S.4 : Charge of income tax – Subsidy – Industrial Policy 1996 of Punjab Government – Capital receipt

Subsidy received by assessee-company on export oriented unit from Director of Industries, Punjab under Industrial Policy 1996 of Punjab Government for installation of plant and machinery would be capital receipt.

Safari Bikes Ltd. v. JCIT (2014) 33 ITR 665 / 166 TTJ 216 / (2015) 67 SOT 257 (Chd.)(Trib.)

S.10(10D) : Life insurance policy – Keyman insurance policy – United Linked Endowment Assurance Plan – Eligible exemption

The assessee claimed a deduction of Rs. 1,49,99,222 towards Keyman insurance policy on its partner Shri Sanjeev Suri. The Assessing Officer disallowed the claim. This was confirmed by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

Even a “United Linked Endowment Assurance Plan” with the main object of guaranteed returns rather than life insurance is a “Keyman insurance” as defined in s. 10(10D). The fact that policy was not termed as a “Keyman insurance” and the fact that the IRDA Guidelines disapproved the issue of such policies is irrelevant. Eligible exemption. (AY. 2006-07)

Suri Sons v. ACIT (Asr.)(Trib.); www.itatonline.org

S.10B : Export oriented undertaking – Exemption allowed in earlier years cannot be withdrawn on the ground that undertaking is not approved under S. 14 of Industrial Development and Regulation Act

Where exemption under section 10B was allowed in earlier years, same could not be withdrawn in subsequent year on ground that undertaking is not approved by Board under section 14 of Industrial Development and Regulation Act. (AY. 2003-04, 2005-06)

Aditya Birla Nuvo Ltd. v. ACIT (2015) 68 SOT 403 (Mum.)(Trib.)

S.12A : Registration – Trust or institution – Charitable institution carrying activities outside India-Denial of Registration was held to be not valid

If activities of a trust are found to be charitable and property is held wholly and exclusively under trust for charitable and religious purposes, then such a trust cannot be denied registration merely because its activities are extended outside India.

Critical Art and Media Practices v. DIT(E) (2015) 153 ITD 664 / 170 TTJ 401 (Mum.)(Trib.)

S.12AA : Procedure for registration – Trust or institution – Denial of exemption – Provision of section 13 can be invoked by A. O. while framing assessment and not by Commissioner while considering application for registration

Assessee-society was formed with object of establishing schools, colleges, hospitals etc. for benefit of Christian Community. The assessee filed an application seeking registration under section 12AA of the Act. The Commissioner rejected the application on the basis that the society was formed for the benefit of a particular community and there was violation of section 13(1)(b) of the Act. On appeal allowing the claim of assessee the Tribunal held that; Commissioner could not reject its application for registration under section 12AA on ground that there was a violation of provisions of section of section 13(1)(b). Provisions of s. 13 can be invoked by A.O. while framing assessment and not by Commissioner while considering application for registration u/s. 12AA.

St. Joseph Academy v. DIT(E) (2015) 153 ITD 669 (Hyd.)(Trib.)

S.12AA : Procedure for registration – Trust or institution – Registration cannot be refused on the ground that the assessee is not carrying out any activities of charitable objects

When the object of assessee is covered by charitable purposes, registration cannot be refused on ground that assessee is not carrying out any charitable activities. Whether the assessee is not carrying out any charitable activities remains to be seen at time of assessment proceedings. As regards registration under section 80G the matter is remanded to Commissioner to decide it according to law.

Life Shines Educational and Charitable Trust v. ACIT (2015) 39 ITR 291(Chennai)(Trib.)

S.14A : Disallowance of expenditure – Exempt income – Stock-in-trade – Rule 8D does not apply to shares held as stock-in-trade. AO cannot apply Rule 8D to make a disallowance without showing how the assessee’s disallowance is wrong

(i) The AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. Even otherwise, on merits also the assessee had made disallowance itself for an amount of Rs. 37,28,966/- and filed computation of disallowance as per rule 8D of the Rules. The AO could not find any fault in the computation of disallowance made by assessee

(ii) The assessee does not have any investment and all the shares are held as stock-in -trade. Once, the assessee has kept the shares as stock-in-trade, the rule 8D of the Rules will not apply. (ITA No. 805/Kol/2012, dt. 14-10-2014) (AY 2008-09)

DCIT v. G.K.K. Capital Markets (P) Ltd. (Kol.)(Trib.); www.itatonline.org

S.14A : Disallowance of expenditure – Exempt income – Stock-in-Trade – Investment in Tax free securities – disallowance justified

Tribunal held that (i) Presumption laid down in HDFC Bank 366 ITR 505 (Bom.) and Reliance Utilities 313 ITR 340 (Bom.) that investments in tax-free securities must be deemed to have come out of own funds and (ii) Law laid down in India Advantage (Bom.) that s. 14A and Rule 8D does not apply to securities held as stock-in-trade cannot be applied as both propositions are contrary to Godrej & Boyce 328 ITR 81 (Bom.) (AY 2008-09)

HDFC Bank Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org

S.28(i) : Business income – Income from other sources – Interest income from business of leasing and financing – Assessable as business income

Interest income earned by the assessee engaged in the business of leasing, financing, etc., is taxable as busimess income and not as income from other sources, not withstanding the fact that the RBI has refused to register the assessee as an NBFC; all the expenses related to the said activity are allowable as deduction. (AY 2006-07)

Preimus Investment and finance Ltd. v. DCIT (2015) 171 TTJ 794 (Mum.)(Trib.)

S.28(1) : Business loss – Loss on account of forward contract entered into by the assessee to hedge against the loss arising on account of fluctuations in foreign exchange is an allowable deduction. Contrary view in Vinod Kumar Diamonds is not good law

The assessee was exposed to the risk arising in fluctuation out of exchange rate and as a prudent business man it would like to hedge its risk. Accordingly, the assessee had booked the forward contracts and utilised the same during the year or in the succeeding years. The pattern of the assessee reflected that it entered into forward contracts during the normal course of business and utilised the same for business allowing them to run upto the date of contract. The assessee was engaged in the export of diamonds and the forwards contract was entered into in respect of foreign exchange to be received as a result of export and the same was done to avoid the risk of loss due to foreign exchange fluctuations. The claim has to be allowed after taking note of the claim of forward contracts and the accounting policies, i.e., AS-11 (revised) and applying the ratio laid down by the Apex Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 294 ITR 451 (SC). The issue i.e. loss on account of forward contract entered into by the assessee to hedge against the loss arising on account of fluctuations in foreign exchange arose before the Tribunal in a series of cases and the claim has been allowed. The learned D.R. for the Revenue had placed reliance on M/s. Vinod Kumar Diamonds Pvt. Ltd ITA No. 506/Mum/2013 dated 3-5-2013. The said decision is contrary to the view taken in Badridas Gauridu P. Ltd. 261 ITR 256 (Bom). We find no merit in the said reliance. (AY 2009-10, 2010-11)

ACIT v. Venus Jewel (Mum.)(Trib.); www.itatonline.org

S.32 : Depreciation – Commercial rights – Network support – Entitled to depreciation

Payments to transferor who owned commercial rights towards the network and facilities constitute payment for business or commercial right hence entitled to depreciation. (AY 2006-07)

ACIT v. Bharti Teletech Ltd. (2015) 150 ITD 185 / 163 TTJ 36 / 119 DTR 139 (Delhi)(Trib)

S.40(a)(ia) : Amounts not deductible – Deduction at source – The amendment is clarificatory and retrospective w.e.f. 1-4-2005-Tax deducted was deposited before due date of filing of return – Disallowance was deleted

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. (ITA No. 211/Ahd/2010, dt. 7-7-2015.) (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

(i) 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.

(ii) 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. (ITA No. 1905/kol/2014, dt. 4-3-2015) (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 – Cash credits – Old unclaimed liabilities which are not written back by the assessee can neither be assessed as “cash credits” u/s. 68 nor assessed u/s.41(1) as “remission or cessation of liability”.

The assessee claimed that addition u/s. 68 of the Act could not be made because the credits in question did not relate to the previous year relevant to AY 2009-10 and therefore the provisions of section 68 will not be attracted. On the question of cessation of liability, it was assessee submitted that there is no evidence brought on record to show that liability of the assessee vis-à-vis creditors has ceased to exist. HELD by the Tribunal:

(i) In Shri Vardhaman Overseas Ltd. 343 ITR 408 (Del.) it has clearly laid down that neither section 41(1) nor section 68 of the Act can be applied. On the applicability of section 68, we are of the view that those provisions will not apply as the balances shown in the creditors account do not arise out of any transaction during the previous year relevant to AY 2009-10. The provisions of sec. 68 are clear in-as-much as they refer to “sum found credited in the books of account of an assessee maintained for any previous year”. Since the credit entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68 of the Act. The proper course in such cases for the Revenue would be to find out the year in which the credits in question were credited in the books of account and thereafter make an enquiry in that year and make an addition in that year, if other conditions for applicability of section 68 are satisfied.

(ii) As far as applicability of section 41(1) of the Act is concerned, Explanation 1 which was inserted w.e.f. 1-4-1997 is not attracted to the present case since there was no writing off of the liability to pay the sundry creditors in the assessee’s accounts. The question has to be considered de hors Explanation 1 to section 41(1). In order to invoke clause (a) of section 41(1) of the Act, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The words “remission” and “cessation” are legal terms and have to be interpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there is no reference either in the order of the AO or CIT(A) to the expression “remission or cessation of liability”. In such circumstances, we are of the view that the provisions of section 41(1) of the Act could not be invoked by the Revenue. In fact the decision of the Hon’ble Delhi High Court in the case of Vardhaman Overseas Ltd. (supra) clearly supports the plea of the assessee in this regard. (ITA No.1078/Bang/2014, dt. 7-8-2015) (AY. 2009-10)

Glen Williams v. ACIT (Bag.)(Trib.); www.itatonline.org

S.43(3) : Speculation loss – Loss on sale of shares, even a speculation loss, can be set-off against the gains on sale of shares

Even if the loss claimed by the assessee relating to share transactions as well as loss resulting on valuation of closing stock is treated as speculation loss, the same is entitled to be set-off against the profit on sale of shares in view of DLF Commercial Developers Ltd. 261 CTR (Del.) 127.(ITA No. 2138/Mum/2010, dt. 7-8-2015) (2006-07)

DCIT v. Envision Investment & Finance Pvt. Ltd. (Mum.)(Trib.); www.itatonline.org

S.43(5) : Speculative transaction – 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

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:

(i) 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 share 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 section 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).

(ii) 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 sections 28 to 41 of the Act. Again, the fact that both delivery based transaction 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.

(iii) 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. (AYs 2009-10 & 2010-2011)

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

S.45(4) : Capital Gains –Distribution of capital asset – Dissolution of firm – Transfer – Firm-Partner – Transfer of legal title in name of firm is not essential – Firm is liable to capital gain tax [S. 2(14)]

Transfer of legal title in name of assessee-firm is not essential to hold that assessee-firm is owner of those assets if such assets are transferred by a partner of firm as capital and Firm had been showing said landed building in balance sheet and claiming depreciation on same. On dissolution of firm, said property was taken over by said partner. transaction was liable for capital gains. (AY 2007-08)

M. Ahammedkutty v. ITO (2015) 67 SOT 353 (Cochin)(Trib.)

S.48 : Capital gains – Computation – In computing “capital gains” the AO is not entitled to substitute the “market value” for the actual “consideration” received by the assessee. He also cannot disregard the valuation report without cogent material

(i) It is settled position of law that in the case of sale, the Assessing Officer has no power to replace the value of the consideration agreed between the parties. In this regard, we find strength from the above cited decision of Hon’ble Delhi High Court in the case of Nilofer Singh holding that the expression “full value of consideration” used in section 48 of the Act does not have any reference to market value (Nilofer Singh 309 ITR 233 (Delhi); George Handorson 66 ITR 622 (S.C); Gillanders Arbuthonot 87 ITR 407 (S.C) referred)

(ii) A report of a valuer is an important piece of evidence and the same cannot be discarded without there being any cogent material on record showing that the report of the valuer is not correct (S. K. Construction & Co. 167 Taxman 171 (Delhi) followed)

(iii) As the expression “full value of consideration” in section 48 of the Income-tax Act, 1961 does not have any reference to market value, the Assessing Officer was having no power to replace the value of the consideration agreed between the parties with any fair market value or estimation. Only because the Pioneer Ltd. had shown the book value of shares at the rate of Rs. 3.50 per share, the Assessing Officer was not justified to ignore the price agreed between the parties and to doubt the genuineness of the claimed loss, even ignoring the valuation report. (ITA No. 5335/Del/2012, dt. 28-9-2015)(AY 2009-10)

Venus Financial Services Ltd. v. ACIT (Delhi) (Trib.); www.itatonline.org

S.54 : Capital gains – Profit on sale of property used for residence – Giving advance to builder constitutes “purchase” of new house even if construction is not completed and title to the property has not passed to the assessee within the prescribed period

The assessee declared sale of a residential property vide sale agreement dated 8-12-2009 for a total consideration of Rs. 1,02,55,000/-. After considering the indexed cost of acquisition of Rs. 14,17,904/-, the long term capital gain was computed at Rs. 88,37,096/-. The relevant capital gain was claimed as exempt under section 54 of the Act on the strength of having acquired a new residential house. The investment in acquisition of the new residential house was claimed by the assessee based on an advance of Rs. 1.00 crore given to the builder as booking advance through a cheque dated 6-2-2010. The AO denied the claim for exemption on the ground that the provisions of section 54 of the Act require the assessee to purchase a new residential house either within a period of one year before the date on which the transfer of original asset took place or two years after date on which such transfer take place. He held that as even after two years of the date of transfer of old house the construction of the new property was not completed and that assessee had not gained possession of the new premises also. He, therefore, held that assessee did not comply with the requirements of section 54 of the Act in as much as it could not be said that assessee had purchased a new residential house within the period prescribed therein. This was confirmed by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) It is not disputed by the Revenue that the sum of Rs. 1.00 crore has been invested by the assessee towards acquiring new property. Of course, the legal title in the said property has not passed or transferred to the assessee within the specified period and it is also quite apparent that the new property was still under construction. So however, the allotment letter by the builder mentions the flat number and gives specific details of the property. The word ‘purchase’ used in Section 54 of the Act should be interpreted pragmatically. The intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to sub-serve the object and more particularly when one was concerned with exemption from payment of tax.

(ii) The plea of the Revenue is that no purchase deed was executed by the builder and that there was only an allotment letter issued. As per the Revenue the advance could be returned at any time and, therefore, the assessee may lose the exemption under section 54 of the Act. In our considered opinion, the aforesaid does not militate against assessee’s claim for exemption in the instant assessment year, as there is no evidence that the advance has been returned. In case, if it is found that the advance has been returned, it would certainly call for forfeiture of the assessee’s claim under section 54 of the Act. In such a situation, the proviso below section 54(2) of the Act would apply whereby it is prescribed that such amount shall be charged under section 45 as income of the previous year, in which the period of three years from the date of the transfer of the original asset expires. The aforesaid provision also does not justify the action of the Assessing Officer in denying the claim of exemption under section 54 in the instant assessment year.(AY 2010-11)

Hasmukh N. Gala v. ITO( 2015) 125 DTR 299 (Mum.)(Trib.)

S.54 : Capital gains – Profit on sale of property used for residence –Purchase – Construction of new house – Booking of a flat which is going to be constructed by a builder, has to be considered as a case of “construction of flat” and not purchase – Not entitled deduction

The assessee sold a residential flat in October, 2005 for certain amount and claimed deduction under section 54 in respect of cost of new flat.

The Assessing Officer noticed that the assessee had booked a flat in a project in December, 2002 in the joint name of assessee and her relative and she obtained possession of the new flat in December, 2004.

The Assessing Officer did not accept the assessee’s contention that the date of possession of new house should be taken as the date of purchase and rejected claim for deduction under section 54. On appeal, the Commissioner (Appeals) confirmed the decision of the Assessing Officer.

On second appeal it was held that :

In the instant case, the assessee along with her relative has entered into an agreement on 4-12-2002 with a builder. As per the registered sale agreement, the builder shall construct residential apartments on a piece of land and allot a specified flat to the assessee. As per the agreement, the builder constructed the residential apartments and finally handed over the possession on 4-12-2004.The ratio laid down in the several cases clearly show that 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”. The deduction under section 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 under section 54 in respect of the cost of new flat. In view of the foregoing discussion, the assessee has not fulfilled the conditions prescribed under section 54. Accordingly, the decision taken by the Commissioner (Appeals) was upheld. (AY. 2006-07)

Farida A. Dungerpurwala v. ITO (2014) 35 ITR 205 / (2015) 67 SOT 208 (Mum.)(Trib.)

S.54F : Capital gains – Investment in a residential house – Transferable tenancy rights –Owner – Substantial rights giving assessee dominion, possession and control over said property with transferable rights, which were almost identical to that of an owner of property, assessee was entitled for exemption

Assessee earned long-term capital gains on sale of shares. She claimed exemption under section 54F on plea that she had purchased a residential flat. Assessing Officer noted from transfer deed that assessee had “transferable tenancy rights” and “not ownership” of flat, therefore disallowed claim under said section. Where rights of assessee in flat were not mere tenancy rights but were substantial rights giving assessee dominion, possession and control over said property with transferable rights, which were almost identical to that of an owner of property, assessee was entitled for exemption. (AY. 2005-06)

Archana Parasrampuria v. ITO (2015) 68 SOT 550 (Mum.)(Trib.)

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

(i) 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.

(ii) The whole genre 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.

(iii) 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.

(iv) Section 10 provides that certain income are 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 do 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).

(v) Though in CIT vs. 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.

(vi) 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). (ITA No. 3317/Mum/2009 & 1692/Mum/2010, dt. 10-6-2015) (AY 2007-08)

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

S.92C : Transfer pricing – Arm’s Length Price – Transactional net margin method – Only companies having related party transactions of less than 15 per cent can be considered – Companies with turnover more than Rs. 200 crores to be excluded – Functionally dissimilar companies to be excluded

Assessee is in the business of Software development services. Tribunal held that; while selecting comparables, only companies having related party transactions of less than 15 per cent. can be considered. Companies with turnover more than Rs. 200 crores to be excluded. Functionally dissimilar companies to be excluded. (AY 2006-2007)

Tektronix Engineering Devt. India P. Ltd. v. Dy.CIT (2015) 39 ITR 212 (Bang.)(Trib.)

S.92C : Transfer pricing – Arm’s Length Price – Software development services – Selection of comparables – Functionally dissimilar companies to be excluded

Tribunal held that Companies having related party transactions less than 15 per cent alone can be considered. Companies with turnover more than Rs. 200 crores to be excluded. Functionally dissimilar companies to be excluded. Small company cannot be compared to giant company engaged in development of niche products. Difference between operating profit margin determined by Transfer Pricing Officer and by assessee within range of plus or minus five per cent adjustment not warranted. (AY 2006-07)

Cypress Semiconductor Technology India P. Ltd. v. Dy. CIT (2015) 39 ITR 468 (Bang.)(Trib.)

S.92C : Transfer Pricing – Arm’s Length Price – Company reflecting high margins in some year and low margin in some year cannot be taken as comparable

It was held that where a company reflected high margins in certain years and very low in other years, being functionally not comparable, margins of said companies could not be applied as comparables while benchmarking international transactions of assessee in IT segments. (AY 2009-10)

PTC Software (India) (P.) Ltd. v. Dy.DIT (2014) 36 ITR 578 / (2015) 67 SOT 138(URO) (Pune)(Trib.)

S.92C : Transfer pricing – Arm’s Length Price – TP adjustment is to be made only in respect of purchases made from AE and not from unrelated parties

Assessee company was engaged in business of manufacture and sale of textile machinery, related parts, automotive parts and trading material and handling equipments. Assessee had shown its margin at 6.15 per cent. TPO did not accept results shown by assessee. He determined mean margin of comparables at 13.32 per cent and made TP adjustment. Assessee claimed that while computing mean margin of comparables, TPO had included purchases made from unrelated parties and claimed that arithmetic mean of comparables fell within (+-) 5 per cent range provided in proviso to Section 92C and, thus, no adjustment was called for. It was held by ITAT that TP adjustment is to be made only in respect of purchases made from AE and not from unrelated parties and hence matter needed reconsideration.(AY 2006-07)

Kirloskar Toyoda Textile Machinery (P.) Ltd. v. ACIT (2015) 170 TTJ 30 (UO) / 67 SOT 222(URO) (Bang.)(Trib.)

S.115JB : Book Profits – Transfer of development rights to subsidiary – (i) Even if an amount is credited to the P&L Account, the assessee can seek exclusion of that amount for purposes of “book profits” if a note to that effect is inserted in the Accounts. (ii) The exemption conferred by S. 115JB to sums exempt u/s. 10 should be extended to all sums which are not chargeable to tax.

The assessee held a parcel of land admeasuring about 61,506 sq. mtr as its capital asset. The said land was attached with development rights/FSI. The assessee transferred development rights/FSI of 55,464.04 sq. mtr which was available on a portion of above said land to its wholly owned Indian subsidiary company. The said transfer generated Long Term Capital Gain (LTCG) of 300.68 crores. The assessee disclosed the same as “Extra Ordinary Income” in the profit and loss account. The said LTCG was not chargeable to tax u/s. 47(iv) of the Act as it arose from the transfer of a capital asset by a company to its wholly owned Indian subsidiary. For purposes of computation of book profits u/s 115JB, the assessee inserted a note in the accounts stating that the said amount credited to the P&L A/c did not have the character of “income” and was not chargeable as “book profits”. The AO & CIT(A) relied on the judgment of the Special Bench in Rain Commodities Ltd v. DCIT (2010) (40 SOT 265; 131 TTJ 514) where it was held that if an amount, though not chargeable as capital gains u/s. 47(iv), is credited to the P&L A/c. the same cannot be excluded from the book profits u/s. 115JB. On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) The decision rendered by the Special Bench of Tribunal in Rain Commodities Ltd. (40 SOT 265; 131 TTJ 514) is not applicable because in that case the capital gains had been included in the profit and loss account and it was accepted that the accounts have been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. In the present case, it is clearly stated in the Notes forming part of accounts that the said profit is not includible for computing book profit u/s. 115JB of the Act, even though it is credited to Profit and Loss account. The profit and loss account prepared in accordance with the provisions of Part II to Schedule VI of the Companies Act should be read along with the ‘Notes forming part of accounts’. Hence the net profit shown in the Profit and loss account shall be first adjusted to take care of the qualifications given in the Notes.

(ii) As regards the contention that since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income” u/s. 2(24) of the Act and since it does not enter into computation provision at all under the normal provisions of the Act, the same should not be considered for the purpose of computing book profit u/s. 115JB of the Act, it is pertinent to note that the provisions of section 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term “income” as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as “incomes not included in total income” for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s .115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of “income”, are excluded for the purpose of computing “Book Profit”, since the said receipts are exempted u/s. 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of “total income” and “book profit”, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in “book profit” u/s. 115JB of the Act.

(iii) A careful perusal of the decision rendered by the Special bench in the case of Rain Commodities Ltd. would show that the above said legal contentions were not considered by the Special Bench. The Special Bench considered cases where the Courts were dealing with the issue of inclusion of capital gains in the computation of “Book Profits”, but such capital gains were otherwise chargeable to capital gain tax u/s. 45 of the Act under the normal provisions of the Act. However, here is the case that the profits and gains arising on transfer of capital is not falling under the definition of “transfer” and hence under the definition of “capital gains chargeable u/s. 45” and consequently, the same does not fall within the purview of the definition of “income” given u/s 2(24) of the Act. Further, the Special Bench did not have occasion to consider the argument urged that the profits and gains arising on transfer of a capital asset by a holding company to its wholly owned Indian Company does not fall under the definition of “income” at all u/s. 2(24) of the Act and hence the same does not enter into the computation provisions of the Act at all. (AY. 2009-10)

Shivalik Venture Pvt. Ltd. v. DCIT (Mum.)(Trib.); www.itatonline.org

S.115JB : Book Profits – Amount towards waiver of loan under OTSS, credited to “General Reserves” and not to the P&L Account cannot be added to “book profits”

The sole dispute raised is, whether the Assessing Officer could have made adjustment to the book profits for an amount of Rs. 3,52,78,000/-, which was on account of waiver of principal amount of loan, which has been credited by the assessee directly in the Balance Sheet in ‘General Reserve’ account, which according to the Assessing Officer should have been routed through profit and loss account and thus, would have been part of the book profit. The provisions relating to book profit u/s. 115JB are absolutely clear that same is to be computed on the basis of profit and loss account prepared in accordance with the provision of Part-II and Part-III of Schedule-VI of the Companies Act and to such profit only certain adjustments as provided in Explanation 1 can be made. The Assessing Officer does not have the power to tinker with such accounts prepared as per Schedule VI and certified by the Auditors. Assessing Officer has also not specified categorically that as to how the Parts II & III of Schedule VI has not been followed or is against the prescribed accounting standard there is a requirement of law that waiver of loan taken for utilising capital expansion is to be routed only through profit and loss account and cannot be credited to the ‘General Reserve’, i.e. directly in the Balance sheet. Thus, the finding of the CIT(A) is purely in accordance with the provisions of the law and the principle laid down by the Hon’ble Supreme Court in the case of Apollo Tyres (supra). The Hon’ble Bombay High Court in the case of CIT v. Akshay Textiles Trading And Agencies (P) Ltd., reported in 304 ITR 401 and later on in the case of CIT v. Adbhut Trading Co. Pvt. Ltd., reported in 338 ITR 94, following the aforesaid decision of the Hon’ble Supreme Court held that accounts prepared under the Companies Act and certified by the authorities under the said “Act” have to be accepted. (AY. 2007-08)

DCIT v. Garware Polyester Ltd. (Mum.)(Trib.); www.itatonline.org

S.115JB : Book profits – Capital gains – In computing the “book profits” the entire capital gains have to be included without computing the benefits of indexation. [Ss. 10(38), 45]

During the year ending on 31-3-2009, the assessee company sold shares and thereby earned a surplus of Rs. 1,90,78,63,394 which was net of STT paid. This amount was credited to the Profit & Loss account as on 31-3-2009. In the computation of book profit u/s. 115JB, the assessee had made a note stating that the long term capital gain should be taken at Rs. 1,72,55,70,760, which is after indexation. The Tribunal had to consider whether while computing the book profit u/s. 115JB the income on account of long term capital gain should include Rs. 1,90,39,06,630 i.e. net amount credited or the sum of Rs. 1,72,55,70,760 computed after indexation. HELD by the Tribunal:

For computing the profit and the taxability u/s. 115JB, it is mandatory for the assessee to compute profit as per Profit & loss account prepared under the relevant provisions of the Companies Act. The relevant Schedule under the Companies Act for the preparation of statement of Profit & loss account provides that in case of sale of investments, net gain/loss should be disclosed. The net gain/loss means sale minus purchase and other cost. The Companies Act does not speak about long term/short term capital gain. From the harmonious reading of the relevant provision as discussed above, it is evident that firstly, the book profit shall be reduced by the amount of income to which provision of section 10 applies. However, income under the provisions contained in section 10(38) will not be reduced. Thus, the income arising from transfer of long term capital asset is to be included in the book profit. The book profits as contemplated in section 115JB means the net profit, which has been shown/credited in the profit & loss account as prepared under the relevant provisions of the Companies Act. The concept of indexation while computing the Long term capital gain cannot be imported to the computation of book profit u/s. 115JB as per the expressed provisions of the said section itself which is a complete code in itself. Thus, in our opinion, the net amount on account of sale of shares of Rs. 1,90,39,06,630 will alone be taken into account in computation of book profit and not the amount of Long term capital gain of Rs. 1,72,55,70,760 after indexation. (AY. 2009-10)

Dharmayug investment Ltd. v. ACIT (Mum.)(Trib.); www.itatonline.org

S.143(3) : Assessment – Admission of undisclosed income – Fact that assessee admitted undisclosed income for one year does not mean that AO can assume that similar undisclosed income is earned in earlier years as well- Deletion of addition was held to be justified

The Assessing Officer estimated the professional income of the assessee for assessment years 2002-03 to 2007-08. The reasoning given by the AO is explained in brief. The excess cash found at the time of search was declared by the assessee as his income for the AY 2008-09. Accordingly, the assessee included the same in the professional receipts. Accordingly the professional receipts for AY 2008-09 was shown at Rs. 328.70 lakhs. The AO took the total number of working days for that year as 300 and accordingly worked out the average collection per day as Rs. 1,09,000/-. Then the AO presumed that the assessee would have earned professional collections in the same pattern in the earlier years also. Accordingly, he estimated the average daily collection at Rs. 1,00,000/-, Rs. 90,000/-, Rs. 80,000/-, Rs. 70,000/-, Rs. 60,000/- and Rs. 50,000/- respectively for assessment years 2007-08, 2006-07, 2005-06, 2004-05, 2003-04 and 2002-03. Accordingly the Assessing Officer worked out the gross receipts. Then the AO worked out the difference between the gross receipts declared by the assessee and that was worked out by him. Thereafter he applied the net profit rate declared by the assessee on the difference and accordingly worked out the additions. On appeal by the assessee the CIT(A) deleted the addition. On appeal by the department to the Tribunal HELD dismissing the appeal:

There is no dispute with regard to the fact that the revenue did not unearth any incriminating material, which could suggest that there was under billing or evasion of professional receipts. The revenue only stumbled with excess cash balance and the same was surrendered as income of the year in which the search took place. The assessee offered the same as his professional income. As observed by CIT(A), the unexplained cash is required to be assessed in the year in which it was found as per the deeming fiction of provisions of sec. 69A of the Act, which does not mean that the assessee would have earned the entire excess cash balance in one year. Hence, in our view also, the Assessing Officer misguided himself by presuming that the entire undisclosed cash balance represents his professional fee collected during the financial year relevant to the assessment year 2008-09. Hence, in our view, the CIT(A) has rightly concluded that the Assessing Officer did not bring any material on record to support his case of estimation of professional receipts of earlier years. We also notice that the Assessing Officer has assessed the net profit on the alleged suppressed professional receipts, meaning thereby, the assessing officer has presumed that the assessee would have suppressed corresponding expenses also. Again it is only a guess work only, unsupported by any material. Similarly, the average daily collection estimated by the AO was also mere guess work. In effect, there is no material available with the AO to show that the assessee has suppressed professional receipts as well as expenses in order to substantiate the estimation made by him. During the course of hearing, the learned D.R placed reliance on the decision rendered by Hon’ble Punjab & Haryana High Court in the case of Ved Prakash v. CIT (265 ITR 642) to support the estimation made by the Assessing Officer. However, we notice that the Hon’ble Punjab & Haryana High Court has considered a case, wherein materials were found during the course of search. However, in the instant case, no material relating to suppression of professional fee receipts was found. (ITA Nos. 711 to 715/Mum/2011, dt. 11-9-2015) (A Ys. 2004-05 to 2008-09)

Uday C. Tamhankar .v. DCIT (Mum.)(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.

(i) 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 audialterampartem. 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.

(ii) 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.144 : Best judgment assessment – If books are rejected and Gross Profit rate is estimated, separate disallowance of expenses cannot be made

The pattern of assessment under the IT Act is given by sections 29/144 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in section 30 to 43D. Section 40 provides for certain disallowance in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the ITO may reject those books and estimate the income to the best of his judgement. When such an estimate is made it is in substitution of the income that is to be computed under section 29. In other words, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also include the embargo placed in section 40 (Indwell Constructions v. Commissioner of Income Tax (1998) 232 ITR 776 (AP) followed). (ITA No. 418/Chd/2015, dt. 12-8-2015) (AY. 2010-11)

CIT v. Hind Agro Industries (Chd.)(Trib.); www.itatonline.org

S.145 : Method of accounting –Valuation of stock – Survey –Stock found less than the stock shown in trading account –Addition as unaccounted sale was not justified

Closing stock found during survey was less than closing stock shown in trading account. This, according to Assessing Officer, proved shortage of stock and unaccounted sales. On facts addition made by Assessing Officer was totally uncalled for.

Safari Bikes Ltd. v. JCIT (2014) 33 ITR 665 / 166 TTJ 216 / (2015) 67 SOT 257 (Chd.)(Trib.)

S.147 : Reassessment – Within four years – Tangible material – In the absence of “fresh tangible material” reassessment is not valid.

(a) Thus, taking help from these judgments, relevant provisions of law, fixing obligations upon the AO for making mandatory compliances, in a step-wise manner, for valid assumption of jurisdiction for reopening and reframing of reassessment order, can be summarized as under:

(i) Availability of the new tangible material indicating escaped income of the assessee, which should have come into possession of the AO, after the passing of original assessment order, whether u/s 143(3) or 143(1),

(ii) Recording of the ‘Reasons’ by the AO: ‘Reasons’ recorded should not be based upon the change of opinion of the Assessing Officer. ‘Reasons’ should be such that any person of ordinary prudence should be in a position to make a belief about escapement of income on the basis of facts narrated and material referred to, in the ‘Reasons’ recorded. The ‘Reasons’ should show that, there is rational nexus and cause & effect relationship between the material sought be relied upon in the Reasons and belief sought to be formed by the AO about escapement of income.

(iii) In case reopening is sought to be done by the AO after expiry of four years from the end of the relevant assessment year and the original assessment was framed u/s. 143(3) then reasons can be recorded only if there was failure on the part of the assessee in disclosure of material of facts, as has been envisaged in first proviso to section 147.

(iv) Before issuing notice u/s. 148, the AO has to obtain, on the reasons recorded by him, sanction for reopening of the case, from the competent authority as envisaged u/s. 151 viz. Additional Commissioner or the Commissioner of Income Tax, as the case may be. Before granting its sanction, the sanctioning authority is required to record its satisfaction based upon its independent application of mind, making out a case that as per the facts narrated and material referred to in the ‘Reasons’ recorded by the AO, a belief can be formed about escapement of income and case sought to be reopened is a fit case for reopening u/s. 147.

(v) After obtaining the sanction, the AO is required to issue and serve notice u/s. 148 upon the assessee, within the time limit as prescribed u/s. 149, to enable him to assume jurisdiction to reopen the assessment.

(vi) The assessee is required to file a return of income, in response to notice u/s 148 and may request for the copy of reasons.

(vii) The AO is bound, as per law, to provide a certified and verbatim copy of reasons to the assessee.

(viii) The assessee may file its objections before the AO, to the Reasons recorded, if any.

(ix) In pursuance to judgment of Hon’ble Supreme Court in the case of GKN Driveshafts 259 ITR 19 (SC), the AO is obliged to dispose of these objections and intimate the same to the assessee, before proceeding further with the reassessment proceedings.

(x) Thereafter, the AO is obliged under the law to issue and serve notice u/s.143(2) to enable him to make assessment of the return filed by the assessee in response to notice issued under section 148.

(xi) Framing of the re-assessment order by the AO u/s. 147/143(3) after providing adequate opportunity of hearing to the assessee and considering replies and evidences of the assessee, and all other applicable provisions of the Act.

(b) Under these facts and circumstances, let us now examine settled position of law on this issue. It has been held in various judgments coming from various courts that availability of fresh tangible material in the possession of AO at the time of recording of impugned reasons is a sine qua none, before the AO can record reasons for reopening of the case, as per the judgment of Hon’ble Supreme Court in the case of CIT v. Kelvinator India Ltd. 320 ITR 561 (SC). The term ‘tangible material’ has been understood and explained by various courts subsequently. There has been unanimity of the courts on this issue that in absence of fresh material indicating escaped income, the AO cannot assume jurisdiction to reopen already concluded assessment.

(c) In the present case, it has already been discussed that admitted facts are that there was no fresh material coming into the possession of the AO, at the time of recording of the ‘Reasons’. These facts have not been rebutted by learned DR also. The case law relied upon by learned DR in the case of Dr. Amin’s Pathology, supra is not applicable on the issue being decided here. The issue that in absence of any fresh material, whether AO can proceed to record Reasons, was not before Hon’ble High Court, therefore Hon’ble High Court had decided the issue of change of opinion in that case. In the case before us, as discussed above, we are not going into that issue. In our considered opinion, at this stage, we need not go into the other aspect i.e. whether there was change of opinion or not. This issue has been aptly clarified by Hon’ble High Court in the case of Madhukar Khosla, (supra), wherein it has been held by their Lordships that external facts or material constitute the driver, or the key which enables the AO to legitimately reopen the completed assessment and in absence of this objective “trigger”, the AO does not possess jurisdiction to reopen the assessment. Further, most importantly, it was held by the Hon’ble High Court that it is at the next stage when the question, whether the reopening of assessment amounts to “review” or “change of opinion” arises. In other words, if there are no “new tangible materials”, then there would be no “reasons to believe”, and consequently reopening would be an impermissible review. Under these circumstances there would not arise any need to go the next stage to examine the next question, i.e., whether there was “review” or “change of opinion”. The condition with respect to availability of “new tangible material” is step anterior to the condition of no “change of opinion” or “review”. (ITA No. 2910/Mum/2013, dt. 22-9-2015) (AY 2006-07)

Motilal R. Todi v. ACIT (Mum)(Trib); www.itatonline.org

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

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 section 153A assessment null and void. HELD by the third Member:

(i) 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 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.

(ii) 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. Followed Ashok Chadha v. ITO (2011) 337 ITR 399 (Delhi)(HC). (AY 1999 to 2000 to 2005-06)

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

S.194C : Deduction at Ssource – 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”.

(i) 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 paid or 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.

(ii) 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.

(iii) 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 breakdown, 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. (AYs 2007-08 to 2011-12)

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

S. 194J : Deduction of tax at source – Fees for professional or technical services – Data Link Charges –Transmission of data via gadgets without any human intervention will not amount to technical services – Not liable to deduct tax at source.

Assessee-software company paid data link charges for utilizing standard facilities which were provided by telecom service providers by way of technical gadgets and there was no human intervention for transmitting data through such data links, same did not involve technical services. It was held that assessee was not liable for tax deduction at source under section 194J. (AYs. 2007-08 to 2010-11)

iGATE Computer Systems Ltd. v. DCIT (2015) 67 SOT 296 (Pune)(Trib.)

S.195 : Deduction at Source – Non-resident – Income deemed to accrue or arise in India – Interest –Payment to head office tax was not required to be deducted at source on principles of mutuality [S.9(1)(v), 40(a)(i)]

Interest paid by Indian branch to Head Office/overseas branches was not taxable in India on principles of mutuality and, therefore, tax was not required to be deducted at source while making said payments. (AY 2004-05)

Credit Agricole Corporate & Investment Bank v. ACIT, (IT) (2015) 67 SOT 208(URO) (Mum.)(Trib.)

S.195 : Deduction at Source – Non-resident – Income from immovable property – Capital gain was invested in another property – Not liable to deduction of tax at source

Assessee purchased a property from a non-resident, since assessee was aware of fact that capital gain arising from sale of said property was not taxable in hands of vendor as he had already invested amount in purchase of another residential property within time period prescribed under section 54, assessee was not required to deduct tax at source while making payment of sales consideration to non-resident vendor. (AY 2012-13)

A. Mohiuddin v. ADIT (2015 ) 171 TTJ 138 / 67 SOT 251 (Bang.)(Trib.)

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

(i) 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.

(ii) 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 234 E is unsustainable in law. (AY 2013-14)

Sibia Healthcare Pvt. Ltd. v. DCIT (Asr.)(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

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:

(i) 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.

(ii) 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. vs. 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).

(iii) 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 D.R 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

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 sec. 254 read with 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. 4,55,41,557 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 section 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:

(i) 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 set aside matter 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.

(ii) 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 expending the 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 –Department representative can only support the AO’s order and cannot set up an altogether new case before the ITAT

The Departmental Representative has no jurisdiction to go beyond the order passed by the Assessing Officer. He cannot raise any point different from that considered by the Assessing Officer or the Commissioner of Income-tax (Appeals). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. Followed ACIT v. Aishwarya K. Rai (2010) 127 ITD 204 (Mum)(Trib)/ ITO v. Anant Y. Chavan (2009) 126 TTJ 984 (Pune)(Trib.)/ Mahindra and Mahindra (2009) 313 ITR 263 (SB) (Mum.)(Trib.) (ITA No. 2138/Mum/2010, dt. 7-8-2015) (2006-07)

DCIT v. Envision Investment & Finance Pvt. Ltd. (Mum.)(Trib.); www.itatonline.org

S.253 : Appellate Tribunal – New issue not basis of disallowance by Assessing Officer cannot be adjudicated – Departmental representative cannot enlarge the scope of the revenue’s appeal. [Ss.80IA, 254(1)]

The assessee claimed deduction under section 80IA of the Income-tax Act.

Held, that the contention raised by the Department was not the basis of disallowance by the Assessing Officer, subject matter before the Commissioner (Appeals) and the Tribunal. Therefore, the issue raised by the Department was a new one and could not to be adjudicated by the Tribunal. Tribunal relied on the ratio of judgment in Kamal Kishore and Co v.CIT (1998) 232 ITR 668 (MP)(HC). The bus shelters and foot overbridges should be considered as part of the infrastructure facility and therefore, the assessee was entitled to deduction under section 80IA of the Act. (AY 2004-05 to 2009-10)

Dy.CIT v. Vantage Advertising P. Ltd. (2015) 39 ITR 240 (Kol.) (Trib.)

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)

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 co-ercive 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. (AY 2010-11 to 2015-16)

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

S.254(2) : Appellate Tribunal – Rectification of mistake – Order of Tribunal pronounced beyond 60/90 days as prescribed in rule 34(5)(c) cannot validly be challenged in rectification petition [IATA R. 34(5)(c)]

Powers of rectification Tribunal has no jurisdiction to recall or review its order passed on merits while dealing with an application u/s. 254(2) Appellant filed instant petition seeking recall of impugned order contending that impugned order suffered from certain mistakes which were apparent on record. Order of Tribunal pronounced beyond 60/90 days as prescribed in Rule 34(5)(c) cannot validly be challenged in a petition. (AY 1993-94)

Times Guaranty Ltd. v. ACIT (2015) 153 ITD 655 / 171 TTJ 387 (Mum.)(Trib.)

S.271(1)(c) : Penalty – Concealment – If the notice does not clearly specify whether the penalty is initiated for “concealment” or for “filing inaccurate particulars”, it is invalid. Mere fact that assessee has surrendered income does not justify penalty if his explanation is not found to be false / not bona fide

(i) The notice issued by the AO u/s. 274 read with section 271 of the Act at the time of initiation of penalty proceedings states that it is issued for “concealment of particulars of income or furnishing of inaccurate particulars of income”. The Assessing Officer has not specified that as to which limb the notice was issued, i.e., whether it is issued for concealment of particulars of income or furnishing of inaccurate particulars of income. The Assessing Officer should be clear about the charge at the time of issuing the notice and the assessee should be made aware of the charge. The penalty order is liable to be quashed as the AO has not correctly specified the charge (decision dated 11-10-2013 in Shri Samson Perinchery in ITA No.4625 to 4630/M/2013 and CIT v. Manjunatha Cotton & Ginning Factory (2013)(35 taxmann.com 250) (Kar.) dated 13-12-2012) followed)

(ii) Surrender of commission expenditure would not automatically lead to the mala fides of the assessee as presumed by the Assessing Officer, since the assessing officer has not afforded an opportunity to the assessee to contradict the documents that were relied upon by the AO. If we examine the explanations furnished by the assessee in terms of Explanation 1 to section 271 of the Act, we notice that the assessee has offered an explanation and the same has not been found to be false. It is pertinent to note that the revenue was having only suspicion about the genuineness of the payments at the time of search proceedings on the basis of enquiries conducted by them. However, the assessee has all through maintained that the payments were genuine. In support of the same, the assessee has stated that the payments were made by way of cheque, TDS were deducted and the service tax was also paid. Hence, in our view, it cannot be said that the explanation of the assessee was found to be false. Though the AO has expressed the view that the admission of the assessee proves malafides, we are of the view that the explanation of the assessee was not proved to be not bona fide one. It is not the case of the Assessing Officer that the assessee has failed to furnish all facts and material relating to computation of income. Accordingly, we are of the view the deeming provisions of Explanation-1 shall also not apply to the assessee. (ITA No. 6222/6223/Mum/2013, dt. 2-9-2015)(AYs 2007-08, 2008-09)

Hafeez S. Contractor v. ACIT (Mum.)(Trib.); www.itatonline.org

S.271(1)(c) : Penalty – Concealment – The deeming provision of Explanation 1 to s. 271(1)(c) applies only to a case of “concealment of income” and not to a case of “furnishing inaccurate particulars of income”

(i) In the assessment order passed u/s. 143(3), the AO initiated penalty for concealing the particulars of income. However, at the time of passing penalty order the AO levied penalty for filing of inaccurate particulars of income under the virtue of Explanation 1 to Section 271(1)(c) of the Act. From a reading of Explanation 1 to Section 271(1)(c) of the Act, it is apparent that, if the AO in the course of assessment proceedings is satisfied that, any person has concealed the particulars of income or furnished inaccurate particulars of such income, then he may levy penalty on the assessee. Thus, there are two different charges i.e. concealment of particulars of income or furnishing of inaccurate particulars of income. The penalty can be imposed only for a specific charge. Furnishing inaccurate particulars of income means, when the assessee has not disclosed the particulars correctly or the particulars disclosed by the assessee are found to be incorrect whereas, concealment of particulars of income means, when the assessee has concealed the income and has not shown the income in its return or in its books of accounts. Explanation 1 is a deeming provision and is applicable when an amount is added or disallowed in computation of total income which is deemed to represent the income in respect of which particulars have been concealed. Explanation 1 cannot be applied in a case where the assessee furnishes inaccurate particulars of income.

(ii) In the present case, the AO initiated penalty proceeding u/s. 271(1)(c) on the basis that the assessee has concealed the particulars of income and the penalty ultimately levied on the assessee has been for furnishing inaccurate particulars by observing that the case of the assessee is covered by the Explanation 1 to Section 271(1)(c).

(iii) It is also observed that mistake of the assessee was bona fide which has been corrected by filing revised return before completion of assessment. Merely because there were some discrepancies, it cannot be held that the assessee intended to evade tax. The assessee had rectified the same and had accepted the mistake before the AO. The assessee also chose not to prefer appeal before the first appellate authority, itself shows that the mistakes were not wilful (ITA No. 1457/Del/2010, dt. 7-9-2015) (AY 2006-07)

Tristar Intech (P) Ltd. v. ACIT (Delhi)(Trib.); www.itatonline.org

S.271(1)(c) : Penalty – Concealment – Revised return beyond time – Assessment was done just to validate in valid revised return –Levy of penalty was not justified

Tribunal held that no escapement of income was detected during the original assessment proceedings and no proceedings were initiated against the assessee, though it was found that the chartered accountant was operating bogus firms, pursuant to search action. The assessee had suo motu offered the additional income. The assessment proceedings under section 147 of the Act were carried out just to validate the invalid revised return and not on account of detection of escapement of income. Therefore, it was not a fit case for levy of penalty under section 271(1)(c) of the Act. (AY. 1998-99 to 2000-01)

Ravi 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

(i) 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 S.C. in CIT vs. 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

(ii) 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 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 prudentman would, however, harbor a belief that such companies can give donation. It is pertinent to note that it cannot be a co-incidence or a chance that five companies managed by a common director, having assets of less than Rs.1 lac, 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. (AYs 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 – Amount disclosed in the statement – Manner of undisclosed income was derived – Levy of penalty was held to be not justified

The assessee has disclosed the income in the statement u/s 132(4) of the Act and also paid the tax together with interest of the undisclosed income. AO and CIT(A) held that the assesssee has not disclosed /substantiated the manner in which the undisclosed income was derived hence confirmed the levy of penalty. On appeal following the Cuttack Bench in Ashok Kumar Sharma v. DCIT (2012) 149 TTJ 33 (URO)(CTK) and Nagpur Bench Tribunal in Concrete Developers v. ACIT in ITA No .381 /Nag/2012 dt. 20-3-2013, deleted the levy of penalty.( ITA No. 711 to 715/Mum/2011, dt. 11-9-2015) (AYs 2004-05 to 2008-09)

Uday C. Tamhankar v. DCIT (Mum.)(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

(i) Undisclosed income means “any income represented by any documents” found during the course of search, which are not recorded in the books of accounts 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.

(ii) 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;

(iii) 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 (2015) 171 TTJ 749 (Kol.)(Trib.)

S.271C : Penalty – Failure to deduct tax at source – Publicity of a brand or logo – Reasonable cause – Deletion of penalty was held to be justified

The assessee made payment for such publicity to SAL without deduction of tax at source.

The Assessing Officer contended that the act of publicising assessee’s business would come under the preview of advertisement and, therefore, payment made for the same was to be subjected to TDS under section 194C. Consequently, the Assessing Officer treated assessee as an assessee-in-default under section 201(1) and levied penalty on it under section 271C.

On appeal, the Commissioner (Appeals) deleted the penalty levied under section 271C for the reason that assessee was not liable to deduct TDS under section 194C.

On appeal to Tribunal

It was held that the assessee/appellant has not deducted TDS on the impugned payments under the bona fide belief that the payments made by it is in the nature of publicity and not for advertisement for which he was required to deduct tax under section 194C. It is also an undisputed fact that the payments were made to the group concern of the assessee i.e. SAL, whose financial position might be known to the assessee. It was emphatically argued that recipient/deductee suffered huge losses, therefore, they had filed all its returns for these years declaring loss in all the impugned assessment years and no tax liability has ever fastened on them on account of these payments and there was no revenue loss on non-deduction of TDS. If all these facts are clubbed together, it can safely be held that the assessee had a bona fide belief or reasonable cause for non-deduction of TDS for which penalty under section 271C cannot be levied. Though in foregoing appeals the matter has been restored to the file of the Assessing Officer for verification of the facts whether the recipients/deductee had filed all its returns for these years declaring loss in all the impugned assessment years and there was no loss to the revenue, but this direction is not required in this case as the existence of the reasonable cause for non deduction of TDS is there. Therefore, under these circumstances, it can be held that the assessee had a reasonable cause for non-deduction of TDS and thus the penalty levied under section 271C is not leviable in the eyes of law. Accordingly the order of the Commissioner (Appeals) deleting the penalty is confirmed. (AY 2007-08 )

DCIT v. Sahara India Commercial Corporation Ltd. (2015) 67 SOT 318 / 169 TTJ 292 / 117 DTR 59 (Luck.)(Trib.)

S.271G : Penalty – Documents –International transaction – Transfer pricing – Failure by Transfer Pricing Officer to indicate specific allegation – Penalty not leviable

Held, that during the transfer pricing proceedings no intimation was given to the assessee alleging any delayed filing of the transfer pricing report. There was no allegation of any specific non-compliance. The assessee on receipt of the show cause notice, got back to the Transfer Pricing Officer asking for details of its alleged non-compliance. In reply, the Transfer Pricing Officer, instead of detailing the nature of the allegations, again made a vague assertion that the assesseeRs.s case was liable for penalty under section 271G of the Act. From the record, the exact nature of the assessee’s non-compliance was not apparent. It is trite law that in penalty proceedings, the assessee needs to be made aware of the exact nature of the charge which is levelled against him. This is so because the assessee has to give a reply on the specific and not assumed allegation. In the absence of specific allegations, the penalty proceedings were not sustainable. (AY. 2006-07)

Gillette India Ltd. v. CIT (2015) 39 ITR 62 / 168 TTJ 392 (Jaipur)(Trib.)

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

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

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

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