Q.1. Eligibility to ITC

I have a question related to GST ITC claim. A Petrol Pump dealer who is registered under GST Act and totally engaged in retail sale of petrol and diesel which is Non-GST sale under the GST Act. The same dealer purchased a tank lorry and paid GST along with purchase cost of tank lorry. Then the he entered into a contract with Indian Oil Corporation. As per the contract the tank lorry will run for the transportation of petrol and diesel and the dealer will get the amount of transportation. The transportation income is taxable under GST. But the Indian oil Corporation is deducting the GST under RCM so the dealer has no obligation to collect and pay tax. But in that case will the taxes paid on tank lorry be available for ITC to the dealer.

Please reply.

Reply:

Under GST, ITC is available as per Section 16 of CGST Act. The said section prescribes criteria for eligibility to ITC.

Section 17 prescribes the apportionment of credit as well as blocking of credit.

Section 17(1) to (3) reads as under:

“17. (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

It can be seen that as per Section 17(3) where RCM is payable by recipient the supply will be classified as exempt supply.

Rule 43(1)(a) prescribes manner of claiming credit in respect of Capital Goods when used for exempt supply. The said Rule is as under:

“43. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be credited to his electronic credit ledger; …”

It can be seen that where capital goods are exclusively used for exempt supply, no ITC can be available or it is blocked.

In the present query, the lorry is exclusively used for transportation service, where the Recipient is paying RCM.

Accordingly, the supply gets classified in to exempt supply and the ITC on lorry purchase becomes ineligible due to above rule. Accordingly, I opine that no ITC on lorry purchase.

Q.2. Interest and Valuation

A supplier has supplied goods to recipient at agreed amount. The supplier is covered by MSME Act. The recipient delayed payment to supplier and hence he has to pay interest as per MSME Act to the supplier. Whether supplier is liable to discharge liability on such interest under GST Act?

Reply:

The taxable value under GST Act is also referred to as consideration.

Section 15 of CGST Act provides meaning of Valuation to find out taxable value of supply. Section 15(1) & (2) reads as under:

“15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include–––

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation. – For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.”

It can be seen that as per section 15(2)(d), interest for delayed payment is part of valuation. It is true that there is no agreement for payment of interest by recipient to supplier and it is being received by supplier as per statutory scheme of MSME Act. However, simply because such interest is received as per MSME Act, it cannot get any separate treatment.

Ultimately, for supplier it is receipt of interest. The word ‘interest’ used in Section 15 is not qualified by any specific kind of interest. So interest of any nature can be covered in said term. In our opinion, the said interest is part of valuation and the supplier will be liable to discharge GST on same.

Q.3. Rule 35 and tax collection

Supplier has not mentioned GST separately on invoice and has not paid tax, considering goods supplied as exempt. Subsequently, due to different interpretation tax has become payable on said supply. Whether the supplier can claim deduction of tax element from invoice value (reverse working) for calculating tax on net reduced value? It will save tax on tax?

Reply:

Normally the supplier is liable to tax on transaction value as per Section 15. The transaction value is exclusive of GST, if it is charged separately. This position is clear from Section 15(2)(a).

Therefore, where tax is charged separately, tax element is not to be included for calculating tax.

However, when tax is not collected separately, reference can be made to Rule 35. Said Rule is reproduced below:

“35. Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax.-Where the value of supply is inclusive of integrated tax or, as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, namely,-

Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) ÷ (100+ sum of tax rates, as applicable, in %)

Explanation.- For the purposes of the provisions of this Chapter, the expressions-

(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made;

(b) “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.”

As per the rule, where the value of supply is “inclusive”of IGST/CGST etc., the benefit of said rule can be taken. In present case, by no stretch of imagination , it can be said that the supplier has mentioned amount in invoice as inclusive of tax. It is supplied as exempt.

Therefore, there cannot be said to be intention to include tax in value charged in invoice. Subsequently, though tax has becomes payable, the value cannot be said to be inclusive of tax when it was charged in invoice. There should be some positive indication to show that value in invoice was inclusive of tax, like in invoice “inclusive of tax”. However, being sold as exempt, there cannot be such possibility and hence no application of Rule 35.

1. Classification of Supply :

Facts :

The applicant, involved in renting of re-usable unit load equipment for shared use, has sought advance ruling in respect of the following questions:-

  1. Whether the equipment leased by the applicant located and registered in Karnataka to its other GST registration located across India (say CIPL, Kerala) would be considered as lease transaction and accordingly taxable as supply of services in terms of Section 7 of the Central Goods and Services Tax Act, 2017.

  2. If the answer to Question 1 is yes, what is the value on which GST has to be charged i.e. whether it should be lease charges or the value of equipment in terms of Section 15 of the CGST Act and KGST Act read with relevant Rules?

  3. What are the documents that should accompany the movement of goods from CUPL, Karnataka to CIPL, Kerala?

  4. Whether movement of equipment from CIPL, Kerala to CIPL, Tamil Nadu on the instruction of CIPL, Karnataka can be said to be mere movement of goods not amounting to a supply in terms of Section 7 of the CGST Act and KGST Act, and thereby not liable to GST?

  5. With reference to Question 4 above, what are the documents that should accompany the movement of the goods from CIPL, Kerala to CIPL, Tamil Nadu?

Observations & Findings :

The branch of applicant, CIPL, in other States is also under the same entity and has no separate existence under the Companies Act. The assets and liabilities of the Company are held in common and hence the assets of one branch do not have separate existence as per the Companies Act or under the Income Tax Act, 1961. They are part of the same entity. There cannot be a transfer of an asset between two persons under these Acts. Therefore, it is clear that the branch of the same company cannot enter into a lease transaction or rental transaction with another branch of the same company as per the provisions of the Companies Act or Income tax Act, 1961, as they are not transactions between two persons and no revenue could be recognized in this transaction. The assets are held in common and there cannot be distinction between assets of CIPL, Karnataka and CIPL, Kerala as per the Companies Act. Hence CIPL, Kerala is also possessing the goods given to it from CIPL, Karnataka as owner of the goods itself and not as a lease hold asset, as far as all the business laws of the country are concerned.

All the supplies made in the course of business from CIPL, Karnataka to CIPL, Kerala would be covered under the scope of supplies under section 7(1) of the CGST Act as between deemed distinct persons as per Section 25(4) of the CGST Act, 2017.

Since the two entities are deemed to be distinct persons, and the transfer of goods are effected from CIPL, Karnataka to CIPL, Kerala without any transfer of ownership of such goods, the same amounts to supply of service as per entry no. 1(b) of the Schedule II to the CGST Act which states that “any transfer of right in goods or of undivided share in goods without transfer of title thereof, is a supply of services.” Hence only for the purposes of the CGST Act, 2017, the transfer of such goods on lease as per the agreement entered to between CIPL, Karnataka and CIPL, Kerala would amount to lease or renting of the goods for a consideration and hence would be a transaction of supply of services and the nature of such services is “lease”, as it is for a period of time.

It can be noted that the recipient, CIPL, Kerala who is the recipient of the goods is eligible for full input tax credit on the transaction between the applicant and the CIPL, Kerala and hence the value declared in the invoice would be the value of supply of goods or services or both as per the second proviso to Rule 28 and hence would be treated as the value of such supply.

The impugned transaction is a supply of services and hence the applicant has to raise a tax invoice for the transaction as per Section 31(2) of the CGST Act, 2017.

From the combined reading of the Rule 55 and Rule 138 of the CGST Rules, 2017, it is seen that the applicant is not supplying goods, but services which involve the movement of such goods given on lease/ rent and hence they are liable to issue a delivery note as per Rule 55 at the time of removal of such goods for the purposes of renting. Further, they shall also generate an e-way bill for movement of such goods as per Section 138(1) based on the details of such delivery note before the movement of such goods and consignment value of the goods shall be the market value of such goods and not the value of supply of services involved in such transaction.

Though the CIPL, Kerala is in possession of the goods, it is CIPL, Karnataka who is the owner of the goods. The CIPL, Kerala is only a lessee of the goods and they have to give the goods back on the termination of the contract of lease between CIPL, Kerala and CIPL, Karnataka and the movement back of such goods should be accompanied by a delivery note issued by CIPL, Kerala and also an e-way bill generated by CIPL, Kerala in accordance with the provisions contained in Rule 55 and Rule 138 of the CGST Rules.

In case CIPL, Karnataka instructs CIPL, Kerala, on termination of contract between them, to transfer the goods to CIPL, Tamil Nadu, then the new contract between CIPL, Karnataka and CIPL, Tamil Nadu entered. CIPL, Kerala, in such a situation, under the instructions of CIPL, Karnataka, arranges / facilitates to transport the goods to CIPL, Tamilnadu, and thus the applicant acts as an agent of CIPL, Karnataka in the said facilitation and not in independent capacity. Once the CIPL, Karnataka issued instructions to CIPL, Kerala, the contract of lease entered between them in respect of the said goods ends and the goods now held by CIPL, Kerala as the bailee of CIPL, Karnataka. Hence CIPL, Kerala would be acting in two capacities, first as an independent entity under the CGST Act for the leased goods while the lease contract of the specific goods is in force and next as a bailee of CIPL, Karnataka. Once the lease contract is over and the goods are no more under the control of CIPL, Kerala. If the goods are to be transferred immediately after the contract of lease is over, the CIPL, Karnataka should enter into the lease transaction with the CIPL, Tamil Nadu and raise a delivery note and e-way bill with ship from address as “CIPL, Kerala” and Ship to address as “CIPL, Tamil Nadu” for those specific goods which are given on lease or rent and in effect, it would amount to CIPL, Karnataka picking the goods and sending to CIPL, Tamil Nadu.

In such a case, the goods in movement is a consequence of the lease contract between the CIPL, Karnataka and CIPL, Tamil Nadu which is a supply by CIPL, Karnataka. The transaction is nothing but the combination of the transaction of returning back the goods on lease by CIPL, Kerala to CIPL, Karnataka and again sending the same goods on a new lease contract by CIPL, Karnataka to CIPL, Tamil Nadu. It cannot be said that the goods are moving not as a result of supply under section 7 of the CGST Act, 2017. It cannot be termed as a mere movement without any involvement of supply and the said transaction of supply of goods on rental or lease basis by CIPL, Karnataka to CIPL, Tamil Nadu and is liable to tax in the hands of CIPL, Karnataka if the transaction is between CIPL, Karnataka and CIPL, Tamil Nadu. Further the services provided by CIPL, Kerala to CIPL, Karnataka in facilitating the transportation of goods to CIPL, Tamilnadu are exigible to GST.

Alternately, CIPL, Kerala may sub-lease the goods to CIPL, Tamil Nadu and in such a case, the transaction is a supply of goods on lease by CIPL, Kerala and the movement is also occasioned by the lease contract between CIPL, Kerala and CIPL, Tamil Nadu and it would be the revenue of CIPL, Kerala and CIPL, Kerala has to generate the e-way bill and delivery challan for such movement. At the same time the contract of lease between CIPL. Karnataka with CIPL, Kerala is also in force as the main lease. Hence from the applicant’s point of view, his lease contract with CIPL, Kerala is continuing and the goods leased should ultimately come back to the applicant from CIPL, Kerala and CIPL, Kerala is liable to pay lease rentals to CIPL, Karnataka.

Ruling :

  1. The pallets, crates and containers leased by CHEP India Private Limited located and registered in Karnataka to its other GST registration located across India (say CIPL, Kerala) would be considered as lease transaction if the specific goods are sent on lease as per the agreement between the two entities and accordingly taxable as supply of services in terms of the provisions of the Integrated Goods and Services Tax Act, 2017 read with Section 7 of the Central Goods and Services Tax Act, 2017.

  2. The value declared in the invoice issued by the applicant would be the value on which GST has to be charged in terms of Section 15 of the CGST Act and KGST Act read with relevant Rules.

  3. The documents to be carried for the movement of goods from CIPL, Karnataka to CIPL, Kerala would be delivery note and e-way bill for the entire value of the goods transported.

  4. The movement of goods from CIPL, Kerala to CIPL, Tamil Nadu under the instruction of CIPL, Karnataka would be as a result of a separate transaction of supply between CIPL, Karnataka and CIPL, Tamil Nadu if the terms of the contract so state. But it would be a supply of CIPL, Kerala, if it is the agreement between CIPL, Kerala and CIPL, Tamil Nadu which causes the movement of goods from CIPL, Kerala to CIPL, Tamil Nadu. Further the services of CIPL, Kerala to CIPL, Karnataka in facilitating the transportation of goods to CIPL, Tamilnadu are exigible to GST.

[2021 (7) TMI 973 – AAR, Karnataka – M/s Chep India P Ltd.]

2. Value of supply :

Facts :

This Appellant, an authorized distributor of M/s. Castrol India Ltd. for the supply of Castrol brand Industrial and automotive lubricants.

The appellant preferred an application before the Advance Ruling Authority and sought ruling on the following question of law :

The appellant is paying tax due as per the value of the invoice issued and availing the input tax credit of GST shown in the inward invoice received by them from the Principal Company Castrol or their stockists. The advance ruling sought classification on the following issues :

  1. On the tax liability of the appellant for the transactions mentioned herein and explained as above. The appellant is paying the tax due as per invoice value issue by them and availing the input credit of GST shown in the inward invoices received by them from the Principal Company Castrol or their stockiest.

  2. Whether the discount provided by the Principal Company to their dealers through the appellants as shown in Annexure D attracts any tax under the GST Laws.

  3. Whether the amount shown in the Commercial Credit not issued to the appellant by the Principal Company attracts proportionate reversal of Input Tax Credit.

  4. Is there any tax liability under GST laws on the appellant for the amount received as reimbursement of discount or rebate provided by the Principal Company as per written agreement between the Principal Company and their dealers and also an agreement between the principal and distributors?

The Authority for Advance Ruling Kerala vide order No. KER 60/2019, dated 16/9/2019 issued ruling as follows :-

  1. The applicant/distributor is eligible to avail ITC shown in the inward invoice received by him from the supplier of goods/principal company.

  2. It is established from the statement of the applicant that the prices of the products supplied by the applicant it determined by the supplier/principal company and the applicant has no control on the price of the products. Therefore, it is evident that the additional discount given by the supplier through the applicant, which is reimbursed to the applicant is to offer a special reduced price by the distributor/applicant to the customers and hence the amount represent consideration paid by the supplier of goods/principal company to the distributor/applicant for supply of goods by the distributor/applicant to the customer. Therefore, this additional discount reimbursed by the supplier of goods/principal company to the distributor/applicant is liable to be added to the consideration payable by the customer to the distributor/applicant to arrive at the value of supply under Section 15 of the CGST/SGST Act at the hands of the distributor/applicant.

  3. The supplier of goods/principal company issuing the commercial credit note is not eligible to reduce his original tax liability and hence the recipient/applicant will not be liable to reverse the ITC attributable to the commercial credit notes received by him from the supplier.

  4. The appellant is liable to pay GST at the applicable rate on the amount received as reimbursement of discount/rebate from the principal company.

Aggrieved of the above decision, the appellant has filed the appeal before this Appellate authority.

Observations & Findings :

We find that the amount paid to the Dealer towards “rate difference” and “special discount” as mentioned above, post the activity of supply are not complying with the requirements of Section 15(3)(b)(i) of the CGST/SGST Act therefore cannot be considered and allowed as discount for the purpose of arriving at the ‘transaction value’ in terms of Section 15 of the CGST/SGST Act. The facts which are undisputed here are that the said post sale discounts are not known or at least not quantified at or before the time of supply or not predetermined in the agreement concerned. Hence, the conditions prescribed in Section 15(3)(b) stand not satisfied for the said discounts get excluded from the transaction value.

The additional discount given by M/s. Castrol to the appellant is a consideration to offer the reduced price in order to augment the sales. This additional discount squarely falls under the definition of the term “consideration” as specified under Section 2(31) of the CGST/SGST Act.

Order :

  1. Whether the discount provided by the M/s. Castrol to their dealers through the appellant attracts any tax under GST?

    Yes, the additional discount reimbursed by M/s. Castrol, is liable to be added to the consideration payable by the customers or dealers to the appellant. The appellant is liable to pay GST at the applicable rate.

  2. Whether the amount shown in the commercial credit note issued to the appellant by M/s. Castrol attracts proportionate reversal of Input Tax Credit?

    M/s. Castrol is issuing commercial credit notes, hence are not eligible to reduce their original tax liability. Thereby the appellant will not be liable to reverse the ITC attributable to the commercial credit notes issued to them by M/s. Castrol.

  3. Is there any tax liability under GST laws on the appellant for the amount received as reimbursement of discount or rebate provided by M/s. Castrol as per written agreement between the principal and distributors?

The appellant is liable to pay GST at the applicable rate on the amount received as reimbursement of discount or rebate from M/s. Castrol.

Accordingly, the Above Ruling No. KER/60/2019, dated 16-09-2019 of the Authority of Advance Ruling, Kerala stands upheld.

[2021 (7) TMI 789 – Appellate AAR, Kerala – M/s Santhosh Distributors]

HIGH COURTS

DELHI HIGH COURT

CENTRAL GOODS AND SERVICE TAX DELHI EAST

v.

SH. NAVAL KUMAR & ORS.

[RAJNISH BHATNAGAR, J]

CRL.M.C. 231/2021

Date of Decision: June 4, 2021

Cancellation of bail – Bail granted challenged by department – Petition dismissed on the ground that there are no supervening circumstances which are not conducive to fair trial – no misuse of bail seen – respondent has joined in investigation – no evidence of tampering evidence or likelihood of absconding inferred – bail granted cannot be cancelled in a mechanical manner

The respondent company was earlier granted bail by A.S.J which is now challenged by the department before Hon’ble High court.

It is Held that once bail is granted it should not be cancelled in a mechanical manner without there being any supervening circumstances which are not conducive to fair trial. It cannot be cancelled until it is established that the same is being misused and it is no longer conducive in the interest of justice to allow the accused to remain on bail.

In the instant case, the respondents have joined the investigation and there are no allegations that they have not co-operated in the said investigation. There are no allegations of any tampering or influencing of the witnesses or likelihood of their absconding. The petitioner has not been able to make out a case of supervening circumstances on the basis of which the bail granted to the respondents should be cancelled and nothing has been brought on record to show that the respondents have such a towering personality that their mere presence out on bail would in any manner thwart the further investigation .There are no reason for pre-trial incarceration of the respondents in the present case – petition dismissed.

ORISSA HIGH COURT

AJAJ AHAMAD

v.

STATE OF ODISHA (CGST)

[S. K. PANIGRAHI, J]

BLAPL No. 1660 of 2021

Date of Decision: June 9, 2021

Bail – Offence u/s 132 of CGST Act – Application for bail rejected considering gravity of alleged offence, evidence, magnitude of amount involved, risk of tampering of evidence.

Considering the nature and gravity of the accusation, the nature of supporting evidence, availability of prima facie case against the petitioner, coupled with the fact that a huge amount of public money has been misappropriated and also the fact that further investigation of the case is under progress and taking into account the apprehension of the petitioner in tampering with the evidence, in the larger interest of society, the petitioner is not allowed to be released on bail – bail application dismissed.

GUJARAT HIGH COURT

COMSOL ENERGY PRIVATE LIMITED

v.

STATE OF GUJARAT

[J.B. PARDIWALA & ILESH J. VORA, JJ]

R/SPECIAL CIVIL APPLICATION NO. 11905 of 2020

Date of Decision: December 21, 2020

Refund of IGST on ocean freight—Tax paid under RCM—Grant of refund declined on account of delay in claim—Held denial of refund would go against A 226 of Indian Constitution

The petitioner has sought refund of the Integrated Goods and Services Tax paid on the Ocean Freight under the reverse charge mechanism after the decision of this Court in the applicant’s own case whereby it was held that the Notification No.8/2017—Integrated Tax (Rate) dated 28.06.2017 and the Entry No.10 of the Notification No.10/2017 under the Integrated Tax (Rate) dated 28.06.2017 lack legislative competency and the same were accordingly declared as unconstitutional. This Hon’ble court had held that the levy of the IGST under the RCM on the Ocean Freight for the service provided by a person located in a non-taxable territory by way of transportation of goods through vessel from a place outside India to customs frontier of India is unconstitutional.

However, the respondent denied it alleging that the refund claims were not filed within the statutory time limit as provided under Section 54 of the CGST Act.

The Court has observed that in an earlier case, the Madras High Court held that the service tax paid under mistake of law is to be returned to the assessee irrespective of the period covered under the refund application. It was held that refusing to return the amount would go against the mandate of Article 265 of the Constitution of India.

Allowing the writ, it is held that Period of limitation u/s Section 54 of the CGST Act is not applicable – general provisions provided under the Limitation Act is applicable to claim refund of such duty

ANDHRA PRADESH HIGH COURT

BENQ CATERING AND ALLIED SERVICES PRIVATE LIMITED

v.

ASSISTANT COMMISSIONER

[JOYMALYA BAGCHI & K.SURESH REDDY, JJ]

WRIT PETITION NO.11178 OF 2021

Date of Decision: June 17, 2021

Natural Justice – No opportunity of hearing given before passing an adverse order – Held Section 74 makes it mandatory to provide an opportunity of hearing before passing an adverse order – Present case indicates a prayer being made in this regard which was left unheeded

An assessment order was passed against which the petitioner has approached the Hon’ble court contending that no opportunity of hearing was provided before passing the adverse order against it.

The Hon’ble court has held that plain reading of S. 74 indicates that it is incumbent upon the assessing authority to give an opportunity of personal hearing to the assessee when a request in that regard is received in writing from it or where any adverse decision is contemplated against the assessee. In the present case, a clear and unequivocal prayer for personal hearing had been made by the petitioner-assessee which remained unheeded to and the impugned assessment order came to be passed.

Hence the impugned order is set aside and the petitioner shall be heard before passing the order.

PATNA HIGH COURT

SHANKAR PRASAD

v.

THE STATE OF BIHAR AND OTHERS

[SANJAY KAROL, C.J. & S. KUMAR, JJ]

CIVIL WRIT JURISDICTION CASE NO. 9781 OF 2021

Date of Decision: June 11, 2021

Appeal – Maintainability of – order passed u/s 74 of the Act – appeal filed dismissed on grounds of delay – writ filed – Held that the order passed is bad in eyes of law as no opportunity of hearing was given – assessment order passed ex parte is short of sufficient reason showing amounts payable by assessee – impugned order set aside

The petitioner has approached the Hon’ble court contesting against the order passed by the respondent holding that the appeal filed by it against the order passed earlier is delayed and thus dismissed. The respondent contends that there is a remedy of appeal available to the petitioner.

The court has observed that the respondent has passed the order in (a) violation of principles of natural justice, i.e. Fair opportunity of hearing. No sufficient time was afforded to the petitioner to represent his case; (b) order of assessment passed ex parte in nature, does not assign any sufficient reasons even decipherable from the record, as to how the officer could determine the amount due and payable by the assessee. The order, ex parte in nature, passed in violation of the principles of natural justice, entails civil consequences. Therefore, writ is allowed.

MADRAS HIGH COURT

ARS STEELS & ALLOY INTERNATIONAL PVT. LTD.

v.

THE STATE TAX OFFICER, GROUP—I, INSPECTION, INTELLIGENCE—I, CHENNAI

[DR.ANITA SUMANTH, J]

W.P. Nos.2885, 2888, 2890,3930, 3936 and 3933 of 2020 &

WMP Nos.3341, 3345, 3336, 4664, 4656 and 4661 of 2020W.P.No.2885 of 2021

Date of Decision: June 24, 2021

Reversal of ITC – Inputs consumed during manufacture – scope of section 17(5)(h)of GST Act, 2017 – ITC reversed on inputs used invoking section 17(5)(h) of the Act contending that some inputs are lost during manufacturing process – writ filed – Held the said section entails goods lost, stolen, destroyed etc. and not loss occasioned by process of manufacture – loss occasioned by manufacture is inherent and misconceived by revenue – thus petition is allowed

The ITC was reversed invoking section 17(5)(h) of the Act as per which ITC on goods lost, stolen, destroyed, written off or disposed by way of gift or free samples would not be granted.

However, the Hon’ble court has held that the loss that is occasioned by the process of manufacture cannot be equated to any of the instances. Therefore, The reversal of ITC involving Section 17(5)(h) by the Revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h). Thus, petition is allowed.

MADRAS HIGH COURT

NCR CORPORATION INDIA PVT. LTD.

v.

THE COMMISSIONER OF GST & CENTRAL EXCISE

[S.M.SUBRAMANIAM, J]

W.P.No.19976 of 2018
And W.M.P.No.23388 of 2018

Date of Decision: June 29, 2021

Writ – Entertainment of – Principles of natural justice allegedly violated – Entertainment of writ declined on the ground that mere violation of principles of natural justice is insufficient to entertain a writ – Mostly writ are filed with a view to avoid pre-deposit

A writ is filed seeking quashing of assessment order. Preferring an appeal is the rule. Entertaining a Writ Petition before exhausting the appellate remedy is an exception. Undoubtedly, writ proceedings may be entertained before exhausting the appellate remedy if there is an imminent threat or gross injustice warranting urgent relief to be granted. Mere violation of principles of natural justice is insufficient to entertain a writ proceedings The practise of filing the Writ Petition without exhausting the statutory remedy is done with a view to avoid pre-deposits to be made in statutory appeals and on the ground that the appellate remedies are time consuming.

The petitioner is at liberty to approach the appellate authority, by preferring an within a period of two weeks from the date of receipt of a copy of this order – Petition disposed off.

UTTARAKHAND HIGH COURT

VIMAL PETROTHIN PRIVATE LIMITED

v.

COMMISSIONER, CGST AND OTHERS

[MANOJ KUMAR TIWARI, J]

WRIT PETITION (M/S) NO. 1128 OF 2021

Date of Decision: June 24, 2021

Credit ledger – blocking of – Blocking of credit ledger cannot continue beyond a period of one year in view of Sub rule 3 of Rule 86 (A)

Petitioner’s input tax credit available in its electronic trading ledger was provisionally blocked on the ground that petitioner had availed input tax credit, based on fake invoices issued by non-existing firms. The blocking of the ledger has been beyond a period of one year .It is held that as per Sub- Rule 3 of Rule 86(A), the continuance of blockage cannot continue beyond 1 year. Hence the ledger is order to be unblocked.

KERALA HIGH COURT

KERALA PRADESH GANDHI DARSHANVEDHI

v.

UNION OF INDIA

[S. MANIKUMAR, CJ & SHAJI P. CHALY, J]

WP(C) NO. 12481 OF 2021

Date of Decision: June 21, 2021

Levy of state tax on petrol and diesel – inclusion of petrol and diesel in the GST regime – Article 279 A (6) of the Constitution of India – representation filed by petitioner to the respondents –

HELD THAT:- It is directed that the Goods and Services Tax Council represented by the Special Secretary, Office of the GST Council Secretariat, New Delhi to forward Exhibit P-2 representation to the Union of India, represented by the Finance Secretary, New Delhi, to take an appropriate decision within a period of six weeks from the date of receipt of a copy of Exhibit P-2 representation. Similarly, Chief Secretary, Government of Kerala, Thiruvananthapuram (respondent No.4), to dispose of Exhibit P-3 representation.

Material on record discloses that the petitioner has submitted Exhibit P-2 representation to the Special Secretary, Office of the GST Council Secretariat, New Delhi to recommend inclusion of petrol and diesel under the GST regime. Material on record further discloses that the petitioner has also submitted Exhibit P-3 representation to the Chief Secretary, Government of Kerala, Thiruvananthapuram to request the GST Council to include the petrol and diesel in the GST regime and till a decision is taken by the GST Council, Government of Kerala may refrain from levying the state tax on petrol and diesel.

The Hon’ble court has ordered that in view of WA No 2061 of 2017 whereby it was held that no mandamus can be issued to the GST Council to take any decision, this court only directs the Goods and Services Tax Council represented by the Special Secretary, to forward Exhibit P-2 representation1 to the Union of India, represented by the Finance Secretary, New Delhi, to take an appropriate decision within a period of six weeks from the date of receipt of a copy of Exhibit P-2 representation. Similarly, Chief Secretary, Government of Kerala, Thiruvananthapuram to dispose of Exhibit P3 representation.

MADRAS HIGH COURT

BHARAT ELECTRONICS LIMITED

v.

COMMISSIONER OF GST & CENTRAL EXCISE, ASSISTANT COMMISSIONER OF GST

[ANITA SUMANTH, J]

W.P. No.2937 of 2019, WMP.Nos.3205 of 2019

Date of Decision: June 21, 2021

Rectification of TRAN-1 – Error noticed and rectified by petitioner – filing and revision date being same – No further errors allowed to be rectified later as revision date had passed and moreover revision can be done only once as per Section 120A – Honble court has permitted rectification of inadvertent error as filing of form and revision date being same could not have occasioned revision of the error in that form – time gap between the two dates ought to be there – respondent to enable filing of revised form

The petitioner has filled TRAN-1 form in October after coming of GST claiming its transitional credit. However, an inadvertent error occurred which was rectified by revision on 27/12/07.The petitioner noticed more errors but was not allowed to amend it on the grounds that the last date of revision/ filing was 27/12/ 2007 and revision could be done only once.

Thus a writ is filed. The Hon’ble court has held that It does not stand to reason that the date of filing of Form-1 and date for revision of the same be one and the same and in order to be viable, there must be a sufficient gap of time in between the two – Section 120A which grants only one opportunity to the petitioner to rectify the Form TRAN-1 has no basis for such restriction. The petitioner has uploaded the TRAN-1 on 27.12.2017 and there was thus, no time available for the petitioner to have sought revision of the error that was occasioned in the Form. The respondent will enable the filing of revised Form TRAN-1 by opening of the portal.

BOMBAY HIGH COURT

JAYCHEM ENTERPRISE PVT. LTD.

v.

ADDITIONAL DIRECTOR GENERAL, NAGPUR ZONAL UNIT & ORS.

[DIPANKAR DATTA, CJ & G. S. KULKARNI, J]

WRIT PETITION NO. 2583 OF 2021

Date of Decision: July 8, 2021

Provisional attachment u/s 83 – No recourse to Sub rule 5 of Rule 159 taken – Writ filed – Hon’ble court has declined to interfere at this stage since the petitioner should take recourse to the abovementioned Rule which is not an inefficient remedy to seek relief

In the given facts, the petitioner’s bank account was attached u/s 83 of the Act. The petitioner has approached the High court contesting against the same though it has not taken recourse to Sub-rule 5 of Rule 159 of CGST Rules. As per the said Rule if the petitioner is able to make its case before the additional director that the said attachment ought not to have been made it could have sought relief under it. Since the said recourse has not been taken, the Hon’ble court is not inclined to interfere at this stage. The petitioner may approach the Additional Director General under the said provision and if such an approach is made, a reasoned order shall be passed after extending an opportunity of hearing.

MADRAS HIGH COURT

TVL. NAGGARAJ ANOORADHA

v.

THE STATE TAX OFFICER (CIRCLE) , CHENNAI

[ANITA SUMANTH, J]

W.P. No.174 of 2021 And WMP Nos.239 and 240 of 2021

Date of Decision: July 8, 2021

Input tax credit – Denial of – Mismatch in export value and returns – No reason given by respondent before passing of order – No opportunity given to explain the deficiency – Order set aside on grounds of violation of natural justice

The ITC claimed was rejected by the respondent on account of mismatch between the export value and net ITC as shown in monthly returns. The mismatch was due to inadvertent omission of two invoices for month of March. Had an opportunity of hearing been given the petitioner would have explained the deficiency. But the respondent passed a non speaking order and the column for mentioning the reason of rejection has been left blank. The Hon’ble court has set aside the impugned order on grounds of violation of natural justice.

ORISSA HIGH COURT

SANTOSH KUMAR GUPTA

v.

UNION OF INDIA

[D.DASH, J]

BLAPL No.3282 of 2021

Date of Decision: June 30, 2021

Bail – Offence u/s 132 – something fishy indicated by search – materials still to still with regard to summons issued – grave economic offence involved – bail declined

An application seeking bail for allegedly having committed an offence under Section 132 of CGST Act, 2017 has been filed. It is contended by the respondent that the petitioner had created 10 firms conspiring in carrying business activities without those taking place in reality and thereby availing fraudulent ITC. When the search at the business premises of the petitioner was conducted certain documents were seized and statement was taken which indicated something fishy on part of the petitioner. The Hon’ble Court has held that materials are yet to surface as to the developments with regard to the summons issued to those entitles for deposit of the ITC. The petitioner is involved in grave economic offence which stands in way of development of the country. Therefore, the court is not inclined to accept the prayer for bail.

MADRAS HIGH COURT

GREENWOOD OWNERS ASSOCIATION, OCEANIC OWNERS ASSOCIATION, M/S. TVH LUMBINI SQUARE OWNERS ASSOCIATION VERSUS

v.

THE UNION OF INDIA

[DR. ANITA SUMANTH, J]

W.P. Nos.5518 & 1555 of 2020

Date of Decision: July 1, 2021

Exemption on specified service – RWA – Whether tax is payable on whole amount if amount of contribution exceeds the given limit or only the difference – Held the exemption notification is unambiguous – exemption is available upto contribution an amount of ` 7500/- meaning that any excess amount is exigible to tax – conclusion of AAR and circulars impugned giving a contrary view are quashed By the Hon’ble court

The petitioner has contested against the order of the AAR and circular dated 22/7/2019. On coming of GST, exemption vide Notification 12/17CT dated 28.06.2017. was granted on certain services leviable to GST. Accordingly contributions of services upto ` 7500/- was exempted and was taxable only on the amount exceeding the said amount. The exemption was granted for sourcing of goods and services from a third person for the common use of the members of RWA.

Held:

The intention of the Circular appears clear, that is, to grant exemption in regard to the receipts from services that answer to the description set out therein. The description of the services is also clear, that is, services to the members of an unincorporated body or non-profit by way of reimbursement of charges or share of contribution upto an amount of ` 7,500/- in the sourcing of goods or services from a third person for the common use of its members. No ambiguity presents itself on a plain reading of the Entry and the intention is clear, so as to remove from the purview of taxation contribution upto an amount of ` 7,500/-. The plain words employed in Entry 77 being, ‘upto’ an amount of ` 7,500/- can thus only be interpreted to state that any contribution in excess of the same would be liable to tax. The term ‘upto’ hardly needs to be defined and connotes an upper limit. It is interchangeable with the term ‘till’ and means that any amount till the ceiling of ` 7,500/- would exempt for the purposes of GST.

As regards the argument concerning slab rate, a slab is a measure of determining tax liability. The prescription of a slab connotes that income upto that slab would stand outside the purview of tax on exigible to a lower rate of tax and income above that slab would be treated differently. The intendment of the exemption Entry in question is simply to exempt contributions till a certain specified limit. The clarification by the GST Department even as early as in 2017 has taken the correct view.

Therefore, the conclusion of the AAR as well as the Circular to the effect that any contribution above ` 7,500/- would disentitle the RWA to exemption, is contrary to the express language of the Entry in question and both stand quashed. To clarify, it is only contributions to RWA in excess of ` 7,500/- that would be taxable under GST Act. Petition is allowed.

RAJASTHAN HIGH COURT

AVON UDHYOG

v.

STATE OF RAJASTHAN

[DINESH MEHTA, J]

CIVIL WRIT PETITION NO.7463 OF 2021

Date of Decision: July 5, 2021

Registration – Cancellation of – No opportunity of hearing granted as alleged – respondent had issued show cause notice asking for reply within 7 days which is itself contrary to law – However, the petitioner did not either file reply within 30 days as required – thus petition is disposed of directing petitioner to put forth its submission

The petitioner has challenged the order suspending its registration certificate contending that no opportunity of hearing was granted to him. The Hon’ble Court has observed that the respondent had issued a show cause notice calling for reply within 7 days of issuance which itself is contrary to the statutory provisions. However, the petitioner has not filed reply even within 30 days of receiving the notice as required under law. The proceeding of cancellation of registration cannot be kept hanging fire and the authority is bound to pass an order as per sub-rule 3 of Rule 22 of the Rules. Thus the petition is disposed of with a direction to the petitioner to put forth its submissions.

MADRAS HIGH COURT

F1 AUTO COMPONENTS P LTD

v.

THE STATE TAX OFFICER, CHENNAI

[DR. ANITA SUMANTH, J]

W.P. No.6631 of 2021 And WMP No.7188 of 2021

Date of Decision: July 9, 2021

Interest – levy of – Wrongful claim of ITC – Error on part of assessee in filing returns as there is a mismatch between returns filed by it and purchasing dealer – Interest levied by revenue on wrongful claim of ITC – Petitioner contests the order on the ground that a notice was ought to be issued u/s 42 of the Act – Held section 42 can be invoked only when error is on part of revenue not assessee – Levy upheld

The petitioner has challenged the order levying interest on u/s 50 relating to both interest on cash remittances as well as remittances by way of adjustment of electronic credit register. It is contended that the respondent should have issued a show cause notice in case there is a mismatch of particulars at the end of the assessee, vis-a-vis, particulars/details furnished in the returns of the selling/purchasing dealer. The Hon’ble court has observed that the said section could have been invoked only if there was an error on part of revenue not on an error on part of assessee as here there was a wrongful claim of ITC by the assessee. Levy is thus upheld to this extent.

  1. There are disputes all over India relating to the appeals filed under Section 18-A of the Central Sales Tax Act, 1956. The assessing officers are passing composite orders in relation to the declarations produced and not produced, which lead to such disputes. Since there are no specific orders under Section 6, 6-A (1) and 6-A (2) of the Act, the dealers are filing appeals against the entire order directly to the Tribunal. The Revenue naturally raises objection for such filing on the ground of maintainability. We propose to discuss the correct position of law in this regard. The scheme of the CST Act, 1956 qua Branch Transfers is discussed here in below.

  2. “Sale” has been defined under Clause (g) of Section 2 to mean any transfer of property in goods by one person to another…. . Thus, if there is no transfer of property to another, there is no sale. Section 6 of the CST Act, 1956 is the charging section and the tax under that Section can be levied on the sales i.e. transfer of property in goods to another person.

  3. Commercially, the dealers themselves do not always effect transfer of property in goods to another person. They do it either through their Branches, Depots, RSOs (Regional Sales Offices), Consignment Agents etc. The dispatch of goods by such dealers to their Depots etc. is commercially called Branch Transfer or Stock Transfer. Such Depots, RSOs may be within a particular State or may be out side that State. In either case the tax is not leviable u/s 6 of the Act, since one cannot sale to oneself.

  4. However, u/s 6-A a rule of evidence has been incorporated. If such Branch Transfer or transfer to an Agent or Principal is effected from a particular State to other States and if the dealer claims that he is not liable to pay tax due to such transfer, a burden is cast on the dealer, under sub- section (1) of 6-A to support such transfer by furnishing to the authority a declaration in form F. Such Form F certifies the description, quantity or weight and value of goods received by the recipient in other State. However, if such declaration is not furnished by the dealer/assessee to the assessing officer then the Act under that sub-section (1) of Section 6-A has incorporated a deeming fiction to hold the same as an Inter-State Sale.

  5. If the assessing officer to whom such declarations have been furnished, after making enquiry is satisfied that the particulars in such declarations are true and no inter-State sales have been effected then the law requires such assessing officer to pass an order under in sub-section (2) of Section 6-A to make an order to that effect.

  6. Sub- section (3) empowers the assessing authority to reassess or higher authority to revise, the order already made under sub-section (2), if subsequently, contrary facts are found.

  7. If the person is aggrieved by an order passed under sub-section (1) of Section 6-A, an appeal is provided under Section 9(2) of the CST Act,1956 read with the State Act.

  8. If the person is aggrieved by an order passed under sub-section (2) or sub-section (3) of Section 6 –A then, Section 18 A empowers the aggrieved person to approach the highest appellate authority of the State (Tribunal) by filing an appeal under sub-section (1) of the said Section 18 A. Any incidental issues like rate of tax, computation of assessable turnover and penalty etc. may be raised before such authority.

  9. Under sub-section (5) of Section 18 A, the said authority is empowered to stay the recovery, after considering the fact of the taxes paid in other States.

  10. The Supreme Court of India in the case of Ashok Leyland Limited v. The State of Tamil Nadu and Another, (2004) 134 STC 473has explained the law relating to the Branch Transfer Vs. Inter-State sale in detail. The mechanism provided under Section 18 A is the result of this judgment. The relevant observations of the Hon’ble Court are reproduced below:

    On Page 498

‘32. The history of legislation as also constitutional amendments in relation to inter-State movement of goods has been noticed in State of A.P. etc v. National Thermal Power Corpn. Ltd.* (2002) 5 SCC 203 and as such it may not be necessary to reiterate the same once over again.

SECTION 6-A OF THE CENTRAL ACT:

Prior to amendment of section 6-A of the Central Act, filing of form F was optional. The dealer was, thus, entitled either to file such form or not to file the same. Only because such form is not filed, the same would not mean that the dealer was prohibited from raising a plea that stock of transfer from his head office to regional offices or regional sales offices has taken place. It was entitled to plead that by reason of such transactions which are intra-organisation, sale was not occasioned by movement of goods. The question which was required to be posed and answered by the assessing authority was, thus, required to be confined only to the fact as to whether any sale has occasioned by movement of goods or not. In other words, an exception had been made to the concept of inter-State sale by invoking the provisions of the Central Act; when such movement of goods was by way of transfer of stock; in terms whereof no tax under the Central Act was payable. Indisputably determination of such a question at the hands of the assessing authority was required for arriving at a finding of fact as to whether the Central sales tax or the local sales tax would become payable. The States, where manufacturing of goods takes place in case involving such nature of transaction, presumably would like to invoke the provisions of the Central sales tax as in terms of article 270 of the Constitution of India despite the fact that the Central sales tax is payable to the Central Government, the amount is invariably passed on to the State concerned. On the other hand, the purchaser when it is a public sector undertaking, would like to see that the purchase and sale takes place within the State so as to entitle the concerned State to collect the local sales tax, a rate therefor would normally be higher. There, thus, exists conflict in interest of the States particularly having regard to the financial crunches faced by them.

33.. Having regard to the Statement of Objects and Reasons of the Central Sales Tax Act vis-a-vis the recommendations made by the law commission, as referred to hereinbefore, it would appear that the Parliament with a view to bring in expediency in such a matter so that the dispute can be determined as expeditiously as possible amended section 6-A. Section 6 of the Act provides for liability to tax on inter-State sales in terms whereof every dealer is liable to pay tax thereunder on sales effected by him in the course of inter-State trade or commerce subject to the exception contained in the proviso appended thereto. Such tax would be leviable notwithstanding the fact that no tax is leviable either on seller or the purchaser under the State tax laws of the appropriate State if that sale had taken place inside the State.

34.. The liability to tax on inter-State sale as contained in section 6 is expressly made subject to the other provisions contained in the Act. Sub-section (2) of section 9, on the other hand, which is a procedural provision starts with the words “subject to the other provisions of this Act and the rules made thereunder”. Section 6-A provides for exception as regard the burden of proof in the event a claim is made that transfer of goods had taken place otherwise than by way of sale. Indisputably, the burden would be on the dealer to show that the movement of goods had occasioned not by reason of any transaction involving sale of goods but by reason of transfer of such goods to any other place of his business or to his agent or principal, as the case may be. For the purpose of discharge of such burden of proof, the dealer is required to furnish to the assessing authority within the prescribed time a declaration duly filled and signed by the principal officer of the other place of business or his agent or principal. Such declaration would contain the prescribed particulars in the prescribed form obtained from the prescribed authority. Along with such declaration, the dealer is required to furnish the evidence of such dispatch of goods by reason of Act 20 of 2002. In the event, if it fails to furnish such declaration, by reason of legal fiction, such movement of goods would be deemed for all purposes of the said Act to have occasioned as a result of sale. Such declaration indisputably is to be filed in form F. The said form is to be filled in triplicate. The prescribed authority of the transferee State supplies the said form. The original of the said form is to be filed with the transferor State and the duplicate thereof is to be filed before the authorities of the transferee State whereas the counter-foil is to be preserved by the person where the agent or principal of the place of business of the company is situated.

35.. When the dealer furnishes the original of form F to its assessing authority, an enquiry is required to be held. Such enquiry is held by the assessing authority himself. He may pass an order on such declaration before the assessment or along with the assessment. Once an order in terms of sub-section (2) of section 6-A of the Central Act is passed, the transactions involved therein would go out of the purview of the Central Act. In other words, in relation to such transactions, a finding is arrived at that they are not subjected to the provisions of the Central Sales Tax Act. It is not in dispute there- under no appeal is provided thereagainst.

36…………………………….

  1. By reason of sub-section (2) of section 6-A, a legal fiction has been created for the purpose of the said Act to the effect that transaction has occasioned otherwise than as a result of sale.

On an analysis of the aforementioned provisions, therefore, the following propositions of law emerge:

(i) The initial burden of proof is on the dealer to show that the movement has occasioned by reason of transfer of such goods which is otherwise than by reason of sale. The assessee may file a declaration.

On a declaration so filed an inquiry is to be made by the assessing authority for the purpose of passing an order on arriving at a satisfaction that movement of goods has occasioned otherwise than as a result of sale.

(ii) Whenever such an order is passed, a legal fiction is created.

Legal fiction, as is well-known, must be given its full effect.’

  1. Thus, for non-production of Form-F, Sub-section (1) of Section 6-A contemplates a specific order. Kindly see the following portion of Section 6-A (1).

    ‘and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purpose of this Act to have been occasioned as a result of sale.’

    Such order is to be passed u/s 9(2) of the CST Act, 1956 read with the State Act. The interest and/ or penalty pertaining to such default is also to be assessed u/s 9(2) of the CST Act,1956 read with MVAT Act,2002.

  2. If the declarations in form F are produced and those are found to be defective or found to be not as per the prescription of Rule 12 of the CST Rules,1957, even in such cases the order is required to be made as per Section 6-A (1) as if the declarations have not been furnished.

  3. However, if the declarations in Form F, complete in all respects are furnished, the Stock transfers covered by the same are either to be allowed or the assessing authority after due enquiry should give a finding of back-to-back transfer amounting to an inter-State sale. An appeal against the same is required to be filed u/s 18A directly to the Tribunal.

  4. The author must also record here that for non-production of C-Forms the levy of tax is contemplated u/s 6 of the CST Act,1956 read with Section 8 of that Act. An order pertaining to the allowance or disallowance of such sales against C Forms is also required to be passed u/s 9(2) read with the State Act. The interest and/ or penalty pertaining to such default is also to be assessed u/s 9(2) of the CST Act,1956 read with the State Act. .

  5. In all the cases of non-production of declarations or production of defective declarations, Section 18-A of the CST Act, 1956 is not relevant.

  6. Section 9 (2) of the CST Act,1956 in clear terms states that it is subject to other provisions of that Act. Thus, if an appeal against an order passed u/s 6A (2) is provided u/s 18-A of the Act then no appeal lies u/s 9(2) read with the State Act.

  7. The assessing officer is expected to pass two orders. One order relating to the allowance /disallowance of declarations /certificates. Second order should be u/s 6A(2) of that Act wherein tax could be levied on the interstate movement of goods despite being production of declarations. The offences relating to ‘non-production of declarations and offences relating to ‘Branch transfers amounting to interstate sale’ are different. The assessing officer is expected to apply his mind to the mens rea or guilty mind involved in committing such offences. The penalty can’t be composite. The Interest u/s 9(2) read with Section 30(3) should also be levied independently. The reason being the appeal against the order relating to disallowance of declarations would go to first appellate authority and an appeal against the order passed u/s 6A (2) would go directly to the Tribunal. The Second appeal against an order passed u/s 9(2) would go to the Tribunal and the Second appeal against an order passed u/s 18-A would go to the Central Sales Tax Appellate Tribunal at Delhi. This being the position in law, the Parliament has consciously specified two separate appellate powers for the orders passed u/s 6A (2) and the order passed u/s 9(2).

  8. Kindly now see Section 18-A of the CST Act, 1956. The said Section commences with non obstante clause. It clearly says that notwithstanding anything contained in a State Act an appeal against an order passed under sub-section (2) of Section 6A is to be filed to the Highest Appellate Authority of the State i.e. the Tribunal. Thus, the State Act cannot be pressed into service for appeals against the orders passed u/s 6A (2). It is to be used for all other orders.

  9. Section 18-A has provided independent mechanism for order passed under sub -section (2) of Section 6A. Any dispute relating to the rate of tax, penalty etc. imposed in such order passed under sub-section (2) of Section 6A has also to be raised in that appeal u/s 18-A of the Act.

  10. Sub-section (5) of Section 18-A is again the non obstante provision and it gives discretion to the Tribunal to determine the pre deposit considering the taxes paid in the other States, wherein the stock transferred goods are sold.

  11. The Larger Bench of the Supreme Court of India has elaborately explained the provisions of Sections 6A, 9 etc. in their Lordships’ judgement in Ashok Leyland Ltd. Vs. State of Tamil Nadu and another, Judgement dated 07.01.2004. The author has already explained this judgment. The mechanism enacted u/s 18-A was provided by the Parliament in the year 2010 by Act No. 14 of 2010.

  12. Let us now see the judgement in Tropicana Beverages. This judgement of the Karnataka High Court reported in (2012) 54 VST 472(KARN) is relevant to the controversy under consideration. In this case, the appellant had submitted to the assessing authority the declarations in Form-F received by them from different States. The assessing authority granted the exemption in respect of the amounts which were covered by the Form-F and called upon assessee to pay taxes in respect of transfer of stock which was not supported by Form-F. Thus, the assessing authority proceeded to pass order under Sec. 9(2) of CST Act, 1956. The appellant filed appeal against the assessment order so passed Under Sec. 62 of the Karnataka Value Added Tax Act, 2003[read with Sec 9(2) of The CST Act,1956]. However, the appellate authority dismissed the appeal on the ground that it was not maintainable in view of Sec. 18A (1) of CST Act.

    On these facts, the Hon’ble Karnataka High Court held that the impugned order of the Tribunal saying that the appeal, which was validly preferred against an order u/s 9 (2) of the CST Act, as not maintainable in view of Sec. 18-A (1) of the Act was not proper.

  13. The author submits that in view of discussion made herein above, the readers must have been convinced that there is no other alternative for the assessing officer but to pass two separate orders, one u/s 9 (2) of the CST Act, 1956 and another u/s 18-A of that Act. Such orders will avoid confusion and enable the dealers to approach proper forum for redressal.

  1. Finance Act, 2016 introduced Section 270A which is applicable from assessment year 2017-18 onwards.

    Tax experts and tax administration were entangled in interpreting the very same legal provisions of Section 271(1)(c) in the backdrop or providing relief from penalty. The Finance Act, 2016 has made a departure from the earlier legal requirements for levy of penalty relating to concealment of income chargeable to tax. When tax assessments got completed the taxpayers felt hat these legal provisions were harsh and putting up huge financial burden on them. The instances of underreporting of income due to misreporting of income costs heavy burden on the tax payers. Penal provisions have deterrent effect on the assessee.

  2. Under reporting of income:

    The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or the Commissioner may during the course of any proceedings under the Act, direct any person who has under reported his income shall be liable to pay penalty in addition to tax, if any, on the unreported income.

    The Assessing Officer during the course of assessment can

    • Initiate proceedings for penalty

    • The CIT(A) when adjudicating the case can initiate penalty proceedings afresh for levy of penalty

    • Where the CIT(A) deviates from the proceedings, that is altering the base of penalty, initiated by the Assessing Officer then CIT(A) is competent authority to initiate penal proceedings

    • Where the CIT(A) enhances the assessment he can initiate consequent proceedings for levy of penalty due to such enhancement. His order of assessment supplements the assessment order of the Assessing Officer, he is the competent person to initiate penalty proceedings for levy of penalty under Section 270A of Income-tax Act.

    • The CIT can initiate proceedings for levy of penalty under Section 270A when he invokes Section 263 of the Income Tax Act, i.e., Revision of Order prejudicial to the revenue.

Sub-section (2) of Section 270A does not define under reporting of income. It only lists out the instances of unreported income. They are as under:

  1. Where the income assessed is greater than the income determined in the income-tax return processed under Section 143(1)(a), when the return is processed under Section 143(1)(a) with some upward revision of income, it is not considered as under reporting of income. After the ITR is processed and when the income assessed is greater than income processed under Section 143(1)(a), it is treated as under reporting of income.

  2. Where the assessee has not furnished return of income and the income assessed is greater than the maximum not chargeable to tax, it is treated as under reported income. In a case, where the income tax return has been furnished for the first time under Section 148 of the Income-tax Act and the income and the income assessed is more than the maximum amount not chargeable to tax, it is treated as s case of under reporting of income.

  3. Where the income reassessed is greater than the income reassessed or reassessed immediately before such reassessment in such a case it would be treated as under reported income.

  4. Where the amount of deemed total income assessed or reassessed is greater as per the provisions of Section 115JC, as the case may be, is greater than deemed total income determined in the return processed under Section 143(1)(a).

  5. Where the amount of deemed total income assessed, as per Section 115JB or Section 115JC, is greater than the maximum amount not chargeable to tax where no return of income has been furnished or where the return has been furnished for the first time under Section 148.

  6. Where the amount of deemed total income reassessed as per Section 115JB or Section 115JC is greater than the deemed total income assessed or reassessed before such reassessment.

  7. Where the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

Illustration of underreported income

Sr. No.

1

2

3

4

5

1

Income assessed under Section 143(3)

20,00,000

Income determined under Section 143(1)(a)

15,00,000

5,00,000

2

Where the income-tax return filed, income assessed above the maximum amount not chargeable to tax

7,00,000

Maximum amount not chargeable to tax

4,00,000

3,00,000

3

Income assessed under Section 147

15,00,000

Income assessed under Section 143(3)

10,00,000

5,00,000

4

Deemed total income under Section 115JB or reassessed

10,00,000

Deemed total income originally assessed under Section 115JB determined under Section 143(1)

7,00,000

3,00,000

5

Where not ITR fled and deemed total income under Section 115JB determined in assessment or reassessment for the first time

12,00,000

Maximum amount not chargeable to tax

12,00,000

6

Where ITR is furnished for the first time under Section 148 and deemed total income determined under Section 115JB

9,00,000

Maximum amount on income not chargeable to tax

9,00,000

7

Deemed total income under Section 115JB reassessed under Section 147

15,00,000

Deemed total income assessed as per Section 115JB in the assessment or reassessment

10,00,000

5,00,000

8

Income assessed under Section 143(3)

(6,00,000)

Income determined under Section 143(1)(a)

(9,00,000)

3,00,000

9

Income assessed under Section 143(3)

5,00,000

Income determined

(4,00,000)

9,00,000

Amount of under reported income:

Sub-section (3) of Section 270A:

Where the income has been assessed for the first time

  1. and the return of income has been furnished by the assessee, in that case the difference between the income assessed and the amount of income determined under Section 143(1)(a) would the under reported income.

  2. Where no return of income has been furnished or where the return of income has been furnished in response to notice under Section 148, then:

    1. The amount of income assessed would be treated as under reported income, in the case of a company, firm or local authority; and,

    2. the difference between the amount of income reassessed or recomputed and the amount of income assessed or reassessed would be the under reported income for other taxpayers. Further, where the under reported income arises out of determination of deemed total income in accordance with the provision of under Section 115JB or Section 115JC, then the amount of total under reported income shall be the total income assessed other than the provisions contained in Section 115B or Section 115JC less the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under reported income, plus the total income assessed as per the provisions contained in section 115JB or Section 115JC less the total income that would have been chargeable had the total income assessed under Section 115JB or Section 115 JC been reduced by the amount of under reported income. Further, where the amount of under reported income on any issued is considered both under the provisions of Section 115JB or under Section 115JC and under the general provisions. Such amount shall not be reduced from the total income.

Sub-section (4) of Section 270A under reported income where the source of receipt, deposit on investment

Where the source of any receipt, deposit or investment is claimed in any assessment year to be an amount added to income or deducted while computing the loss in any preceding year to the assessment year and no penalty was levied for preceding year and no penalty was levied for preceding year, then the under reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

Sub-section (5) of Section 270A:

The amount of under reported income in the preceding year shall be in the following order:

  1. The preceding year immediately before the year in which the receipt, deposit, deposit or investment appears, being the first preceding year; and

  2. Where the amount added or deducted in the first preceding year is not sufficient to cover up the receipt, deposit or investment, then the year immediately preceding the first preceding year and so on.

Cases where it is not under reporting of income:

Section 270A(6):

  1. Where the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Commissioner or the Principal Commissioner, as the case may be is satisfied that the explanation is bonafide and the assessee has disclosed all the material facts to substantiate the explanation offered by him, the income so enhanced shall not be treated as under reporting of income.

  2. The amount of under reported income determined on the basis of an estimate shall not be treated as under reported income if the accounts are correct and complete to the satisfaction of the Assessing Officer or Commissioner (Appeals) or the Commissioner or the Principal Commissioner provided the method employed is such that the income cannot properly deducted therefrom.

  3. The amount of under reported income determined on the basis of an estimate and the assessee on his own estimated or lower amount of addition or disallowance of the same and has such amount in the computation of his income and has disclosed all the material facts to such addition or disallowance.

  4. The amount of under reported income on the basis of any addition made with reference to the arm’s length price (ALP) determined by Transfer Pricing Officer (TPO) in a case where the assessee has maintained information and documents prescribed under Section 92E and declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction.

The amount of undisclosed income referred to in Section 271AAB:

Sub-section (7) deals with quantum of penalty

The quantum of penalty shall be 50% of the amount payable on underreported income.

Section 270A(6)(a):

The under reported income does not include the following:

  1. Under Section 276A(6), the income-tax authority must record his satisfaction or dissatisfaction before levying the penalty or dropping the penalty, as the case may be. The Assessing Officer or CIT(A) or the Commissioner, or the Pr. CIT, as the case may be, is satisfied that the explanation is bonafide and the assessee has disclosed all the material facts to substantiate the explanation offered. It is for the income-tax authority to record why he is not satisfied with the explanation of the taxpayer.

  2. The amount of under reported income is determined on the basis of an estimate provided the accounts are correct and complete to the satisfaction of the income-tax authority but the method employed is such that the income cannot properly be deducted therefrom. Section 270A(6) read with Section 270A(1) given an overall scope of the provision empowering the income-tax authorities to levy penalty for under reported income sub-section (6) is meant for entire section 270A and not for under reported income simplicitor.

  3. Misrepresentation or suppression of facts:

    Suppression of facts or suppression falsi entail a deliberate act of not revealing the fact. Not furnishing of facts could amount to suppression of facts. The assessee is given an opportunity of being heard when representing the case there could be misrepresentation.

    However, the amount of under reported income is determined on the basis of an estimate if he has on his own estimated lower amount of addition or disallowance and has included such amount in the computation of income and has disclosed all the facts material to the addition or disallowance would not be treated as under reporting of income.

    The suppression of facts entail a deliberate act of not revealing the facts. Similarly, not furnishing the facts could amount to suppression of facts. This would cause great hardship to the taxpayers as additions made otherwise then by way of estimated addition would be construed as misrepresentation or suppression of facts by the income-tax authorities.

  4. The amount of under reported income is represented by any addition in conformity with the arm’s length price determined by the Transfer Pricing Officer (TPO) and the assessee has maintained information and document prescribed under Section 92D and declared the international transaction and made material disclosure relating to the transaction. It will not amount to under reporting.

  5. The amount of undisclosed income referred to in Section 271AAB (penalty when search has been initiated) would not amount not amount to under reporting.

Section 270A(8): Levy of Penalty:

Notwithstanding anything contained in sub-section (6) or sub-section (7), where under reported income is in consequence of misreporting, the penalty shall be equal to two hundred percent (200%) of the amount of tax payable on under reported income.

Section 270A(a): Cases of Misreporting of income:

The cases of misreporting of income shall be the following, namely:

  1. Misrepresentation or suppression of facts;

  2. Failure to record investments in the books of account;

  3. Claim of expenditure not substantiated by any evidence;

  4. Recording of any false entry in the books of account;

  5. Failure to record any receipt in the books of account having bearing on total income; and

  6. Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

Sub-section (10): Tax payable in respect of under reported income:

  1. Where the return of income is furnished:

    or

    Where return has been furnished for the first time under Section 148 and the income has been assessed for the first time;

    The amount of tax calculated on the under reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

  2. Where the total income determined under Section 143(1)(a) or assessed or reassessed or recomputed in a preceding order is a loss.

    The amount of tax to be calculated on the under reported income as if it were total income;

  3. In any other case:

    Where the amount of tax calculated on the under reported income as increased by the total income determined under Section 143(1)(a) or the total income assessed or reassessed or recomputed in a preceding order.

Sub-section (11): No addition or disallowance shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

Sub-section (11): Penalty Order:

It shall be imposed by an order in writing by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.

Conclusion

Under reporting of income due to misreporting is a heavy burden cost on the taxpayers. The penal provisions shall have deterrent effect on the assessees. However, the penal consequences could be mitigated with regard to under reporting income by having recourse to Section 270AA.

The question of penalty is rather too much and this will increase litigations. Section 270AA made be suitably amended by allowing misreporting by limiting the relief for two times during the lifetime of the taxpayers so that tax realization is not affected and to reduce the tax disputes for better and efficient compliance and reducing burden on administration.

Introduction

Authority and power to conduct search and seizure operations is strident and caustic power authorized by law to be taken recourse to when the conditions mentioned under different clauses of Section 132 (1) of the Act are satisfied.

The jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorised are that (i) the authority issuing the authorization is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) qua the person searched exist; and (iii) the said information has nexus to such belief.

The law is well settled that a warrant of search and seizure under Section 132(1) can only be issued on the basis of some material or information on which the Commissioner/Director has reason to believe that any person is in possession of money, jewellery or other valuable articles representing wholly or partly income or property which has not been or would not be disclosed, under the IT Act. The satisfaction of the authorities under Section 132 must be on the basis of relevant material or information. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”.

Having said so, the primary thrust of the Search and Seizure action is to collect evidences of tax evasion which otherwise could not have surfaced and brought to tax. Section 132(4) of the act has been put in place by the legislature consciously so as to enable the authorized officer to collect such evidences by recording statements during the course of search. Section 132(4) of the act empowers the Authorized Officer, to examine and record a statement under oath of any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under the Income Tax Act’1961.

Direct Tax Law (Amendment) Act’1987 w.e.f. 01-4-1989, inserted an explanation to Section 132(4), which reads as under:-

“Explanation.—For the removal of doubts, it is hereby declared that the exami-nation of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but
also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.”

Here, it would be relevant to point out that the statements u/s 132(4) are recorded by administering oath which is presumed to be carrying truth in view of the provisions of section 181 and section 193 of the Indian Penal Code which provide for imprisonment if a false statement is given.

Therefore there is a considerable importance of statements recorded u/s 132(4) during search and seizure operations, which is clear from the intent of Legislature as it thought fit to include a separate sub-section 132(4) for recording of statement during a search operation. However, it is further most pertinent to mention here is that the words ‘may be used in evidence in any proceedings’ appearing in section 132(4) are of great significance. The Legislature seems to be aware that some admissions may be made at the time of search which may be true, but for which sufficient corroborative evidence may not be found.

The word ‘statement’ is defined neither in the Income-tax Act nor in the Indian Evidence Act, and, hence, it assumes its dictionary meaning of ‘something that is stated’.

The Division Bench of the Kerala High Court in CIT v. Hotel Meriya [2011] 332 ITR 537 /[2010] 195 Taxman 459 (Ker.) considered the scope of a statement recorded under Section 132(4) and found that such statement recorded by the officer as well as the documents seized would come within the purview of evidence under the Income-tax Act read with Section 3 of the Evidence Act. The necessary corollary is that such an evidence should be admissible for the purpose of search assessments too. The Explanation to Section 132(4) of the Income Tax Act was also noticed by the Division Bench to further emphasize that the evidence so collected would be relevant in all purposes connected with any proceedings of the Income Tax Act.

Having said so, it is further pertinent to mention that statement recorded on oath u/s 132(4) of the act is significant both from the point of view department as well as the assessee who is subjected to search. From the departmental point of view, such a statement enables the department to bring on surface the tax evasion, to examine the nature of incriminating documents, assets etc. found during the course of search and record the assessee’s version with the regard to the contents of such incriminating documents and assets, its source, mode and manner of earning/application and its accountability in the books of accounts whether disclosed or not. Such a statement recorded on oath carries a significant evidentiary value which may be used by the Assessing Officer during the course of assessment proceedings as a corroborative evidence along with documentary evidences material unearthed during the course of search and seizure action.

On the other hand, the assessee subjected to such a search and seizure action, by making a valid disclosure of its undisclosed income in the statement recorded u/s 132(4) gets benefitted from less or no levy of penalty for the specified previous year u/s 271AAA or 271AAB, as the case may be, though on fulfillment of conditions mandated in Section 271AAA and/or 271AAB. Therefore, the assessee’s must be cautious enough about his or her disclosures, manner of disclosures of unaccounted income and it’s substantiation thereof as the manner and way in which assessee makes the declarations decides the fate of the assessee as regards the penal provisions are concerned.

It is further pertinent here that invariably in every search and seizure action, statements u/s 132(4) are recorded multiples times, till the search is concluded. The persons giving such statements during search proceeding remain under great mental pressure, nervousness and stress. Most of times they also do not have the availability of relevant details, documents and books of account at the time of giving such statements, in the absence of which precise information the statements made during the search proceeding are often vulnerable on the ground that same cannot be correctly furnished.

There may be cases, in the course of search and seizure operations wherein an attempt is often made to extract information about undisclosed income with the desire to announce the success of the operation of search by the concerned authorities, for achieving their success in search operations. In such cases, the Income-tax Department may adopt the pressure tactics for confessions of undisclosed income, which amounts to violation of human rights and on the contrary an assessee always complains of adopting pressure tactics by the department to extract confessions for declaration of undisclosed income. In such cases the authorities try to obtain and record Statement of the nature they would like to record. The persons making the Statements are made to sign on the statements and other documents.

To curb such erroneous practices of seeking involuntary forced confession of undisclosed income, the CBDT issued Circular F. No. 286/2/2003-IT(Inv.), dated 10-3-2003 after taking due recommendation of Kelker Committee, which clearly states that ‘no attempt should be made to obtain confession/surrender as to the undisclosed income during search. Any action on the contrary shall be viewed adversely’.

CBDT Instruction F. No. 286/2/2003-IT (Inv.), dated 10-3-2003 regarding confession of additional income during the course of search & seizure and survey operation is as reproduced herein under –

“In pursuance of the Finance Minister’s budget speech dated 28-2-2003 this instruction was issued by the CBDT and is as under:

“Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess undisclosed income during the course of the search and seizure and survey operation. Such confession, if not based on credible evidence, are taken/retracted by the concerned assessees while filing return of income. In these circumstances, confession during the search and seizure and survey operation do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-tax department. Similarly, while recording statement during the course of search and seizure operation, no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely”. This instruction is in line with the recommendation of the Task Force on Direct Taxes Chaired by Dr. Vijay Kelker.”

Recommendation in final Report Para 3.27 of Task Force on Direct Taxes Chaired by Dr. Vijay Kelkar in this context

  • The CBDT must issue immediate instruction to the effect that no raiding party should obtain any surrender whatsoever.

  • Where, a taxpayer desire to voluntarily make a disclosure, he should be advised to make so after the search.

  • All cases where surrender is obtained during the course of the search in violation of the instruction of the CBDT, the leader of the raiding party be subjected to vigilance enquiry.

  • All statements recorded during the search should be Video recorded.

Subsequently, CBDT also issued another letter [F.NO.286/98/2013-IT (INV.II)], DATED 18-12-2014, emphasizing upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence. The letter is being reproduced herein under:-

“SECTION 132, READ WITH SECTION 133A OF THE INCOME-TAX ACT, 1961 – SEARCH & SEIZURE – ADMISSIONS OF UNDISCLOSED INCOME UNDER COERCION/PRESSURE DURING SEARCH/SURVEY

LETTER [F.NO.286/98/2013-IT (INV.II)], DATED 18-12-2014

Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light.

  1. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Board has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence.

  2. In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the I.T.Act,1961 and/or recording a disclosure of undisclosed income under undue pressure/ coercion shall be viewed by the Board adversely.

  3. These guidelines may be brought to the notice of all concerned in your Region for strict compliance.

  4. I have been further directed to request you to closely observe/oversee the actions of the officers functioning under you in this regard.

  5. This issues with approval of the Chairperson, CBDT.”

It is often argued by the Department that in the confessional statements during the course of search, there is a mention that there was no pressure and the statement was given voluntarily without any threat. In this connection, the Bombay Tribunal in Deepchand & Co. v. Asstt. CIT (1995) [IT Appeal Nos. 1231 to 1234 (Bom.) of 1993, dated 27-7-1994] has observed thus:

‘The stereotyped mention at the end of the statement that whatever was stated was true and to the best of the knowledge and belief and the statement given was voluntary without any threat, force or undue influence, would not mean that they agreed for making additions. Putting certain expression at the end of the statement cannot be taken as true in view of the retraction. Retraction can be made only after understanding the correct meaning and consequences of the statement.’

There may be cases also where the assessee on his own motion gives the disclosures of undisclosed income including its manner of earning without being prompted by the authorized officer. However, later on, such an assessee may realize, on deeper analysis and investigation that such a statement was given under a fallacy or under mistaken belief of facts or at times of nervousness, stress and panic and thereby the statement so tendered doesn’t reflect the true state of affairs. To illustrate by way of a simple example, there may be a case wherein an assessee declares cash found at his premises as his undisclosed income but later on realizes that in fact such cash found is disclosed which actually represents the cash available in his books of accounts. There can be number of such illustrations.

Issue under consideration:-

Now a question arises whether the statement recorded u/s 132(4) of the act can be retracted and under what circumstances.

This is a vital issue for discussion in respect to search and seizure cases.

The Thumb Rule to address this issue is to understand the legal principle that though an admission u/s 132(4) of the act is an extremely important piece of evidence, but it cannot be said that it is conclusive and it is open to the person, who made it, to show it that the impugned statement has incorrectly been made and the person, making the statement should be given proper opportunity to show that it does not show the correct state of facts. At the same time, it has to be kept in mind that merely because a statement is retracted, it cannot become as statement which involuntarily or unlawfully obtained. For any retraction to be successful in the eyes of law, the assessee has to show as to how earlier recorded statements do not state the true facts or that there was coercion, inducement or threat while recording his earlier statements. During the course of practice of search and seizure cases, it is observed that on several occasions, after having admitted certain facts, in a statement made under section 132(4) of the act during a search and seizure operation, assessee’s retract the admissions made by denying the facts admitted, claiming that the admissions were obtained under duress, by applying mental pressure, or under mistaken belief of facts and law. Although law permits retraction of a statement, it lays down certain perquisites, without which the statement, though retracted, can be used as evidence in any proceedings under the Act. Any statement recorded under section 132(4), statutorily deemed to have evidentiary value; cannot be retracted at the mere will of the party. A statement made under oath deemed and permitted to be used in evidence, by express statutory provision, has to be taken as true unless there is contra evidence to dispell such assumption. A self-serving retraction, without anything more cannot dispell the statutory presumption. Admission as has been often held is the best evidence on a point in issue and though not conclusive is decisive of the matter unless successfully withdrawn or proved erroneous. Any retraction of a clear admission made has to be on the ground of it being either erroneous or factually incorrect or one made under threat or coercion.

Therefore, whenever an assessee pleads that the statements have been obtained forcefully/by coercion/undue influence without material/contrary to the material, then it should be supported by strong evidence. Once a statement is recorded under section 132(4), such a statement can be used as a strong evidence against the assessee in assessing the income, the burden lies on the assessee to establish that the admission made in the statements are incorrect/wrong and that burden has to be discharged by an assessee at the earliest point of time

Generally, as explained hereinabove, the statements made earlier u/s 132(4) are retracted when the maker contends that earlier admissions:

  1. were untrue; or

  2. were on a mistaken understanding, misconception; or

  3. were not voluntary; or

  4. were under mental stress, undue influence, pressure

At this juncture, it is pertinent to mention that Section 31 of the Indian Evidence Act, 1872 states that admissions are not conclusive proof of the matters admitted. Furthermore, in view of Section 94 of the Indian Evidence Act, presumption can be rebutted by proving that the admission or confession was caused by inducement, threat or promise, thereby making the admission irrelevant. Thus, an admission or acquiescence cannot be a foundation for an assessment where the admission was made under involuntarily, threat, force, pressure, coercion or erroneous impression or misconception of law. In such circumstances, it is always open to an assessee to demonstrate and satisfy the authority concerned with documentary evidence and thereby retract from the statement so rendered u/s 132(4) though without any significant delay of time.

The settled principle of law suggests that a confession of an accused would need corroboration with evidences to convict the accused. It is a matter of acceptance that though an admission is an important piece of evidence but it is not conclusive and it is open to the assessee to show that it is incorrect. At this stage, it shall not be out of place to quote the verdict of Hon’ble Supreme Court of India in case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 wherein their Lordships while observing that admission is an extremely important piece of evidence, held that, it cannot be said to be conclusive and the maker can show that it was incorrect. The landmark verdict was followed by the Hon’ble Delhi High Court of Delhi in case of S. Arjun Singh v. CWT [1989] 175 ITR 91.

Further reliance can also be placed on the judgement of the apex court in case of Nagubai Armul V. B Sharma Rao AIR 1956 SC 100 wherein it was held that an admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee who made the admission to show that it is incorrect. In yet another case of Sarwan Singh Rattan Singh v. State of Punjab AIR 1957 SC 637, the Hon’ble Supreme Court of India held that an admission is not conclusive as to the truth of the matters stated therein. It is only a piece of evidence, the weight to be attached to which must depend on the circumstances in which it is made. It can be shown to be erroneous or untrue.

In yet another case of Asstt. CIT v. Jorawar Singh M. Rathod [2005] 148 Taxman 35 (Ahd. – Trib.) (Mag.) the assessee during the recording of his statement was under constant threat of penalty and prosecution and was confused about various questions asked by the searching party about documents, papers, etc., of other persons found from his premises. He declared such sum under pressure which was evident from the fact that no such corroborative evidence, asset or valuables were found in form of immovable or movable properties from his residence in support of the amount of disclosure which was later on retracted but not accepted by the department. The Tribunal observed as under:

“…It is true that simple denial cannot be considered as a denial in the eyes of law but at the same time it is also to be seen (that) the material and valuables and other assets are found at the time of search. The evidence ought to have been collected by the revenue during the search in support of the disclosure statement. It is settled position of the law that 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 [S.R. Koshti v. CIT [2005] 193 CTR (Guj.) 518]. . . . In the light of above discussion, we apply the ratio of Apex Court in the case of Durga, (supra), [CIT v. Durga Prasad More [1973] CTR (SC) 500], i.e., test of human probabilities. We do not find any material on record on which basis it can be said that the disclosure of the assessee of Rs. 16 lakhs is in accordance with law or in spirit of section 132(4)…”. (p. 872)

On the similar lines the Hon’ble Chandigarh bench of the Income tax Appellate Tribunal in case of Surinder Pal Verma v. Asstt. CIT [2004] 89 ITD 129 (Chd.) (TM) took a realistic view of the facts and circumstances in which disclosure is generally made in search and seizure proceedings. It was observed as under:-

“It is well known fact that the confessional statements made during the search are often vulnerable on the ground that the person giving such statements remain under great mental strain and stress. They also do not have the availability of relevant details, documents and books of account at the time of giving such statements in the absence of which precise information relating to the mode of utilization of such income and the year of such investment cannot be correctly furnished. The assessees are, therefore, entitled to modify/clarify the statements after verifying the necessary details from the relevant records at later point of time.” (p. 24)

On the similar footing in case of ITO v. Bua Dass (2005) 97 TTJ (Asr.) 650/(2006) 155 Taxmann 130(Asr.) (Mag.) it was held that where the assessing officer made additions merely on the basis of confessional statement, made by the assessee before DDIT(Inv.), which was not supported by any independent and corroborative evidence and said statement was subsequently retracted by assessee during course of assessment, additions made on the basis of said statements were to be deleted.

Further reliance can be placed in the case of the DCIT v. Pramukh Builders (2008) 112 ITD 179 wherein it was held that there being no spectre of evidence regarding undisclosed income, addition made only on the basis of statement given in the state of confusion and later retracted could not be sustained.

Similarly, the Hon’ble Delhi ITAT in case of M.S. Aggarwal v. DCIT (2004) 90 ITD 80 (Del) following the judgement of the Hon’ble Supreme Court in case of Pullangode Rubber Product Co. Ltd. v. State of Kerala (1973) 91 ITR 18 held that the statement can’t be the only basis for making addition if the facts are different and the same are demonstrated by way of evidences at later stages.

In Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453, the Pune Bench of the Tribunal has held as under :

“8. However, there are exceptions to such admission where the assessee can retract from such admission. The first exception exists where such statement is made involuntarily, i.e., obtained under coercion, threat, duress, undue influence etc. But the burden lies on the person making such allegations to prove that statement was obtained by the aforesaid means. The second exception is where the statement has been given under some mistaken belief either of fact or law. It is well settled that there cannot be estoppel against the law. If a person is not liable to tax in respect of any receipt, he cannot be made liable to pay tax merely because he has agreed to pay the tax in the statement under section 132. He can always retract in such situation. For example the assessee might have sold his agricultural land and not declared its sale proceeds in his income-tax return. If such agricultural land does not fall within the ambit of the words ‘capital asset’ then no tax is payable. If the assessee had offered to pay tax on the profits on such sale under section 132(4), in our opinion, he can always retract from such statement. Similarly, if the assessee can show that the statement has been made on mistaken belief of facts, he can retract from the statement if he can show that facts on the basis of admission so made were incorrect. This is what has been held by the Hon’ble Supreme Court in the case of Pullangode Rubber & Produce Co. Ltd.”

“9. In view of the above discussions, we are of the view that admission made in statement under section 132(4) has great evidentiary value and is binding on a person who makes it. Therefore, the admission can be made on the basis of such admission by using the same in evidence. The Legislature was well aware that under the general law mere admission may not be conclusive one. The Income-tax Act is a specific Act and assessment has to be made on the basis of material gathered by the Assessing Officer. For this purpose, vast powers have been conferred on the Income-tax Authorities for making investigation including the powers of search. If in the course of such search, the assessee makes some admission, he debars the authorised officer from making further investigation. In view of this, Legislature in its wisdom has provided that such statement can be used in evidence and the assessment can be made on the basis of such statement. The sanctity of such provision would be lost if the assessee is allowed to contend that no addition can be made on the basis of such admission. However, such admission can be retracted by the assessee only if the circumstances as mentioned in the earlier paragraphs are established by the assessee to exist.” [Emphasis supplied]

Burden to prove the genuiness of retraction is on the assessee:-

The statement recorded under section 132(4) has evidentiary value, as provided in the Act itself that it can be used in evidence. The person who has given the statement can retract from the same if he can establish that (i) the statement was given under duress, coercion or under some other adverse circumstances; (ii) the statement was given under misconception of facts and law; (iii) the statement was not correct in the view of facts or material/evidence on record; and (iv) such other facts, material/evidence that come to light at a later stage show that the statement was not correct.

Merely because a statement is retracted, it cannot become as involuntarily or unlawfully obtained. For any retraction to be successful in the eyes of law the assessee has to show as to how earlier recorded statements do not state the true facts or that there was coercion, inducement or threat while recording his earlier statements. The burden of proof in on the assessee.

The Hon’ble Supreme Court has considered the question of burden of proof in the decision reported in CIT v. Best & Co. (P.) Ltd. A.I.R.1966 S.C.1325 and specifically dealt with it in paragraph 6:

“6. At this stage the question of burden of proof raised at the Bar may be noted. In (1965) 57 ITR 400: (AIR 1966 SC 54), this court observed:

“…..it must in the first instance be observed that it is for the revenue to establish that a particular receipt is income liable to tax….”

We may point out, as some argument was advanced on the question of burden of proof, that this Court did not lay down that the burden to establish that an income was taxable was on the Revenue was immutable in the sense that it never shifted to the assessee. The expression “in the first instance” clearly indicates that it did not say so. When sufficient evidence, either direct or circumstantial, in respect of its contention was disclosed by the Revenue, adverse inference could be drawn against the assessee if he failed to put before the Department material which was in his exclusive possession. This process is described in the law of evidence as shifting of the onus in the course of a proceeding from one party to the other. There is no reason why the said doctrine is not applicable to income-tax proceedings. While the Income-tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping.”

– The Allahabad High Court in Dr. S.C. Gupta v. CIT (2001) 248 ITR 782 (All-HC), in para 7 of the report, held as under:–

“7. As regards the assessee’s contention that the statement having been retracted the assessing officer should have independently come to a conclusion that there was additional income as sought to be assessed and that there was no material to support that there was such income, this contention in our view is not correct. As held by the Supreme Court in Pullan-gode Rubber Produce Co. Ltd. v. State of Kerala, (1973) 91 ITR 18 (SC) an admission is an extremely important piece of evidence though it is not conclusive. Therefore, a statement made voluntarily by the assessee could form the basis of assessment. The mere fact that the assessee retracted the statement could not make the statement unacceptable. The burden lay on the assessee to establish that the admission made in the statement at the time of survey was wrong and in fact there was no additional income. This burden does not even seem to have been attempted to be discharged.

Similarly, P.K. Palwankar v. CGT, (1979) 117 ITR 768 (MP-HC) and CIT v. Mrs. Doris S. Luiz, (1974) 96 ITR 646 (Ker-HC) on which also learned counsel for the assessee placed reliance are of no help to the assessee. The Tribunal’s order is concluded by findings of fact and in our view no question of law arises. The applications are, accordingly, rejected.”

– The Hon’ble Kerala High Court in case of CIT V O. Abdul Razak [2012] 20 taxmann.com 48 (Ker.) held that a self-serving retraction, without anything more cannot dispel statement made under oath under section 132(4). A statement made under oath deemed and permitted to be used in evidence, by express statutory provision, has to be taken as true unless there is contra evidence to dispell such assumption.

Brief Facts of the case were as under:-

Pursuant to a search conducted at the residential premises of the assessee, the Assessing Officer computed the undisclosed income on the basis of the seized documents and further on the basis of clear admission made by the assessee in the sworn statement recorded under section 132(4) made certain additions. The first addition was with regard to the actual money paid by the assessee for purchase of four properties. The assessee had voluntarily submitted before the ITO that the amounts shown in the document were not the actual amounts and that he had paid more than that shown in the document. He had also categorically stated the amounts actually paid with reference to the total extent of each of the properties, The second addition was with respect to the personal expenses. Last of the additions was an amount of Rs. 3 lakh which the assessee claimed as an NRI loan in his cash flow statement and later in a reply stated to be a loan from his elder brother. On appeal the first appellate authority confirmed the additions. On further appeal, the Tribunal, inter alia, held that the statement recorded under section 132(4) could not be the sole ground for making addition and the Assessing Officer ought to have obtained sufficient evidence to make the additions especially in the context of the statement under section 132(4) having been retracted by the assessee.

On revenue’s appeal:

The Hon’ble Court held as under:-

“The additions made by the Assessing Officer was on the basis of clear admission made by the assessee in the statement recorded under section 132(4). The Tribunal has proceeded to deal with the issues on the premise that no evidentiary value can be attributed to the statement under section 132(4) especially in the context of there being a retraction and that for making additions, the Assessing Officer should necessarily unearth materials during the search. [Para 6]

From a reading of the statement on oath given by the assessee, it is evident that the assessee had voluntarily submitted before the Income-tax Officer that the amount shown in the document with respect to purchase of four properties were not the actual amounts and that he had paid more than that shown in the document. The assessee has also categorically stated the amounts actually paid the reference to the total extent of each of the properties. In fact, it is the case of the assessee as is revealed from the order of the Tribunal, that the documents recovered during the search were put across to the assessee and it was looking into these documents that the assessee had stated the details of the various transactions. The statement given under oath has to be considered in the context of the long prevalent practise of not stating the actual consideration with respect to transactions of immovable properties, for the purpose of evading stamp duty: True, the assessee has a case in his retraction statement, as also before the first appellate authority and the Tribunal that he was threatened and coerced into stating the facts recorded in the statement under section 132(4). It is pertinent to note that the first appellate authority has clearly found that the appellant had volunteered the information and the demeanour of the deposition belies the contention of threat and coercion. Strangely, the Tribunal refused to go into that aspect as is discernible from its order.

The Tribunal without going into that aspect merely disbelieves the statement recorded under section 132(4) relying on the retraction statement as also on the lack of any material on record with respect to the alleged actual payments. The deletion made by the Tribunal is on the premise that the burden of proving undisclosed income in search is not established by the department. [Para 7]

It cannot be doubted for a moment that the burden of proving the undisclosed income is squarely on the shoulders of the department. Acquisition of properties by the assessee are proved with the documents seized in search. Since under statement of consideration documents is the usual practise the officer questioned the assessee on payments made over and above the amounts stated in the documents. Assessee gave sworn statement honestly disclosing the actual amounts paid. The question now to be considered is whether the sworn statement constitutes evidence of undisclosed income and if so whether it is evidence collected by the department. The burden of proof is discharged by the department when they persuaded the assessee to state details of undisclosed income, which the assessee disclosed in his sworn statement, on being confronted with the title deeds seized in search. [Para 8]

Section 132 deals with search and seizure and sub-section (4) of section 132 empowers the authorized officer during the course of the search and seizure to examine on oath any person who is found to be in possession of control of any books of account, documents, money or valuable articles or things etc. and record a statement made by such person which can be used in evidence in any proceedings under the Act. The explanation appended to clause (4) also makes it clear that such examination can be in respect of any matters relevant for the purpose of any investigation and need not be confined to matters pertaining to the material found as a result of the search. A plain reading of section 132(4) would clearly show that what was intended by empowering an officer conducting the search to take a statement on oath was to record evidence as contemplated in any adjudication especially since section 131 confers on all officers empowered their in with the same powers as vested in a Court under the Code of Criminal Procedure, for the purpose of the Act. [Para 9]

A Division Bench of this Court in CIT v. Hotel Meriya [2011] 332 ITR 537 /[2010] 195 Taxman 459 (Ker.) considered the scope of a statement recorded under section 132(4) and found that such statement recorded by the officer as well as the documents seized would come within the purview of evidence under section 158(BB) read with section 3 of the Evidence Act and section 131 of the Act Based on the above finding, it was also held that such evidence would be admissible for the purpose of block assessments too. The Explanation to section 132(4) was also noticed by the Division Bench in further emphasis that the evidence so collected would be relevant in all purposes connected with any proceedings of the Act. [Para 10]

The Tribunal’s finding that the statement recorded under section 132(4) has no evidentiary value, hence cannot be sustained. The reliance placed by the Tribunal on the retraction statement is totally untenable in so far as any statement recorded under section 132(4), statutorily deemed to have evidentiary value; cannot be retracted at the mere will of the party. A statement made under oath deemed and permitted to be used in evidence, by express statutory provision, has to be taken as true unless there is contra evidence to dispel such assumption. A self-serving retraction, without anything more cannot dispel the statutory presumption. The admission made by the assessee before the Assessing Officer corroborated by the title deeds seized in search absolves the department from discharging any burden regarding the additions made on the strength of such admission. Admission as has been often held is the best evidence on a point in issue and though not conclusive is decisive of the matter unless successfully withdrawn or proved erroneous. Any retraction of a clear admission made has to be on the ground of it being either erroneous or factually incorrect or one made under threat or coercion. In the instant case, the first appellate authority has clearly found that the plea of the assessee that the admissions were made under threat and coercion is clearly unfounded. The Tribunal also has categorically refused to consider the issue of threat and coercion. In such circumstances, the Tribunal ought to have seen if the assessee has established that the admissions made were erroneous and factually incorrect. It was well within the capacity of the assessee to have shown before the fact finding authorities either at the original or at the appellate stage that the assessee had only paid amounts as disclosed in the documents for the various property transactions entered into by him. The assessee having not proved any threat or coercion and further having failed to prove that the amounts shown in the documents were the only payments made, the Tribunal was not right in casting a burden on the department The assessee in the instant case has failed to successfully disprove the admissions made by him and admissions made in a statement under section 132(4), by the clear provisions in the statute has to be considered to have evidentiary value. In the circumstances, addition made by the revenue on the basis of the statement of the assessee under section 132(4) was justified. [Para 11]

The sustainability of the additions made by the Assessing Officer with respect to undisclosed income vis-a-vis the property transactions as also that made on account of personal expenditure has to be decided with reference to the answer in the first question, since both additions arc on account of admissions made in section 132(4) statement corroborated by documents recovered in search and the attendant circumstances. The Tribunal place much reliance on the retraction and even went to the extent of stating that it was the Department’s burden to prove the retraction to be untrue by bringing in any corroborative evidence.

In the instant case on the clear admission of the assessee corroborated by the documents the burden on the department ceases to exist. On the retraction being filed by the assessee, there is a burden cast on the assessee to prove the detraction or rather disprove the admissions made. It is not a shifting of the onus but a new burden cast on the assessee to disprove the earlier admissions having evidentiary value. As noticed earlier, retraction made by the assessee can only be considered as a self-serving afterthought and no reliance can be placed on the same to disbelieve the clear admissions made in the statement recorded under section 132(4). Deletion of the additions vis-a-vis the property transactions on the reasoning that the department cannot do so on the basis of the admission made under section 132(4) and on the premise that the Department ought to have proved retraction to be untrue cannot be countenanced in view of the specific words employed in section 132(4). [Para 12]”

– The ACIT v. Ramesh Chandra R. Patel [2004] 89 ITD 203 (Ahd.) (TM), it was accepted that the assessee had a right to retract but that has to be based on evidence brought on record to the contrary and there must be justifiable reason and material accepting retraction i.e., cogent and sufficient material have to be placed on record for acceptance or retraction. All that has to be done by the assessee if he is to retract at the statement is recorded in the presence of witnesses unless there is evidence of pressure or coercion. The facts of each case have to be considered to reach the conclusion whether retraction was possible or not as there can be no universal rule.

– The Hon’ble Delhi High Court in case of CIT V. Sunil Aggarwal [2015] 64 taxmann.com 107 (Delhi) held that a retracted statement under Section 132(4) of the Act would require some corroborative material for the AO to proceed to make additions on the basis of such statement. Of course, where the retraction is not for any convincing reason, or where it is not shown by the Assessee that he was under some coercion to make the statement in the first place, or where the retraction is not followed by the Assessee producing material to substantiate his defense, the AO might be justified in make additions on the basis of the retracted statement.

Retraction has to be within reasonable time

The statement under section 132(4) of the act is binding on the assessee and the same can be rebutted only on the ground that the same was made under mistaken belief of law or facts or it was obtained by coercion or duress. Where the assessee intends to retract his admission on the aforesaid ground, he should come forward at the earliest point of time with sufficient, credible and corroborative evidence to support his claim.

It is pertinent to mention here is that declaration u/s 132(4) of the assessee makes the departmental authorities to believe that the declaration made by the assessee is true and induced them to act upon such belief. The predominant judicial view is that it is not open to the assessee to change the stand it has already taken after a significant elapse of time and thus cause the situation in his favour by inducing the department not to investigate or enquire into the matter on the seized documents.

In the course of practice, it is seen that the assessee’s subjected to search and seizure action and after having tendered a statement u/s 132(4), generally sits over such statement till the commencement of assessment proceedings. This is not warranted. If any retraction has to be made, it has to be made at the earliest. By seeking to retract at a later stage, the assessee scuttles the investigation that might have been been resorted by the Investigation wing had the statement bring retracted earlier. This is also due to the fact that with passage of time, the evidence which the department could have collected may no longer be available; they might be manipulated, fabricated or destroyed. Further, the power of authorized officer to investigate is far wide and intense as compared to the power of Assessing Officer. By making the declaration before the authorized officer and admitting concealment and thereafter retracting it before the Assessing Officer, means practically closing the investigation by the investigation wing of the department. The predominant judicial view negates such retractions made at a later stage being an afterthought. Thus, any retraction sought to be made by the assessee after several months of declaration and admission under section 132(4) is only a well thought out device to shut the department from collecting the evidence to unearth unaccounted income.

– In case of PCIT v. Roshan Lal Sancheti (ITA No. 47/2018), the Hon’ble Rajasthan High Court held that the statement recorded under section 132(4) of the Act and later confirmed in statement recorded under section 131 of the Act, cannot be discarded simply by observing that the assessee has retracted the same because such retraction ought to have been generally made within reasonable time or by filing complaint to superior authorities or otherwise brought to notice of the higher officials by filing duly sworn affidavit or statement supported by convincing evidence. Such a statement when recorded at two stages cannot be discarded summarily in cryptic manner by observing that the assessee in a belatedly filed affidavit has retracted from his statement. Such retraction is required to be made as soon as possible or immediately after the statement of the assessee was recorded. Duration of time when such retraction is made assumes significance and in the present case retraction has been made by the assessee after almost eight months to be precise, 237 days and thus not permissible.

– In case of CIT, Bikaner v. Ravi Mathur 2017 (1) WLC (Raj.) 387, the Hon’ble High Court of Rajasthan held that the statements recorded under section 132(4) of the Income Tax Act have great evidentiary value and they cannot be discarded summarily and cryptic manner, by simply observing that the assessee retracted from his statement. One has to come to a definite finding as to the manner in which the retraction takes place. Such retraction should be made as soon as possible and immediately after such statement has been recorded by bringing to the notice of the higher officials by way of duly sworn affidavit or statement supported by convincing evidence, stating that the earlier statement was recorded under pressure, coercion or compulsion. Para 15 of the said judgment, is reproduced herein under:-

“15. In our view, the statements recorded under section 132(4) have great evidentiary value and it cannot be discarded as in the instant case ITA No. 720/JP/2017 M/s. Bannalal Jat Construction (P) Ltd., Bhilwara v. ACIT, Central Circle-Ajmer by the Tribunal in a summary or in a cryptic manner. Statements recorded under section 132(4) cannot be discarded by simply observing that the assessee retracted the statements. One has to come to a definite finding as to the manner in which retraction takes place. On perusal of the facts noticed hereinbefore, we have noticed that while the statements were recorded at the time of search on 9-11-1995 and onwards but retraction, is almost after an year and that too when the assessment proceedings were being taken up in November 1996. We may observe that retraction should be made as soon as possible and immediately after such a statement has been recorded, either by filing a complaint to the higher officials or otherwise brought to the notice of the higher officials, either by way of a duly sworn affidavit or statements supported by convincing evidence through which an assessee could demonstrate that the statements initially recorded were under pressure/coercion and factually incorrect. In our view, retraction after a sufficient long gap or point of time, as in the instant case, loses its significance and is an afterthought. Once statements have been recorded on oath, duly signed, it has a great evidentiary value and it is normally presumed that whatever stated at the time of recording of statements under section 132(4), are true and correct and brings out the correct picture, as by that time the assessee is uninfluenced by external agencies. Thus, whenever an assessee pleads that the statements have been obtained forcefully/by coercion/undue influence without material/contrary to the material, then it should be supported by strong evidence which we have observed hereinbefore. Once a statement is recorded under section 132(4), such a statement can be used as a strong evidence against the assessee in assessing the income, the burden lies on the assessee to establish that the admission made in the statements are incorrect/wrong and that burden has to be discharged by an assessee at the earliest point of time and in the instant case we notice that the assessing officer in the Assessment Order observes :–

“Regarding the amount of Rs. 44.285 lakhs, it is now contended that the statement under section 132(4) was not correct and these amounts are in ITA No. 720/JP/2017 M/s. Bannalal Jat Construction (P) Ltd., Bhilwara v. ACIT, Central Circle-Ajmer thousands, not lakhs i.e. it is now attempted to retract from the statements made at the time of S & S operations.”

– The Hon’ble Punjab and Haryana High Court in CIT v. Lekh Raj Dhunna (2012) 344 ITR 352 (P&H-HC) taking note of the fact that the assessee had made a statement under section 132(4) of the Income Tax Act whereby a surrender of Rs. 2 lakh was made and further that the assessee had admitted that he had earned commission from a party, which was not disclosed in the return filed by him and certain documents were seized which bore the signature of the assessee, held in para 16 of the report as under :–

“16. Thus, in view of sub-sections (4) and (4A) of section 132 of the Act, the assessing officer was justified in drawing presumption against the assessee and had made addition of Rs. 9 lakhs in his income under section 68 of the Act. The onus was upon the assessee to have produced cogent material to rebut the aforesaid presumption which he had failed to displace.

The assessee retracted from the said statement, vide letters dated November 24, 1998, and March 11, 1999, during the course of assessment proceedings. However, no value could be attached thereto in the present case.

In case the statement which was made by the assessee at the time of search and seizure was under pressure or due to coercion, the assessee could have retracted from the same at the earliest. No plausible explanation has been furnished as to why the said statement could not be withdrawn earlier. In such a situation, the authenticity of the statement by virtue of which surrender had been made at the time of search cannot be held to be bad. The Tribunal, thus, erred in concluding otherwise. The Tribunal, therefore, was not justified in reversing the order of the assessing officer which was affirmed by the Commissioner (Appeals) also.”

– On the Similar Lines, the Hon’ble Punjab and Haryana High Court in Bachittar Singh v. CIT (2010) 328 ITR 400, in para 7 of the report, held as under :–

“7. It is not disputed that the statement was made by the assessee at the time of survey, which was retracted on 28-5-2003, and he did not take any further action for a period of more than two months. In such circumstances, the view taken by the Tribunal that retraction from the earlier statement was not permissible, is definitely a possible view. The mere fact that some entries were made in a diary could not be held to be sufficient and conclusive to hold that the statement earlier made was false. The assessee failed to produce books of account which may have been maintained during regular course of business or any other authentic contemporaneous evidence of agricultural income. In the circumstances, the statement of the assessee could certainly be acted upon.”

– In Vasant Thakroor v. ACIT (2013) 27 ITR 254, the Hon’ble Mumbai ITAT didn’t conceded to a retraction filed after more than 2 years.

– In Video Master V JCIT [2002] 83 ITD 102 (MUM.), the Hon’ble Mumbai ITAT propounded that to prove that whether the retraction made was valid or not, one has to consider the following factors:-

  1. The time gap between the date of recording the statement under section 132(4) of the Act and the date of filing the affidavit retracting the above statement.

  2. The evidence of the witnesses who were present during the course of search.

  3. Communication made with the higher authorities and the documents seized during the course of search.

The observations of the court in this regard is reproduced herein under:-

“10. So far as the arguments of the learned counsel regarding the retraction of the statements of Shri D.N. Shah recorded under section 132(4) of the Act are concerned, we find nothing on record to indicate that income tax authorities have employed third degree methods to force Shri D.N. Shah to make confession or admissions. To prove that whether the retraction made was valid or not, one has to consider the following factors:

(i)The time gap between the date of recording the statement under section 132(4) of the Act and the date of filing the affidavit retracting the above statement.

(ii)The evidence of the witnesses who were present during the course of search.

(iii)Communication made with the higher authorities and the documents seized during the course of search.

So far as the first factor is concerned, the retraction of the statement was made by Shri D.N. Shah by filing an affidavit only after about a month. The statements under section 132(4) of the Act were recorded on 24-8-1995 and 25-8-1995 whereas the affidavit for retraction by Shri D.N. Shah was filed on 20-9-1995. If the statement of Shri D.N. Shah was recorded by using duress, intimidation or coercion, he would have immediately on the same day or on the following day filed the retraction. The very fact that he kept quite for almost a month after recording the statement proves beyond doubt that the statement was not recorded by using any force by the search party. Therefore, the affidavit filed by Shri D.N. Shah was an afterthought and it was simply a device to frustrate the efforts of the Department to sniff off the unaccounted income of the assessee.

  1. Coming to the factor of evidence of the witnesses who were present during the course of search, the issue cannot be decided merely because Shri D.N. Shah , one of the partners of the assessee firm made a protest after the conduct of the search. There is nothing to show that the search was conducted out of any malice on the part of the officer of the Department. There is nothing in the evidence to show that the search party intimidated Shri D.N. Shah to give a confession of Rs. 3 crores in the course of search. The assessee had not discharged the burden of proving coercion and use of force during the course of recording the statement of Shri D.N. Shah under section 132(4) of the Act. The search is generally conducted in the presence of two independent witnesses preferably from the same locality. The assessee has failed to obtain any statement from the witnesses to the effect that there was any irregularity in the search or the statement of Shri D.N. Shah was recorded under coercion and by use of force by the search party which resulted in the disclosure of undisclosed income of Rs. 3 crores. The statement was given by Shri D.N. Shah voluntarily as we have discussed above. It is quite usual for persons whose premises are subjected to search to send complaints of unfounded allegation with the view to escape from the consequences and from disclosures made during the course of search. The assessee had not obtained any statement or affidavit from the witnesses in support of the plea that the statement of Shri D.N. Shah was obtained by coercion or intimidation. So the assessee has totally failed to discharge the burden of proving that fact. Therefore, we do not find any force in the retraction filed by Shri D.N. Shah.

  2. Coming to the factor of communications made with higher authorities, we do not find anything on record which would indicate the efforts made by the assessee to bring into the notice of the higher authorities, the methods used by the search party to extract the disclosure of Rs. 3 crores from Shri D.N. Shah in his statement recorded under section 132(4) of the Act. Section 132 of the Income-tax Act deals with search and seizure of any books of account or other documents and to make a note or any inventory of any money, bullion, jewellery or other valuable articles or thing in the course of search of any premises. Sub-section (4) and the explanation there under read as follows :

“(4) The authorised officer may, during the course of search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable articles or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceedings under the Indian Income-tax Act, 1922 (11 of 1922) or under this Act.

Explanation : For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922) or under this Act.”

Thus the authorised officer had the power to record statements on oath on all matters pertaining to the suppressed income. The statement cannot be confined only to the books of account. If Shri D.N. Shah, partner of the firm came forward to disclose Rs. 3 crores of undisclosed income of the firm during the course of search in his statement under section 132(4) of the Act, there is no reason why the Assessing Officer shall not make use of it even though there was no actual verification of the various docu- ments seized during the course of search. The statement was made voluntarily. If there had been any irregularity or use of any force or intimidation, the assessee could have made correspondence with higher authorities immediately after recording such statement appraising them of the coercion or duress used for obtaining the statement. There is nothing to stop the assessee to meet either personally or through their Authorised Representative to authorities of bringing to their notice through written communication that any statement or admission made by them before the search party was on account of threat, coercion or under higher influence. Moreover, as we have stated above, merely writing would not be sufficient, but what actual threat, coercion or undue influence was exercised is also required to be spelt out so that its veracity could be verified with the witnesses who were there at the time of search. But in the present case, Shri D.N. Shah neither met the higher authorities personally nor he made any written communication with higher authorities immediately after recording his statement regarding the duress or coercion used by the search party for extracting the disclosure of undisclosed income of Rs. 3 crores. Shri D.N. Shah also did not bring into the notice of the higher authorities, the particular form of force or intimidation used by the search party. Under the circumstances, the retraction made by Shri D.N. Shah after about a month of recording the statement under section 132(4) of the Act is an afterthought to cover up the undisclosed income. The affidavit filed by Shri D.N. Shah is not supported by any evidence whatsoever, therefore, the same has been rightly rejected by the Assessing Officer as the same does not inspire any confidence. During the course of search, a number of documents were seized by the search party. The documents seized contains various types of financial transactions which runs into several crores. Shri D.N. Shah made the disclosure on the basis of such documents seized during the course of search. We find sufficient force in the arguments of the learned DR that if the offer of settlement in the form of confessional statement is made and the same is accepted by the Department, the assessee cannot subsequently turn around and disown the settlement. If Shri D.N. Shah would not have made this confessional statement, the Department could have continued the search and thereafter, the Department could have investigated the entire matter on the basis of the various documents seized during the course of search. By making the disclosure of Rs. 3 crores, Shri D.N. Shah stopped the entire process of further investigation as the Department accepted the disclosure and closed further investigation. After making such an offer of settlement in the form of confessional statement which is also accepted by the Department, the retraction filed by Shri D.N. Shah after about a month from the date of confessional statement cannot be considered as a valid retraction and the same is nothing but a well planned device to frustrate the efforts of the Department to unearth unaccounted funds by resorting to action under section 132(4) of the Act. In view of the discussion above, the retraction filed by the assessee is, therefore, an afterthought and the same is rejected.”

– In Hiralal Maganlal & Co. v. DCIT [2005] 96 ITD 113 (MUM.), the Hon’ble Mumbai ITAT held that the retraction sought to be made by the assessee several months after making the declaration under section 132(4) was nothing but a well planned device to frustrate the efforts of the Department to unearth unaccounted income. In para 25, the court observed as under:-

“25. In our view, the retraction sought to be made by the assessee several months after making the declaration under section 132(4) was nothing but a well planned device to frustrate the efforts of the Department to unearth unaccounted income. The attempt of the assessee to retract from the said declaration is not only against the well-settled principles of common law and against the letter and spirit of section 115 of the Evidence Act but also against the principles of equity, justice and good conscience. The declaration made by Shri Prataprai Sanghvi under section 132(4) clearly fell under section 115 of the Evidence Act and hence it was not open to the assessee to retract from the said declaration after the Departmental Authorities had accepted the same and altered their position by closing the search. Further, declarations falling under section 115 of the Evidence Act do not require any corroboration. Retraction from declaration or acts falling under section 115 of the Evidence Act is also not possible at all. The retraction filed by the assessee in the case before us is hit by section 115 and hence the Assessing Officer was justified in rejecting the same. We see no infirmity in his action.”

– The Hon’ble High Court of Chhattisgarh in the case of Asstt. CIT v. Hukum Chand Jain [2010] 191 Taxman 319 held that if an allegation of duress or coercion was made almost after two years, then such allegation has to be overruled.

– The Hon’ble Ahmedabad Bench of ITAT in case of Kantilal C. Shah v. ACIT [2011] 14 taxmann.com 108 (Ahmedabad) held that retraction after a significant delay creates doubt on its veracity. The court observed as under:-

“5.2 We have heard both the sides. We have also perused the retraction made by the assessee. First, we shall deal with the admissibility of the retraction in the present set of facts and circumstances of the case. A search was conducted on 12/12/1995 and on that very day a statement u/s.132(4) of the Act was recorded on 12/12/1995 at 12’O clock, however, after a lapse of around nine and a half months, i.e. 01/10/1996 a retraction was made through an Affidavit. It is also important to place on record that the said retraction was not immediately submitted before the AO but it was submitted through a covering letter dated 19/11/1996. This was pointed out by ld.DR Mr. S.K. Gupta that the retraction in the form of an Affidavit dated 1/10/1996 was kept with the assessee for 1½ months and on 19/11/1996 it was submitted before the AO. According to his pleadings the said delay thus demonstrated that the assessee was not confident about filing of the retraction.

5.3 We have perused the contents of the retraction which appears to be general in nature and there is no specific mention of a particular admission which was claimed to be retracted. There was a mention of ill-health or mental disturbance. In the said retraction, there was also a mention of some pressure tactics applied by the revenue but remained unsubstantiated. There was no reference or mention of any evidence. As noted above, though at the close of the statement recorded it was duly verified that the same was made without any pressure but it was so alleged in the impugned retraction. Had there been any pressure or torture as alleged, the assessee would have complained the same to the Commissioner or to any other Authority. No such attempt was ever made. Law in respect of admissibility of a retraction is very well settled. There must be some convincing and effective evidence in the hands of the assessee through which he could demonstrate that the said statement was factually incorrect. An assessee is under strict obligation to demonstrate that the statement recorded earlier was incorrect, therefore, on the basis of those specific evidences later on retracted. Further there should also be some strong evidence to demonstrate that the earlier statement recorded was under coercion. In the present case, the retraction is general in nature and lacking any supportive evidence. Rather assessee took several months to retract the initial statement, which by itself created a serious doubt.”

– The Hon’ble Mumbai ITAT in case of Manmohansingh Vig v. DCIT [2006] 6 SOT 18 (MUM.) also warranted against such late retractions and held that such late retraction can scuttle the investigation proceedings. The court observed as under:-

“18. About the argument of the ld. counsel of the assessee that no enquiries were done from the seller of the property by the Assessing Officer, we are of the view that the admission and disclosure made by the assessee had practically persuaded the ADI not to make any enquiry. The result of such enquiries is authentic only when they are conducted along with the search without loss of time. Passage of time gives opportunities to the concerned parties to create, destroy, manipulate, and arrange evidence to suit them. Reality and Truth are often lost in the delayed action. In the present case the Assessing Officer or the ADI did not investigate further, as the matter had practically come to a close after the admission and disclosure by the assessee. If the Assessing Officer had taken any action even after admission and disclosure, he would have been alleged for harassment. The thought of further investigation would arise only after the retraction. And it is done after 11 months of the search. Investigation in such matter after lapse of so many months is an exercise in futility. We therefore reject this argument also.

  1. We have heard the rival submissions and considered the facts and materials on record including the statements, replies of assessee and reasonings of the Assessing Officer for making the additions. We have also considered the submissions of learned counsel for the assessee of Shri Manmohan Singh given in that appeal before us and who submitted to adopt his arguments in the present case also. After considering the material and also the case laws cited in the case of Shri Manmohan Singh, we are of the view that issue simply boils down to the point that whether statement given under section 132(4) has to be used against the assessee or retraction is given weightage and additions be deleted. The issue has been considered in detail in the case of Shri Manmohan Singh Vig (HUF) (supra) by this Tribunal. Following that order, we hold that :

    1. What was retracted subsequently was only a denial. No material evidence was furnished so as to discharge onus cast on the assessee by virtue of statement recorded under sections 132(4) and 131(1A).

    2. Presumption raised under section 132(4A) is not rebutted by the assessee by submitting cogent evidence. Hence, the statement given under sections 132(4) and 131(1A) hold their evidentiary value.

    3. No material has been submitted to show that there was any pressure or coercion was exercised while recording the statements under sections 132(4) and 131(1A). No complaint was filed immediately after search or recording of statement under section 131(1A) to show that there was any pressure or coercion. Statement under section 132(4) was recorded before witnesses. Hence, there is a presumption that there was no pressure/coercion unless proved.

    4. Disclosure was enhanced during statement under section 131(1A) as compared to be given under section 132(4). Hence, the theory of pressure or coercion applied during recording of statement under section 132(4) is not acceptable.

    5. The assessee is silent for about 11 months. No letter/correspondence was sent immediately after recording of statement under section 132(4). Hence, theory of pressure or coercion is only an after- thought.

    6. Disclosure of several items were based on documents found in the search. These documents were explained under sections 132(4) and 131(1A). Hence, there is a strong reason to believe that statement under section 132(4)/131(1A) reveal correct state of affairs and retraction has to be ignored.”

– The Hon’ble Delhi High Court in case of PCIT v. Avinash Kumar Setia [2017] 81 taxmann.com 476 (Delhi) held that where an assessee surrendered certain income by way of declaration and withdraw same after two years without any satisfactory explanation, it could not be treated as bona fide and, hence, addition would sustain.

– In case of Principal Commissioner of Income-tax-9 v. Om Prakash Jakhotia [2019] 107 taxmann.com 283 (Delhi), the assessee made a statement u/s 132(4) wherein a substantial disclosure of undisclosed income was made during the course of search which was retracted after a significant lapse of time and that too without being corroborated by some material and thereafter the assessee approached the settlement commission with significantly lower additional income. The assessee during the course of Settlement offered certain additional amount stating to be in spirit of settlement. The court held that once the assessee approached it with a certain amount, representing that it constituted full and true disclosure (and had maintained that to be the correct amount till the date of hearing) the question of “offering” another higher amount as a “full” disclosure is impermissible. Ajmera Housing (supra) clearly held that:

“there is no stipulation for revision of an application filed under 245C (1) of the Act and thus the natural corollary is that determination of income by the Settlement Commission has necessarily to be with reference to the income disclosed in the application filed under the said Section in the prescribed form.”

The court further held that the amount offered in this case, clearly could not have been considered or accepted. The ITSC, in this regard, fell into error as there was no full and true disclosure by the assessee’s.

With regard to the delayed retraction, the court held as under:-

“The stark facts emerging from the above discussion and the discussion in the impugned order thus are that statement was made voluntarily on 20.01.2012, in the course of search proceedings. There is presumptive value to such statement by virtue of Section 132(4) of the Act. Moreover, it is not merely the statement that is material in the present case; in fact ledgers and other books of accounts were seized. The first respondent candidly stated that the amounts constituted unanticipated or sudden expenditure and that it was not feasible for him to indicate the veracity of the statement.

This Court is of the opinion that the approach of the ITSC was flawed throughout. Apart from brushing aside the fact that the retraction took place close to two years after the statement was made, the commission overlooked that nowhere did the assessees complain that the statement of the first respondent was recorded under coercion. His explanation for retraction was that the disclosures were not feasible, because he did not have the benefit of the records. But that is the point: if indeed someone is involved in clandestine activities, but is aware of its monetary magnitude and indeed discloses it voluntarily, he is in the best position to say if it is supported by evidence. At the stage of voluntary disclosure there was candour on the part of the first statement, that he could not support the “out of book” transactions with evidence. Later too, the position did not alter. Furthermore, the other important fact is that the assessee made no attempt to support the claim that the loan credit and other credits were genuine; the parties concerned, their creditworthiness and the reason for the credit was not substantiated in any manner.”

Retraction of Statement recorded during odd late hours in nervousness, panic and stress

It is also noted that various courts in the following cases have held that during the search the whole atmosphere is of utmost pressure and therefore there is very little scope for free and fair thinking on the part of a person searched. The courts have held that such a statement which has been recorded in late hours cannot be considered to be free, fearless and voluntary and an assessee can retract such a statement though after inducing valid evidences and substantiate so far as to how the factual position is in contrast as compared to the earlier statement so retracted.

– In CIT v. Naresh Kumar Agarwal, (2014) 369 ITR 171, the Hon’ble High Court of Andhra Pradesh observed that the circumstances under which a statement is recorded from an assessee, in the course of search and seizure, are not difficult to imagine. He is virtually put under pressure and is denied of access to external advice or opportunity to think independently. A battalion of officers, who hardly feel any limits on their power, pounce upon the assessee, as though he is a hardcore criminal. The nature of steps, taken during the course of search are sometimes frightening. Locks are broken, seats of sofas are mercilessly cut and opened. Every possible item is forcibly dissected. Even the pillows are not spared and their acts are backed by the powers of an investigating officer under Section 94 of Cr.P.C by operation of sub-section (13) of Section 132 of the Act. The objective may be genuine, and the exercise may be legal. However, the freedom of a citizen that transcends, even the Constitution cannot be treated as non-existent”.

– In DCIT v. Rajiv Kumar Gupta (ITA No. 15/DEL/2013) vide order dated 21-12-2018, the Hon’ble Delhi ITAT has deleted the additions made on the basis of statement u/s 132(4) of the act and held as under:-

“7.2 We also note that following pleadings and evidences were made in this regard before AO and Ld. CIT(A) submitting that statement recorded allegedly during the course of search was not free and fair and therefore addition cannot be made on that basis. At page no. 79-83 of the Paper Book, it is noted that the search was com,pleted at the locker of the assessee on 25.3.2009 and letter of retraction was made within 48 hours of such completion. It is also noted from page no. 57-58 of the Paper Book that no witnesses were present at the time of recording of statement which is evident from statements itself that there is no mention of any witness or any signatures of witnesses on statements. Also AO has also not provided the names of person present at the time when the statements have been recorded. Thus the above facts demonstrates that no witness were present at the time of such record. At Page No. 84-87 of the Paper Book there is a copy of retraction letter dated 27.03.2009 filed before ADIT (Inv.) along with affidavit of Smt. Sushmita Gupta and Shri Rajiv Kumar Gupta elucidating that statements were made under force, coercion and duress. She has further clarified that the same were made under mental tension and utter confusion; At page No. 89-90 of the Paper there is a copy of letter dated 20.04.2009 filed by the assessee to Ld. ADIT (Inv.) explaining that surrender made in statements recorded during search was product of coercion, duress, threat and mental tension and thus, the same was retracted by the assessee. At page no. PB 312-316 of the Paper Book there is a copy of letter dated 29.10.2010 filed before the Ld. ACIT stating that amount surrendered by the assessee along with her husband has been retracted vide letter dated 27.03.2009. lt was further emphasized that surrendered amount was illegal, without any basis and was under mental tension, duress, coercion, treat and undue influence. At page no. 370-383 (PB 373) of the Paper Book is the copy of submission filed before the Ld. CIT(A) reiterating that surrender made by assessee and her husband was not voluntary and was under undue pressure from the search officials with assurance to conclude search. However, the assessee explained the source of each and every asset/loose paper found during the course of search and submitted before AO and Ld. CIT(A) that as to why additions cannot be made in respect of such assets/loose documents. The AO made an abrupt addition of Rs. 1,50,00,000/- which was affirmed by Ld. CIT(A) as against amount of Rs. 15, 58,632/- offered by the assessee suo-moto before the Ld. CIT(A). We also note that the case laws cited by the Ld. CIT(DR) are not exactly on the same facts and circumstances of the present case, hence, does not support the case of the Revenue.”

– In Kailashben Manharlal Chokshi v. CIT (2008) 220 CTR 138, the Hon’ble Gujarat High Court held that if a statement is recorded during odd hours late in the night or after long search operation when assessee is fully tired and exhausted, retraction of such statement may be accepted by the courts after taking into account the entire gamut of facts and circumstances of the case. In para 22, the court as under:-

“The glaring fact required to be noted in the instant case was that the statement of the assessee had been recorded under section 132(4) at mid night. In normal circumstances, it is too much to give any credit to the statement recorded at such odd hours. The person may not be in a position to make any correct or conscious disclosure in a statement, if such statement is recorded at such odd hours. Moreover, that statement was retracted after two months. [Para 22]”

– In Deepchand & Co. v. ACIT (1995) 51 TTJ 421, the Hon’ble Mumbai Tribunal held that statements recoded during search proceedings which continued for an unduly long period also cannot be considered to be free, fearless and voluntary. Thus can be successfully retracted contending the same were recorded under pressure and force.

Retraction of Statement given under mistaken belief of law or fact

It is a settled position of law that admission made by the assessee u/s 132(4) is an important piece of evidence but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and the same is given under mistaken belief of fact or law.

– In case of Jyotichand Bhaichand Saraf & Sons (P.) Ltd. v DCIT [2012] 26 taxmann.com 239 (Pune), the Hon’ble ITAT Pune held that though It is a settled position that admission made by assessee under section 132(4) is an important piece of evidence but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and the same is given under mistaken belief of fact or law.

– The Amritsar ITAT Bench in Asstt. CIT v. Janak Raj Chauhan [2006] 102 TTJ 316, observed that admission made at the time of search action is an important piece of evidence, but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and same was made under mistaken belief of law and fact.

– The Jodhpur ITAT Bench in Maheshwari Industries v. Asstt. CIT [2005] 148 Taxman 74 (Jodh) (Mag.) has held that additions should be considered on merits rather than on the basis of the fact that the amount was surrendered by the assessee. It is settled legal position that unless the provision of statute warrant or there is a necessary implication on reading of section that the principles of natural justice are excluded, the provision of section should be construed in manner incorporating principles of natural justice and quasi judicial bodies should generally read in the provision relevant section a requirement of giving a reasonable opportunity of being heard before an order is made which will have adverse civil consequences for parties effected.

– In case of Krishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293 (Punjab & Haryana), the Hon’ble Punjab and Haryana High Court held that the assessee has the right to prove that the admission was in fact wrong and the surrender was made simply to avoid botheration. It is an established principle of law that a party is entitled to show and prove that the admission made by him previously is in fact not correct and true

– Likewise, in case of Abdul Qayume v. CIT [1990] 184 ITR 404 (All.), the Hon’ble Allahabad High Court opined that an admission or an acquiescence cannot be the foundation for an assessment where the income was returned under an erroneous impression or misconception of law. It is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law.

– Similarly, In case of Satinder Kumar (HUF) v. CIT [1977] 106 ITR 64 (HP), their lordships held that it is true that an admission made by an assessee constitutes a relevant piece of evidence but if the assessee contends that in making the admission he had proceeded on a mistaken understanding or on misconception of facts or on untrue facts such an admission cannot be relied upon without first considering the aforesaid contention.

Recently in Commissioner of Income Tax-14, Mumbai v. Rakesh Ramani [2018] 94 taxmann.com 461 (Bombay), it was held that in course of block assessment, wherein the assessee brought on record various documents to establish that jewellery seized from him actually belonged to his employer, impugned addition made in respect thereof merely on ground that assessee in course of statement made under section 132, had admitted that said jewellery belonged to him, could not be sustained.

Having said so, even otherwise, 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 any assessee, under a mistake, misconceptions 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. The Hon’ble Bombay High Court has dealt with this issue in case of Balmukund Acharya (310 ITR 310) and has held as under:-

“31. Having said so, we must observe that the Apex Court and the various High Courts have ruled that 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 any assessee, under a mistake, misconceptions 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 (see S.R. Kosti v. CIT [2005] 276 ITR 165 (Guj.), CPA Yoosuf v. ITO [1970] 77 ITR 237 (Ker.), CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi), CIT v. Archana R. Dhanwatey [1982] 136 ITR 355 (Bom.).

  1. If particular levy is not permitted under the Act, tax cannot be levied applying the doctrine of estoppel. (See Dy. CST v. Sreeni Printers [1987] 67 SCC 279.

  2. This Court in the case of Nirmala L. Mehta v. A. Balasubramaniam, CIT [2004] 269 ITR 1 has held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. In the case on hand, it was obligatory on the part of the Assessing Officer to apply his mind to the facts disclosed in the return and assess the assessee keeping in mind the law holding the field.”

Reliance can also be placed on the Departmental Circular No. 14(XL-35), dated 11-4-1955 which states that officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way. Therefore, the retraction of statement tendered on mistaken belief of law or facts should be accepted by the department. The departmental circular is reproduced herein under:-

“Administrative instructions for guidance of Income-tax Officers on matters pertaining to assessment

Circular : No. 14(XL-35), dated 11-4-1955.

  1. The Board have issued instructions from time to time in regard to the attitude which the Officers of the Department should adopt in dealing with assessees in matters affecting their interests and convenience. It appears that these instructions are not being uniformly followed.

  2. Complaints are still being received that while Income-tax Officers are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Act. Dilatoriness or indifference in dealing with refund claims (either under section 48 or due to appellate, revisional, etc., orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and granting refunds and giving reliefs.

  3. Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should—

    1. draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other ;

    2.  freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

  4. Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited.

  5. While officers should, when requested, freely advice assessees the way in which entries should be made in various forms, they should not themselves make any in them on their behalf. Where such advice is given, it should be clearly explained to them that they are responsible for the entries made in any form and that they cannot be allowed to plead that they were made under official instructions. This equally applies to the Public Relation Officers.

  6. The intention of this circular is not that tax due should not be charged or that any favour should be shown to anybody in the matter of assessment, or that where investigations are called for, they should not be made. Whatever the legitimate tax it must be assessed and must be collected. The purpose of this circular is merely to emphasise that we should not take advantage of an assessee’s ignorance to collect more tax out of him than is legitimately due from him.

Circular : No. 14(XL-35), dated 11-4-1955.“

On the similar lines, if the assessee retracts a statement made u/s 132(4) on the pretext of it being subjected to coercion, force and under influence, the burden lies on the assessee to substantiate with evidences that statement so tendered is subjected to such alleged coercion, force and under influence.

In Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453, the Pune Bench of the Tribunal has held the burden lies on the person making such allegations to prove that statement was obtained by the aforesaid means.

The allegation that the assessee was tortured and harassed by the search team and was forced into making an admission is not enough. For the retraction to be valid, threat or coercion has to be proved – Manharlal Kasturchand Chokshi v. Asstt. CIT [1997] 61 ITD 55 (Ahd.).

The Mumbai Tribunal, in the case of Param Anand Builders ( P.) Ltd. v. ITO [1996] 59 ITD 29, has held that allegations of torture and harassment were unacceptable when independent witnesses were present at the time of search. Mere filing of a letter retracting the statement was not held to be rebuttal of the presumption that what is admitted is true. The Tribunal’s observations were also based on the fact that the ‘Panchas’ had not brought any harassment to the notice of the higher authorities. In specific reference to the income-tax proceedings, it would be useful to refer to the decision of the Madras Bench of the Income-tax Appellate Tribunal in the case of T.S. Kumarasamy v. Asstt. CIT [1998] 65 ITD 188 where, taking note of the fact that ITOs are not Police Officers and, as such, they do not use or resort to, unfair means in recording oath statements during the search operations or during the course of any proceedings before them, it was held that such statements, admissions and confessions are binding and cannot be retracted, unless and until it is proved by legally acceptable evidence that such admission, confession or oath statement was involuntary or was tendered under coercion or duress. Drawing support from the decision of the Supreme Court in the case of Surjeet Singh Chhabra v. Union of India [1997] 1 SCC 508 the Tribunal disallowed plea of retraction of the assessee on the ground that neither the ground of coercion or duress nor the ground of involuntary statement was proved to have existed at the time of recording of the statement. This decision of the Tribunal goes to indicate that admissions or confessions made in the statements recorded during search or survey, without there being any other evidence to support such admissions, can successfully be made use of to assess the income, unless they are proved to be involuntary or are proved to have been taken under duress, coercion, misconception, etc.

Manner of Retraction:

Generally, as discussed herein above, the statements made earlier are retracted when the maker contends that earlier admissions:

  1. were untrue; or

  2. were on a mistaken understanding, misconception; or

  3. were not voluntary; or

  4. were under mental stress, undue influence, pressure or coercion.

Retraction or rebuttal of earlier statements/admitted facts can, inter alia, be:

  1. in the form of statement which is recorded later on ; or

  2. in the form of a letter; or

  3. in the form of an affidavit filed.

Retraction by an Affidavit

Though retractions would be effective in all the manners discussed above, yet, comparatively speaking, like a subsequent statement recorded on oath by the concerned income-tax authority, retractions by way of affidavit filed on oath or affirmation attested by the Notary/Oath Commissioner are considered to be more effective for the simple reason that in the eyes of law they carry more value in view of the specific provisions of the Indian Penal Code as contained in sections 181, 191 & 193 which provide for prosecution in case of false statements given on oath.

Affidavit which is a solemn and voluntary declaration or statement of fact in writing, relating to matters in question and sworn or affirmed and signed by the deponent before a person or officer duly authorized to administer such an oath or affirmation. Such an affidavit should show the circumstances under which admission was made and the grounds for which the admission is incorrect. Necessary supporting evidences to support the correct facts need to be filed. When by a sworn statement or affidavit facts admitted, in an earlier statement which was recorded on oath, are retracted the Assessing Officer may like to examine the maker carefully. Regarding the retraction made by way of an affidavit it is important to note that mere filing of an affidavit even before the Court will not conclusively make the earlier admissions ineffective because an affidavit is only a statement in respect of the matter in the personal knowledge and in respect of affidavit the deponent is liable to be cross-examined. On furnishing of an affidavit, the Authorized Officer is entitled to cross examine the deponent and the assessee can be required to produce the deponent in person for cross examination. If the assessee fails to comply affidavit can be ignored. However, if the Officer fails to cross-examine the deponent the statement made in the affidavit becomes unchallengeable. On this point, useful reference can be made to the decision of the Supreme Court in the case of Mehta Parikh & Co. v. CIT [1956] 30 ITR 181 where it was held that it will not be open to the revenue to challenge the statements made by the deponent in their affidavits later on, if no cross examination with reference to the statements made in the affidavits is done.

It is also important to note here is that making an incorrect or false affidavit is criminal offence. It has been held in the case of Baban Singh v. Jagdish Singh AIR 1967 SC 68 that where a false affidavit is sworn, the offence would fall u/s 191 and 192 of the Indian Penal Code 1860. Hence an affidavit has to be considered as a piece of evidence. The importance and relevance of the averments made in the affidavit cannot be brushed aside without really having any material to contradict the same.

Conclusion:

Having said so, from the principles of law laid down as mentioned herein above, it may be deduced that, admission is one important piece of evidence but it cannot be said that it is conclusive. It is rebuttable. It is open to an assessee who made an admission to establish that the confession was involuntary and the same was extracted under duress and coercion. The burden of proving that the statement was obtained by coercion or intimidation lies upon the assessee. Where the assessee claims that he made the statement under the mistaken belief of fact or law, he should have applied for rectification to the authority who passed the order based upon his statement. The retraction should be made at the earliest opportunity and the same should be established by producing any contemporaneous record or evidence, oral or documentary, to substantiate that that the earlier statement is contrary to the facts of the matter and doesn’t hold good.

In conclusion, while making initial admissions by way of statement or otherwise, one has to be take ample precautions and before making admissions. It is most important that one should understand the facts and issues properly. One should not make initial admissions in a huff or in a casual or light hearted manner because, subsequently, it may not be easy for him to retract or disown them. Further, instead of retracting initial statements or admissions in a bald manner, one has to bring on record cogent reasons or evidences failing which any retraction thereafter may be decided against him on the basis of initial statement itself. In the interest of revenue, it is also pertinent to mention that even if the assessee has tendered a statement u/s 132(4) of the act accepting its undisclosed income, the investigating officer should reinforce such an admission based on his independent investigation and enquires during the course of post search investigation.

A will or testament is a legal document by which a person, the testator, expresses his wishes as to how his property is to be distributed after his death. He also names one or more persons, to act as the executor, to manage the estate until its final distribution. For the devolution of property not disposed of by will.

A “will” was historically limited to real property while “testament” applies only to dispositions of personal property, thus giving rise to the popular title of the document as “Last Will and Testament”. However, the historical records show that the terms have been used interchangeably in many cases. Thus, the word “will” validly applies to both personal as well as immovable property. A testamentary trust, that is effective only after the death of the testator, may also be created by a will.

Definition of Will: Section 2(h) of Indian Succession Act, 1925 provides that Will means the legal declaration of the intention of a person with respect to his property, which he desires to take effect after his death. Corpus Juris Secundum defines – A ‘Will’ is the legal declaration of a man’s intention, which he wills to be performed after his death, or an instrument by which a person makes a disposition of his property to take effect after his death.

A last will and testament is a legal document that communicates a person’s final wishes pertaining to possessions and dependents. A person’s last will and testament outlines what to do with possessions, whether he is leaving them to another person or group or donating them to charity, and what happens to other things for which he is responsible, such as custody of dependents and accounts as well as management of his interests.

A will made by a Hindu, Buddhist, Sikh or Jain is governed by the provisions of the Indian Succession Act, 1925. However Mohammedan are not governed by the Indian Succession Act, 1925 and they can dispose their property according to Muslim Law.

Key ingredients of a Will: These are as follows:

  1. Details of Testator– Name, age, address details of the person making the Will

  2. Legal declaration– A Will is a declaration. In a Will, a living person (called testator) declares his desires or intentions. A Will is never an agreement or contract or settlement. It is for this reason that the beneficiaries of a Will should not be parties to the Will. The declaration must be legal. A declaration that is illegal either by way of the ultimate objective or in some other way, will not be considered as a Will.

  3. Intention of testator– A Will is declaration of intention of the person making the Will. Intention relates to the future and is different from statement of narration of facts as at present. A Will that only narrates the present state of affairs and does not carry a clear exposition of the intention of the testator is not a Will. If a Will is made by a wife stating what her deceased husband always desired before death is not a Will; since it carries intentions of the testator’s deceased husband and not of the testator.

  4. Will has to be in respect to property of Testator– A Will can only be made with respect to the property that the testator owns or has rights over such property. The general rule is that one can only give what one has. That means one cannot give away something that one does not have. The testator should give details of the properties, which he wants to give to his beneficiaries under his Will. Such details in case of immovable property are the address of property with proper description, registration number, date of registration and whether it is his self acquired property etc. If it is a movable property, then it is advisable to give the details and description of each item of property should be clearly and individually be mentioned.

  5. Details of Beneficiary– In case of multiple beneficiaries, the details of each beneficiary like name, age, address, relationship of the Testator with the beneficiary, should be given.

  6. Desires to be carried into effect after Testator’s death– The Will must state clearly that the testator desires that it comes into effect after his / her death. A renunciation during one’s lifetime does not amount to a Will. If the document desires to partition property among the testator’s sons and daughters, while the testator is still living, the document cannot be termed as a Will.

  7. Executor of the Will – The Testator should appoint an Executor to his Will. An Executor is a person who shall implement the Will after the Testator’s death. There may be more than one Executors to the Will.

  8. Guardian for Minors– If the Testator wishes to give his property to any beneficiary who is a minor, then he should appoint a guardian who will take care of the minor’s property till the minor attains majority.

  9. Signature and Date– The Will should be clearly mention the date of its execution and signed by the Testator at the place in the document just below the last sentence in the document. It has to be signed by the Testator in presence of two witnesses, who all should be present at the time of execution of Will.

  10. Joint family property– The Testator cannot give in his Will any joint family property or ancestral property that is common to many other members too. Such a Will becomes void.

Important points:

  1. Any stipulation in construction of the Will that postpones the vesting of legacy in the property disposed should be avoided.

  2. The intention of the testator should be decided after construing the Will as a whole and not its clauses in isolation.

  3. A will can be on a plain paper.It need not be made on Stamp Paper. It is optional to register a will with Registrar of Assurance. Will can be kept in a sealed envelope and it is optional to keep such envelope with the Office of Registrar of Assurances.

  4. Will can be modified: The Testator may modify his will by revoking the earlier will. The Last Will is considered valid. The last Will as the name hints is a legal document that communicates a person’s last wishes specified before his death.

Some Judicial decisions: The Hon’ble Supreme Court held in the case of Gnanambal Ammal vs T. Raju Ayyar And Others 1951 AIR 103,:1950 SCR 949 that the cardinal maxim to be observed by the Court in construing a Will is the intention of the testator. This intention is primarily to be gathered from the language of the document, which is to be read as a whole. The primary duty of the court is to determine the intention of the testator from the Will itself by reading of the Will. The Hon’ble Supreme Court in Bhura v. Kashi Ram AIR 1994 SC 1202, JT 1994 (1) SC 11, 1994 (1) SCALE 17, (1994) 2 SCC 111, 1994 1 SCR 16, 1994 (1) UJ 503 SC held that a construction which would advance the intention of the testator has to be favoured and as far as possible effect is to be given to the testator’s intention unless it is contrary to law. The Court should put itself in the armchair of the testator. In Navneet Lal Alias Rangi vs Gokul And Others 1976 AIR 794, 1976 SCR (2) 924, the Hon’ble Supreme Court held that the Court should consider the surrounding circumstances, the position of the testator, his family relationships, the probability that he would use words in a particular sense. However Hon’ble Supreme Court also held that these factors are merely an aid in ascertaining the intention of the testator. The Court cannot speculate what the testator might have intended to write. The Court can only interpret in accordance with the express or implied intention of the testator expressed in the Will. It cannot recreate or make a Will for the testator.

Types of wills: Will may be Privileged Will or Unprivileged Will or Formal Wills or Handwritten Wills or Oral Wills or Joint and Mutual Wills or Conditional and Contingent Wills or Statutory Wills or Self-Proving Will.

  1. Privileged Will:The only persons who can make a privileged Will are: (a) Soldier / airman employed in an expedition or engaged in actual warfare; and (b) mariner at sea. Relevant section of Indian Succession Act, 1925 reads: A privileged Will can be in writing or can be oral. A privileged Will written in his own hand by the Testator need not be signed. A privileged Will signed by the Testator does not need attestation by witnesses. Privileged Will is a special Will made in extraordinary circumstances like war or dangerous expedition. Most importantly, Hindus are not permitted to make privileged Wills since the relevant sections 65 and 66 of Indian Succession Act, 1925 are not listed in Schedule III of the Act.

  2. Unprivileged Will / Holograph Will:Every person who is not entitled to make a privileged Will can make an unprivileged Will. In other words, Hindus can only make unprivileged Wills. Essential procedural requirements of an unprivileged Will can be summed up as follows: (i) Must be in writing (ii) Signed by testator in the presence of witnesses (iii) Signed by two or more witnesses in presence of the testator

    Relevant section of Indian Succession Act, 1925 reads: The most essential requirement for a Will as per Indian law is attestation by two or more witnesses. A person can take any plain paper and write the Will in his / her own hand putting down his / her wishes on paper without any need for assistance from a legal professional. Such a Will in one’s own handwriting is called Holograph Will. If a Holograph Will is duly attested by witnesses, there is strong presumption in favour of genuineness of the Will. So, if one has a clear mind and decent control on language, one should write out the Will in one’s own handwriting, sign it in front of two witnesses and get the signature of the two witnesses. It must be noted that even when a Will is a Holograph Will, the requirements of signature of the testator and attestation by witnesses must be complied with. Any slip with respect to either the signature or the attestation will may make the Will null and void. It may be noted that assistance of a legal professional is not necessarily required for making of a Will. However, a lawyer can help in avoiding confusions caused by poor drafting or errors of language. An experienced and seasoned legal professional can also help a testator clarify his thoughts and wishes. It is advised that one must choose a professional who is not only competent and knowledgeable, he is also a person of highest level of integrity. Often when a Will is challenged, the testimony of the Legal professional/ scribe or document writer may be crucial for determining the genuineness of the Will and also about the roles played by different persons in getting the Will prepared.

  3. Formal Wills:One can make a will by typing out his wishes and signing the document, along with two witnesses present at the same time. The person making the Will need to be of sound mind and (in most states) of at least 18 years. No official language is necessary. The Testator should state his wishes clearly. One can use his formal will to distribute his property, name an executor, name guardians for minor children, and forgive debts.

  4. Handwritten Wills:Many States in our country recognize handwritten wills, which are also called holographic wills. A holographic will must be in Testator’s own handwriting, and it doesn’t have to be witnessed. Although this might sound easier, holographic wills can cause problems after Testator dies because the Court will have to decipher and verify your handwriting. This can cause hassles for Testator’s family. If Testator wants to make a will of any significant length or complexity, it will be much easier to make a formal will on a computer, using software, or with a lawyer’s help. If a Testator needs a will fast, by all means he may write down his wishes in a handwritten will. In many cases, a handwritten will is better than no will at all. However making of a formal typed will is advisable. It will result in a more robust, precise, and easily probatable document.

  5. Oral Wills: Oral wills are valid in just a few States and under limited circumstances. The Oral Wills usually require a presence of fear of death and they can be used only to distribute personal property. Oral wills are unusual and uncertain. If a person is planning to make a will, it is advisable not to make an oral will on your death bed. Instead, it is better to make a formal will.

  6. Joint and Mutual Wills: A joint will distributes the property of two or more people, usually a married couple. Joint wills determine what will happen to the couple’s property after one spouse dies, and also what will happen to the property after the second spouse dies. It may seem convenient to a couple to make just one will, joint wills can cause problems for the surviving spouse because it ties up property and restricts what he or she can do with it. For example, if a couple makes a joint will and the husband dies in his fifties, the wife may live another 30 or more years but she will still be bound by the terms of the will made earlier in her life. Joint wills are best used by couples who have children in common and who want to ensure that property will go to those kids. It may be considered to make mutual wills, instead of making a joint will. Mutual wills are two separate wills that are close mirrors of each other. Mutual Wills allow couples to “leave everything to each other” and any number of other similar wishes, but because each person has his or her own will, he or she is free to change or alter it, as may be needed after the first spouse dies.

  7. Conditional and Contingent Wills: Conditional wills only go into effect when a certain act or condition happens. This could be a future event not closely related to writing the will, such as attaining a certain age.

  8. Statutory Wills:A statutory will is one that contains standard terms provided by State law. These State laws were created to allow people to make their own standard will that will be easily recognized and probated. Statutory forms can normally be made without a lawyer by using the State’s fill in the blank forms. Some States have mandatory provisions which are required to be considered/ incorporated as part of the statutory will. In these States, the standard terms are implied, even if they weren’t explicitly written in the Will. If a Testator have very simple wishes, a statutory will can work well for him. However, these wills are not very flexible and one may not be able to customise/ tailor them to one’s needs.

  9. Self-Proving Will:A self-proving will, (or a self-proving affidavit attached to a will), must be notarized, and it should be certified that the witnesses and testator properly signed the will. This type of will makes it easy for the Court to accept the document as the true Will of the person who has died, serving as testimony, and avoids the delay and difficulties in locating witnesses and producing them before the Court at the time of probate proceedings.

  10. Advance Medical Directives is not a Will: Unlike other types of wills, a living will does not distribute property after the death of the testator. Instead, it gives instructions on what type of medical treatment one wishes to receive if you become seriously ill. For example, one might state that if he becomes terminally ill and unconscious, he does not want to be hooked up to a feeding tube even if he would die without it. The formal requirements for a living will are more flexible than for a testamentary will, but it should be clear and detailed. Advance Medical Directives (AMD) is a set of instructions that are given by a person about the level of permissions that he is willing to give to doctors about treatment of his body. AMD relates to permissions that one grants or refuses to grant with regards to one’s body when one is moving towards death. AMD has also been called as Living Will though the Hon’ble Supreme Court prefers the term Advance Medical Directives. AMD, even though called by some as Living Will, are not a part of a person’s Will. A Will is to dispose of one’s movable and immovable properties after one’s death, while AMD operates only during one’s life and has no relevance after death. AMD relates to permissions that one grants or refuses to grant with regards to one’s body when one is moving towards death. Hon’ble Supreme Court explained the concept of AMD: “It has often been argued that one’s right to life includes one’s right to die or at least to die with dignity.
    Debate about right of life and death becomes important when a person is going through terminal illness, extreme pain and has no hope of survival. At times like these, death may seem like a boon. Modern medicine may not be able to cure, but can often only prolong the ordeal of pain and vegetative existence. Under such circumstances, many may choose a painless and quick death over medically supported expensive life support systems. The problem is that the person going through the ordeal is not in a position to take the decision or convey the decision. Hence, there is need for Advance Medical Directives which are written by one when one is in good health and are detailed instructions to doctors in case of such terminal illness.

Some relevant movies where the actors were seriously ill are: Anand (Starring Rajesh Khanna, Amitabh Bachhan and Sumita Sanyal); Paa (Starring Amitabh Bachhan, Abhisek Bachhan and Vidya Balan) and 102 Not out (Starring Amitabh Bachhan and Rishi Kapoor).

India does not have legislation for AMD or any type of euthanasia. In the absence of any legislation, it has fallen upon the Hon’ble Supreme Court to lay down the law related to euthanasia and also AMD. Recent judgment (9 March 2018) in the matter of Common Cause versus Union of India W.P. (Civil) 215 of 2005 is a landmark judgment that lays down the guidelines in this field. The Supreme Court gave a landmark verdict making the way for passive euthanasia, which is also described as Physician Assisted Suicide (PAS). The Court reiterated that the right to die with dignity is a fundamental right, as already held by its constitutional bench in Gian Kaur case earlier, and declared that an adult human being, having mental capacity, to take an informed decision, has right to refuse medical treatment including withdrawal from life saving devices. Giving its verdict in the above case of Common Cause vs. Union of India and others, the Apex Court concluded that a person of competent mental faculty is entitled to execute an advance medical directive. The 538 page judgment was delivered by the five-judges’ constitutional bench comprising the Chief Justice of India, Mr. Justice Dipak Misra, Mr. Justice, A.K. Sikri, Mr. Justice A.M. Khanwilkar, Mr. Justice D.Y. Chandrachud and Mr. Justice Ashok Bhushan.

Conclusion: It is advisable for all to make their Will. It is necessary for the sake of convenience and to avoid future disputes. Now a days life is uncertain so this advice may be followed. A will makes it much easier for your family or friends to sort everything out when he dies – without a will the process can be more time consuming and stressful. If you don’t write a will, everything you own will be shared out in a standard way defined by the law – which isn’t always the way you might want. The amount or asset or property received by virtue of a Will is not liable to income tax due to provision in section 47 of the Income Tax Act.

Taxation of partnership firms has always been a controversial issue specially with reference to taxability of withdrawal of capital over and above the balance by partners at the time of retirement or receipt of money or assets on reconstitution or dissolution of a partnership firm.

 Partnership and Partner

As per Sec 4 of the Partnership Act, “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually “partners” and collectively a “firm”, and the name under which their business is carried on is called the “firm name”. As per this definition various judgments have held that partner and partnership firm are not different entity and are one and the same hence any money received from the firm after retirement or on dissolution is not a gain in the hands of the firm or partner except in case of any asset received on dissolution or otherwise of the firm {As per erstwhile Sec. 45(4)}.

 Erstwhile Sec. 45(4)

As per judicial precedents if any partner received any money on his retirement from the firm where the firm continues even after his retirement and no asset is received by the partner at his retirement or on dissolution then such money even if over and above the capital account balance of that partner were not deemed to be taxable in the hands of firm or partner.

 New Sec. 9B & substituted Sec. 45(4)

To overcome the shortcomings of erstwhile Sec. 45(4) and to make negatived the relevant precedents, substitution of Sec 45(4) and introduction of new provision being Sec. 9B in the act has taken place. In this article I have discussed changes brought in by Finance Act,2021 being made effective from Assessment Year 2021-22 in respect of taxation of partnership firms specially with reference to receipt of money or asset received by partners on dissolution or reconstitution of partnership firms.

 Specified entity and Specified Persons

Before we proceed to discuss these issues, two words used in Sec. 9B & 45(4) of the I.T. Act must be understood here, “specified entity” and “specified person”.

Specified entity means, “a firm or other association of persons or body of individuals (not being a company or a co-operative society)”, “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year”. Firm includes LLP.

In the following discussion even if the word “partner”, & “partnership firm”, is used, but it will be denoting and covering specified person and specified entity respectively here for the purposes of Sec. 9B & 45(4).

 Dissolution or reconstitution of a partnership firm Sec. 9B

As per newly inserted Sec. 9B of the act, if any partner receives any capital asset or stock in trade on dissolution or reconstitution of partnership firm, then it will be deemed that such partnership firm has transferred capital asset or stock in trade to the partner in the previous year in which, such asset or stock is received by such partner.

Reconstitution of the firm means if any partner ceases to be a partner, or admission of any partner where one or more partner as were before the change continue after change, or another situation where no incoming or outgoing partner but change in share of partners.

Then any profit and gains arising on deemed transfer of such stock or asset shall be deemed to be, “profit & gains of business or profession”, or “capital gains” of the partnership firm of the previous year in which such asset or stock is received by the partner. Computation of such profits & gains of business or profession or the capital gains shall be made as per provisions of the act.

If any capital asset or stock in trade is not received by the partner, e.g. if value of asset or stock is revalued on reconstitution at the time of admission or retirement of a partner then in such a case since no asset or stock is received by existing or incoming partner then Section 9B will not come into play, or if any asset received by the partner is not a capital asset, e.g. if rural agricultural land is received by the partner then it being not a capital asset as per Sec. 2(14) of the act hence it will be out of purview of Sec. 9B.

The fair market value of capital asset or stock in trade on the date of receipt of such asset or stock by the partner shall be deemed to be the full value of consideration in the hands of firm.

 Reconstitution of a partnership firm Sec. 45(4)

As per substituted Sec. 45(4) w.e.f. A.Y. 2021-22 if any partner receives any money or capital asset upon reconstitution of the firm then profits and gains arising from such receipt of money or asset by the partner shall be deemed to be the capital gain in the hands of the firm in the year of receipt of asset or money by the partner. Such capital gain shall be calculated as per the following formula :-

A = B + C – D

Where,

A = income of the firm U/s 45(4) under the head “Capital gains”;

B = value of any money received by a partner from the firm on the date of such receipt;

C = the amount of fair market value of the capital asset received by the partner from the firm on the date of such receipt; and

D = the amount of balance in the capital account (represented in any manner) of the partner in the books of account of the firm at the time of its reconstitution:

Provided that if the value of “A” in the above formula is negative, its value shall be deemed to be zero :

Provided further that the balance in the capital account of the partner in the books of account of the firm is to be calculated without taking into account the increase in the capital account of the partner due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

From the above formula it is clear that profit and gain being capital gain shall be calculated by adding value of money received and FMV of capital asset received by the partner and deducting his capital account balance, such capital account balance shall be considered ignoring any increase in capital account balance arisen due to revaluation of any asset or valuation or revaluation of any self generated asset or goodwill. If the result is negative it shall be ignored and if the result is positive it is deemed to be the capital gain in the hands of the firm.

No loss can be there under the head capital gains as a result of sec. 45(4) of the act.

 Sec. 9B vs. 45(4)

Sec. 9B is applicable for capital asset and stock in trade whereas Sec 45(4) is applicable for capital asset and any money received only, sec. 9B is applicable on dissolution and reconstitution but provisions of Sec. 45(4) is applicable only in case of reconstitution of the firm and not in case of dissolution of the firm.

 Sec. 48(iii)

Sec. 48(iii) specifies that gains computed U/s 45(4) to be attributed to remaining capital assets of the firm.

 CBDT Circular and notification

Sec. 9B(4) states that if any difficulty arises in giving effect to the provisions of 9B and 45(4), the Board may, with the approval of the Central Government, issue guidelines for the purposes of removing the difficulty. Every guideline issued by the Board shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the assessee.

Accordingly CBDT issued guidelines vide circular No. 14/2021 dt. 02-07-2021 specifying that as the amount taxed U/s 45(4) of the Act is required to be attributed to the remaining capital assets of the firm, so that when such capital assets get transferred in the future, the amount attributed to such capital assets gets reduced from the full value of the consideration and to that extent the firm does not have to pay tax again on the same amount. This attribution is given in the Act only for the purposes of section 48 of the Act. Section 48 of the Act only applies to capital assets which are not forming block of assets. For capital assets forming block of assets there is Sec. 43(6)(c) of the Act to determine WDV of the block of asset and section 50 of the Act to determine the capital gains arising on transfer of such assets. However, the Act has not yet provided that amount taxed U/s 45(4) of the Act can also be attributed to capital assets forming part of block of assets and which are covered by these two provisions. The guideline clarified that rule 8AB of the Income Tax Rules, notified vide notification no. 76 dated 02.07.2021 also applies to capital assets forming part of block of assets. Wherever the term capital asset is appearing in the rule 8AB of the Rules, it refers to capital asset whose capital gains is computed under section 48 of the Act as well as capital asset forming part of block of assets. Further, wherever reference is made for the purposes of section 48 of the Act, such reference may be deemed to include reference for the purposes of Sec. 43(6)(c) of the Act and section 50 of the Act.

For the purpose of Sec. 48 of the act CBDT notified vide Noti. No. 76 – rule 8AA(5) and rule 8AB on 02-07-2021. Rule 8AA(5) specifies that in case of the amount which is chargeable to income-tax as income of partnership firm U/s 45(4) under the head Capital gains such gain shall be deemed to be STCG if such gain attributed to capital asset which is short term capital asset at the time of taxation of amount U/s 45(4); or capital asset forming part of block of asset; or capital asset being self-generated asset and self-generated goodwill as defined in clause (ii) of Explanation 1 to Section 45(4); and such gain shall be deemed to be LTCG if it is attributed to capital asset which is not STCG and is long term capital asset at the time of taxation of amount U/s 45(4).

For example if Rs.50 Lakh is be attributed to remaining asset “A” & “B” in the ratio of 50:50 (being equal upward revaluation of A:B), i.e., Rs. 25 Lakh each. When either of these asset would be sold in future, Rs. 25 Lakh amount attributed shall be reduced from sales consideration under section 48(iii) of the Act. The amount of Rs. 50 Lakh charged to tax under section 45(4) of the Act shall be deemed to be long-term capital gains in view of Rule 8AA, considering Rs. 50 Lakh has been attributed to asset “A” and “B”, both being long term capital assets at the time of taxation under section 45(4) of the Act. In simple words, nature of gain u/s 45(4) is determined on the basis of nature of remaining assets to which attribution is required to be made.

Rule 8AB specifies that for the purposes of clause (iii) of section 48, where the amount is chargeable to income-tax as income of partnership firm U/s 45(4), the specified entity shall attribute such amount to capital asset remaining with the firm in a manner provided in rule 8AB. Where the aggregate of the value of money and the fair market value of the capital asset received by the partner from the firm, in excess of the balance in his capital account, chargeable to tax U/s 45(4), relates to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill, of the partnership firm, the amount attributable to the capital asset remaining with the firm for purpose of clause (iii) of section 48 shall be the amount which bears to the amount charged U/s 45(4) the same proportion as the increase/recognition of, value of that asset because of revaluation or valuation bears to the aggregate of increase/recognition of, value of all assets because of the revaluation or valuation. Where the aggregate of the value of money and the fair market value of the capital asset received by the partner from the firm, in excess of the balance in his capital account, charged to tax U/s 45(4) does not relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill, of the partnership firm, the amount charged to tax U/s 45(4) shall not be attributed to any capital asset for the purposes of clause (iii) of section 48. Where the aggregate of the value of money and the fair market value of the capital asset received by the partner from the specified entity, in excess of the balance in his capital account, charged to tax U/s 45(4) relate only to the capital asset received by the partner from the firm, the amount charged to tax U/s 45(4) shall not be attributed to any capital asset for the purposes of clause (iii) of section 48. The firm shall furnish the details of amount attributed to capital asset remaining with the firm in Form No. 5C. on or before the due date specified U/s 139(1) for the assessment year in which the amount is chargeable to tax U/s 45(4).

All the discussions on Sec. 9B & 45(4) of the act in the above article is brief and said provisions will have to be analysed in the light of specified relevant section, rules and different situations. The views herein are guiding but before taking any conclusion with regard to circumstances detailed analysis of relevant sections and rules should be taken care of.

The dictionary meaning of the word ‘tax’ is a strain or heavy demand, an oppressive or ‘burdensome’ obligation. The dictionary also says ‘tax’ means a call to account. In my humble opinion, we Indians and particularly those who are doing well in life have not understood the fundamental principle of taxing power. The power is utilized in order to create Harmony and balance in the society. It integrates and brings together a huge population divided amongst others Economically. The taxing power is really calling for those in higher income groups and at the top to account for the needs of those who are not so affluent and can safely be termed as deprived sections of the society.

Historical Backdrop

Independence on 15th August 1947, was an epoch-making event that sealed the fate of the Britisher colonials and at the same time also handed us the destiny of our own land with all the strengths, merits, faults, and follies. Such an event was a result of over a century worth of struggles with its sporadic success and failures, which eventually culminated in Independence. While rightfully celebrating the ecstasy of the event, it is sometimes forgotten how a topic like tax has acted as a catalyst in overthrowing a foreign power. It is well known that the slogan ‘No taxation without representation’ was a battle cry of the Americans against the Great Britain, but is there an Indian equivalent?

On March 8 in 1929, Mahatma Gandhi heralded the beginning of the Civil disobedience movement by taking a decision to break the Salt Act 1882. “That is for me one step, the first step, towards full freedom,” he said as quoted in historian Ramachandra Guha’s book, ‘Gandhi: The years that changed the world (1914-1948)’. Guha further writes, “Gandhi wanted this to be a long march, or pilgrimage perhaps, where his leisurely progress would enthuse people along the way and attract wider publicity too.” Finally, he decided on Dandi to be the point at which the salt law would be broken.

This Dandi March movement was so effective that, whilst enacting the Central Excises and Salt Act, 1944, even a nearly bankrupt and cash hungry Great Britain in Section 3 Chapter II Levy and Collection of Duty specifically excluded Salt produced and manufactured in India.

Dynamic Role of the Indian Constitution

The topic of the present article is Indirect taxation since independence. No discussion on indirect taxation can commence and be complete without referring to the Constitution of India. Today, we do not realize that 75 years back in 1946 the Constituent Assembly was established. It met first on 18th December 1946. It deliberated and discussed on the making of a constitution and prepared a draft of it, which we accepted on 26th November 1949. That is how our constitution is a document which we have given to ourselves. It is in that sense unique. As held by the Supreme Court of India it embodies human values, cherished principles and spiritual norms. It upholds the dignity of man. Indians have solemnly resolved to constitute a sovereign socialist, secular, democratic republic and to secure to all its citizens what is aptly summarized in the preamble to our constitution. To meet that goal, the power of taxation is conferred. We do not realize that a tax may be compulsory contribution to the support of the government and levied on persons, income, commodities, transaction, etc., The essential distinction between tax and fee can never be forgotten. The tax does not assure anything in return to the taxpayer but while not rendering specific service or benefit, it is a collection for public purpose.

There is a difference between development and progress. The later word means advancement. While direct taxes reach the income, Indirect Taxation brings to tax inter alia goods and services. The power to tax is decentralized providing for apportionments and adjustments so as to achieve complete co-ordination between the union and States in our federal structure. The subject matter of laws which can be made by the parliament and the States is traceable to Article 246 and Schedule VII of the Constitution which sets out the three lists. List I is the Union list. List II is the State list and List III is the concurrent list. The Constitution has been repeatedly amended and recently the 101st amendment to the Constitution resulted in the introduction of Article 246-A. It confers on the parliament absolute power to make laws with respect to goods and service tax, but also takes care in stating that while the parliament has exclusive power to make laws with respect to goods and service tax, that power is restricted to supply of goods or services in the course of inter-state trade or commerce. Thus, intra state taxation on the supply of goods or services remains with the State. The Constitution has been amended so as to include in Part XI titled as “Relations between the Union and the States” particularly legislative relations. Chapter 1 in Part XII titled as Finance, Property, Contracts and Suits, inserts various articles by which it is evident that while levy and collection of goods and service tax in the course of interstate trade and commerce can only be by the Government of India, but that tax will be apportioned between the Union and the States in the manner as may be provided by parliament by law and on the recommendation of the Goods and Service Tax Council. Thus, the imposition and levy may be by the Centre, but the distribution and apportionment between the Union and the States also takes place in accordance with the law which the constitution allows the parliament to make. Similarly, by introduction of Goods and Service Tax Council and its establishment, there is a supervision, control, monitoring and review of this tax.

Levy, collection of tax has always been a prerogative of the Government. Article 265 of the Constitution of India clearly states that Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law.

Once the authority to levy tax is established, one safely state, that the Government enjoys a vast play in the way taxation is to be levied as well collected. The basic character of Indirect tax is that it is a tax on commerce and economic affairs. The purpose however of such a tax is not to merely collect revenue, penalize or control business, the noble purpose of tax is to strive towards equality, as has been quite succinctly explained by Justice Venkatachaliah in Srinivasa Theatre v. Govt of TN (1992) 2 SCC 643

The instrument of taxation is not merely a means to raise revenue in India; it is, and ought to be, a means to reduce inequalities. You don’t tax a poor man. You tax the rich and the richer one gets, proportionately greater burden he has to bear.

Indirect taxes and the Past

It is an interesting and progressive path that indirect tax law has taken over the past 75 years.

Major indirect taxes in India have been Customs, Excise, Sales tax laws, Service tax, VAT, and subsequently leading to the all-encompassing Goods and Services tax Act.

An Item which was imported was subject to Customs Duty, which in turn was a massive exercise in determining the rate of tax from an extremely diverse rate schedule.

Furthermore, if it was used as a raw material to manufacture a product on which there was excise duty, when it was sold, one had to pay Sales tax if sold locally which depending on the era and item could be First point, last point, or multi point sales tax . If sold interstate, in that case, the seller had to prostrate before the purchaser of another state to issue him C Forms. If the goods were transferred to another state, there was the question of F Forms which had to be backed by establishing that the same was otherwise than by way of sale. One could actually fill up parchments if one had to enlist even the most basic issues that arose out of the plethora of taxes which were levied. It would be safe to use the word archaic and not business friendly.

It is natural for an observer looking back at the chaotic nature of indirect taxation since independence to ask, why were the past governments with their treasure trove of visionaries and economists not able to react faster. The first real VAT/GST system was introduced in France in 1954, hence there was no shortage of international precedents .

There are umpteen number of countries which are far less heterogenous than India , but some how devolved into totalitarian dictatorship after a few years of experiment with democracy. A spirit of federalism and granting autonomy to the regional states by empowering the States to tax exclusively on some transactions and the Centre keeping residuary powers was one of the driving factors which have contributed handsomely to the irreversible and deep entrenchment of Democracy.

In the present era, the democracy and political system is so deeply rooted into India that despite all their internal differences and political schisms, all States and the Centre could amicably ratify the tectonic changes in the Constitution and bring about such a GST law.

It was a long and arduous journey for India and its economy to travel, before Our Ex-Prime Minister Hon’ble Mr. Manmohan Singh as a Finance Minister in 1993, said the golden words “Nothing can stop an idea whose time has come” and fast tracked the Market based semi regulated capitalist economics. Such a change in the outlook of Indian economy was also brought about by the precarious condition that our economy was in at that point of time.

Post-independence, the priority was massive industrialization and at the same time there was pressing need to support Agriculture and agro based industries. In the 4 decades between independence and opening of Indian economy, the indirect tax laws have undergone significant flux.

Thus dispassionate analysis can lead one to a conclusion, that modern Indirect tax laws like VAT, GST which required massive administrative infrastructure and synergy between the states and Union would have been nearly impossible.

Effective Implementation of Laws and powers of exemptions

On several occasions the core issue in discussion is how the laws relating to indirect taxes could be effectively implemented. In that we fail to notice that in a vast and thickly populated country like ours, coordination at all levels is not impossible to achieve, but seems difficult. We have inherent and inbuilt contradictions, complications and complexities in our Country. We do not organise our financial matters and property affairs properly. It is necessary therefore for every legislation to attempt to fulfil the dreams and aspirations of a cross section of the Society. Therefore, the drafting of Tax laws as a whole is indeed an enormous task. On occasions clumsiness and lack of clarity exists because there is attempt to please every one and all. That is why after the charging section and outlining the Incidence of tax follow the machinery provisions which enable recovery and collection of Tax. When there is an imposition and levy and the incidence falls on goods or services or acts including import thereof, it is necessary in Indian context to confer a power to exempt from taxation. Input Tax credit on Goods or Services or allowing a set off or adjustment in the tax on final product. Thus, Input Credit is provided for so that the Trade does not feel aggrieved if the burden is heavy.

It is commonly misunderstood that exemption means ‘tax free’. ‘Tax free’ or ‘no tax’ is not always equivalent to Exemption. The burden falls, but in the light of the power to exempt being exercised the tax is not recovered and collected. Once the exemption is withdrawn, the recovery will follow. The power to exempt is not always conferred in absolute terms. Moreover, it is to be exercised in public interest. It cannot be unconditionally exercised under all circumstances. Therefore, a balance is struck by granting conditional or partial exemption. If the conditions are satisfied and fulfilled the exemption can be enjoyed and whether the conditions are fulfilled or satisfied or not will have to be adjudged in the event of a dispute.

Thus it can be seen that power to exempt is essentially necessitated for the State to further their goals of public interest.

Tax exemptions dilute the incidence of tax and thus offer such refuge. Whether a taxpayer or a transaction fall within the scope of the exemption provision, therefore, becomes a point of inquiry and debate1. Interpretation of Exemption notification itself has been an oscillating affair. The general rule as settled was while interpreting a certain aspect of the law, when there was an ambiguity, the view that favours the assessee was held as acceptable. It was only in 2018, that Constitution Bench of the Supreme Court in Commissioner of Customs (Import) v. Dilip Kumar2, settled the law of interpretating an exemption notification by holding that:

66.1 Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

66.2. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.

Reforms in indirect tax law and structure

It was in 1974, that the LK Jha Committee Suggested Introduction of VAT System, and VAT was introduced in 2005. Per Contra Chellaih Committee Report recommended “VAT/GST” in 1991 and the GST laws saw the light of the day in 2017. The drastic reduction in the time taken to implement reforms, also reflect the reality of the growing ambitions of Indian Trade. The aspirations of Indian Enterprise acts like a river which beyond a certain threshold shatters the dam, even if it is a behemoth like the complex bureaucracy, politically divergent state politics, federal autonomy and the tax administration. The 101st Constitutional amendment is therefore a result of an aspirational India and its desire to be competitive at an international stage.

The Hon’ble Apex Court has laid down that, every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide all possible situations or anticipate all possible abuses.3 After several decades of trial and error, the time had come for one of the most awaited experimental restructuring of the entire indirect tax laws , i.e. GST laws.

The need for reforming the plethora of indirect taxes extant in India in 2017 was to re shape the entire Indian tax System. A baneful feature of the Indian Tax System is the lack of administrative efficiency. There is no coordination between taxes to allow a well-organized, planned and coordinated tax to evolve4.

The deficiency in the tax administration is not something which was lost on the Executive and the Government. The working paper published by The Department of Economic Affairs, Ministry of Finance in 20095, admittedly states:

Compounding the structural or design deficiencies of each of the taxes is the poor or archaic infrastructure for the administration of taxpayer services, which are a lynchpin of a successful self-assessment system, are virtually nonexistent or grossly inadequate under both the Central and the State Administrations.

GST Laws are a tryst with a system of true self-assessment and an administration which is backed by robust Information Technology.

Legal Challenges

In the circumstances, we have a typical scene where firstly a challenge is mounted on the power to levy and impose the tax. Secondly, disputes are raised during the course of recovery and collection of taxes and thirdly, disputes and differences occur when the power to exempt is exercised. The complaint throughout is that the power is not exercised in conformity with the mandate of Article 14 of the Constitution of India. While, the power to tax, recover a tax and equally exempt from taxation is not immune from challenge under Article 14 and is subjected to the Constitution itself, still, the legislature enjoys a large discretion in these matters. It need not tax all to tax someone and in the same breadth need not exempt all in order to leave out someone. The latitude is much more. Yet, the common Indian picture is that disputes and differences in relation to the above three are pending in courts for decades together.

Role of Tribunals

Tribunalisation has not helped at all. The traditional civil court is denuded of its power to take cognisance of the above referred matters by a civil suit and Tribunals are established, but post establishment scenario is pathetic. The Tribunals are not given adequate financial assistance, they lack manpower and basic resources and therefore are not able to render justice in a timely manner. Since the infrastructural and budgetary issues remain unresolved, competent persons are reluctant to join the service and are not keen to be appointed as either judicial or administrative members. In India, the traditional system of justice delivery caters to the Tax Tribunals as well. There is no independent service like an Administrative service, Revenue service, etc., or a All India Judicial service. Though specifically permitted by the Constitution such a service is not established till today. Therefore, we face vacancies, and which are not filled in for months and years together. Members of the District Judiciary of a State, post retirement and members of the Higher judiciary demitting office, all of a certain age, are only available to man these tribunals. Similarly, existing members of Administrative and Revenue Services are not available for being appointed. That apart, successful members of the bar are unwilling to accept Judicial appointments for varied reasons. In such circumstances, a Tribunal is incomplete. It has failed to achieve the blend of expertise viz., judicial and administrative. Apart from other issues, calibre, competence and character is lacking in some cases.

Interpretation of fiscal and taxing statutes is a Challenging task. Traditional approach must give way to achieve the object and purpose of Taxation. Strict Interpretation is not possible when the result is palpable anomaly and absurdity. Then, purposive Interpretation may have to be resorted to. The challenge can be met by experience and a Justice oriented approach.

Conclusion

In the light of the above, I feel that after 75 years of independence we are left with a mixed feeling. Equality and Harmony through taxation is yet to be achieved. People are not willingly paying taxes, although the number is increasing. A Tax payer resorts to litigation because there is no assurance that a genuine and bona fide dispute touching the power to tax, its recovery and collection would be decided efficiently and expeditiously. Thus, only those who do not dispute the above-mentioned facets of taxation continue to suffer by paying enormous taxes on consumption of goods and services. A robust Tax structure appears to be the only solution.

Finally, I must thank my young friend Parth Badheka without whose able/assistance / research it was not possible to write this piece.

 

  1. 2021 SCC OnLine Blog Exp 14

  2. (2018) 9 SCC 1

  3. Union of India v. Paliwal Electricals P ltd (1996) 3 SCC 407

  4. International Journal of Management Vol 10 Issue 3 May June 2019, Indian Tax Structure – An analytical Perspective Dr SM Alagappan, Ph.D

  5. Working Paper No 1/2009-DEA Satya Poddar and Ethisham Ahmad

The first seeds of the modern-day system of direct taxation in India, as we know it, were sown by the British. Tax on income was introduced into India by Sir James Wilson and a separate Income Tax Act was passed in the year 1886. This was then replaced by an Act passed in 1918. The Income Tax Act that independent India inherited was the Indian Income-tax Act, 1922, which was an Act to consolidate and amend the law relating to Income Tax and Super Tax and it was only in the year 1962, 1st April, 1962 to be precise, that the Income-tax Act, 1961, came into force.

A great deal has been said in bits and pieces upon the evolution of the 1961 Act from luminaries such as N.A. Palkhivala, who controverially called it “a national disgrace”. To quote: –

“Today the Income-Tax Act, 1961, is a national disgrace. There is no other instance in Indian Jurisprudence of an Act mutilated by more than 3000 amendments in less than thirty years, simple provisions like Sections 11 to 13 (which deal with exemption of the income of charitable Trusts) have suffered no less than fifty amendments.

The tragedy of India is the tragedy of waste of national time, energy and manpower. Tens of millions of men – hours, crammed with intelligence and knowledge – of tax gatherers, tax payers and tax advisors – are squandered every year in grappling with the torrential spate of mindless amendments. The feverish activity achieves no better than fever?”

As tempting as it may be to subscribe to the same school of thought, if the Act is seen as an instrument of policy, more charitable words would perhaps be used. I certainly do not subscribe to the view that the Act is a “national disgrace”, but perhaps one could understand the anguish behind those words. In a country where the legislature is regularly derided for being lax to amend and update legislations to better suit the needs of today, the Income-tax Act, 1961, perhaps due to its yearly amendments, has been successful in not only being a barometer of the fiscal priorities of those in power, but also the most agile instrument of policy. The study of income tax over the years is fascinating inasmuch as the insight it provides in jurisprudence as well as politics.

The maximum income tax rate for Individuals in the financial year 1947-48 was ‘Five Annas in the rupee’. This changed to ‘Four Annas in the rupee’ in financial year 1955-56. The Second general election in India was held in February 1957. In the financial year 1958-59 the maximum income tax rate for Individuals was 25% which was reduced to 20% in 1964-65. It was in 1966 that Smt. Indira Gandhi came to power as the Prime Minister and the maximum tax rate for the financial year 1966-1967 sky-rocketed to 65%. In the year 1968-69 this rate further escalated to 75% 1969 being a year which also witnessed Bank Nationalisation. The year 1971 witnessed the abolition of the privy purses through the twenty sixth amendment to the Constitution of India and the financial year 1971 -72 witnessed a maximum income tax rate for individuals reach 85% in line with the ‘Garibi Hatao’ slogan coined by Mrs. Gandhi in the 1971 election year. The financial year 1976-77 saw the rate reduce to 60% during the period of emergency and the term ‘socialist’ was introduced into the Preamble in the year 1976. The Janata ‘coalition’ come to power in power in March 1977, however the rate remained constant until the financial year 1984-85. The rate of for the year 1984-85 reduced to 55%.When further reduced to 50% in 1986-87. The stint of V.P. Singh as the Finance Minister also saw a “long term fiscal policy” being introduced and spoken about for the first time raising hopes of stability of rates over the long term. The rate remained at 50% until 1992. In 1991, in a historic decision, the Indian economy was opened up as a response to the payment crisis. The financial year 1992 saw the rate reduce to 40% which remained constant until the financial year 1995-96. The rate went back up to 50% in the financial year 1996-97 in the final days of the Narasimha Rao government, to be sharply slashed to 30% by the Vajpayee government. The base tax rate has remained constant ever since at 30%, though various governments have imposed ‘surcharges’ and ‘cesses’ as required.

The above data is only indicative and meant to demonstrate that the Income-tax Act has quite closely reflected the philosophy of the government from time to time and has been used as an effective tool for fiscal as well as social policy. Taxation in a democratically elected government necessarily needs to reflect the will of the people which is dynamic and not static. In a welfare state taxation is an important tool for reducing disparities of income and wealth and in a socialist state it is an important tool for redistribution of wealth. The Income-tax Act, 1961, at best, can be accused of at times being over-enthusiastic resulting in being reined in by the Courts of law.

It is not just the rates of tax but also the authorities in the adjudication of tax disputes that have undergone a sea change since independence. The Appellate Authorities under the 1922 Act were the Appellate Assistant Commissioners and then the Income Tax Appellate Tribunal; there was also a revision to the Commissioner of Income Tax. The 1961 Act continued giving Appellate Assistant Commissioners jurisdiction over appeals up until 1989 when the same was vested with the Deputy Commissioner (Appeals) and Commissioner (Appeals). The Income Tax Appellate Tribunal had been introduced into the Indian Income-tax Act, 1922, on 25.01.1941 (as the notified date on which it came into force). The Tribunal has functioned without any fundamental changes ever since even with the introduction of the 1961 Act. The 1922 Act provided for a reference of a question of law for the advisory opinion of the High Court and was set in motion by a statement of the case to be made by the Tribunal to the High Courts. This procedure was continued in the 1961 Act with the modification that in certain cases, there can be a direct reference of a question of law to the Supreme Court. In 1998, the reference procedure was changed to an appeal to the High Court from the orders of the Tribunal, but only on “substantial questions of law”, as in the case of second appeals under the Code of Civil Procedure. The merits of the change is debatable, but it has come to stay.

Even though the authorities under the Act have not since changed, the years 2019, 2020 and 2021 have seen drastic changes sought to be made in the justice delivery system as far as Income Tax Act is concerned. The Finance Act, 2019, paved the way for the ‘E-Assessment Scheme, 2019’ which was later in 2020 renamed as the ‘Faceless Assessment Scheme’. The change introduced by it in the procedure of assessment has been revolutionary and it purports to remove the then existing human interface in the assessment proceedings. Close on its heels, the ‘Faceless Appeal Scheme, 2020’ was introduced to remove the human interface in the first appeal before the Commissioner of Income-Tax (Appeals). The Finance Act, 2021, has amended the Income-tax Act, 1961, in preparation for a scheme to make the Tribunal faceless. Once notified, the making of Tribunals ‘faceless’ shall be one of the biggest changes made to the administration of justice in Income Tax matters. The constitutional validity of the Faceless Appeal Scheme has already been challenged in certain High Courts and a similar challenge to the implementation of ‘Faceless Tribunal’ as and when the rules are notified seems inevitable.

In a well-intentioned move to give an opportunity to “errant” assesses to come clean and “turn a new leaf”, the Government appointed the Justice Wanchoo Committee to make recommendations, inter alia, in this regard and the result is the Income Tax Settlement Commission (‘ITSC’). It was set up in 1976 and the first fifteen-twenty years or so saw the same functioning in the true spirit of settlement. It is not known what irked the Government when the ITSC was sought to be made dysfunctional in 2007 but it survived; there seems to have been a shift or change in its functioning since then, not the least due to the “tightening” of the language of the statutory provisions. From 1st February, 2021 the ITSC has been abolished and an “Interim Board” has been put in its place. It is generally believed that closing of the doors for “settlement” of the affairs of an “errant” tax payer, permanently, is not a well-considered move. The abolishing of the ITSC has been challenged and the constitutional validity of this retroactive discontinuance has also been challenged before different High Courts. Penalty proceedings have also been rendered faceless through the ‘Faceless Penalty Scheme, 2021’. A dispute resolution committee has also been sought to be set up to give relief to small tax payers having a taxable income upto rupees 50,00,000/- and a disputed income upto Rs. 10,00,000/- with the powers to waive penalty and give immunity from prosecution to eligible taxpayers.

It is not just the policy and the legislative changes that have helped evolve tax jurisprudence. Justice O. Chinnappa Reddy, with whom the other four judges concurred, observed in the McDowell & Co. judgement that the Duke of Westminister doctrine, which looked benignly upon tax avoidance, was dead and gone even in the England, the country of its birth, and saw no justification for continuing the rule in India where “the time has come……..”. The judgment was placed in perspective by Justice Ruma Pal and Justice Srikrishna in the case of Azadi Bachao Andolan and still recently in Vodafone by a Constitution Bench. It is a matter of comfort for the harassed assesses that the Tribunal and the Courts have time and again stepped in to make the operation of tax laws more equitable. Tax laws are subject to strict interpretation, however, the courts have often gone out of their way to use ‘purposive interpretation’ in order to make sure that a beneficial provision does not become a dead letter in law due to ambiguities. The judgements of the Courts on issues pertaining to the statutes of indirect taxation have also explained the interpretation to be placed on beneficial provisions. In Collector of central Excise, Bombay-I & Onr. v. Parle Exports (1989) 1 SCC 345 it was held by a division bench of the Supreme Court that when two views of a notification are possible, it should be constructed in the favour of the subject and that while interpreting an exemption clause, liberal interpretation must be imparted to the language thereof, provided that no violence is done to the language employed by the statute. A three Judge bench of the Supreme Court in the case of Sun Export Corporation v. Collector of customs, Bombay & Ors. (1997) 6 SCC 546 had held that when two views are possible the one favourable to the Assessee in matters of taxation has to be preferred. However, a five judge constitution bench of Hon’ble Supreme Court in Commissioner of Customs (Import) v. Dilip Kumar & Co. (2018) 9 SCC 1 (FB) has held that every taxing statute at the threshold should be interpreted strictly, and in the case of ambiguity of charging provisions the benefit goes to the Assessee, in case of exemption provisions, the benefit must be strictly interpreted in favour of Revenue. It is moot that all these decisions are directly applicable to the interpretation of the Income-tax Act, 1961. The journey of Direct Tax jurisprudence has quite acutely been influenced by the jurisprudence relating to Indirect Taxation. It is notable that in the case of Venakata Dilip Kumar v. CIT (2019) 419 ITR 298 (Mad), in a writ petition heard by a single judge, the Madras High Court, even after considering the Judgement of the Supreme Court in the case of Commissioner of Customs (Import) v. Dilip Kumar & Co. held that when the Assessee had satisfied the mandatory requirements under Section 54(1) of the Income-tax Act, 1961, to get deduction, his claim could not be rejected merely because of the technical defect of him not depositing the sum in the Capital gains account scheme as required by the statute.

The Jurisprudence with respect to penalty has similarly seen its fair share of changes with respect to the basic question as to what is the nature of the penalty imposed by the Income Tax Act, 1961. The Supreme Court in the case of CIT v. Messrs. Khoday Eswarsa & Sons 1971 (3) SCC 555, relying upon the Judgement in CIT, West Bengal v. Anwar Ali (1970) 76 ITR 696 (SC) held with respect to the 1922 Act that before levying penalty, the department should have cogent material or evidence from which it could be inferred that the Assessee had consciously concealed particulars of income or had deliberately furnished inaccurate particulars of income. This Judgements found resonance even decades later in the case of Dilip N. Shroff v. JCIT (2007) 6 SCC 329 where the Supreme Court held that before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and that the Assessee had consciously concealed the particulars of his income or furnished inaccurate particulars thereof. However, in the case of UOI v. Dharmendra Textile Processors & Ors. (2008) 13 SCC 369, a three Judge bench of the Supreme Court, while dealing with an issue regarding the Central Excise Act, 1994, referred to Dilip Shroff and stated that penalty under Section 271(1)(c) was a civil liability and that willful concealment is not an essential ingredient for attracting civil liability as in the case of prosecutions. Subsequently, the Supreme Court in the case of CIT v. Reliance Petroproducts P. Ltd. (2010) 11 SCC 762, further explained that the Judgement of Dharmendra Textiles had overruled the judgement of Dilip shroff only to the extent that the latter had upheld the relevance of mens rea to the penalty proceedings. It went on to hold that there must be ‘concealment’ or ‘furnishing of inaccurate particulars of income’ and that merely making a claim that is not sustainable by law shall not by itself amount to furnishing of inaccurate particulars regarding the income of the Assessee. The new section 270A coins novel expressions such as “under reporting” and “misreporting”, but I believe that the substance of the matter has not undergone any change; and it is quite unlikely – at least I would like to believe so – that the Tribunal and the courts will change the discourse relating to penal provisions and succumb to the attempts made by the revenue to merely make penalty an automatic adjunct to the tax and thus a source of revenue.

Much water has flowed under the bridge as far as the debate between tax planning and tax evasion is concerned. The sanction to arrange affairs in a manner so as to reduce the impact of taxation in a legitimate way as per the framework of law always had judicial sanction even when the 1922 act was in operation. The Supreme Court in the case of Jiyajeerao Cotton Mills Ltd. v. CIT (1958) 34 ITR 888 (SC) held that every person is entitled to arrange his affairs as to avoid taxation but the arrangement must be real and genuine and not sham or make believe. In Mc Dowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) a constitutional bench of the Supreme Court re-iterated the said principles and further stated that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. Justice Reddy observed, “In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it”. The McDowell Judgement was subsequently used by the department to probe transactions in a broad manner and allege commercial transactions to be colourable devices. In UOI v. Azadi bachao Andolan (2004) 10 SCC 1, the department sought to argue that the McDowell judgement had changed the concept of fiscal jurisprudence in this country and any tax planning which is intended to and results in tax avoidance of tax must be struck down by the Court. However, in Azadi Bachao Andolan, the Court observed that the majority opinion was not congruous with the ‘extreme’ view taken by Cinnappa Reddy J. The Judges observed that “The judgment of the Privy Council in Bank of Chettinad (1940) 8 ITR 522 (PC), wholeheartedly approving the dicta in the passage from the opinion of Lord Russell in Westminster 1936 AC 1 was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of Article 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of this Court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell (1985) 3 SCC 230 we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad (1940) 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this Court in Mathuram (1999) 8 SCC 667. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence in India, as would entail a departure. In our judgment, from Westminster to Bank of Chettinad to Mathuram despite the hiccups of McDowell, the law has remained the same.”Subsequently, the Supreme Court in Vodafone International Holdings BV v. UOI & Ors. (2012) 6 SCC 613, when asked to reconsider the Judgement in Azadi Bachao Andolan, has reaffirmed that it is not conflicting in nature with Mc Dowell in so far as treaty shopping and / or tax avoidance is concerned, stating that the Judgement of Reddy J. spoke with the need to depart with the Westminster principle only in the context of colourable and artificial devices.

It is impossible to capsulise the evolution of income tax law since independence where there are constraints of space! All that can be done – and I do not at all claim to have attempted anything more – is to just show the contours of the subject and the manner in which a miniscule part of them have evolved over a period of 75 years. I cannot pretend to have done justice to the subject.

Jai Hind!!!