax is to be deducted on transfer of property located outside India?
The Section will apply when the transferor as well as transferee are residents. Therefore, tax is to deducted even in respect of transfer of property located outside India. Tax is to be deducted also for the reason that income of the transferor will be chargeable in India, being resident.
10. Whether the provisions will apply in case of exchange of property or on payment of consideration by way of kind?
The section provides for deduction of tax at source where any sum is paid by way of consideration for transfer of any immovable property. On strict interpretation it can be said that tax is deductible only when payment of a sum is made either by way of cash, cheque or draft or by any other mode and the provision will not apply in case of exchange or payment of consideration in kind. Held in the case of Chief Accounts Officer Bruhat Bangalore Mahanagar Palike v. ITO (2015) 113 DTR (Bang)(Trib) 209; ITA Nos.719 & 720 /Bang/2014 decided on 14.11.2014 in the context of Section 194LA that “where neither there is quantification of the sum payable in terms of money nor actual payment in monetary terms, it would be unfair to burden a person with the obligation of deducting tax at source and exposing him to the consequences of such default.”
11. Whether provision will apply in case of transfer of Share in a society resulting in transfer of rights in the property?
On reasonable interpretation of the provision, it should apply on transfer of share in the society for the reason that transfer of share would effectively result in transfer of immovable property.
12. Whether provisions will apply to development contracts with the developer?
Subject to answer given in Issue No. 10 above, in case of development contracts, generally, developer transfers a part of built up area to the land owner in exchange of transfer of proportionate land rights. Accordingly, land owner and also developer are the buyers as well as sellers and therefore, both are required to deduct tax at source under the section. In respect of further sale made by developer, buyers will deduct tax on consideration paid to developer.
13. In case of development contracts, at what stage tax is required to be deducted by the developer as well as land owner?
It is a controversial issue in case of development contracts that at what stage transfer takes place; whether at the stage entering into the agreement and handing over the possession of land to the developer or when property is built up and possession of the built up area is given to the land owner. Tax will be deductible when transfer takes place and/or when consideration is deemed to be paid.
14. Whether the provision will apply when payment is directly made by bank or a finance company to the seller on behalf of the transferee?
Provisions will apply even when payment made on behalf of the transferee by the bank or a finance company and the transferee has to ensure deduction of tax at source from that payment also.
15. Whether the provision will apply in case of long-term lease agreements where lump sum premium is paid? How the distinction will be made between long-term lease or short-term lease, say lease is for 2 years or 10 years or 25 years or 99 years?
Provisions will be applicable considering the facts of the case, terms of the agreement and intention of the parties. Generally in case of long-term leases intention of the parties is to transfer substantially the rights in the immoveable property and therefore, tax should be deductible in this section. In case of short-term lease however tax is deductible under Section 194-I.
16. Whether by covering lease agreements under this provision, tax can be deducted at 1% on premium payment instead of 10% under Section 194-I?
As mentioned in issue No. 15 hereinabove, in case of short-term lease, tax should be deductible under Section 194-I and if the intention is to transfer the immovable property, tax should be deducted under Section 194-IA.
17. Whether purchase of property in auction by a bank or financial institution pursuant to default in payment of loan by the owner of the property will be subject to TDS under Section 194IA?
In such cases, sale by the bank or financial institutions will be on behalf of the defaulter and the defaulter is the transferor. In fact, the defaulter will be liable to pay capital gain tax on sale of the property. Therefore the provisions will be applicable and transferee has to deduct tax and deposit the same by giving the details of the transferor.
18. Whether tax is deductable w.r.t. deemed consideration under Section 50C of the Act or on actual consideration if same is less than the deemed consideration?
As per provisions of Section 194IA tax is to be deducted on consideration paid by the transferee to the transferor. Accordingly, deemed consideration mentioned under Section 50C is not relevant. This position is also clear in view of the language of earlier Section 194LAA, which had specific provisions in this regard.
19. Whether tax can be deducted in subsequent payments if the transferee has defaulted in deducting tax in earlier payment?
Yes, the tax should be deducted in subsequent payments if it has not been deducted in earlier payments.

Procedural requirements and consequences of non-compliance

  • As per Section 194IA tax is required to be deducted at 1%. In case, however, transferor does not have PAN, provision 206AA will be attracted and the transferee will be liable to deduct tax at source @ 20%.

  • Transferee on deduction of tax has to furnish particulars to the department in Form No. 26QB. The statement is to be submitted within 7 days from end of the month in which tax has been deducted;

  • The transferee has to print out TDS Certificate in Form No. 16B from the site of the department and is to be provided to the transferor within a period of 15 days from the due date for furnishing the statement in Form No. 26QB.

  • In case tax is not deducted by the transferee consequences for non deduction will be as in case of any other defaulter and the transferee will be liable to pay tax, interest and also penalty under Ss. 201, 221 and 271C of the Act.


The new law will definitely keep a proper track on all high value property transactions in the country and will give the taxing authorities the details in a systematic way. There are, however, controversial issues in compliance of the provision by the transferee, as discussed above, which need to be clarified at the earliest to avoid litigation. For property buyers, the newly inserted section puts additional compliance burden, which they have to comply strictly to avoid penal consequences. Further, in most of the cases, buyers/ transferees are not acquainted with provisions of Income Tax Act and the procedural compliances and therefore, compliance of the provisions results in undue burden and botheration to them. Hence, concept of TDS provisions is a painful exercise for real estate buyers. Only the taxing authorities are the gainer and they have been able to pass on their own responsibility of levying and collecting tax from Capital gain earners.

V. P. Gupta

1. Introduction

1.1 Assessment proceedings and recovery of tax are both separate topics. It is difficult to deal with two topics in this paper. However, the attempt is made to highlight the fundamental principles in brief without discussion by placing reliance on Supreme Court and High Court decisions reported. The authorities have followed the said principles in recent judgments.

1.2 Back assessments, Search assessment and Section 144A are not within the scope of this paper.

1.3 Assessment proceeding is the base of the entire Income-tax Act. If this base is taken away the whole edifice of the Income-tax Act will collapse. Therefore, it is important proceedings that one will have to be very careful while complying with notices of the Assessing Officer [AO].

2. Assessment Proceedings

2.1 Assessment proceedings commences with the issue of notice under Section 143(2). At present in most of the cases formal 143(2) notices are issued along with the annexures. The assessee takes it lightly that it is a formal notice. This is not a correct approach since when the question whether adequate opportunity is given or not, the formal notice is also considered. The assessee should be careful while replying notices under Section 142(2) and 143(2) from time-to-time. The reply must be given with necessary evidences in respect of each query raised. For example, in case of cash credits, evidences like confirmation duly signed from the depositor, address, PAN and the source of the deposit along with copy of accounts should be furnished. It is advisable not to be indifferent towards compliance of Section 142(2) and 143(2) notices with annexures.

2.2 Whenever difficult query is raised, the assessee at times either gives vague reply or avoids to give reply. This is dangerous. In fact, the assessee should try to find out the proper reply and should give the reply with adequate evidences. This is because it is difficult to produce additional evidence before the appellate stage. Non-compliance of notices under Sections 142(2) and 143(2) attracts penalties under different provisions of law.

3. Notice under Section 143(2)

3.1 The A.O should issue notice under Section 143(2) within six months from the end of the financial year in which the income tax return is submitted. If no notice is issued within the statutory period then it cannot be issued thereafter. If the notice under Section 143(2) is issued after the expiry of statutory period, the assessment is invalid
[DCIT v. Maxima Systems Ltd. 344 ITR 204 (Guj) and DCIT v. Mahi Velly Hotels & Resorts 287 ITR 360 (Guj) approved by Supreme Court in case of ACIT v. Hotel Blue Moon 321 ITR 362 (SC)].
The Department must prove that the notice under Section 143(2) is issued within time
[CIT v. Lunar Diamonds Ltd. 281 ITR 1 (Del.)].

3.2 Notice under Section 148 cannot be issued unless the limitation period for issue of Notice under Section 142(1) or 143(2) is over
[CIT v. K.M. Pachayappan 304 ITR 264 (Mad.) and CIT v. Qatalys Software Technologies Ltd. 308 ITR 249 (Mad.) and CIT v. TCP Ltd. 323 ITR 346 (Mad.) and CIT v. Abad Fisheries 246 CTR 513 / 204 Taxman 267 (Ker.)].

4. Assessment proceedings are quasi judicial

4.1 The proceedings are quasi-judicial since conclusion or decisions taken by the Officer have some attributes of judicial decision though there are no attributes of a judicial proceeding. This attributes can be discussed in three principal aspects:

  1. The Assessing Officer should act in a judicial manner, proceed with a judicial spirit and come to a judicial conclusion. Though he is an Executive or Administrative Officer engaged in the administration of the act, his function is fundamentally quasi-judicial. He has to very often apply the principle of judicial decisions to the facts of the case before him with due care. His duty is to administer the provision of the Act in the interest of public revenue and to prevent evasion or escapement of tax legitimately due to the state but as pointed out by the Supreme Court in
    CIT v. Simon Carves Ltd. 105 ITR 212 this does not mean that he should exercise his powers only in a manner beneficial to the revenue and adverse to the assessee. However, it is also held by the Supreme Court in the case of
    CIT v. Central India Industries Ltd. 82 ITR 555 that making of the assessment in a particular manner cannot be affected merely because it affects the assessee adversely. His conclusions are not final but subject to appeal. Exercise of such power, from its very nature, is governed by judicial and not arbitrary consideration and postulates the existence of reason for the conclusion arrived at. He may not act on suspicion or conjecture, or pure guess without reference to any material or evidence
    [Dhakeswari Cotton Mills Ltd. v. CIT 26 ITR 775-782 SC]. He should proceed without bias, give sufficient opportunity to the assessee to place his case before him, and conduct himself in accordance with rules of justice, equity and good conscience. It is in his discretion what material he would accept and what he will reject but he cannot pick and choose some part of the material produced before him ignoring others and without considering the assessee’s explanation for discrepancies
    [Indore Malwa United Mills Ltd. v. State of Madhya Pradesh 60 ITR 41 SC].

  2. A second requirement is that the A.O. should act independently and arrive at his own conclusions. He should not, except where the statute specifically permits him, allow his superior officer to interfere in his conduct of a case or act on the opinion, advice or dictates of a superior authority
    [J.K. Synthetics Ltd. v. CBDT 83 ITR 335 SC]. Nor can he claim privilege regarding his communications with his higher authorities which may have taken place contrary to law.

  3. A third important requirement is that he should give a fair hearing to the assessee before deciding against him [M. Chockalingam and M. Meyyappan v. CIT 48 ITR 34 SC]. This would involve also a right in the assessee to inspect the records and obtain the substance of all relevant documents, such as statements, orders, reports etc. so as to be able to lead evidence in rebuttal or to cross-examine witness who have given evidence against him
    [Gargi Din Jwala Prasad v. CIT 96 ITR 97 (All.)]. It also means that the assessee should be given a reasonable time and opportunity to produce such evidence as he may consider necessary
    [Munnalal Murlidhar v. CIT 79 ITR 540 (All.)].

4.2 While the provisions of the Indian Evidence Act do not apply, the Assessing Officer is bound to apply general principles of evidence as to onus of proof, presumptions and consideration of evidence to contradict, vary or add to written documents
[CIT v. Umrao Lal 180 ITR 403 (All.)]. Non-registration of a compulsorily registrable document will affect its admissibility on the question of its effect on the property, though not for collateral issues.

5. Rule of natural justice to be followed

5.1 The A.O. is not fettered by technical rules of evidence and pleadings; he is not absolved of the obligation to comply with the fundamental rules of natural justice which have to be known in administrative law as the principles of jurisprudence. Compliance with the audi alteram partem rule of natural justice is an indispensable requirement of valid assessment order
[Jagdambika Pratap Narayan Singh v. CBDT 100 ITR 698 SC].

5.2 An order passed in violation of principle of natural justice may not, however, render the act one totally outside the Act. It may still be an order under the Act liable to be corrected or set-aside to be redone after complying with such principle.

5.3 If the A.O. proposes to act on such material as he might have gathered as a result of his private inquiries behind the back of the assessee, he must disclose the substance of all such material, though not the sources thereof to the assessee and if this is not done, the principle of natural justice stands violated [Kishanchand Chellaram v. CIT 125 ITR 713 SC].

5.4 The provision contained in Section 142(3) and Section 143(3)(ii) gives statutory recognition to the principle of natural justice, audi alteram partem.

5.5 Whether rule of natural justice is followed or not depends upon the facts of each case.

6. Opportunity of hearing

6.1 From the language of the Sections 142 and 143(3)(ii) as well as from the above discussion, it will be clear that an assessment under Section 143(3) can be made only after the assessee has been heard fully in three aspects:

  1. He should be given an opportunity to produce the evidence on which he relies in support of the return [143(2)(ii)];

  2. If, in respect of the evidence so produced or in view of other material gathered under Section 142(2) by the officer, he requires any clarifications or evidence on any specific points he should give the assessee an opportunity to furnish explanation or produce documents [143(3)(ii)]; and

  3. If the Assessing Officer has gathered material on which he desires to rely, he should disclose to the assessee the substance of such material and give him an opportunity to have his explanation in regard thereto [142(3)].

6.2 The Assessing Officer under Sections 142 and 142(2A) has been empowered to gather material in the manner he deems necessary to complete the assessment. He can make any inquiry for the purpose of aforesaid and collect material from various sources but once he has collected that material Section 142(3) cast on him the obligation to give an opportunity to the assessee of being heard so that he may explain the material so gathered by him. Failure by him to comply with the requirements of Section 142(3) i.e. use of material gathered by him without confronting the assessee with the same would render the proceedings illegal.

7. Furnishing of information / evidences from time to time during assessment proceeding

7.1 In the course of hearing, the A.O. may seek clarifications and further information to enable him to decide whether the return should be accepted or not and, if not, the basis on which and manner in which the assessment should be completed. He can seek such information by the issue of notice under Section 142(1) or Section 143(3) or summons under Section 131 or in such manner as he may consider appropriate. Under this sub-section the Officer has discretion to call for additional evidence where he believes that the evidence produced is not sufficient but the provision does not absolve the assessee of producing all evidence in his possession or power. Unless the assessee proves his case, he cannot complain that the Officer had not asked him for further evidence.

8. Gathering of material

8.1 Section 142, expressly, and Section 143(3), by implication, confer a power in the A.O. to make such inquiries as he may consider necessary.

8.2 Such inquiries may be carried out privately or confidentially. He can also summon witnesses and record their statement in the presence of the assessee or even behind his back. Only, he should satisfy himself as to the correctness of the information and as has already been pointed out, the substance of any information sought to be used against the assessee should be put to him and he should have a fair opportunity consistent with the principles of natural justice, to rebut the same.

8.3 Evidence may be tendered on an affidavit before the AO.

8.4 The language of Section 143(3) makes it clear that the assessment order should be based on the evidence before the Officer. In the absence of any evidence, the assessment order will be vitiated.

9. Cross-examination

9.1 If an assessing authority is relying on the testimony of a witness, the assessee is to be afforded an opportunity to cross-examine him
[CIT v. Eastern Commercial Enterprises 210 ITR 103-111 (Cal.)]. It is not open to the assessing authority to get over this hurdle on the plea that the witness had not been produced by the assessee
[Gargi Din Jwala Prasad v. CIT 96 ITR 97 (All.)].

9.2 In the absence of any opportunity for cross- examination, the assessment is invalid
[CIT v. D.M. Joshi & Ors. 239 ITR 315 (Guj.)]. Request for permission to cross-examine person searched not allowed. Finding that principles of natural justice not followed, the assessment is invalid
[CIT v. SMC Share Brokers Ltd. 288 ITR 345 (Del.) – SLP by Revenue dismissed 322 ITR 2 (Stat)]. However, in the absence of cross-examination the assessment is set aside by directing to provide the opportunity
[Kalra Glue Factory v. Sales Tax Tribunal 167 ITR 498 (SC)]. The cross-examination depends upon the facts of each case.

10. Affidavit

10.1 Evidence may be tendered on an affidavit before the A.O. Such evidence is legal and can be acted upon by the A.O and appellate authority. Should the A.O, or the CIT(Appeals) or the Appellate Tribunal regard the same as not sufficient proof of the contents thereof, they should cross-examine the deponent and, if dissatisfied, call upon the assessee to produce documentary evidence in support of the contents of the affidavit. If no such thing is done, the affidavit by itself should be regarded as sufficient proof as held by Supreme Court in the case of
Mehta Parikh & Co. v. CIT 30 ITR 181 (SC).

11. Books of Account and allowability of expenditure

11.1 Books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof
[Tolaram Daga v. CIT 59 ITR 632-636 (Assam)]. Even before a court of law, such books are evidence under Section 34 of the Evidence Act after the relevant entries are proved by oral evidence or are admitted. As the rules of evidence are not strictly applicable to the assessment proceedings, the A.O. should accept such books and / or entries therein, barring the special deeming and specific onus provisions, to be correct unless he has in his possession some material to the contrary
[Adl. CIT v. Jay Engineering Works Ltd. 113 ITR 389-392 (Del.)].

11.2 At the same time, book entries made by an assessee, specially when they go against the averments of the assessee, are an extremely important piece of evidence but it cannot be said that they are conclusive. It is open to the assessee to show that the entries are incorrect, and if an assessee pleads so, he should be given proper opportunity to show that book entries do not disclose the correct state of fact
[Pullangode Rubber Produce Co. Ltd. v. State of Kerala 91 ITR 18 (SC)]. Entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of the provisions contained in the Act
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].

11.3 Thus, the onus clearly lies on the assessee to prove that the entries ostensively showing receipt of money in cash are not real receipts
[Debi Burman v. CIT (1994) Tax LR 452-456 (Cal.)]. In that case, it has been held that the entries in the exercise book in the possession of the assessee and wherein the entries were made by him in his own hand are per se sufficient as evidence needing no corroboration by the paying party.

11.4 Where no specific defect is found in the books of account, accounts cannot be rejected. If there are some discrepancies, the entire books of account cannot be rejected. The addition may be made to the extent of discrepancies only
[Bharat Dana Bera v. ITO 153 ITD 421 (Mum.).

12. Value of Audit Report when books were destroyed

12.1 Where the books of account of an assessee are examined and audited under statutory provisions and audit report is submitted thereabout, reliance could be placed by the income tax authorities on such a report treating the same as “a material” in case the books of account of the assessee were destroyed by fire etc. This is so because an auditor is required by the statute to find out if the deductions claimed by the assessee in its balance sheet and profit and loss account are supported by the relevant entries in assessee’s books of account. Therefore, it may be presumed that the auditor has done so and has found that the books of account supported the claim for deductions made by the assessee [Adl. CIT v. Jay Engineering Works Ltd. 113 ITR 389-392 (Del.)].

13. Other Principles

13.1 Once the genuineness of the borrowing is proved that it is for the purpose of business, it is not in the power of the A.O. to disallow the deduction either on the ground that the rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].

13.2 Normally, the ordinary rule, namely, that revenue expenditure incurred in a particular year is to be allowed in that year, is to be applied. Thus, if the assessee claims that expenditure in that year, the Department cannot deny it. However, in a case where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of “matching concept” is satisfied, which up to now has been restricted to cases of debentures
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].

13.3 The A.O. did not allow the claim of assessee under Section 80HH and Section 80I though claimed in the original return since the assessee omitted to revise the claim under Section 80HH and Section 80I while filing the revised return. The CIT(A) dismissed the appeal. The ITAT, Mumbai in the case of
Chicago Pneumatic India Ltd. v. DCIT 15 SOT 252-255 (Mum.) held as under:

“It is well-settled that the onus lies on the assessee to make right claim and such claim must be made within the framework of provisions of the Act. However, this situation may result into genuine hardship to the assessees, as the assessees would be left with the option only to proceed under Section 264, that too in case they have not gone into appeal before the Commissioner (Appeals) on the same issue or the Commissioner (Appeals) has not admitted those issues. Other option would be to approach the CBDT under Section 119 for getting the specific relief. Both these options involve time as well as engagement of other administrative authorities, which can be otherwise devoted to other important issues. Therefore, one has to look into the duties of the Assessing Officer rather than the powers of the Assessing Officer, because the Government is entitled to collect only the tax legitimately due to it, otherwise the tax not so collected would be violative of the Article 265 of the Constitution. The CBDT as back as in the year 1955 issued Circular No. 14 (XL-35) dated 11-4-1955 as to what should be a departmental attitude towards refund and reliefs to the assessees. In this circular, the CBDT has recognised the fact that responsibility for claiming refunds and reliefs rests with the assessees; even then the CBDT has directed the officers to draw the attention of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or the other. Further, the Board also issued Circular No. F. 81/27/65-IT(B), dated 18-5-1965 defining the duties of the PROs in providing assistance to the public. In this circular, the CBDT has also advised the PRO to visit the Government / commercial establishments to provide them assistance in filing correct returns and making eligible claims. These circulars issued by the CBDT almost 4-5 decades before cast a duty on the Assessing Officer to collect only the legitimate tax. It is a settled position that the Circulars issued by the Board are binding on the subordinate income-tax authorities………. Thus, there is a strong case for reciprocity to be shown by the revenue authorities while completing assessments and to avoid administrative hardships to the assessee………. Therefore, the Commissioner (Appeals) was to be directed to consider the claim of the assessee at the revised figures on merits and decide the same according to the provisions of Sections 80HH and 80-I.”

The above referred Circulars still hold good today since they are not withdrawn till now.

13.4 The Gujarat High Court in case of
S.R. Koshti v. CIT 276 ITR 165-175 laid down certain general principles in Para No. 22 which is reproduced as under:

“A word of caution. The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. This Court, in an unreported decision in case of
Vinay Chandulal Satia v. N.O. Parekh, CIT [Spl. Civil Application No. 622 of 1981 dated 20-8-1981], has laid down the approach that the authorities must adopt in such matters the following terms:

“The Supreme Court has observed in numerous decisions, including
Ramlal v. Rewa Coalfields Ltd. AIR 1962 SC 361, State of West Bengal v. Administrator, Howrah Municipality AIR 1972 SC 749 and Babutmal Raichand Oswal v. Laxmibai R. Tarte AIR 1975 SC 1297, that the State authorities should not raise technical pleas if the citizens have a lawful right and the lawful right is being denied to them merely on technical grounds. The State authorities cannot adopt the attitude which private litigants might adopt.”

14. Presumption and burden of proof in assessment

14.1 The normal presumption is in favour of good faith. This presumption applies to the
bona fides of the assessee’s transactions as well as his accounts. It cannot be presumed that an assessee is a notorious black marketeer or smuggler or that, in the circumstances prevalent in the accounting year, he must have entered into transactions not lawful, above board or dishonest.

14.2 The presumption is similarly regarding his books of account, that the entries in the account books are made in the ordinary course of business and there is no concealment of income. The books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof
[Tolaram Daga v. CIT 59 ITR 632 (Assam) and Addl. CIT v. Jay Engineering Works Ltd. 113 ITR 389 (Del.)]. It is for the department to prove to the contrary and there should be adequate grounds for disbelieving the accounts. It is for A.O. to prove that there is income from that source. The assessee cannot prove the negative.

14.3 Upon rejection of assessee’s unsatisfactory / unbelievable evidence, the burden of proof shifts to the assessee:

Where an assessee produced unsatisfactory and unbelievable evidence the department can reject the same and need not produce contrary evidence before drawing an adverse inference against the assessee. Again, if the income should be shown as having suddenly diminished from the previous year, the onus will be on the assessee to explain. The onus is on the assessee to show that his return is correct, as all the facts are exclusively in his knowledge and that he has incurred a loss.

14.4 Burden of proof as regards status – on the assessee:

Again, it is for the assessee to prove his status viz., that he is a partner or a member of an Undivided Hindu Family, or a member of an association of persons or a person not ordinarily resident etc.

In general, the onus is on the revenue authorities to show that the amount which is sought to tax, is liable to tax and the onus is on the assessee, who claims an allowance or exemption to establish such claim
[Parimisetti Seetharamanna v. CIT 57 ITR 532 (SC)]. But such onus would not extend to proving a mere negative, as for instance, where an assessee denies that a third person is his benamidar.

15. Onus regarding ownership of property and income – on the Department

15.1 There is no presumption that property standing in the name of a certain person is other than his property. The burden rests upon the department to show that the apparent is not the real state of affairs. In
CIT v. Durga Prasad More 82 ITR 540 (SC), the Supreme Court observed that science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore the Courts and tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law. The court also observed that though an apparent state of affairs must be presumed to be real until it was shown to the contrary, this rule should not be blindly applied to all situations. In a case where a party relied on self serving recitals in his own documents, it was for that party to establish the truth of those recitals. The taxing authorities are entitled to look closely into all the circumstances to find out the reality of such recitals.

16. Possession of valuables – ownership can be presumed

16.1 The Supreme Court in
Chuharmal v. CIT 172 ITR 250 has opined that what is meant by saying that the Evidence Act does not apply to proceedings under the Income-tax Act is that the rigour of the rules of evidence contained in the Evidence Act are not applicable; but that does not mean that when the taxing authorities are desirous of invoking the principles of the Evidence Act in proceedings before them, they are prevented from doing so. Section 100 of the Evidence Act embodies a salutary principle of common law jurisprudence viz. whereas a person is found in possession of anything, the onus of proving that he is not the owner is on that person. This principle can be attracted to a set of circumstances that satisfy its condition and is applicable to taxation proceedings.

17. Admission by Parties

17.1 Assessment based on admission of assessee that particular amount is liable to be included in his total income, is a valid assessment
[Ratanchand Bholanath v. CIT 210 ITR 682 (MP)]. An admission made by the assessee is a good, relevant and substantial piece of evidence that can be used against him and is, very often, the best evidence that can be available against him
[Murugesan & Bros. v. CIT 88 ITR 342 (SC) and Kanshi Ram Wadhwa v. CIT 138 ITR 830 (P&H)]. But it is not conclusive and it is open to the assessee to show that it was incorrect or was given under some erroneous impression
[Pullangode Rubber Produce Co. Ltd. v. State of Kerala 91 ITR 18 (SC) and Greenview Restaurant v. ACIT 263 ITR 169 (Gau)]. But the admission should be construed as a whole and with regard to the circumstances and context in which it was made. The effect of the admission should be limited to the fact admitted and does not extend to claims or contentions that may be open to an assessee otherwise [Palwankar v. CIT 117 ITR 768 (MP)]. An admission regarding facts by a duly authorised counsel is equally binding on the assessee unless withdrawn [Jayshree Chit Fund & Services v. CIT 127 ITR 740 (Ker.) and CIT v. Jyoti Tubewell Co. 164 ITR 301 (Pat.) and CIT v. Dayaram Vasudev 57 Taxman 209 (Bom.)].

18. Method of Accounting and Income Computation and Disclosure Standards

18.1 Profits and gains from business and income from other sources should be computed either on mercantile or cash basis in accordance with method of accounting regularly followed by the assessee subject to Section 145(2). Section 145 provides option to the assessee either to follow mercantile system or cash system but it should be in accordance with the method of accounting regularly followed. If the books of account are maintained say on mercantile basis in accordance with the method of accounting regularly followed such books should normally be accepted except the A.O. points out the defects in the method of accounting. This method should be followed consistently. It does not mean that the wrong method should be followed consistently. Even if the wrong method is followed consistently, the A.O. has a statutory duty to make the adjustment according to the right method of accounting. The assessee valued the closing stock and work in progress on the basis of cost of raw material but did not include the overheads. In fact the overheads should be the part of the cost of raw material. Therefore it was held that even if the method is followed consistently, it is the statutory duty of the A.O. to make the adjustment since the method found was such that the correct income cannot be deduced therefrom since each year is a self contained assessment year
[CIT v. British Paints India Ltd. 188 ITR 44 (SC)].

18.2 Section 145(2) empowers the government to notify income computation and disclosure standards to be followed by any class of assessee or in respect of any class of income. The words accounting standards is substituted for Income Computation and Disclosure Standard [ICDS] by Finance (No. 2) Act, 2014 with effect from 1-4-2015. The Central Government has notified on 31-3-2015 – 10 Income Computation and Disclosure Standards with effect from 1-4-2015 i.e. Financial Year 2015-2016 relevant to A.Y. 2016-2017. The notification provided that Income Computation and Disclosure Standards should be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “ Income from other sources”. Preamble to each standard provided that each standard should be followed for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account. Income Computation and Disclosure Standards are not to be applied for cash method of accounting followed by the assessee who is carrying on business or profession or has income from other sources and also to the assessees who have income from salary, property and capital gain. The accounting standards prescribed by the ICAI are required to be followed for maintenance of books of accounts. Therefore, the computation of income from A.Y. 2016-2017 is going to be cumbersome.

18.3 Preamble to each standard also provides that in case of conflict the provisions of Act shall prevail. Section 145(1) is subject to Section 145(2). However, if there is conflict between sub-section (1) and (2), sub-section (1) shall prevail and the profits and gains of business or income from other sources should be computed either on mercantile or on cash basis in accordance with method of accounting regularly followed by the assessee.

19. Assessment

19.1 The assessment order should determine not only the total income of the assessee but also the amount payable by him. The Assessing Officer should apply his mind to the facts before him, apply the relevant law and come to a positive conclusion that the income assessed belongs to the assessee before him. The assessments under the Act have to be made every year and even if there is a dispute regarding the ownership of the income, the officer must come to a conclusion and cannot hold up his decision till the dispute is resolved in the ordinary courts [CIT v. Hirjee (H) 23 ITR 427 (SC)].

20. Remand Proceedings

20.1 The CIT(A) has now no power to set-aside the assessment. However the CIT(A) can call for the remand report on specific issues. The A.O. should submit the remand report only on those issues on which the remand report is called for and should not travel beyond that. The powers of the Tribunal are confined to the subject matter of appeal as constituted by the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal. Thus, when the Tribunal allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of A.O. is confined to such subject matter only. If the specific direction is given then there is no scope whatsoever for the A.O. to travel beyond those directions or restrictions
[Kochhar (SP) v. ITO 145 ITR 255 (All.).

Recovery of Tax

21. When assessee is deemed to be in default

The amounts specified in the demand notice as payable should be paid within 30 days from the date of receipt of notice. However, if the A.O. is of the opinion that it is detrimental to the revenue he may require the assessee to pay the demand in a shorter period as may be specified in the notice. The interest @ 1% per month shall be payable for the delay in making payment of demand.

21.1 The attention is drawn to the provisions of Section 220(1A) read with 2nd proviso to Section 220(2) which is inserted with effect from 1-10-2014 by Finance (No. 2) Act, 2014. It is provided that interest as per the original demand notice payable is reduced as a result of appellate authority and increased as a result of higher appellate authority, the assessee shall be liable to pay interest under Section 220(2) from the date of original demand notice till the amount is paid. It appears that Section 220(1A) read with 2nd proviso to Section 220(2) are inserted in consonance with the decision of the Delhi High Court in the case of
Girnar Investment Ltd. v. CIT 340 ITR 529 which has distinguished Supreme Court decision in the case of
Vikrant Tyres Ltd. v. ITO 247 ITR 821 (SC) on facts. To illustrate the addition of Rs. 1.00 crore is made. The assessee has made stay petition which is granted. The assessee has not paid any demand towards outstanding demand. The addition is deleted by CIT(A) and therefore there is no demand. Subsequently, Revenue prefers appeal to the ITAT which is dismissed. The appeal to the High Court by Revenue is also dismissed. The appeal to the SC is finally allowed in favour of revenue and against the assessee. The assessee is required to pay the demand plus interest on demand of Rs. 1.00 crore from the date of original demand notice i.e. if the SC decides say after 20 years than the assessee will be required to pay the interest for 20 years @ 1% per month though there was no demand after giving effect to the CIT(A) order till Supreme Court decides. If the ITAT sets-aside the order to recompute the disallowance then on the reduced disallowance the interest is payable from the date of original demand
[ACIT v. HCL Corporation Ltd. 68 SOT 272 (Del) URO]. The levy of interest under Section 220(2) is appealable under Section 246A
[ITO v. Rajeswari Hospitals 34 ITR(T) 371 (Cochin)].

21.2 The interest may be reduced or waived under Section 220(2A) if the Commissioner is satisfied that the genuine hardship to the assessee is caused and that the non-payment of interest is due to the circumstances beyond the control of the assessee and that the assessee has co-operated in any inquiry during assessment proceedings and recovery proceedings. The discretion for waiver or reduction of interest has to be exercised judiciously. How the discretion is to be exercised judiciously
[Supreme Court in the case of B.M. Malani v. CIT 306 ITR 196]. It is observed as under:

“The provision for levy of interest for non-payment of tax within time, although statutory in nature, has to be interpreted by the principle of purposive construction. That principle should also be applied for the purpose of determining whether any hardship had been caused or not.

The ingredients of genuine hardship must be determined by the dictionary meaning thereof and the legal conspectus attending thereto. For that purpose another well-known principle, namely, that a person cannot take advantage of his own wrong, may also have to be borne in mind. Another principle that has to be borne in mind is that a statutory authority must act within the four corners of the statute.

A genuine hardship would, inter alia, mean a genuine difficulty. That per se would not lead to the conclusion that a person having large assets would never be in difficulty as he can sell those assets and pay the amount of interest levied.

The Commissioner has discretion not to accede to the request of the assessee but that discretion has to be judiciously exercised. He has to arrive at the satisfaction that the three conditions laid down in Section 220(2A) of the I.T. Act, 1961 have been satisfied. They are (i) payment of the amount has caused or would cause genuine hardship to the assessee (ii) default in payment of the amount on which interest has been paid or was payable was due to circumstances beyond the control of the assessee and (iii) the assessee has co-operated in any inquiry relating to the assessment or any proceedings for the recovery of the amount due from him.”

21.3 The Finance Act, 2012 has inserted sub-clause (2B) to Section 220 with effect from 1-7-2012 whereby it is provided that if the interest is charged for failure to deduct or to make the payment of tax deducted as per intimation under Section 200A(1) then the interest under Section 220(2) shall not be charged. This provision is with a view to avoid charging of interest twice. In other words, for failure to deduct tax or for making payment of the tax deducted the interest @ 1% per month shall be charged either under Section 220(2) or under Section 201(1A) but not under both the sections.

21.4 The Finance Act, 2015 has inserted sub-clause (2C) to Section 220 with effect from 1-6-2015 whereby it is provided that if the interest is charged for failure to collect the tax or to make the payment of tax collected as per intimation under Section 206(CB) then the interest under Section 220(2) shall not be charged. This provision is with a view to avoid charging of interest twice. In other words, for failure to collect tax or for making payment of the tax collected the interest @ 1% per month shall be charged either under Section 220(2) or under Section 206C(7) but not under both the sections.

21.5 In the absence of demand notice which is a basic requirement for invoking the provision of Section 220 of the Act, the assessee could not have been treated to be an assessee in default and therefore the subsequent proceedings under Sections 220 to 226 of the Act are without jurisdiction
[Saraswati Moulding Works v. CIT 347 ITR 161 (Guj.)].

21.6 If the assessee fails to make the payment of tax demanded within 30 days or in the instalments, if granted under Section 220(3) then the assessee shall be deemed to be in default.

22. Stay of Recovery [Section 220(6)]

If the assessee has preferred an appeal and if the AO grants the time on such terms and conditions as may be specified the assessee shall not be deemed to be in default Section 220(6).

22.1 The assessee can apply to A.O. under Section 220(6) for keeping the demand in abeyance till the disposal of appeal. If the A.O. reject the application than the application may be made to the higher authorities. The A.O. normally rejects the application on the ground that mere filing of appeal is no ground for stay of demand as per CBDT Instruction No. 1914 dated 2-12-1993. It is a rule that the instructions are to be read as a whole and not in part. It is stated in Para Nos. B & C of the said instruction that the higher authorities may grant stay following the CBDT Instruction No. 1914 dated 2-12-1993 on the ground that the assessee’s case is covered by the appellate order in his own case or is covered by the SC or High Court judgments or it is highpitched or due to severe financial crises etc. The CIT(A) has also power to grant the stay.

22.2 The Rajasthan High Court in the case of
Maheshwari Agro Industries v. Union of India 346 ITR 375 (Raj) has discussed all the Instructions and Circulars issued by the CBDT from time to time. The Rajasthan High Court has taken a view that the CBDT Instruction No. 96 dated 21-8-1969 still holds good following the Delhi High Court judgment in the case of
Valvoline Cummins Ltd. v. DCIT 307 ITR 103 and held that CIT(A) is empowered to grant the stay. The Delhi High Court in the case of
Soul v. DCIT 323 ITR 305 and Rajasthan High Court in the case of
Urban Improvement Trust v. ACIT 209 Taxman 22 (Raj.) (Mag) also held that Instruction No. 96 dated 21-08-1969 still holds good to the effect that if the income assessed is twice than the return, it is unreasonably highpitched.

22.3 The authorities are not in habit of passing speaking order. The Gujarat High Court in the case of
Hitech Outsourcing Services v. ITO 372 ITR 582 held as under:

“…………………………………In our view, when the matter is to be considered for grant of stay against any demand made of tax, it may be required for the authority to prima facie consider the merits and balance of convenience and also irreparable injury. None has been examined nor considered. In any event, as the appeal is pending, we leave it at that. Suffice it to observe that when the application is to be considered and decided, it would be required for the concerned authority to record the reasons and then to reach to the ultimate conclusion as to whether the stay should be granted or not and if yes on what condition. In absence of any reasons, the order cannot be sustained ……………………………… In any event, until fresh order is passed below the stay application and/or final order in appeal, whichever is earlier, the ad interim relief granted by this Court for not to take coercive action shall remain in operation.”

22.4 If the assessee has preferred an appeal to the ITAT, he may apply to ITAT for stay of demand. The department is not supposed to recover till the disposal of stay petition by the Tribunal. This is so held by Gujarat High Court in the case of
Gujarat Maritime Board v. ACIT 220 CTR 390. The Bombay High Court in case of
DIT(E) v. ITAT 361 ITR 469 by following its earlier decision in the case of
UTI Mutual Fund v. ITO 345 ITR 71 (Bom.) held that ITAT was within its power to order the refund of the amount withdrawn forcibly from the bank account before the expiry of time limit for filing the appeal before the Tribunal and before the disposal of stay petition by ITAT. The Bombay ITAT in the case of Maharashtra Housing and Area Development Authority v. ADIT 66 SOT 66 by following its earlier decision in the case of
Maharashtra Electricity Co. Ltd. v. CIT 81 ITD 299 (Bom.) held that the Assessing Officer contradicted the basic principles laid down in the decisions viz. (i) that the Assessing Officer had taken the coercive action before the expiry of time of filing the appeal against the order of the Commissioner (Appeals); (ii) the action was taken even prior to the disposal of the stay application of the assessee; and (iii) no prior notice was given to the assessee before taking the recovery action under section 226(3). Thus, in view of the above judicial principles the Assessing Officer has misused his powers and the action of recovery from the bank account of the assessee is a gross violation of the directions as well as the basic rule of law and principle of natural justice. Accordingly, the revenue is directed to refund the entire amount to the assessee within 10 days from the date of receipt of order.

22.5 Section 254(2A) is empowered to grant the stay up to 180 days initially and grant further stay up to 365 days only and that the Tribunal shall dispose off the appeal within the time specified in the order granting the stay. The ITAT is also empowered even to grant the stay beyond 365 days for valid reasons. This is so held by Gujarat High Court in the case of
CIT v. Vodafone Essar Gujarat Ltd. Special Civil Appli. No. 5014 of 2015 pronounced on 27th June 2015. The reliance was placed by the Gujarat High Court on SC decision in the case of Commissioner of Customs and Central Exercise,
Ahmedabad v. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC) and
Commissioner v. Small Industries Development Bank of India Tax Appeal No.341 of 2014 (Guj.)

23. Penalty for failure to make the payment of tax as per demand notice

If the assessee defaults in making the tax payable within the time allowed then over and above interest under Section 220(2) he is liable for penalty of any amount not exceeding the total demand. The penalty under Section 221 is not automatic but discretionary. The discretion has to be exercised judiciously and not arbitrarily. The A.O. may not levy the penalty even if there is default in making the payment of the outstanding demand if it is shown to the A.O. that the default is due to genuine difficulty and hardship. The A.O. may also issue the certificate to TRO who is empowered to recover as per Rules of the 2nd Schedule. The recovery may be enforced by attachment and sale of movable and immovable property or by appointing Receiver.

24. Garnishee Order – Section 226(3)

The A.O. is empowered to recover the outstanding demand from the assessee by issue of notice under Section 226(3) i.e. garnishee order. It is obvious that the object of Section 226(3) is to follow up the money due to the Income-tax department in the hands of either the assessee or any person who is holding money on behalf of the assessee. The section, however, does not empower the A.O. to follow the money in hands of the bona fide transferee from the assessee even before the dues have accrued. Section 226(3) is applicable only if the amount is payable and not otherwise. The service of notice before attachment is mandatory at the last known address by the A.O. The property which is exempt from attachment cannot be attached. For example, balance of PPF Account cannot be attached since it is exempt from attachment
[Dineshchandra Bhailalbhai Gandhi v. TRO 362 ITR 380 (Guj.)].

25. Conclusion

25.1 While complying the notices under Sections 142(1) and 143(2) if above referred principles are kept in mind it will help in the assessment proceedings and also in the appellate proceedings.

[Source: Article published in Souvenir of National Tax Conference held at Ahmedabad on 11th and 12th July, 2015.]

CA Ashvin C. Shah

1. Introduction

The Principal Commissioner/Commissioner of Income-tax (hereinafter referred as Revisional Authority) commands a unique position within his territorial jurisdiction. He, apart from being immediate head of assessing officers within his charge, has to perform judicial act as revising authority. He has to safeguard interest of the revenue as also to provide necessary relief to a harassed taxpayer. He has to keep a balance between the tax collector and the taxpayer. He has an equal obligation to the taxpayer. Section 263 of Act casts a duty on the Commissioner of Income-tax to enhance or modify assessment or cancel the assessment and direct a fresh assessment, if any, order passed by the Assessing Officer, Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner u/s. 144A; Joint Commissioner in exercise of the powers conferred or assigned to him by the prescribed authority (hereinafter referred as “an Assessing Officer”) is found to be erroneous and prejudicial to the interests of the revenue. However, such a revisional order can be made after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary.

2. Order

There must exist an order, which is sought to be revised by the Commissioner. An order which is sought to be revised must be in writing. The concept of the words “any order” is very wide. However, if an assessment order does not contain any satisfaction for initiation of penalty proceedings, such an order cannot be revised because the proceedings for levy of penalty are independent proceedings and separate from the assessment proceedings as held by the Delhi High Court in
Addl. C.I.T. v. J.K.D’Costa (1982) 133-ITR-7. Same view has been expressed by the Rajasthan High Court in
C.I.T. v. Kesari Mal Parasmal (1986) 154-ITR-484 and by the Calcutta High Court in
C.I.T. v. Linotype and Machinery Ltd. (1991) 192-ITR-337. All orders made by an Income Tax Officer or Assistant Commissioner or Deputy Commissioner made with or without the directions issued under section 144A, shall be liable to be revised under the said section. The order made by the appellate authority cannot be revised. In respect of matters, which have not been agitated before, considered, dealt with or decided by the First Appellate Authority, the order shall be deemed to be an order of the Assessing Officer and the Revisional Authority shall be competent to exercise revisional jurisdiction.

3. Jurisdiction

The jurisdiction cannot be exercised unless and until the Revisional Authority makes out that the impugned order of the Assessing Officer is erroneous and is also prejudicial to the interests of the revenue. Both the preconditions are cumulative, concurrent and must coexist. If one of it is lacking, the power to revise cannot be exercised. “Erroneous” means suffering from errors or mistakes. The expression ‘erroneous’ has been explained and expanded by insertion of Explanation 2 by the Finance Act, 2015 with effect from 1st day of June, 2015 namely:- “For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, – (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board u/s.119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person”.

3.1 If the Assessing Officer fails to make an enquiry into the truth of the facts stated in the return filed by the assessee before accepting the statement made by the assessee his order can be said to be erroneous and the Commissioner may be justified to revise, if facts are found to the contrary. However, the learned Commissioner should indicate the basis on which he comes to the
prima facie conclusion and should also apprise the assessee as to the material on the basis whereof he comes to the conclusion that the order is erroneous. After indicating his reasons for such a conclusion and after hearing the assessee, he should give reasons for rejecting the plea of the assessee. The Commissioner should examine the merits of the objections raised by the assessee.

3.2 With the insertion of Explanation 2 and on its applicability, if an order is passed without making inquiries as deemed necessary by the Competent Authority or non-making of a required verification the order shall be deemed as ‘erroneous’. To illustrate in case of share application money mere receipt by a cheque/banking channel having PAN and confirmation alone would not suffice, the Assessing Officer should examine credit worthiness, source of receipt, recording in the audited accounts and other relevant aspects preferably with verification from the Assessing Officer of the applicant company/person, if practicable and possible. Similarly in respect of deductible expenditure, deductions, reliefs and allowances claimed, inquiry is to be made. Much vigilance is necessary at the level of Corporate Advisors/Authorized Representatives, as to fulfilment of these requirements.

3.3 The impugned order shall be deemed as ‘erroneous’ if it is not in conformity with any order, direction or instruction issued by the Central Board of Direct Taxes u/s. 119 of the I.T. Act. hence, it is desirable that the Corporate Advisors/Authorised Representatives remain well-equipped with complete data of such orders, directions, instructions which are of binding nature on the Assessing Officer and to see that the impugned assessment is in accord therewith and not ignorant of it.

3.4 The impugned order must be in accord with the binding precedents laid down on the subject by the Hon’ble Supreme Court and the Hon’ble High Court, which are otherwise binding under Articles 141 and 226/227, respectively of the Constitution. If the impugned order is contrary to the law laid down by the Hon’ble Courts, then such an order would be deemed as ‘erroneous’ and the competent authority is to correct and make it in accord with the binding precedents. To maintain consistency orders made on the issue in question in other persons case, would have to be followed. It is in accord with Article 14 of the Constitution. The Corporate Advisors/Authorised Representatives are well-advised to keep a complete record of binding precedents and see that they are followed not faulted but respected. Similar is the duty castes on the Competent Authority, if brought to its notice by the assessee.

3.5 However, it should not be an endeavour of the Commissioner of Income-tax to find one or other minor fault or mistake or lapse on the part of the Assessing Officer but the object should be to correct an erroneous order, which may affect the tax administration as a whole and which involves prejudices to the income-tax administration. The Madras High Court held in Venkatakrishna Rice Co. v. C.I.T. (1987) 163-ITR-129 that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act; the prejudice that is contemplated under section 263 is prejudice to the income-tax administration as a whole; section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate’s order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue. The Supreme Court in
Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 observed: “The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the A.O. Every loss of revenue as a consequence of an order of the A.O, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law”.

3.6 The Supreme Court in
CIT v. G.M. Mittal Stainless Steel P. Ltd. (2003) 263 ITR 255 observed that the satisfaction must be one objectively justifiable and based on material either legal or factual when available, it cannot be mere ipsie dixit of the Commissioner. The Supreme Court in
CIT v. Greenworld Corporation (2009) 314 ITR 81 held: “The jurisdiction u/s. 263 can be exercised only when both the following conditions are satisfied (i) the order of the Assessing Officer should be erroneous, and (ii) it should be prejudicial to the interests of the Revenue. These conditions are conjunctive. An order of assessment passed by the Assessing Officer should not be interfered with only because another view is possible”. The Apex Court in
CIT v. Max India Ltd. (2007) 295 ITR 282 observed: ‘Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. When the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law’. In my view supremacy of law has been recognised.

3.7 Full Bench of Guwahati High Court in
CIT v. Jawahar Bhattacharjee (2012) 341 ITR 434 observed: ‘Not holding such inquiry as is normal and not applying the mind to relevant material in making an assessment would be an erroneous assessment warranting exercise of revisional jurisdiction’. It held ‘cases of assessment orders passed on a wrong assumption of facts, or an incorrect application of law, without due application of mind or without following the principles of natural justice are not beyond the scope of section 263 of the Act’.

4. Record

It is the bounden duty of the Revisional Authority to examine the record of the assessee before assuming jurisdiction. Attention of the Revisional Authority can be drawn by any lower authority including the Assessing Officer himself. It can be a source but not in a mechanical manner. He should examine the point issued by himself and after examination, verification and satisfaction may issue show cause notice. Record includes dissolution of partnership taking place after passing of assessment order as held in
South India Steel Rolling Mills v. CIT (1997) 224 ITR 654 (S.C.).

4.1 The Apex Court in CIT v. Shree Majunathesware Packing Products & Camphor Works (1998) 231 ITR 53 held: ‘ In view of the clear words used in clause (b) of the Explanation to s. 263(1), it is open to the Commissioner, while calling for and examining the record of any proceeding, not only to consider the record of that proceeding but also the record in relation to that proceeding available to him at the time of examination. The Commissioner can take into consideration the valuation report called for by the Assessing Officer before making the assessment but submitted by the valuer after the assessment’.

5. Show Cause Notice & Service

The show cause notice containing all the information on the basis whereof the Commissioner forms his opinion as to the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue must be sent and served on the assessee in the manner required u/s. 282 of the Act. The Commissioner should give adequate, sufficient and reasonable opportunity to represent. The S.C. in
CIT v. Ramednra Nath Gosh (1971) 82 ITR 888 did not approve of the action on finding that the service made was not a proper service. The Rajasthan High Court in
CIT v. Girdhari Lal (1984) 147 ITR 379 observed that it is well-settled that the power of attorney given to an agent should be construed strictly and from that power of attorney only such authority which has been conferred expressly or by implication, should be taken into consideration.

5.1 The show cause notice should be detailed, pointing out the mistakes or inaction which needs correction. No new issue de hors the notice can be made as a basis of the order. The Andhra Pradesh High Court in
CIT v. G.K. Kabra (1995) 211 ITR 336 observed that it is necessary for the Commissioner to point out the exact error in the order which he proposes to revise. In final order the Commissioner cannot travel beyond the issues raised in the show cause notice. Taking up of any new issue would be in violation of principles of natural justice and

6. Our duty

It is our bounden duty to minutely examine the show cause notice, the issues raised therein and to pin-pointedly reply and meet with each and every error or inaction and support it with detailed explanation with the supporting material. It is equally advisable to adduce additional evidence/material to justify the action of the Assessing Officer, supported by case laws and to co-operate. Notice should be seriously taken note of and not in a casual manner. Personal appearance is desirable.

7. Order

The Competent Authority on receipt of the reply and after giving a personal and patient hearing at his own level to pass a reasoned and speaking order highlighting the fulfillment of two conditions precedent and considering the supporting material and pleas raised by the assessee. The Revisional Authority is entitled to pass such order thereon as the circumstances of the case justify. The Commissioner can enhance or modify the assessment. He can cancel the assessment and direct a fresh assessment. If he sets aside the assessment and directs a fresh assessment, he should give guidelines, on the basis whereof fresh order is to be made. If the assessment is set aside, it should not be set aside as a whole but should be set aside only in part, to the extent the order is erroneous and on the points, which have made the order erroneous and prejudicial to the interests of the Revenue. It is a quasi-judicial function and must be discharged with due care and precaution, with full fairness and good conscience and in judicial manner and not as a futile exercise.

8. Limitation

A Revisional Order can be made within two years from the end of the financial year in which the order sought to be revised has been passed by the Assessing Officer. The only exception to the above said rule is that an order may be passed at any time in the case of an order, which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. While computing the period of limitation, the time taken in giving an opportunity to the assessee to be reheard under the proviso to sec. 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

8.1 Where items other than item sought to be revised by the Commissioner are the subject of reassessment the period of limitation for revision by the Commissioner begins from the date of the original assessment not from reassessment in which the item was not dealt with. The doctrine of merger does not apply in such a case as held by the Supreme Court in
CIT v. Alagendran Finance Ltd. (2007) 293 ITR 1.

9. Remedy

An appeal u/s. 253 can be filed against order of the competent authority before the Income-tax Appellate Tribunal, within 60 days for the date of receipt of the order. Statement of facts and grounds should be drawn after minute examination of the impugned order, original order, material/evidence adduced earlier, the show cause notice, detailed reply etc.

10. Whether Explanation 2 to Sec. 263(1) is prospective or retrospective?

Explanation 2 has been inserted with effect from 1st day of June, 2015 and primarily to nullify view expressed on the expression ‘Erroneous’ by the Apex Court, High Courts and Income-tax Appellate Tribunal. However, it expands the meaning of the expression ‘Erroneous’ earlier construed and interpreted by the Hon’ble Courts. Though it has been inserted as an Explanation but to expand its meaning and to read its meaning different to the one arrived at consistently by the Courts and its natural meaning, hence, it can be claimed that it is ‘substantive’ in effect, bringing in a large number of cases not ‘erroneous’ earlier and putting additional burden of extra revenue payment, hence, prospective and effective on all orders made by the Assessing Officer on or after 1-6-2015. It cannot be said to be corrective. It is well settled proposition that when a provision imposes additional penal liability, such provision should be strictly construed/interpreted and in favour of the taxpayer. That apart the legislature in its wisdom has made it effective from 1-6-2015 and not retrospectively from any earlier date. Hence, it should be considered as prospective and effective on assessment orders made on or after 1-6-2015. At best it can be applied on all orders passed by the Revisional Authority on or after 1-6-2015.

10.1 The Supreme Court in
CIT v. Vatika Township P. Ltd (2014) 367 ITR 466 observed: ‘The proviso added to section 113 of the Act is not beneficial to the assessee. On the contrary, it is a provision which is onerous to the assesseee. Therefore, the normal rule of presumption against retrospective operation would apply. The fundamental rule is that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication’. It has been consistently held that a provision must be read subject to the rule that in the absence of an express provision or clear implication, the Legislature does not intend to attribute to the amending provision, a greater retrospectivity than is expressly mentioned’. It is settled law that a taxing provision imposing liability is governed by the normal presumption that it is not retrospective as held in
S.S. Gadgil v. Lal And Co. (1964) 53 ITR 231 (SC).

11. Conclusion

It has been noticed that many Assessing Officers take the solemn act of framing an assessment in casual manner, ignoring binding precedents and circulars of the Board and without making desired or required investigation, examination and verification at their level, causing loss of revenue and enhancing evasions. Hence, Explanation 2 has been inserted in order to do justice with equality and uniformity. The readers are advised to be well-equipped with law and adduce material/evidence supported by case laws at the assessment stage, in the scrutiny assessment, to avoid exercise of revisional power and to avoid unending litigation and harassment at all levels. Vigilance and due diligence at all levels is demand of the day.

[Source: Article published in Souvenir of National Tax Conference held at Ahmedabad on 11th and 12th July, 2015.]

N. M. Ranka
Sr. Advocate

The Finance Minister in his Budget speech in February, 2015 announced proposals to monetise gold i.e., converting the country’s gold holding into loanable assets to spur spending and investment, and limit the need to import gold. The stock of gold in India that is held by households and institutions namely, temples and other religious places, charitable trusts etc is virtually a dead investment that is neither monetised nor traded. India’s gold holdings are estimated to be over 20,000 tons worth about Rs. 60 lakh crore at the current market price. About 800-1,000 tons of gold imported every year increases the nation’s stock of this precious commodity.

The Government has since issued a draft Gold Monetisation Scheme (GMS in short) inviting suggestions from the stakeholders. Its objectives are as follows:-

  1. To mobilise the gold held by households and institutions in the country.

  2. To provide a fillip to the economy’s gems and jewellery sector by making gold available as raw material on loan from the banks.

  3. To be able to reduce reliance on import of gold over time to meet the domestic demand since we produce gold within the country.

Working of the Scheme

The Scheme involves the purity verification of the gold, its conversion into gold bars of 24 ct purity: its deposit for credit in the Gold Savings Account with the bank of the depositor’s choice and lending of gold on interest and its utilisation for other purposes by the banks.

(i) Purity verification, conversion into pure gold and its deposit

Bureau of Indian Standards (BIS) has approved nearly 350 hallmarking Centres all over the country. They will act as purity test centres for GMS as they are well equipped to certify the purity of the gold jewellery in a short span of time. The purity test centres will inform the intending depositor, after a preliminary test, the approximate amount of pure gold in the gold ornaments that he proposes to be converted into gold bars for the purpose of deposit in the Gold Savings Account. If the depositor agrees, he will have to fill up a bank-KYC form and give his consent for melting the jewellery. If the depositor doesn’t agree to the melting, he can take back his jewellery. After receiving the customer’s consent for melting the jewellery, a further test of purity will be conducted called the Fire Assay Test. The customer can watch, from the viewing gallery, the entire process of melting and assaying the gold. The gold ornaments will then be cleaned for its dirt, studs, meena, etc. The studs etc. will be returned to the customer. The jewellery will be melted and its purity ascertained. If the customer is not satisfied with the results of the Fire Assay Test, he will have the choice of refusing to accept, in which case, he can take back the melted gold in the form of gold bars after paying a nominal fee to the Centre. Alternatively, he may agree to deposit the gold, in which case, the fee will be paid by the bank if the customer agrees to open a Gold Saving Account with it. He will be given a certificate from the Gold Collection Centre certifying the amount and purity of the gold deposited. The gold will be transferred toone or the other 32 gold refineries that exist in the country.

(ii) Opening of Gold Saving Account with the bank

On production of the certificate from collection centre, the bank will open a Gold Saving Account for the customer and credit the quantity of gold into that account. The customer will be paid interest on the deposit which will be decided by the bank. The tenure of gold deposit will be for a minimum period of one year with a roll out in multiples of one year. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself, i.e., at the time of deposit of gold and opening of the Gold Saving Account. The minimum quantity of gold that a customer can deposit is proposed to be only 30 grams- this is to encourage the small depositors to allow their gold ornaments to be used for productive purposes.

(iii) Utilization of the gold deposits with banks

As per the Scheme, the gold deposited with the banks can be utilized for any of the following purposes.

  1. Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR)

    To incentivise banks, it is proposed that they may be permitted to deposit the mobilised gold as part of their CRR or SLR requirements with the Reserve Bank of India.

  2. Foreign Currency

    Banks may sell the gold to generate foreign currency. The foreign currency thus generated can be used for onward lending to importers.

  3. Coins

    The bank may also convert mobilised gold into coins for onward sale to their customers

  4. Gold Exchanges

    Banks may buy and sell gold on domestic commodity exchanges, where mobilised gold can be delivered.

  5. Lending to jewellers

    The gold can also be used for lending to the jewellers. The procedure will be somewhat as follows:-

    1. Gold Loan Account: The jeweller, on the basis of the terms and conditions of the bank, may open a Gold Loan Account at the bank.

    2. Delivery of gold to the jeweller: When a gold loan is sanctioned, the jeweller will receive physical delivery of gold from the refiner. The bank will in turn make the requisite entry in the jeweller’s Gold Loan Account.

Challenges for the success of the Scheme

The success of the Scheme will largely depend on the response from the gold depositors who generally comprise households, institutions like trusts, temples and other religious places, and persons holding gold bars or coins by way of investment. The Indian households see the gold ornaments not as a mere investment but more as a status symbol. It is a well-known fact that in most of the Indian households, especially in southern States, gold ornaments are passed on from generation to generation as family; they are considered very sacred and have sentimental value. They become a part of the cultural heritage of the families. The villagers regard jewellery as their only means of savings. There is general aversion against parting with jewellery and getting it melted for earning a parting interest. They may not like to part with their ornaments. Selling or pledging of jewellery is perceived as a social ignominy.

As of now, investment in the Scheme will fetch higher price for every year for keeping gold in the Scheme. The interest will be in the form of gold and if the price of gold goes up, the interest will also go on. The Scheme will also be attractive to investors who invest gold in Exchange Traded Funds (ETFs). They can invest their holdings in gold ETFs and gold mutual funds to earn additional return. They can still hold the same amount of gold but can earn additional tax free return on their holdings per year. However, it is to be seen whether gold ETFs can be submitted to the bank under this scheme.

Exemption from income-tax, capital gains and the wealth tax

The Scheme proposes to provide exemption from income tax, capital gains tax and wealth tax. It is, however, not an amnesty scheme like the Voluntary Disclosure Scheme announced earlier. At the time of opening the Gold Saving Account, the bank may ask the depositor to meet its KYC (Know Your Customer) requirements, as per which, every depositor will have to furnish his photograph, proof of residential address, Permanent Account Number and identity proof. This is likely to discourage the depositors who have large amount of gold ornaments not disclosed to the Income-tax Department and have not disclosed them in their wealth-tax returns. In respect of households where gold is a family inherited property, it will be difficult to produce any documents to prove their ownership. There may also be a fear in the minds of depositors that the Income-tax Department may initiate enquiries and reopen assessments by issuing notices u/s. 147 of the Income-tax Act, 1961 and u/s. 17 of the Wealth-tax Act even though the Wealth-tax Act has been abolished by the Finance Act, 2015 from the A.Y. 2016-17. The depositors, may therefore, not only have to pay wealth tax and income tax, but may also be subjected to levy of interest and penalty. However, the Scheme may be attractive to investors who buy gold bullion for the purpose of investment. These investors can use the Scheme to earn some interest while protecting the increase in the future prices of gold.

Some suggestions

In order to make the Scheme attractive, the following are some of the suggestions for consideration:

  1. Since, purchase vouchers are generally not preserved for the purchase of jewellery, no questions should be asked about its source, for the purposes of income tax or wealth tax from assessees who have not been subjected to wealth tax in the past at least, to the extent of one kg. of jewellery in the case of every married lady, one half kg. for every unmarried girl and one-fourth kg. per adult male.

  2. Although the Wealth-tax Act has been abolished by the Finance Act, 2015 from the A.Y. 2016-17, no action should be taken for any of the earlier assessment years under the Act. This concession should form part of the Scheme and should therefore, be a judicially recognised commitment.

  3. In order to make the Scheme more attractive, the rate of interest on gold deposit accounts should be higher at about 4% and should be the same as in the case of interest payable on Saving Bank Accounts. It should also be exempt from income tax irrespective of the size of the amount involved.

  4. The depositor should be allowed to obtain loan against their deposits in case of need.

  5. In order to encourage the senior citizens to offer the jewellery for gold deposit accounts, the interest should be payable monthly so that it becomes a source of their living. They should also be permitted freely to bequeath the gold lying in their gold deposit accounts to their legal heirs.

  6. Lot of gold ornaments are lying in India belonging to the NRIs. They should also be permitted to open the gold deposit accounts and have the gold transferred to their country of residence in case they so desire.

  7. The banks need not ask the depositor to meet KYC requirements in the case of agriculturists who have been enjoying income tax exempt income.

*Comments are welcome at:- [email protected]

S. R. Wadhwa