S. 2(22)(e) : Deemed dividend – loans and advances given for business transaction between the parties does not fall within the definition of “deemed dividend”

Payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of section 2(22)(e). The deeming provisions of law contained in section 2(22)(e) apply in such cases where the company pays to a related person an amount as advance or a loan as such and not in any other context. The law does not prohibit business transactions between related concerns, and, therefore, payments made in the ordinary course of business cannot be treated as loans and advances. (AY. 2005-06)

Ishwar Chand Jindal v. ACIT (Delhi) (Trib).www.itatonline.org

S. 2(24) : Income – Deduction at source – Advance payment – Does not automatically lead to the conclusion that it is income of the recipient-Addition was deleted. [S. 194C]

Certain advances were received by the assessee against jobs to be carried out. The party paying the amount showed the nature of payment of Rs. 34,00,000/- as ‘transportation charges’ in its TDS certificate for Rs. 70,000/- issued to the assessee. But, a clarificatory letter was also issued along with a sworn affidavit that the TDS was against the advance payment against job work and the TDS certificate mentioning transportation charges was an error. The Assessing Officer made an addition of Rs. 34,00,000 as transportation charges income based on the TDS certificate. It was held that merely because the transportation charges was mentioned as payment in TDS certificate that cannot be a conclusive evidence that income has accrued to the assessee. The fact that it was a mistake was duly clarified by the party paying the amount. The addition was deleted. (AY. 2004-05)

ITO v. Shree Vinayak Udyog (2015) 170 TTJ 390 (Kol.)(Trib.)

S. 11 : Property held for charitable purposes – Anonymous donations – Cash credits – Identity of donors was established – Donations cannot be assessed as anonymous donations [Ss. 12A, 68, 115BBC]

1. The trust is registered u/s. 12A of the Act. There is no dispute that the entire voluntary donations have been disclosed by the trust as income in the Income and Expenditure account. The income so disclosed has been applied for charitable purposes as provided u/s. 11(1) of the Act and hence cannot be included in total income of the trust. Adding part of the voluntary donations again as unexplained cash credits u/s. 68 to the total income of the trust amounted to taxing, the same income twice which is not permissible

2. To obtain the benefit of the exemption under section 11, an assessee is required to show that the donations were voluntary. In the instant case, the assessee had not only disclosed its donations, but had also submitted a list of donors. The fact that the complete list of donors was not filed or that the donors were not produced, did not necessarily lead to the inference that the assessee was trying to introduce unaccounted money by way of donation receipts. That was more particularly so in the facts of the case where admittedly, more than 75 per cent of the donations were applied for charitable purposes;

3. Section 68 had no application to the facts because the assessee had in fact disclosed the donations as its income and it could not be disputed that all receipts, other than corpus donations, would be income in the hands of the assessee. There was, therefore, full disclosure of income by the assessee and also application of the donations for charitable purposes. It was not in dispute that the objects and activities of the assessee were charitable in nature, since it was duly registered under the provisions of section 12A;

4. Section 115BBC of the Act was not violated by the trust and the donations received from the nine donors cannot be categorised as anonymous donations. To be excluded from the definition of expression “anonymous donation” the person receiving the voluntary contributions referred to in section 2(24)(iia) is required to maintain a record of identity indicating the name and address of the contributor and such other particulars as may be prescribed. Since no other particulars have been prescribed under the provisions the person receiving the donation is under obligation to maintain the identity of donors indicating the name and address only. On perusal of the details furnished by the trust it is seen that the trust has not only furnished the names and addresses of the donors but also furnished a number of other details in respect of such donors viz., their PANs, copy of ITRs, copy of bank statements their confirmations, financial statements, computation of income etc. In view of the above it is held that the trust has established the identity of donors as provided u/s. 115BBC of the Act and the donations cannot be categorised as anonymous donations and subjected to tax as per provisions of section 115BBC of the Act. (AY. 2010-11)

ITO v. Saraswati Educational Charitable Trust (Luck.)(Trib.) ; www.itatonline.org

S. 12AA : Procedure for registration – Trust or institution – Assessee filing application for registration on last day of previous year – Entitled to exemption from assessment year to which previous year relates [S. 11]

The assessee, a statutory Board created by the Government of Andhra Pradesh, applied for registration under section 12A of the Income-tax Act, 1961 on March 31, 2008. The Director of Income-tax (Exemption) granted registration under section 12AA of the Act with effect from the date of filing the application. In a petition under section 154 of the Act, the assessee contended that, since the application was made on March 31, 2008, the assessee was entitled to exemption from the assessment year 2008-09. On appeal :

Held, allowing the appeal, that the DIT(E) had failed to mention the applicability of provisions under section 11 of the Act from a particular assessment year. In terms of section 12A(2) of the Act, the assessee would be entitled to exemption under section 11 of the Act for the assessment year following the financial year in which the application for registration was made under section 12A of the Act. Admittedly, the assessee had applied for registration in the financial year 2007-08. Hence, the provisions of sections 11 and 12 of the Act would be applicable to the assessee from the assessment year 2008-09 and not the financial year 2008-09. (AY. 2008-09)

Andhra Pradesh Pollution Control Board v. DIT (E ) (2015) 38 ITR 539 (Hyd.) (Trib.)

S. 14A : Disallowance of expenditure – Exempt income – Satisfaction – Investments in subsidiaries & joint ventures are for strategic purposes and not for earning dividend and so the expenditure cannot be disallowed, (ii) If the AO does not deal with the assessee’s submissions and merely says “not acceptable” it means he has not recorded proper satisfaction. [R. 8D]

1. Investment in subsidiary companies and joint venture companies are long term investments and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature and no direct or indirect expenditure is incurred for maintaining the portfolio on these investments or for holding the same. The department has not disputed that the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investments in subsidiary companies. The Assessing Officer has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. Therefore, no disallowance u/s 14A or Rule 8D can be made .

2. The observations of the High Court in
   Godrej And Boyce Mfg. Co. Ltd. v. Dy. CIT & Another [2010] 328 ITR 81 (Bom.) and Maxopp Investment Ltd. & Ors. v. CIT, (2012) 247 CTR 162 (Del.),
   clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of Rule 8D of the Rules in order to compute the disallowance u/s. 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In order to examine the aforesaid compliance with the precondition, we have perused the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that “the said disallowance was not acceptable”. In-fact, we find that the assessee made detailed submissions to the Assessing Officer. As per the assessee, the determination of disallowance u/s. 14A of the Act of Rs. 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilised. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is “not acceptable”. Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. (A Y. 2009-10)

U P Electronics Corporation Ltd. v. DCIT (Luck.)(Trib.); www.itatonline.org

S. 28(i) : Business income – Income from other sources –Construction activity started – Advances received from customers put temporarily in Fixed Deposits – Interest received is business income [S. 56].

The assessee was engaged in the business of development and construction of properties. The assessee firm had received advances from customers and money received through such advances which were not required immediately was deposited in FDRs etc. on temporary basis. The interest credited on such deposits was deducted from the work in progress. However, Assessing Officer taxed such interest as ‘income from other sources’. On behalf of the Revenue, reliance was placed on the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT. It was observed that the facts in this case were completely different and, therefore, decision in the case of
Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT was not applicable. The decision of the Hon’ble Supreme Court in the case of
CIT v. Bokaro Steel Ltd. 236 ITR 315 (SC) held that interest income is to be assessed as business income because the assessee had already commenced business. In this background the interest income was held to be not taxable. Since the facts of the assessee’s case were identical to the facts of
CIT v. Bokaro Steel Ltd. case, therefore, following the decision, it was held that the interest income cannot be treated as ‘income from other sources’ but the same was to be reduced from the work in progress and the same is not taxable as income from other sources. The addition of interest as income from other sources was directed to be deleted. (AY. 2008-09)

Samar Estate (P) Ltd. v. ITO (2015) 170 TTJ 14 (UO)(Chd.)(Trib.)

S. 35: Scientific research – Any material is purchased for research & development, same should be allowed as deduction and it is immaterial whether material is consumed or held as closing stock

When a material is purchased for research and development purpose, it is immaterial whether the material is consumed during the year or held as closing stock and the entire expenditure incurred on raw material for the purpose of research and development qualifies for deduction u/s. 35 irrespective of the accounting treatment of the same in the books of account. (AYs. 2007-08 to 2009-10)

Balaji Amines Ltd. v. Addl. CIT(2015) 153 ITD 20 (Pune)(Trib.)

S. 37(1) : Business expenditure –Corporate entity – Even if no business is carried, the expenditure incurred to maintain the corporate entity has to be allowed as a deduction

Permission/denial by the RBI to register an assessee as NBFC does not decide the issue of carrying of business or make the business illegal. If the assessee had violated any provisions of law under the RBI Act it would be penalised by the appropriate authority. But that does not mean that the systematic organised activity carried out by the assessee for earning profit would not be treated as business. The explanation to section 37(1) of the Act is not at all applicable to the case under consideration. In the scrutiny assessment, completed in the earlier years, the AO had assessed the interest income as business income and had allowed all the expenditure related with the business activity. The rule of consistency demands that for deviating from the stand taken in the earlier AY, the AO should bring on record the distinguishing feature of that particular year. We find that the AO or the FAA has not mentioned even a single line as to how the facts of the case under appeal were different from the facts of the earlier or subsequent years. We find that the disallowance of the expenses was without any basis. In the case of
Rampur Timber & Turnery Co. Ltd. (129 ITR 58), the Hon’ble Allahabad High Court has held that expenditure incurred for retaining the status of the company, namely miscellaneous expenses, salary, legal expenses, travel expenses would be expenditure wholly and exclusively for the purpose of making and earning income. There is no doubt that the assessee is a corporate entity. Even if it is not carrying on any business activity it has to incur some expenditure to keep up its corporate entity. Therefore expenditure incurred by it has to be allowed. (AY. 2006-07)

Preimus Investment and finance Lt. v. DCIT (Mum.) (Trib). www.itatonline.org

S. 40(a)(ia) : Amounts not deductible – Fees for technical services – Amount paid as management fees – Not liable to deduct tax at source. [S.9(1)(vii), 195]

The Tribunal held that the payment cannot be considered as ‘fees for included services’ so as to be charged to tax in the hands of foreign AE. Once the amount is not chargeable to tax in India as per Article 12 of the DTAA there can be no question of any liability on the payer-assessee to make deduction of tax at source. Tribunal held that section 9(1)(vii) is not applicable so disallowance made under section 40(a)(i) is deleted. (AY. 2009-10)

Hughes Systique India (P) Ltd. v. DCIT (2015) 169 TTJ 193 (Delhi)(Trib.)

S. 40(a)(i): Amounts not deductible – Deduction at source – Non-resident – Income deemed to accrue or arise in India (Independent personal services) – Payment to foreign agent, on account of legal consultancy fee for initiating anti-counterfeiting proceeding, since agent was not having any fixed base in India, it could not be taxed in India in respect of fees paid by assessee –Not liable to deduct tax at source – DTAA – India-Morocco [S. 9(1)(i), 195, Articles 5, 14].

Assessee Company was engaged in business of licensing, protection and defence of trademark. Assessee paid a certain sum to Saba, a trademark and patent agent of Morocco, on account of legal consultancy fees for initiating and prosecuting an anti-counterfeiting proceedings before Tribunal of Commerce at Rabat (Morocco). Though services rendered by lawyers are included in independent personal services as per Article 14 of DTAA, but since Saba was not having any fixed base in India, condition of Article 14 was not fulfilled and, Saba could not be taxed in India in respect of said fees and disallowance under section 40(a)(i) was not justified. (AY. 2008-09)

Kirloskar Proprietary Ltd. v. Dy. CIT (2015) 153 ITD 11 (Pune)(Trib.)

S. 40(a)(ia) : Amounts not deductible – Deduction at source – The amendment is clarificatory and retrospective w.e.f. 1-4-200 – Tax deducted was deposited before due date of filing of return-Disallowance was deleted. [S. 139(1)]

It is not in dispute, in the light of a series of judgments of Hon’ble jurisdictional High Court, that the amendment brought to Section 40(a)(ia), which provides that as long as the taxes deducted at source have been deposited before the due date of filing return under section 139(1), disallowance under section 40(a)(ia) cannot be invoked for delay in depositing the tax deducted at source, is only clarificatory in nature and it will also apply to the assessment years prior to the assessment years 2010-11 as well. In the case of
CIT v. Omprakash R. Chaudhury & Others (TA No. 412 of 2013; judgment dated 22nd November 2013), it was held that the amendment made in section 40(a)(ia) of the Income-tax Act, 1961, as retrospective in operation having effect from 1st April 2005, i.e. from the date of insertion of Section 40(a)(ia) of the Act. (AY. 2006-07)

Shri. Umeya Corporation v. ITO (Ahd.) ( Trib.) ; www.itatonline.org

S. 40(a)(ia) : Amounts not deductible – Deduction at source – Finance Act 2012, with effect from 1-4-2013, second proviso is curative and retrospective – Legitimate business expenditure cannot be disallowed if the payee has paid tax thereon. [S. 194A]

1. The second proviso to section 40(a)(ia) of the Act inserted by the Finance Act, 2012 is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax. It has for long been the legal position that if the payee has paid tax on his income, no recovery of any tax can be made from the person who had failed to deduct the income tax at source from such amount.

2. The settled position in law is that if the deductee/payee has paid the tax, no recovery can be made from the person responsible for paying of income from which he failed to deduct tax at source. In a case where the deductee/payee has paid the tax on such income, the person responsible for paying the income is no longer required to deduct or deposit any tax at source. In the similar circumstances, the first proviso to section 40(a)(ia) inserted by the Finance Act, 2010, which has been held to be curative and therefore, retrospective in its operation by the Hon’ble Calcutta High Court in ITAT No. 302 of 2011, GA 3200/2011,
   CIT v. Virgin Creations decided on November 23, 2011 provides for allowance of the expenditure in any subsequent year in which tax has been deducted and deposited. The intention of the legislature clearly is not to disallow legitimate business expenditure. The allowance of such expenditure is sought to be made subject to deduction and payment of tax at source. However, in a case where the deductee/payee has paid tax and as such the person responsible for paying is no longer required to deduct or pay any tax, legitimate business expenditure would stand disallowed since the situation contemplated by the first proviso viz. deduction and payment of tax in a subsequent year would never come about. Such unintended consequence has been sought to be taken care of by the second proviso inserted in section 40(a)(ia) by the Finance Act, 2012. There can be no doubt that the second proviso was inserted to supply an obvious omission and make the section workable. (AY. 2007-08)

Santosh Kumar Kedia v. ITO (Kol.) (Trib.); www.itatonline.org

S. 41(1) : Profits chargeable to tax – Remission or cessation of trading liability – Amount continued to be shown as creditors in the Balance Sheet – liability has not ceased to exist – No addition can be made

The books of the assessee showed certain creditors who were having opening balances and there were no purchases during the year under consideration. The Assessing Officer made an addition u/s. 41(1) mentioning that the liability is not existing at present. It was held that as per Explanation 1 to section 41(1), if the assessee has written back the liability in his accounts then it will be considered that even by unilateral act of the assessee, there is remission or cessation of the liability. But in the assessee’s case, the assessee has not written back the liability in his accounts. In the light of these provisions of section 41(1) and the judgment of Hon’ble Supreme Court in the case of
Kesaria Tea Co. [2002] 254 ITR 434 (SC) and another judgment of Hon’ble Supreme Court rendered in the case of
CIT vs. Sugauli Sugar 236 ITR 518, the addition made by the Assessing Officer was held to be not sustainable. (AY. 2009-10)

ITO v. Sheikh Abdul Farid (2015) 170 TTJ 49 (UO)(Luck.)(Trib.)

S. 43(5) : Speculative loss –Business loss – Hedging transaction – Foreign exchange loss – Import and Export business of diamonds – Premature cancellation of such forward contracts to minimise the anticipated future losses – Not a speculative loss. [S.28(i)]

The Tribunal held that the foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import-export business of diamonds cannot be held to be a speculative loss rather a business loss which can be set off against profits & gains of business subject to the condition that the assessee will have to satisfactorily prove that the maturity of hedge did not exceed the maturity of underlying transaction and further to explain the requirement/necessary for premature cancellation of such forward contracts or that such cancellation or re-bookings were done to minimise the anticipated future losses from such transactions. The Tribunal set aside the order of CIT(A) and restored back to the file of AO to decide the same accordingly after giving proper opportunity to the assessee to represent its case. (AY. 2009-10)

Jaimin Jewellery Exports (P) Ltd. v. ACIT (2015) 169 TTJ 121 (Mum.)(Trib.)

S. 43(5) : Speculative loss – Business loss- Forex derivative contracts – Loss suffered on account of forex derivative contracts (Exotic Cross Currency Option Contracts) cannot be treated as speculative loss to the extent that the derivative transactions are not more than the total export turnover of the assessee. If the derivative transaction is in excess of export turnover, the loss in respect of that portion of excess transactions has to be considered as speculative loss because the excess derivative transaction has no proximity with export turnover. [S. 28(i), 73]

The assessee was engaged in the business of manufacturing and export of hosiery garments. During the course of export, the assessee entered into derivative contract. The assessee incurred loss in this transaction. The assessee claimed it as business loss. According to the Assessing Officer this loss was not business loss and it is a speculative loss and this transaction is speculative in nature as such the loss incurred on this transaction cannot be set-off against business income of the assessee. On appeal by the assessee HELD:

1. The derivative transaction cannot fall under section 73. Explanation to section 73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of shares and suffer loss, such loss should be treated to be speculative transaction within the meaning of section 73 of the Act, notwithstanding the fact that the definition of speculative transaction mentioned in section 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of section 43(5), trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of secyion 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as section 43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as section 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to section 73 is concerned. Therefore, aggregation of the share trading profit and loss from derivative transactions should be done before the Explanation to section 73 is applied. The above view has been taken by Special Bench of this Tribunal, Mumbai Bench, in the case of
   CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum)(SB).

2. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of section 43(5) of the Act which provides definition of “speculative transaction” exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transactions in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction .

3. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffered in respect of that portion of excess transactions to be considered as speculative loss only as that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. (AY. 2009-10 & 2010-11)

Majestic Exports v. JCIT (Chennai)(Trib.) ; www.itatonline.org

S. 45 : Capital gains – Development agreement – Stock- in-trade – Short term capital gains – Business income – None can make profit by dealing with himself – Valuation will be at cost or market value whichever is less – When right exercised in part or in full profit can be taxed – Additions confirmed by CIT(A) were deleted. [Ss. 2(14), 2(42B), 2(47)(v), 4, 5, 28(i), Transfer of Property Act, 1882, S. 53A, 55A]

The assessee was engaged in the business as a builder and was the owner of a piece of land, which was held as stock-in-trade. The assessee entered into a development agreement with Menorah Realties Pvt. Ltd. (MRPT) under which MRPT was to construct a residential apartment building at its cost. In consideration of the land of the assessee being used for this project, MRPT was to give 40% of total saleable constructed area, parking spaces and undivided interest in the said property. In effect, the assessee was to transfer entire land holding to this project, and, in consideration of the land being used for this housing project, receive 40% of total saleable area, parking space and undivided interest in the property. By way of a subsequent modification to this agreement, in consideration of delay in execution of project, the assessee was to get an additional 2% share in the constructed area, parking space and undivided interest in the property. The assessee claimed that even though the assessee had entered into a development agreement in the relevant previous year, no gains arose as a result of this agreement since the proposed building project was not even cleared by the regulatory bodies. It was pointed out that the licence to construct the building project was received in the subsequent previous year, and, therefore, no capital gains could be said to have arisen in this year. However, the AO relied on
CIT v. Dr. T. K. Dayalu [(2011) 202 Taxman 531 (Kar.)] and Chatubhuj Dwarkadas Kapaida v. CIT [(2003) 260 ITR 491 (Bom.)] and held that there is a transfer u/s. 2(47)(v) and capital gains will arise in the year in which full control and possession of the land in question is given. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

1. Once the land is held to be a part of the stock-in-trade, it ceases to be a capital asset. The gains on the transfer of this land could only arise by the virtue of the increase of closing stock value in respect of the right to 42% share in the constructed building. Relevance of Section 55A of the Transfer of Property Act is only for the purpose of transfer under section 2(47) which, in turn, is relevant, only for the purposes of capital assets under the Income-tax Act. What holds good for transfer of a capital asset, for the purposes of triggering taxability of capital gains, is in the context of a specific legal fiction, which is introduced in the Act for a limited purpose, cannot be treated as omnibus in effect.

2. The business transaction entered into by assessee is that the assessee contributed a trade asset consisting of a piece of land on which a group housing project was to be constructed, and what he got in consideration of this transfer is the right to sell 1,28,940.26 sq. ft. constructed area in this project. In his closing stock, even if he is to substitute the part ownership of the land transferred with the value of this right to sell 1,28,940.26 square feet constructed area, it would not make any difference to the profit figures because, as far as this assessee, is concerned the cost of acquiring this right is the same as the cost of giving up the right in the land, and, as is the settled legal position, the closing stock can only be valued at cost price or market price – whichever is less. Obviously, the cost price of this right to sell 1,28,940.26 sq. ft., which has been treated as a trading asset, is less than the market price of these rights, and, therefore, these rights can only be valued at cost in the accounts.

3. What the assessee has got today is only a right to sell the 1,28,940.26 sq. fts. of constructed area in the Alexandria project and the profits, howsoever certain they may appear to be, will only fructify and be realised, and can even be quantified, only when this right is exercised – in part or in full. That stage has not yet come, and until that stage comes, such profit cannot be taxed. Unlike in a case of a capital gain which arises on parting with the capital asset at the first stage itself, it is a case of business transaction which is completed when the rights so acquired by the assessee are exercised; none can make profits by dealing with himself. (AY. 2010-11)

Dheeraj Amin v. ACIT (Bang.)(Trib.); www.itatonline.org

S. 45 : Capital gains – Business income – Dealer and investor –Share broker – Shares held as investment could not be treated as business income [S. 28(i)]

The assessee is already having investment in shares as established by the fact of earning dividend income and long term capital gains on sale of shares. All these facts are taken into consideration, it is found that there is no reason for the AO to treat the short-term capital gains as business income of the assessee. The AO was prompted by the difference in the rate of tax as the rate of tax for short-term capital gains earned out of sale of shares is 10 per cent and the rate of tax for business income is 30 per cent. Tribunal held that short-term capital gains on sale of shares held as investment could not be treated as business income of assessee. (AY. 2007-08)

Chona Financial Services Ltd. v. ACIT (2015) 153 ITD 119 (Chennai)(Trib.)

S. 50C : Capital gains – Full value of consideration (circle rate) is to be worked out on basis of circle rate prevailing on the date of registration of agreement to sell and not on the date of execution of sale deed

The assessee entered into an agreement to sell its land and the said agreement was registered on 27-5-2004. Thereafter the sale deed was executed on 16-9-2004. The circle rate on date of agreement was Rs. 13,000/- per sq. mtr. However, the circle rate on date of execution of sale deed was increased to Rs. 20,000/- per sq. mtr. The AO made addition applying the circle rate on execution of sale deed for computing capital gains. On appeal the Appellate Tribunal held that the enhancement of circle rate is beyond the control of assessee and buyer had not paid anything above amount that had been agreed. Hence, addition made by AO is unjustified. (AY. 2005-06)

ITO v. Modipon Ltd. (2015) 168 TTJ 480 (Delhi)(Trib.)

S. 54 : Capital gains – Profit on sale of property used for residence – Booking a flat which is going to be constructed by the builder is a case of “construction” of the flat. If the flat is booked prior to the date of transfer of the old flat, deduction u/s. 54 is not available. The date of receiving possession of the new flat cannot be regarded as the date of “purchase” of the new flat [S. 45]

Mr. A sold a flat on 27-3-2008 and generated long-term capital gain of Rs. 1.55 crores thereon. The assessee claimed deduction u/s. 54 of the Act pertaining to the cost of another flat. The assessee had booked the flat with M/s. Life Style Property Venture in the year 2004 and the agreement was registered on 1-12-2004. He paid the consideration in instalments as per the agreement. He finally got the possession on 30th June, 2007. The assessee claimed that the date of possession of flat should be considered as the date of purchase of flat, where as the AO took the view that the date of purchase should be considered as the date of entering of agreement, viz., 1-12-2004. Since the deduction u/s. 54 of the Act could be availed, inter alia, only if the residential house was purchased within one year prior to the date of house giving rise to capital gain and since the date of purchase of flat, according to AO, fell beyond the period of one year, the AO rejected the claim for deduction u/s. 54 of the Act. The CIT(A), however, agreed with the contentions of the assessee and accordingly allowed the deduction u/s. 54 of the Act. On appeal by the department to the Tribunal HELD allowing the appeal:

The booking of a flat which is going to be constructed by a builder has to be considered as a case of “Construction of flat”. Deduction u/s. 54 is available only if the assessee constructs a new house within three years after the date of transfer. In the instant case, the assessee has constructed a house prior to the date of transfer of original house, in which case, the assessee is not entitled to claim deduction u/s. 54 of the Act in respect of the cost of new flat. (AY. 2008-09)

ACIT v. Sagar Nitin Parikh (Mum.) (Trib.) ; www.itatonline.org

S. 56 : Income from other sources – Compensatory interest – builder’s failure to deliver flat by a specified date, compensatory interest received by assessee on refund of deposit amount was assessable as interest income – Lump sum awarded as compensation was held to be capital in nature [Ss.2(28A), 4 ]

Assessee entered into an agreement with a builder for purchase of two residential flats. Flats booked were not delivered despite lapse of considerable time. Assessee received entire amount from builder along with interest at contracted rate besides another amount by way of compensation. Excess amount received by assessee under contract as interest at specified rate represented a compensation on non-performance of contract by a specified date and, thus, same being revenue receipt was assessable as interest income u/s. 56. Tribunal also held that lump sum amount awarded by common forum as compensation was on capital account. (AY. 2006-07)

Kumarpal Mohanlal Jain v. ITO (2015) 153 ITD 292 (Mum.)(Trib.)

S. 56(2)(v) : Income from other sources – Family settlement –Income/Amount received under Family settlement claim exempt

The assessee an individual has received substantial income under Family settlment/agreement and claimed whole such amount as deduction under section 56(2)(v). The AO summoned donor, verfied transaction genuieness and creditworthiness of the donor but added the income concluding the assessee intentionally and deliberately understated the real consideration by adopting a colourable device, as the gift deeds are not properly stamped. CIT(A) quashed the addition. Tribunal also held, the fact remains that the entire property was in existence at the time of partition in which concerned family members were having their interest/shares, and by way of the mutual settlement only the respective shares were determined therefore, it was clearly a family settlement. Therefore, the family arrangement is not taxable and no addition was warranted on the income which never arose to the assessee. (AY. 2007-08)

DCIT v. Paras D. Dundecha (2015) 169 TTJ 1 (Mum) (Trib.)

S. 68 : Cash credits – Profits chargeable to tax – Remission or cessation of trading liability – Bogus credits – Unclaimed liabilities to creditors, even if fictitious and bogus, cannot be assessed u/s. 41(1) in the absence of a write-back. The bogus credits can be assessed u/s. 68 only in the year the credits were made and not in the year they are found to be not payable [S. 41(1)]

1. Having held that the sundry creditors are not payable and fictitious, the next question that comes up for our consideration is the year in which the amount is taxable under what provisions of law either under Section 41(1) or 68 of the Act. We are required to examine whether this amount should be brought to tax in the year in which credit was made first time in the books of account or in the year in which these are found not payable. An identical issue had come up for consideration before the Hon’ble Gujarat High Court in the case of CIT v. Bhogilal Ramjibhai Atara in Tax Appeal No. 588 of 2013, dated 4-2-2013, in which it was held that that even if the debt itself is found to be non-genuine from the very inception there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(1) of the Act. The Jurisdictional High Court in the case of CIT v. Shri Vardhman Overseas Ltd., (2012) 343 ITR 408 (Del.), has dealt with the issues of taxability under section 41(1) of the Act in a case where long outstanding sundry creditors were treated as taxable. The High Court after referring to the decisions of Hon’ble Supreme Court in the cases of
   CIT(Chief) v. Kesaria Tea Co. Ltd., (2002) 254 ITR 434(SC) and
   CIT v. Sugauli Sugar Works P. Ltd (1999) 236 ITR 518 (SC), has held that such amounts cannot be brought to tax under Section 41(1) of the Act. The Hon’ble Suprme Court in the case of
   CIT v. Sugauli Sugar Works P. Ltd. (supra) held that a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt.

2. Applying the ratio in the cases mentioned supra, the amount in question cannot be brought to tax in the year under appeal under the provisions of Section 41(1) of the Act. It is trite law that an addition under Section 68 can be made only in the year in which credit was made to the account of the creditors in the books of account maintained. Kindly refer to the Supreme Court in the case of
   Damodar Hansraj v. CIT, (1969) 71 ITR 427 (SC). Admittedly, in this case the credit to the account of creditors was made in the earlier years and therefore, the amount even cannot be brought to tax under Section 68 in the year under appeal. However, it is open to the Department to levy tax on such amount by resorting to the remedies available under the provisions of Act by duly following the procedure known to the law. (AY. 2007-08)

Perfect Paradise Emporium Pvt. Ltd. v. Ito (Delhi)(Trib.) ; www.itatonline.org

S. 70 : Set-off of loss – One source against income from another source – Same head of income – Though the LTCG on sale of equity shares (subject to STT) is exempt from tax u/s. 10(38), the long-term capital loss on sale of such shares can be set-off against the taxable LTCG on sale of another asset. [S.10 (38), 45, 71 ]

1. The main issue is whether long term capital loss on sale of equity shares can be set-off against long term capital gain arising on sale of land or not, as the income from long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “capital asset” and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has been enumerated from sections 48 to 55. Further sub-section (3) of section 70 and section 71 provides for set-off of loss in respect of capital gain.

2. The whole genus of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular “provision” of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions.

3. Section 10(38) provides exemption of income only from transfer of long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e., payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No. 2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of long term capital asset and, further fulfils the conditions mentioned in sub-section (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable.

4. Section 10 provides that certain income is not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income does not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is excluded in the computation of total income. For instance, if the assessee has income from short term capital gain on sale of shares; long term capital gain on debt funds and long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s. 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in
   Royal Calcutta Turf Club v. CIT (1983) 144 ITR 709 (Cal).

5. Though in CIT v. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118 (SC), the Supreme Court opined that if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward, the ratio and the principle laid down by the Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases.

6. Thus, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of long term capital asset or short term capital asset being shares. Accordingly, long term capital loss on sale of shares would be allowed to be set off against long term capital gain on sale of land in accordance with section 70(3) (AY. 2007-08)

Raptakos Brett & Co. Ltd. v. DCIT (Mum) (Trib.) ; www.itatonline.org

S. 80P : Co-operative society –Assessee providing credit facilities to its members – Assessee not co-operative bank – Entitled to deduction [S. 80P(2)(a)(i)]

The assessee, a co-operative society, registered under the Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995. For the assessment years 2007-08 to 2009-10, the assessee claimed deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, on the income from providing credit facilities to its members. The Assessing Officer, relying on Circular No. 6 of 2010 dated September 20, 2010 ([2010] 328 ITR (St.) 63), rejected the claim. The Commissioner (Appeals) noticed that the subject matter in the circular was with reference to eligibility of regional rural banks for deduction under section 80P and did not apply to the assessee. He held that the assessee was a co-operative society and not a co-operative bank and the provisions of section 80P(4) would not apply and therefore it was entitled to deduction under section 80P(2)(a)(i) of the Act. On appeal :

Held, that the order of the Commissioner (Appeals) did not call for any interference. (A Y. 2007-08 to 2010-11)

ACIT v. Metrocity Criminal Courts Employees Mutually Aided Co-operative Credit Society Ltd. (2015) 39 ITR 1(Hyd.)(Trib.)

S. 92C : Transfer pricing –Arm’s length price – While benchmarking international transactions where assessee had advanced money to its AE and charged interest, international rates fixed being LIBOR + rate would be applicable and not domestic prime lending rates

The Appellate Tribunal held that while benchmarking international transactions what has to be seen is comparison between related transactions, i.e., where assessee has advanced money to its associated enterprises and charged interest, then said transaction is to be compared with a transaction as to what rate assessee would have charged, if it had extended loan to third party in foreign country and in that case, international rates fixed being LIBOR + rates would have an application and domestic prime lending rates would not be applicable. The Appellate Tribunal has further held that where assessee had made borrowings on LIBOR + rates and advanced same at LIBOR + rates, then said transaction was at arm’s length price.

Varroc Engineering (P) Ltd. v. ACIT (2015) 168 TTJ 514 (Pune)(Trib.)

S. 92C : Transfer pricing – Arm’s length price – Where prices charged to Associated Enterprises are higher than prices charged to non-Associated Enterprises, a transaction based benchmarking approach should not be rejected

The Hon’ble Appellate Tribunal held where prices charged to Associated Enterprises are higher than prices charged to non-Associated Enterprises, though yearly average is a good and reasonable indicator for benchmarking under CUP approach, but a transaction based benchmarking approach should not be rejected especially when rejection of a transaction-based benchmarking may lead to some distortion. (AY. 2007-08)

Saertex India (P) Ltd. v. ACIT (2015) 168 TTJ 139 (Pune)(Trib.)

S. 92C : Transfer pricing – Arm’s length price – Where a particular company was wrongly excluded for determining ALP for an earlier year, same could not debar the assessee from including it in list of comparables in succeeding year

It has been held by the Appellate Tribunal that simply because a particular company was wrongly excluded by assessee in determining ALP of an international transaction for an earlier year, could not debar him from including it in list of comparables in succeeding year, if it was actually comparable. (AY. 2006-07)

Microsoft Corporation India (P) Ltd. v. Addl. CIT (2015) 168 TTJ 314 (Delhi)(Trib.)

S. 92C : Transfer pricing – Arm’s length price – Even if the loan to the 100% subsidiary is intended to be a long term investment in the subsidiary and it has a crucial role to play in the assessee’s business plans, it cannot be treated as “quasi-capital”. The ALP of the loan has to be determined on the basis of LIBOR interest [S. 92CA(3)]

The assessee established a wholly owned subsidiary, by the name of Soma Textiles FZE, in the United Arab Emirates (UAE), and invested Rs. 21,71,723 in share capital of Soma Textiles FZE and also advanced Rs. 16,75,88,215 to this company. The AO and TPO held that these transactions are covered by the scope of ‘international transactions’, as defined under section 92CA(3) of the Act. The basic contention of the assessee that the entire amount of Rs. 16.75 crore advanced to the Soma Textiles FZE was out of the foreign exchange proceeds of assessee’s Global Depository Receipts (GDRs) issue and that it was in nature of “contribution towards quasi-capital of the said company” was rejected. It was held that commercial expediency of the transaction was not relevant in as much as what is to be examined, while ascertaining the arm’s length price, is the price at which such transactions would have been entered into by the parties if these parties were independent enterprises. As regards the claim for the advance being in the nature of quasi-capital, the TPO relied upon the decision in the case of
Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del.)] where it was held that “the argument that the loans were in reality not loans but quasi-capital cannot be accepted because the agreements show them to be loans and there is no special feature in the contract to treat them otherwise”. The TPO proceeded to treat LIBOR plus 2% as arm’s length price of this loan and made an adjustment in respect of the same. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD:

1. The relevance of ‘quasi-capital’, so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the AE and the transaction it is being compared with. Under Rule 10B(1)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplicitor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplicitor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi-capital, are treated differently than the normal loan transactions.

2. The expression ‘quasi-capital’ is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplicitor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi-capital loans or advances, the comparison of the quasi-capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the
   Coordinate Benches (Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del.), Micro Inks Ltd. v. ACIT [(2013) 157 TTJ 289 (Ahd.)], Four Soft Pvt. Ltd. v. DCIT [(2014) 149 ITD 732 (Hyd.)], Prithvi Information Solutions Pvt Ltd. v. ACIT [(2014) 34 ITR (Tri.) 429 (Hyd.)],
   wherein references have been made to the advances being in the nature of ‘quasi-capital’, these cases referred to the situations in which (a) advances were made as capital could not be subscribed due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. Clearly, the advances in such circumstances were materially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm’s length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.

3. The assessee’s contention that whenever it can be said that the loan transaction is in the nature of quasi-capital, and the grant of loan was intended to be a long term investment in the subsidiary which has a crucial role to play in its business plans, its arm’s length price should be ‘nil’ rate of interest is not acceptable. On a conceptual note, several types of debts, particularly long term unsecured debts, and revenue participation investments could be termed as ‘quasi-capital’. So far as arm’s length price of such transactions are concerned, this cannot be ‘nil’ because under the comparable uncontrolled price method, such other transactions between the independent enterprises cannot be at ‘nil’ consideration either. Nobody would advance loan, in arm’s length situation, at a nil rate of interest. The Comparable uncontrolled price of quasi-capital loan, unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for the intent of the assessee to treat this loan as investment, nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of arm’s length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place, in an arm’s length situation, without any interest being charged in respect of the same. As for the contention regarding crucial role being played by, or visualised for, this AE, there is no material on record to demonstrate the same or to justify that even in an arm’s length situation, a zero interest rate loan would have been justified to such an entity. A lot of emphasis has also been placed on the fact that the loan was out of the GDR funds, and, for this reason, the interest free loan was justified. We are unable to see any logic in this explanation either. Even when the loan is given out of the GDR funds held abroad, the arm’s length price of the loan is to be ascertained. The source of funds is immaterial in the present context. We have also noted that the assessee has not offered any assistance on the quantum of ALP adjustment in respect of this loan transaction, and that in the subsequent assessment years, the assessee himself has accepted ALP adjustment by adopting the LIBOR + 2% interest rate. In this view of the matter, no interference is warranted on the quantum of the ALP adjustment either. (AY. 2007-08)

Soma Textiles & Industries Limited v. ACIT(Ahd.)(Trib); www.itatonline.org

S. 143(3) : Assessment – Bogus sales and purchases – Natural justice – Reliance on statement of supplier who confesses to providing accommodation entries without giving assessee right of cross-examination violates principles of natural justice and the addition has to be deleted in toto – Sales made was not questioned – Addition was deleted. [Ss. 69, 131]

1. The assessment was reopened on the basis of the statement of Shri Hiten L. Rawal, the proprietor of M/s. Zalak Impex. In this statement recorded u/s 131 of the Act, Shri Rawal confessed to have provided accommodation entries in the form of sales and purchases, to various parties. The assessee was stated to have obtained bills for non-existing parties, amounting to Rs. 4,09,12,718, during the year under consideration. It remains undisputed that the assessee was never provided any opportunity to cross-examine Shri Hiten L. Rawal, though he specifically asked for such cross-examination. On the other hand, the burden was sought to be shifted on the assessee by the AO by asking him to produce Shri Rawal, even though it was the AO who had relied on the statement of Shri Rawal, without either confronting this statement to the assessee, or providing opportunity to the assessee to cross-examine Shri Rawal. Therefore, the reassessment order is as a result of violation of the natural principle of
   audi alteram partem. A statement recorded at the back of a party cannot be used against such party without confronting such statement to the party. Hence, on this score alone, the reassessment order is unsustainable in the eye of law and we hereby cancel the same. As a consequence, the order of the ld. CIT(A) is also cancelled in toto.

2. Further, even otherwise, before the AO, the assessee had contended that the assessee being in an export promotion zone, the movement of its goods is controlled and customs approved; that the purchases being approved purchases, there was no question of their being bogus purchases. The assessee enclosed the custom approved invoices in respect of purchases from Zalak Impex. As per these invoices, the goods purchased had been verified and approved by the Customs Authority. This clearly shows that the goods had actually been purchased and received by the assessee. As such, these purchases could not have, by any stretch of imagination, been treated as bogus purchases. It is also noteworthy that the payments made by the assessee to Zalak Impex were through account payee cheques only. Neither of the taxing authorities, however, took these invoices into consideration and wrongly held the assessee’s purchases from Zalak Impex to be bogus purchases. Nothing has been brought on record to show that these invoices were self-made or fabricated. Moreover, the comparative chart of purchases made during the year and the selling price has not been refuted and this also goes to prove the theory of bogus bills and accommodation entries to be wrong. Therefore, the order under appeal is a result of complete misreading and non-reading of cogent documentary evidence brought on record by the assessee. For this reason also, along with the reason that the sales made by the assessee were never questioned, the addition is deleted in toto. (AY. 2006-07)

ACIT v. Tristar Jewellery Exports Pvt. Ltd. (Mum.) (Trib.); www.itatonline.org

S. 147 : Reassessment – Non-resident – Royalty – Tax was deducted at 15% whereas tax leviable at 30% – Reassessment was held to be valid. – DTAA-India-USA. [S.44D, 115A, 143(1) 148]

The assessee, a non-resident company filed its return of income declaring income received as royalty from its Indian subsidiary and discharged its tax liability by way of taxes deducted at source by its wholly owned subsidiary in India. Taxes were deducted at the rate of 15 per cent claiming beneficial provisions of the India-US tax treaty in contrast to section 44D read with section 115A that stipulates tax rate of 30 per cent. The return of income was processed under section 143(1) and thereafter assessment was reopened under section 147 by issuing notice under section 148 and reassessment proceedings were completed accepting the returned income but the Assessing Officer taxed it at the rate of 30 per cent applying section 115A read with section 44D. It was held by the ITAT that the expression “relief in the return” employed in sub-clause (b) of Explanation 2 section 147 would bring in its ambit the benefit that an assessee got by virtue of non-making an assessment or by non-determining its tax liability. Thus, if an assessee offered income by applying lower rate of tax and it was not determined by way of an assessment order then, to that extent assessee would get relief in the return and would fall in the ambit of escaped income. (AY. 2002-03 to 2004-05)

DDIT v. McDonald’s Corporation (2014) 48 taxmann.com 332 / (2015) 170 TTJ 722 (Delhi)(Trib.)

S. 153A : Assessment – Search or requisition – Undisclosed income – Additional ground – No material was found in the course of search – Assessment was not pending – No jurisdiction to make the addition – Addition was held to be bad in law. [Ss. 69A, 254(1)]

The assessee raised additional ground before the Tribunal that the reassessment proceedings under section 153A should confine to the material in possession of the AO detected during the course of search and entire assessment is not open before him. The addition under section 69A and sustained by CIT(A) at Rs. 1,80,000/- is without there being any material found in course of search and is beyond the scope of reassessment proceedings under section 153A.

The Tribunal admitted the additional ground of appeal keeping in view the decision of Apex Court in the case of
National Thermal Power Ltd. v. CIT (1998) 229 ITR 383. Further held that when assessment is not pending at the time of search and no incriminating material is found during the course of search, AO has no jurisdiction to make addition in the assessment framed under section 153A. The addition of Rs. 1,80,000/- made by the AO and confirmed by the learned CIT(A) is bad in law. (AY. 2000-01)

Rawal Das Jaswani v. ACIT (2015) 169 TTJ 1 (UO)(Raipur)(Trib.)

S. 153A : Assessment – Search or requisition – Share transactions – Capital gains – No incriminating material was found – Assessment was held to be void [S. 45, 132]

No incriminating material found during search to indicate bogus long-term capital gains arising out of sale of shares. Assessment of sale proceeds as income without considering details of purchase of shares produced by assessee. Assessment was held to be void. (AY. 2004-05 to 2006-07)

Vasantraj Birawat v. CIT (2015) 39 ITR 450 (Mum.) (Trib.)

S. 153A : Assessment – Search or requisition – Notice – There is no requirement to issue a notice u/s. 143(2) before making an assessment u/s. 153A – Assessment is not null and void [Ss. 143(2), 158BC]

The Third Member had to consider whether the issue of a notice u/s. 143(2) was mandatory for the completion of an assessment u/s. 153A and whether the non-issue of such a notice rendered the s. 153A assessment null and void. HELD by the Third Member:

1. There is no specific provision in the Act requiring the assessment made under section 153A to be after issue of notice under section 143(2) of the Act. Learned counsel for the assessee places heavy reliance on the judgment of the Hon’ble Supreme Court in
   ACIT v. Hotel Blue Moon v. DCIT ( 2010) 321 ITR 362 (SC) wherein it was held that the where an assessment has to be completed under section 143(3) read with section 158BC, notice under section 143(2) must be issued and omission to do so cannot be a procedural irregularity and the same is not curable. It is to be noted that the above said judgment was in the context of Section 158BC. Clause (b) of Section 158BC expressly provides that “the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of Section 142, sub sections (2) and (3) of Section 143. Section 144 and Section 145 shall, so far as may be, apply. This is not the position under section 153A. The law laid down in
   Hotel Blue Moon, is thus not applicable to the facts of the present case.

2. It is also to be noted that Section 153A provides for the procedure for assessment in case of search or requisition. Sub-section (1) starts with non-obstante clause stating that it was “notwithstanding” anything contained in sections 147, 148 and 149, etc. Clause (a) thereof provides for issuance of notice to the person searched under Section 132 or where documents etc are requisitioned under Section 132(A), to furnish a return of income. This clause nowhere prescribes for issuance of notice under Section 143(2). Learned counsel for the assessee/appellant sought to contend that the words, “so far as may be applicable” made it mandatory for issuance of notice under Section 143(2) since the return filed in response to notice under Section 153A was to be treated as one under Section 139. The words “so far as may be” in clause (a) of sub section (1) of Section 153A could not be interpreted that the issue of notice under Section 143(2) was mandatory in case of assessment under Section 153A. The use of the words “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). As is noted, a specific notice was required to be issued under Clause (a) of sub-section (1) of Section 153A calling upon the persons searched or requisitioned to file return. That being so, no further notice under Section 143(2) could be contemplated for assessment under Section 153A. (AY. 1999 to 2000 to 2005-06)

Sumanlata Bansal v. ACIT (TM)(Mum.)(Trib.) ; www.itatonline.org

S. 153C : Assessment – Income of any other person – Search and seizure – the AO of the searched parties have not recorded any satisfaction that some money, bullion, jewellery or books of account or other documents found from those persons belonged to assessee, initiation of proceedings under section 153C on assessee is void ab initio. [S. 132]

A search and seizure action under s. 132 of the Act was carried out in the cases of Shri B.K. Dhingra, Smt. Poonam Dhingra and M/s Madhusudan Buildcon Pvt. Ltd. on 20-10-2008. The AO of the assessee recorded in the instant assessment order that during the course of search on the above three persons, certain documents belonging to the assessee were seized. Proceedings were initiated against the assessee under section 153C read with section 153A of the Act on the basis of such documents. The AO finalized the assessment order on the basis of said documents found during the course of search of the third parties. On appeal the Appellate Tribunal held that the AO of the third parties on whom search has been conducted has not recorded any satisfaction that some money, bullion, jewellery or books of account or other documents found from these persons belonged to assessee. Hence, the initiation of proceedings under section 153C of the Act is without any basis. (AY. 2003-04)

Tanvir Collections (P) Ltd. v. ACIT (2015) 168 TTJ 145 (Delhi)(Trib.)

S. 189 : Firm – Dissolved – Discontinued – no addition under section 69 of the Act can be made on the basis of document found from the third party for the period after the dissolution of the firm [S. 69]

The assessee firm was dissolved on 31-3-2002 and all necessary formalities for closure were completed. During the course of search and seizure action carried on a third party, some documents were seized which revealed that a sum of Rs. 1.5 crore was paid to a party by assessee in month of December, 2003. The AO made the addition on the basis of said document found. On appeal the Appellate Tribunal held that there is no evidence to suggest that the transaction allegedly noted on lose paper with name analogous to the name of the assessee firm pertains to the year in which the assessee firm was in existence. Hence, no addition can be made as unexplained investment in the hands of the assessee. (AY.:2004-05)

Mantri Developers v. ITO (2015) 168 TTJ 372 (Pune)(Trib.)

S. 194C : Deduction at source – Contractors – No obligation to deduct TDS at stage of making provision for expenditure if payee cannot be identified. No obligation to deduct TDS if services (roaming charges) are rendered without human intervention and are not “technical services”. [S.194J, 201(1), 201(IA)]

1. The assessee, a telecom operator, made provision for site restoration expenses, however, TDS was not made. The provision was made for dismantling the towers and restoration of site to its original position after termination of the lease period. The lease period is normally 20 years and above. The assessee by placing reliance on the Accounting Standard – 29 claims that a provision would be made in respect of an obligation. In other words, the assessee had an obligation to incur the expenditure after termination of the lease period. The Revenue contended that due to misconception and ignorance of law and with an intention to circumvent the statutory provisions, the assessee made the provision. The fact remains that the payment was not made to anyone and it is not credited to the account of any party or individual. The account does not disclose the person to whom the amount is to be paid. The contractor who is supposed to be engaged for dismantling the tower and restore the site in its original position is not identified. As contended by the assessee, the assessee by itself engaging its own labourers may dismantle the towers and restore the site to its original position. In such a case, the question of deducting tax at source does not arise. The assessee has to pay only the salary to the respective employees. Suppose the work is entrusted to a contractor, then definitely the assessee has to deduct tax. In this case, the contractor would be identified after the expiry of lease period. Therefore, even if the assessee deducts tax, it cannot be paid to the credit of any individual. The assessee has to issue Form 16A prescribed under Rule 31(1)(b) of the Income-tax Rules, 1962 for the tax deducted at source. The assessee has to necessarily give the details of name and address of deductee, the PAN of deductee and amount credited. In this case, the assessee could not identify the name and address of deductee and and his PAN. The assessee also may not be in a position to quantify the amount required for incurring the expenditure for dismantling and restoration of site to its original position. In those circumstances, the provision which requires deduction of tax at source fails. Hence, the assessee cannot be faulted for non-deduction of tax at source while making a provision.

2. As regards the year-end provisions, the assessee made arrangement with other service provides for providing value added services. There may be justification with regard to the expenditure for availing the services of identification and verification for the last month of financial year, since the assessee may not have the exact details on verification done by the concerned persons and the amount required to be paid. However, in respect of the downloads and value added service, etc. the entire details may be available in the system. Therefore, wherever the particulars and details available and amount payable could be quantified, the assessee has to necessarily deduct tax. In respect of value added services like daily horoscopes, astrology, customer acquisition forms are all from specific service providers and these value added services are monitored by system. Therefore, even on the last day of financial year, the assessee could very well ascertain the actual quantification of the amount payable and the identity of the payee to whom the amount has to be paid. To that extent, the contention of the assessee that the payee may not be identified may not be justified. The Assessing Officer has to examine whether the payment to the party/payee is identifiable on the last day of financial year and whether the quantum payable by the assessee is also quantified on the last date of financial year. In case the Assessing Officer finds that the payee could not be identified on the last day of financial year and the amount payable also could not be ascertained, the assessee may not require to deduct tax in respect of that provision. However, in case the payee is identified and quantum is also ascertainable on the last day of the financial year, the assessee has to necessarily deduct tax at source.

3. As regards roaming charges, the Supreme Court held in
   CIT v. Bharti Cellular Limited (330 ITR 239) that whenever there was a human intervention, it has to be considered as technical service. In the light of the above judgment of the Apex Court, the Department obtained an expert opinion from the Sub-Divisional Engineer of BSNL. The Sub-Divisional Engineer clarified that human intervention is required for establishing the physical connectivity between two operators for doing necessary system configurations. After necessary configuration for providing roaming services, human intervention is not required. Once human intervention is not required, as found by the Apex Court, the service provided by the other service provider cannot be considered to be a technical service. It is common knowledge that when one of the subscribers in the assessee’s circle travels to the jurisdiction of another circle, the call gets connected automatically without any human intervention. It is due to configuration of software system in the respective service provider’s place. The subscriber can make and receive calls, access and receive data and other service without any human intervention. Like any other machinery, whenever the system breaksdown, to set right the same, human intervention is required. However, for connecting roaming call, no human intervention is required except initial configuration in system. Human intervention is necessary for routine maintenance of the system and machinery. However, no human intervention is required for connecting the roaming calls. Therefore, as held by the Apex Court in Bharti Cellular Limited (supra), the roaming connections are provided without any human intervention and therefore, no technical service is availed by the assessee. Therefore, TDS is not required to be made in respect of roaming charges paid to the other service providers. (AY. 2007-08 to 2011-12)

Dishnet Wireless Limited v. DCIT (Chennai) (Trib.) ; www.itatonline.org

S. 194C: Deduction at source – Contractors – Only payments “in pursuance of a contract” are subject to TDS. Payments made under a legal obligation are not covered. [Ss. 201(1), 201(IA)]

The appellant has made payments to Punjab Water Supply and Sewerage Board for execution of work relating to sewerage pipelines and for treatment of polluted water of the city. However, such payments are out of legal obligations rather than contractual arrangements. It is only when payments are made “in pursuance of a contract” that the provisions of section 194C come into play. The contract may be oral or written, express or implied but there must be a contract nevertheless. In the present case, the payment is on account of legal obligation under section 24(1) of the Punjab Water Supply and Sewerage Board Act 1976. Accordingly, the provisions of section 194C did not come into play on the facts of this case. Therefore, the impugned demands under sections 201(1) and 201(1A) r.w.s. 194C are wholly devoid of any legally sustainable merits. (AY. 2007-08 to 2010-11)

Jalandhar Improvement trust v. ITO (Asr.)(Trib.); www.itatonline.org

S. 201(1A) : Deduction of tax at source – Failure to pay – Delay in remitting deducted tax to Government – Interest to be computed taking period of thirty days – Not British calendar month

The interest payable under section 201(1A) of the Income-tax Act, 1961 for the delay in remitting tax deducted at source to the Government account is to be computed taking a period of thirty days as a month instead of the British calendar month. (AY. 2012-13)

Navayuga Quazigund Expressway P. Ltd. v. Dy. CIT (2015) 39 ITR 612(Hyd.) (Trib.)

S. 234E : Fee – Default in furnishing the statements – Prior to the amendment to section 200A w.e.f. 1-6-2015, the fee for default in filing TDS statements cannot be recovered from the assessee –deductor. [S.200A]

1. Section 200A was amended by the Finance Act 2015 with effect from 1st June 2015 to provide that in the course of processing of a TDS statement and issuance of intimation under section 200A in respect thereof, an adjustment could also be made in respect of the fee computed in accordance with the provisions of section 234E. As the law stood prior to 1st June 2015, there was no enabling provision therein for raising a demand in respect of levy of fees under section 234E. While examining the correctness of the intimation under section 200A, we have to be guided by the limited mandate of Section 200A, which, at the relevant point of time, permitted computation of amount recoverable from, or payable to, the tax deductor after making the adjustments (a) on account of “arithmetical errors” and “incorrect claims apparent from any information in he statement” and (b) interest computed on the basis of sums deductible as computed in the statement. No other adjustments in the amount refundable to, or recoverable from, the tax deductor, were permissible in accordance with the law as it existed at that point of time. Accordingly, the adjustment in respect of levy of fees under section 234E was beyond the scope of permissible adjustments contemplated under section 200A.

2. This intimation is an appealable order under section 246A(a), and, therefore, the CIT(A) ought to have examined legality of the adjustment made under this intimation in the light of the scope of the section 200A. The CIT(A) has not done so. He has justified the levy of fees on the basis of the provisions of Section 234E. That is not the issue here. The issue is whether such a levy could be effected in the course of intimation under section 200A. The answer is clearly in negative. No other provision enabling a demand in respect of this levy has been pointed out to us and it is thus an admitted position that in the absence of the enabling provision under section 200A, no such levy could be effected. As intimation under section 200A, raising a demand or directing a refund to the tax deductor, can only be passed within one year from the end of the financial year within which the related TDS statement is filed, and as the related TDS statement was filed on 19th February 2014, such a levy could only have been made at best within 31st March 2015. That time has already elapsed and the defect is thus not curable even at this stage. In view of these discussions, as also bearing in mind entirety of the case, the impugned levy of fees under section 234E is unsustainable in law. (AY. 2013-14)

Sibia Healthcare Private Limited v. DCIT (Asr.)(Trib.); www.itatonline.org

G. Indhirani (Smt.) v. DCIT (Chennai) (Trib.); www.itatonline.org

S. 250 : Appeal – Commissioner (Appeals) – Binding precedent –Orders of the ITAT are binding on the lower authorities and should be followed unreservedly. Blatant failure to do so could attract contempt of court proceedings.[S. 80IB (10), 254 (1)]

The CIT(A), instead of following the order of the Tribunal, followed the order of his predecessor even though it had been set aside by the Tribunal. He also blatantly observed in the order that he cannot sit in judgment over the view taken by his predecessor. On appeal by the department to the Tribunal HELD allowing the appeal:

1. The findings of the CIT (Appeals) clearly show that instead of deciding the appeal on merits and in compliance with the order of the Tribunal dated 23-11-2011, he preferred to follow the view and order passed by his predecessor. The CIT(A) has even gone to the extent of noting in the impugned order that the view taken by his predecessor was correct. Thus it is clear that the CIT(A) has shown disobedience to the order of the Tribunal by which the earlier order of the predecessor of the CIT (A) was set aside by the Tribunal in toto. The earlier order of the predecessor of the CIT(A) would not stand in the eyes of law;

2. It is a clear case of showing disrespect to the order of the Tribunal. Therefore, contempt proceedings could have been initiated against the CIT(A) for blatantly disobeying the order of the Tribunal. The Madhya Pradesh High Court in
   Agrawal Warehousing & Leasing Ltd. v. CIT 257 ITR 235 held that the CIT(A) cannot refuse to follow the order of the Appellate Tribunal. The CIT(A) is a quasi-judicial authority and is subordinate in judicial hierarchy to the Tribunal. The orders passed by the Tribunal are binding on all the revenue authorities functioning under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities
   (Union of India v. Kamlakshi Finance Corporation AIR 1992 SC 711 referred);

3. The order of the CIT(A) cannot be sustained in law and is clearly in defiance of the order of the Tribunal. Since it is a first matter reported to us during the course of arguments by the DR that the order of the CIT(A) shows complete defiance of the order of the Tribunal, therefore, we do not propose at the stage to initiate contempt proceedings against the CIT(A). However, we warn him to be careful in future in following the order of the Tribunal in accordance with law and should not show any defiance to the order of the Tribunal. (AY. 2007-08)

DCIT v. Sham Sunder Sharma (Chd.) (Trib.); www.itatonline.org

S. 251 : Appeal – Commissioner (Appeals) – Powers – In an appeal against an order passed by the AO to give effect to the ITAT’s order, the CIT(A) has no jurisdiction to enhance the assessment with respect to a new source of income or disallowance of expenditure [S. 40(a)(ia), 68, 254(1)]

The ITAT directed that the assessee be granted sufficient opportunity to rebut the evidence used by the Assessing Officer regarding the addition of Rs. 89,39,92,188 made by the Assessing Officer on account of alleged short receipts declared in the profit and loss account violating the principles of natural justice. In compliance, the Assessing Officer made the assessment on the issue afresh under section 254 read with section 143(3) of the Act making the addition of Rs. 4,55,41,557 out of Rs. 89,39,92,188 which was questioned before the CIT(Appeals). The CIT(Appeals) not only upheld the addition of Rs. 04,55,41,557 made on account of short receipts declared in profit and loss account but enhanced the income by directing the Assessing Officer to disallow payments made by the assessee under section 40(a)(ia) of the Act. The assessee claimed that by directing the Assessing Officer to make the disallowance of payments made by the assessee under sec. 40(a)(ia) of the Act, the CIT(Appeals) has introduced in the assessment a new source of income, which is not allowed in an assessment which was made by the Assessing Officer strictly in compliance of the order of the ITAT for reconsideration of addition of Rs. 89,39,92,188 after examining the evidence and upholding opportunity of being heard to the assessee. HELD by the Tribunal:

1. The direction to the Assessing Officer by the CIT(Appeals) to disallow payments made by the assessee under section 40(a)(ia) of the Act was a question of taxability of income from a new source of income which has not been considered by the Assessing Officer, hence it was exceeding of jurisdiction by the CIT(Appeals) in a matter set aside by the ITAT in the present case. Though the CIT(Appeals) has co-terminus powers as of the Assessing Officer and is empowered to do what an Assessing Officer can do for the assessment, the directed disallowance was new source of income, which was not the subject matter of setting aside order by the ITAT, in compliance of which assessment under section 254 read with section 143(3) was framed.

2. The power of the CIT(Appeals) to set aside assessment, which does not involve a proposal for enhancement cannot be used for the purpose of expanding whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the appellate authority. (AY. 2007-08)

Cheil India Pvt. Ltd. v. ITO ( Delhi)(Trib.) ; www.itatonline.org

S. 253 : Appellate Tribunal – CIT(A) – Stay – Appeal in the ITAT can be filed against order of the CIT(A) on a stay application. Stay should be granted if relevant criteria of existence of prima facie arguable case, irreparable loss and financial position are not considered by the CIT(A). [Ss. 201(1), 250]

Considering the fact that the issue on merits is yet to be decided by the CIT(A) and being of the view that the findings arrived at in para 5 have not taken into consideration the relevant criteria for deciding the issue namely the existence of
prima facie arguable case in favour of assessee or not; irreparable loss if any and the financial position of the assessee etc. as no reference to these settled legal parameters is found mentioned in the order. It also seen that the merits of the order of the Assessing Officer till date have not been tested by any Appellate Authority. Thus, in these peculiar facts and circumstances, we direct the Revenue authorities from refraining to take any coercive action against the assessee till the passing of the order of the CIT(A) on merits. In view of the same, the Ld. CIT(A) is directed to pass a speaking order in the appeals on merit after giving the assessee a reasonable opportunity of being heard. (AYs. 2010 -11 to 2015-16)

Bharat Heavy Electricals Ltd. v. ITO(TDS) (Delhi) (Trib.) ; www.itatonline.org

S. 254(2A) : Appellate Tribunal – Power – Stay – Tribunal has power to stay the prosecution proceedings initiated under section 276C(1) [Ss. 271(1)(c), 276C(1)]

The stay application has been filed by the assessee for keeping in abeyance the launching of prosecution proceedings. The Tribunal held that the Tribunal has power to stay proceedings initiated by the AO by issuing show cause notice for launching prosecution under section 276C(1) in view of the proviso to section 254(2A). Outcome of the appeals pending before the Tribunal relating to the validity of the additions made by the AO in the assessment made pursuant to the order passed under section 263 and penalty imposed under section 271(1)(c) in respect of the said additions will have a direct bearing on the question whether prosecution is to be launched or not and therefore, stay is granted against the proceedings initiated by issuing show cause notice for launching prosecution under section 276C(1) till the disposal of appeals. (AY. 2008-09)

Jindal Steel & Power Ltd. v. ACIT (2015) 169 TTJ 704 (Delhi)(Trib.)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – In a case where there is inadequate inquiry but not lack of inquiry, the CIT must conduct inquiry and verification and record the finding how the assessment order is erroneous. He cannot simply remand the matter to the AO for verification. [Ss. 24(b), 143 (3), 153]

In cases where there is inadequate inquiry but not lack of inquiry, the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if inquiry and verification is conducted by the CIT and he is able to establish and show the error and mistake made by the AO, making the order unsustainable in law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. In this situation, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further inquiry without a finding that the order is erroneous. The distinction must be kept in mind by the CIT while exercising judgment under Section 263 of the Act and in absence of the finding that the order is erroneous and prejudicial to the interest of revenue, the exercise of jurisdiction under said section is not sustainable. The finding that the order is erroneous is the condition or requirement which must be satisfied for exercise of jurisdiction u/s. 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean that the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question. In most of the cases of alleged inadequate investigation, it would be difficult to hold that the order of the AO, who had conducted inquiries and had acted as an investigator is erroneous without CIT conducting verification/inquiry. It was also laid down that the CIT can direct reconsideration of assessment on this ground but only when the order is erroneous and an order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous and such order is not permissible under the provisions of section 263 of the Act. The jurisdictional pre condition for invoking section 263 of the Act is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. (AY. 2009-10)

Maya Gupta v. CIT (Delhi)(Trib.) ; www.itatonline.org

S. 263 : Commissioner – Revision of orders prejudicial to revenue Depreciation – Windmill, generated wind power and sold it to state electricity board prior to 30th September of year, income from which was taxed, depreciation was to be allowed at full rate – Revision order was set aside [S.32]

The assesse was in the business of power through windmill. The assessment was completed u/s. 143(3). Depreciation loss of 80% on the cost of a new windmill was allowed. In revision proceedings under section 263, Commissioner held that erection invoices showed that the windmill erection was completed on 30-9-2007 hence he directed to restrict the depreciation to 40%. On appeal the Tribunal held that, the assessee’s windmill was erected and generated power before 30-9-2007. The same was sold to state electricity board and sale proceeds were being offered for taxation. Department had not questioned certificate issued by State Electricity Board, it could not be said that assessee had not erected windmill on or before 30-9-2007,hence allowance of depreciation at 80% was held to be justified. Order of Commissioner was quashed. (AY. 2008–09)

D.M. Kathir Anand v. ACIT (2014) 29 ITR 753/ (2015) 153 ITD 115 (Chennai)(Trib.)

S. 269SS : Acceptance of loans and deposits – Otherwise than by account payee cheque or account payee bank draft – Penalty – Journal entries – Section does not apply to non-monetary book entry transactions of loans and advances [S. 271D]

Section 269SS indicates that it applies to a transaction where a deposit or a loan is accepted by an assessee, otherwise than by an account payee cheque or an account payee draft. The ambit of the Section is clearly restricted to transaction involving acceptance of money and not intended to affect cases where a debit or a liability arises on account of book entries. The object of the Section is to prevent transactions in currency. This is also clearly explicit from clause (iii) of the explanation to Section 269SS of the Act which defines loan or deposit to mean “loan or deposit of money”. The liability recorded in the books of account by way of journal entries, i.e. crediting the account of a party to whom monies are payable or debiting the account of a party from whom monies are receivable in the books of account, is clearly outside the ambit of the provision of Section 269SS of the Act, because passing such entries does not involve acceptance of any loan or deposit of money. (AY. 2007-08)

CIT v. Mahagun Technologies Pvt. Ltd. (Delhi)(Trib.); www.itatonline.org

S. 271(1)(c) : Penalty – Concealment – Revised return filed beyond time – Assessment was done to validate invalid return – Levy of penalty was held to be not justified. [S. 139(5)]

Assessee declaring profit from firm in revised return filed beyond time after search proceedings revealed firm bogus. No escapement of income detected during original assessment proceedings and no proceedings initiated against assessee after search. Assessment proceedings carriedout just to validate invalid revised return.No escapement of income. Penalty cannot be levied.(AY. 1998-1999 to 2000-2001)

Ranjana Sud v. ACIT (2015) 39 ITR 356 (Mum.) (Trib.)

S. 271(1)(c) : Penalty – Concealment – Validity of assessment can be objected in penalty proceedings – Satisfaction was recorded of person searched – Donation was not disclosed in the original return – Belated return was filed – Revised return was held to be not valid – Levy of penalty was held to be justified [S. 32 (4), 139(5), 153C, 158BD]

1. The argument that the satisfaction ought to have been recorded by the AO of the searched person and copy of such satisfaction should be available in the record of searched person is not acceptable because the AO of the searched person as well as of the assessee is a common authority. The same AO has jurisdiction over both the assessees. He has recorded the satisfaction for satisfying himself that money belonged to the assessee was found at the premises of the assessee. His action is being challenged that he has recorded the satisfaction while taking cases of the present assessee i.e. when he took cases of such other persons, whereas he should have recorded satisfaction in the capacity of AO of searched person. There is built-in fallacy in the arguments of the assessee. The fallacy became evident if the argument if tested by envisioning to the facts of the present case. There is no dispute that notice under section 153C was issued by the AO after recording the satisfaction extracted
   supra. The AO is the same AO who has jurisdiction over the searched person as well as the other person i.e. the assessee. Let us take a situation, the AO was examining the file of Shri Bhaskar Ghosh. On perusal of his statement recorded under section 132(4) coupled with the fact of cash found during the course of search and buttressed by the Managing Director (Finance) of the KPC Group of companies, visualised that cash belonged to the assessee, he immediately took a piece of paper and recorded his satisfaction that the money belongs to the assessee, therefore notice under section 153C is to be issued in the case of assessee. The question is, where this paper was placed by him? Whether in the order sheet entries of Shri Bhaskar Ghosh’s assessment proceedings; in a separate file or in cupboard available in his room. There is no dispute that this satisfaction was not recorded within the stages contemplated by the Hon’ble Supreme Court in the case of
   CIT v. Calcutta Knitwears 362 ITR 673. The attempt at the end of the assessee is that there should be a straight jacket system, whereby the satisfaction recorded even by the same AO then, that should be placed in the file of searched person and if it is placed in some other cupboard in his room by the AO then, there cannot be any satisfaction, we fail to appreciate that technical approach at the end of the assessee. The law does not require the manner and the procedure of keeping the files. The section only requires that a satisfaction be recorded and it should be during the period propounded by Hon’ble SC in
   CIT v. Calcutta Knitwears 362 ITR 673, that has been recorded in the present case. The second scenario can also happen that seized material of KPC group might be kept in a common bundle, wrapped in a cloth where all the files are emanating from search and survey are being placed. If the above satisfaction note was found to be tagged with other file would it be held that no satisfaction was recorded. In our understanding the reply will be that satisfaction was recorded;

2. The most important feature of section 271(1)(c) is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation I to section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or CIT(Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income. Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the Learned CIT(Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished. On examination of the facts, we find that firstly, there is no explanation at the end of assessee, why it has not disclosed these donations in the original return(s)? There is no
   bona fide in the alleged explanation of the assessee that it had received the money through account payee cheque and, therefore, harboured a belief that donations are genuine. This explanation is wholly for the sake of explanation. The assessee failed to spell out specific facts and circumstances or reason which operated in the minds of its managing director, finance while preparing the return and treating these donations as genuine. Looking to the facts of these five donors, no prudent man would, however, harbour a belief that such companies can give donation. It is pertinent to note that it cannot be a coincidence or a chance that five companies managed by a common director, having assets of less than Rs. 1 lakh, not done any business but would give donations of Rs. 33 crores. These circumstances in itself suggest a well designed scheme at the behest of the assessee, because it is the assessee who is ultimately getting the benefit. Therefore, there was no explanation at the end of assessee for not showing these donations as its income in the original return(s) or in the return(s) filed in response to notice under section 153C. The CIT(A) has rightly confirmed the penalty upon the assessee. (AY. 2007-08 to 2009-10)

KPC Medical college & Hospital v. DCIT ( Kol.) (Trib.); www.itatonline.org

S. 271AAA : Penalty – Search initiated on or after 1st June, 2007 – Undisclosed income – “dumb” document – Surrender of income – Levy of penalty was held to be not justified

1. Undisclosed income means “any income represented by any documents” found during the course of search, which are not recorded in the books of account of the assessee. In the instant case, the additions of cash expenses and payments of Rs. 71,90,623 is the result of cash available out of the disclosed cash of Rs. 6.84 crores which was included in the disclosure petition. Further, addition of Rs. 15 lakh on account of alleged cash receipts from Sampoorna Logistics, which was alleged to be reimbursement, it is clear that expenditure recorded in the books of account can be held to be undisclosed income of the assessee if the said expenditure is found to be false. It is the Department on whom, onus of proving that expenditure recorded in the books is bogus or false based on documentary evidences found in the course of search. Here in the present case, no documentary evidences establishing the falsity of claim of transportation charges paid to Sampoorna Logistics was found in the course of search. According to us the said expenditure cannot be held to be undisclosed income of the assessee for the purpose of levying penalty u/s. 271AAA of the Act;

2. A charge can be levied on the basis of document only when the document is a speaking one. The document should speak either out of itself or in the company of other material found on investigation and/or in the search. The document should be clear and unambiguous in respect of all the four components of the charge of tax. If it is not so, the document is only a dumb document. No charge can be levied on the basis of a dumb document. A document found during the course of a search must be a speaking one and without any second interpretation, must reflect all the details about the transaction of the assessee in the relevant assessment year. Any gap in the various components for the charge of tax must be filled up by the Assessing Officer through investigations and correlations with other material found either during the course of the search or on investigations. A document was bereft of necessary details about the year of transaction, ownership, nature of transaction, necessary code for deciphering the figures cannot be relied upon;

3. Penalty cannot be levied merely on the admission of the assessee and there must be some conclusive evidence before the AO that entry made in the seized documents, represents undisclosed income of the assessee. Where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessee’s surrender will not be well-founded. (AY. 2008-09)

SPS Steel & Power Ltd. v. ACIT (Kol.) (Trib.); www.itatonline.org

S. 275 : Penalty – Bar of limitation – Penalty – Concealment – Period of limitation within six months from the end of the financial year in which the order is received by the Commissioner – Challenge by assessee to validity of penalty order entertained in Dept’s appeal despite lack of cross objection or cross-appeal by assessee – Penalty order was held to be barred by limitation [S.271(1)(c)]

On a combined reading of Section 275(1)(a) along with its proviso it becomes clear that main section 275(1)(a) talks of a period of six months from the date on which the order is received by Commissioner and main section also talks of orders passed by Commissioner appeals as well as by Tribunal talk whereas the proviso which is applicable from 1-6-2003 talks about orders passed by Commissioner Appeals only and here, the period of limitation for passing penalty order is one year from the date Commissioner receives Tribunal order. We find that in the present case quantum proceedings travelled up to Hon’ble ITAT and therefore, main section 275(1)(a) will be applicable wherein the period of limitation has been mentioned as six months from the end of financial year in which order is received by Commissioner. The proviso to section 275(1)(a) will not be applicable. Proviso talks about orders passed by Commissioner (Appeals) only. Admittedly, the quantum order in the present case was received on or before 11-5-2007 as noted in reply to RTI application and therefore, penalty order should have been passed on or before 30th November, 2007 whereas, the penalty order has been passed on 10-1-2008 which is beyond the limitation period of six months. In view of above, as the penalty order has not been passed within six months from the end of month in which order was received by Commissioner, the penalty order passed by AO is bad in law and is therefore, quashed. (AY. 2001-02)

ITO v. Pandit Vijay Kant Sharma (Delhi) (Trib.); www.itatonline.org

S. 282: Service of notice – The postal authorities are the agent of the recipient. There is a presumption that handing over notice to the postal department means that it has been served on the assessee. [S. 143(2), 147, 148, CPC, order V Rule 19A]

The provisions of Section 282 of the Act with regard to the service of notice have been duly complied with by the Revenue. Since the notice u/s. 143(2) of the Act has not been received back unserved within thirty days of its issuance, there would be presumption under the law that notice has been duly served upon the assessee. The notice was under transmission by handing over to the postal authority who acted as an agent of the recipient. The speed post notice has not been returned mentioning the address as wrong or undelivered which is a standard practice of the postal Department. Assessee’s AR in the initial hearings never indicated that 148 notice was not properly served. The lame objection is taken at the fag end of assessment, which clearly smack of a design. (AY. 2003-04)

ITO v. Shubhashri Panicker (Jaipur) (Trib.); www.itatonline.org

S. 292BB : Notice of demand to be valid in certain circumstances – Reassessment – Dead person – Issue of notice in the name of the deceased person renders the assessment order null and void even if the order is passed in the name of the legal heir. The fact that the legal heir attended the proceedings does not make it a curable defect u/s. 292BB. [Ss. 69, 143(2), 147, 148]

The AO recorded the reasons for issuing the notice u/s. 148 of the Act in the name of the deceased assessee and got the approval of the Addl. CIT also in the same name. The AO issued notice dated 31-3-2010 u/s. 148 of the Act in the name of the deceased assessee and also mentioned in the body of the assessment order that the notice u/s. 148 of the Act was issued and served upon the assessee by post within the statutory time period prescribed. Though the legal heir of the deceased assessee informed the AO that the assessee had expired and the return in the name of deceased assessee was filed by the legal heir, the AO did not issue any notice u/s. 148 of the Act or 143(2) of the Act in the name of the legal heir. Therefore, the assessment framed by the AO on the basis of the notice issued u/s. 148 of the Act in the name of the deceased assessee was invalid and void ab initio. (AY. 2003-04)

ITO v. Late Som Nath Malhotra (Delhi) (Trib.); www.itatonline.org

Research Team