1. S. 80IA: Special Deduction – Interest from investment deposit u/s. 32AB was not eligible for deduction.

The Assessee is a Co-operative Ltd., a multi- state Co-operative Society engaged in the business of manufacture of fertilizers such as Urea, Ammonia. The issue before the high court was that, the tribunal has decided deduction or coverage under section 80-IA of the Income-tax Act, 1961 in respect of Interest income earned by the Assessee from investment deposit under section 32AB of the Act in IDBI Bank against the assessee and denied the deduction. The Honourable High Court observed that, the assessee had deposited certain amounts in the account maintained under section 32-AB with the Development Bank. The deposits so made were out of the sale proceeds i.e. income chargeable under the head Profits and gains of business or profession. The Interest was earned on the said deposits and the assessee claims that the interest earned should be included in the income derived from the industrial undertaking and accordingly was eligible for deduction u/s. 80-IA of the Act. The High Court held that S. 80-IA of the Act does not apply and cover income in the nature of profits and gains of business or profession but is restricted only to income derived from an industrial undertaking after a certain date etc. The expression derived from refers to the first or the immediate cause/ source of income earned, which would be the deposits in the bank and interest paid by the said bank and not the industrial undertaking.

The aforesaid interest income, therefore, cannot be treated as income derived from the industrial undertaking covered u/s. 80-IA of the Act. Krishak Bharati Cooperative Ltd. v. Jt. CIT, ITA No. 595 of 2014 dt.15/09/2014

The Assessee filed SLP, and the Honourable Supreme Court dismissed the same since investment made in bank was derived from sale proceeds i.e. income chargeable under head profits and gains of business or profession, interest income earned on same could not be included in deriving income from industrial undertaking covered under section 80-IA.

Krishak Bharati Cooperative Ltd. v. Jt. CIT [2022] 289 Taxman 75 (SC)

2. S.142 (2A) : Inquiry before assessment (Special audit) Assessee failed to furnish necessary details and reconciliation of books of account and several replies to queries of AO, Notice for Special Audit is justified.

The Revenue enquired from the Assessee of the reason for not filing advance tax. As well as enquired as to why advance tax deposited for the first quarter of the current year, i.e., financial year 2019-20 was only Rs.14 crores, while the corresponding amount for the preceding year was Rs. 19 crores. This query was replied vide e-mail and letter dated August 16, 2019, pointing out that the advance tax deposited in the preceding year had led to refund claim of Rs.40 crores, which when provided for, showed little variation in earlier years’ deposit. On September 9, 2019, the Pr. CIT wrote to the Assessee directing payment of “correct amount” of advance tax for the relevant quarter. The said amount was deposited on dated September 13, 2019 and on the very same evening, revenue issued notice under section 142(1), reproducing the initial questionnaire of 53 queries making incorrect reference to filings by the Assessee and asking to show cause as to why special audit under section 142(2A) not be ordered. The Assessee filed response thereto making reference to details already filed and clarified. The Assessee filed evidence/correspondence in response to the initial questionnaires issued. However, Revenue thereafter passed an order under section 142(2A) of the Act. The Assessee file petition before the High Court.

The Honourable High Court after observing the facts of the case held that, the satisfaction recorded by the AO was in consonance with the principles enunciated in section 142(2A). The suspicions expressed by the AO were on the basis of the complexity of the accounts recorded upon objective considerations. The AO had applied his mind and the anomalies and discrepancies that had been pointed out in the order were sufficient to the test of judicial review while questioning the subjective satisfaction for appointment of a special auditor. On a perusal of the record, it was also clear that apart from the show cause notice, the AO had given several other opportunities to the assessee calling upon it to furnish its response along with documentary evidence. The direction for special audit was valid. NBCC (India) Ltd. v. Addl. CIT [2020] 422 ITR 429 (Del)(HC)

The Assessee filed SLP, and the Honourable Supreme Court dismissed the same, stating that assessee had not submitted satisfactory reply to these queries and failed to produce its ledger, accounts and documents as called for – Non-specific reply of assessee revealed complexity in accounts of assessee and raised doubts about correctness of transactions and thus AO ordered for special audit under section 142(2A) was justified.

NBCC (INDIA) Ltd. v. Addl. CIT, SLP APPEAL (C) NO(S). 4718 of 2020, dt.06/07/2023 (SC)

3. S.170: Succession to business otherwise than on death (Validity of assessment)- Liberty to file review petition against High Court ruling that where company merged into another company under an approved scheme and thereby lost its existence, notice issued u/s. section 148 in name of non-existent company was bad in law.

Notice u/s. 148 was issued for AY 2012-2013 on 31st March 2019. The Assessee states that the company ECD Electrons and Electrolysis Pvt. Ltd. was merged with Lenient Finvest Pvt. Ltd. vide a Court’s order dated 7th November 2014. Lenient Finvest Pvt. Ltd. was later merged into Vahanvati Consultants Private Ltd., the Assessee by an order passed by National Company Law Tribunal, Mumbai and the appointed date was 1st April 2013. The Assessee states that on 31st March 2019 when the notice u/s. 148 of the Income-tax Act was issued, ECD Electrons and Electrolysis Pvt. Ltd. was no more in existence. Also points out that an order u/s. 271 (1)(c) of the Act was passed by the ACIT on 31st March 2018 for the dues of ECD Electrons and Electrolysis Pvt. Ltd. showing the assessee to be Appellant. The Assessee submitted that, though the revenue were always aware that ECD Electrons and Electrolysis Pvt. Ltd. was no more in existence, then also issued a notice u/s. 148 in the name of a non-existing company. The High Court following the Maruti Suzuki India Ltd. [2019] 416 ITR 613 (SC) held that, issuance of notice and assessment order thereafter passed in name of non-existing company is a substantive illegality and not a procedural violation of nature adverted to in section 292B, where assessee company was amalgamated with another company and thereby lost its existence, order passed subsequently in name of said non- existing entity would be without jurisdiction. Vahanvati Consultants (P.) Ltd. v. ACIT, WP No. 2828 of 2019 dt.11/08/2021 (Bom)(HC)

The revenue filed SLP, and the Honourable Supreme Court disposed of same stating that make a factual distinction between the positions as it obtained in that case with the facts of the present case. To file a review petition before the High Court bringing the distinguishing features on the record of the High Court.

ACIT v. Vahanvati Consultants (P.) Ltd. [2022] 287 Taxman 176 (SC)

4. S.145: Method of accounting – Change of (Completed contract method) – accounting for contemporary period of said contract was justified.

The Assessee-sub-contractor, engaged in business of construction, had undertaken a project in Iraq as sub-contractor of a company, namely IRCON, and claimed to have completed a portion of construction work but had not received full consideration. During year, he entered into a supplementary agreement with IRCON for deferred payment of contract dues in view of war conditions between Iraq and Iran and resorted to completed contract accounting method. The view of the AO, that departure from mercantile system of accounting to completed contract method would not reflect a fair and reasonable picture of profit earned from year to year and, therefore, added difference between amount of certified bills and expense to total income. The Honourable High Court held that assessee was justified in resorting to completed contract system for contract work under execution in Iraq in contemporary period and consequently, bills certified as relating to work completed could not be recognized as receipts and brought to tax for assessment year under consideration. CIT v. Bhageeratha Engineering Ltd., ITR193 to 197 of 1997 dt.24/06/2021 (Ker)(HC)

The Revenue filed SLP, and the Honourable Supreme Court dismissed the same stating that, undertaking of construction work for a project in Iraq, deferred payment of contract dues in view of war prevailing between Iraq and Iran, departure from mercantile method to completed contract method of accounting for said contract was justified in contemporary period.

CIT v. Bhageeratha Engineering Ltd. [2022] 289 Taxman 10 (SC)

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