Chartered Accountant Finance: [aaykarbhavan] Fw: MCA on XBRL, Judgments,

All About Disallowance under Section 40(a)(3)

It shall be discussing the treatment of expenditures incurred by an assessee in excess of Rs. 20000/- in cash or bearer cheque.

The income tax department in its endeavor to plug in tax evasion mechanisms has introduced section 40(a)(3). This section provides that any expenditure incurred by an assessee (whether individual, company, firm etc.) above Rs. 20000/- other than by account payee cheque or draft shall not be allowed as a deduction. Simply put, this section covers those payments over Rs. 20000/- made by bearer cheque or cash.

However, if the payments are made for hiring or leasing carriages for goods such as lorries, trucks etc then the limit is extended to Rs 35000/-.

To further counter any tax evasion, the Income Tax department has specified that this section extends to single payments or aggregate of payments made to a single person in a day. Therefore, if X makes a payment to Y, of Rs. 10000, Rs. 15000, and Rs. 18000 in cash in one single day, then the aggregate amount of Rs. 43000 will be disallowed.

This section is not applicable in the following cases. These points are covered under Rule 6DD of the Income tax rules :-

1) Payments made to banking and other credit institutions such as RBI, commercial banks, cooperative banks, LIC etc.

2) Payments made through the banking system i.e. Letters of credit, mail or telegraphic transfers, bills of exchange etc.

3) Payment by adjustment of a liability for goods supplied or services rendered: – where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee, no disallowance operates.

4) No disallowance is applicable where such expenses are made to growers, producers or cultivators of agriculture, horticulture, fish and animal produce.

5) Payment is made to a producer for the purchase of the products manufactured or processed without the aid of power in a cottage industry.

6) Payment is made to a person who resides or carries on his/her business in a village not served by banks and financial institutions.

7) Any payments made to Government (whether State or Central Government). Such payments are direct taxes, indirect taxes, duties, cess etc.

8) No disallowance operates where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or his heirs of any such assessee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head salaries of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or in the immediately preceding financial year did not exceeds Rs. 50000.

9) In case of a bank closure either due to a holiday or strike and payments in cash were made on such a day, then this section will not be applicable and there will be no disallowance

10) Payment made by any person to his agent who is required to make payment in cash for goods or services.

11) Authorized dealers and foreign exchange money changers as registered with RBI are required to pay cash for purchase of foreign currency. Therefore the disallowance under this section is not applicable to them.

CASE STUDY

1. In the absence of unavoidable/ exceptional circumstances covered under Rule 6DD, Payment in Excess of Rs. 20,000/- not allowable

CIT v/s Tirupati Trading Co. – Kolkata High Court; AY 2000-01

The assessee-firm carried on business of manufacturing, trading and export of C.I. casting goods made of cast iron. The assessee firm made a payment for purchases of Rs. 94,506 in cash to M/s Dharam Roadways. The assessing officer had disallowed the entire amount of Rs. 94,506 taking into account the provisions of Sction 40 (a) (3). The assessee firm sought relief for the disallowance of this amount. The Kolkata Tribunal held that Tirupati Trading company was not able to explain the genuineness of payment made to Dharam Roadways and was also unable to explain whether any unavoidable/ exceptional circumstances covered under Rule 6DD of the IT rules were applicable in this case. Hence the disallowance stood at Rs. 94,506/-.

2. Section 40A(3) – Payment to milk producers in cash not disallowable

3. In CIT v K.K.S. K Leather Processor P. Ltd.[2007] 292 ITR 669(Mad.) it was held that payments made on a day on which the banks are closed either on account of holiday or strike, shall not come within the ambit of disallowance u/s 40A(3).

4. In The Commissioner of Income-tax versus Vijay Kumar Goel [2010] 324 ITR 376 (Chattisgarh) it was held that From a reading of the definition of bill of exchange u/s 5 and cheque under section 6 of the Negotiable Instrument Act, 1881, it is clear the banker's cheques/pay orders/ call deposit receipts are instruments which fall within the definition of bill of exchange. Hence payment made by the same could not be disallowed u/s 40A(3).

5. Where Books of accounts have been rejected and profit has been estimated, it is deemed that all the expenses and disallowances have been considered. Hence no further disallowance u/s 40A(3) is permissible- CIT V. Smt Santosh Jain[2008] 296 ITR 324(P&H).

6. Disallowance u/s. 40A(3) for consolidated entry of cash payment in excess of Rs. 20000/- at year end?

7. Assessee need to prove that why payments could not be made by crossed cheques/demand draft or that these were made out of sheer necessity u/s. 40A(3)

8. Salary paid in cash to employees posted at Rigs for more then 15days can not be disallowed

9. Splitting of cash payment to circumvent the provisions of law attracts Section 40A(3)

IT : Seizure - Under section 132, Assessing Officer has no authority to seize stock-in-trade

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[2012] 26 taxmann.com 83 (Orissa)

HIGH COURT OF ORISSA

Puspa Ranjan Sahoo

Assistant Director of Income-tax (INV)*

V. GOPALA GOWDA, CJ

AND B.N. MAHAPATRA, J.

W.P. (C) NO. 31361 OF 2011

JULY 3, 2012

Section 132 of the Income-tax Act, 1961 - Search and seizure - General - Whether under section 132, no power/authority is vested with Assessing Officer to seize any bullion, jewellery or valuable article or thing being stock-in-trade even if he comes to conclusion that said stock-in-trade represents wholly or partly undisclosed income or property of assessee - Held, yes [Paras 17 & 27] [In favour of assessee]

Interpretation of Statutes : Rule of strict construction

Circulars and Notifications : Circular No. 8 of 2003 dated 18-9-2003, Instruction No. 7 of 2003 dated 30-7-2003

FACTS

Facts

• The assessee was engaged in the trading of gold and silver jewellery.

• Search and seizure operation was conducted at the residential-cum-business premises of the assessee and stock-in-trade of the business and stock hypothecated were seized.

Assessee's submission

• The department is debarred from seizure of stock-in-trade in view of the third proviso of section 132(1) whether disclosed or undisclosed and whether explained or unexplained

HELD

• Section 132(1) has to be strictly construed and the information of the person or reason to believe by the authorizing officer must be apparent from the note recorded by him.

• In the instant case there are materials available on record for which the specified authority had reason to believe that the condition precedent to issue the warrant of authorization to conduct search and seizure operation in terms of section 132 at the residential-cum-business premises of the assessee existed. Therefore, there was no need to quash the warrant of authorization.

• Proviso to section 132(1)(iii) bars authorized officer from seizing stock-in-trade.

• Section 132(1)(iii) empowers the authorized officer to seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search which represent either wholly or partly undisclosed income or property of the person. However, the proviso carves out an exception. It provides that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, found as a result of such search shall not be seized but the authorized officer shall make a note or inventory of such stock-in-trade of the business. Therefore, even if the authorized officer is of the view that any bullion, jewellery or other valuable article or thing which is in form of stock-in-trade either wholly or partly represents the undisclosed income or property of the person/assessee searched, he cannot seize the same. But he shall make a note or an inventory of such stock-in-trade of business. [Para 17]

• Therefore, the seizure of jewellery being stock-in-trade by the authorized officer is wholly without authority of law and contrary to the statutory provision contained in proviso to section 132(1)(iii) and third proviso to section 132(1)(v).

• Therefore, the department is directed to return the jewellery (gold and silver ornaments) seized by the authorized officer in course of search forthwith to the petitioner-assessee after complying with the requirement provided, i.e., making a note or inventory. [Para 27]

CASES REFERRED TO

Mahesh Kumar Agarwal v. Dy. DIT [2003] 260 ITR 67/133 Taxman 520 (Cal.) (para 11), Ganga Saran & Sons (HUF) v. ITO [1981] 130 ITR 212/6 Taxman 248 (Delhi) (para 12), Nathi Devi v. Radha Devi Gupta AIR 2005 SC 648 (para 22), Salkia Businessmen's Association v. Howrah Municipal Corpn. [2001] 6 SCC 688 (para 23), Goodyear India Ltd v. State of Haryana [1990] 2 SCC 71 (para 24), S. Narayanaswani v. G. Panneerselvam AIR 1972 SC 2284 (para 25) and Union of India v. Hansoli Devi [2002] 7 SCC 273 (para 26).

U.C. Behura and S.K. Ray for the Petitioner. A.K. Mohapatra for the Respondent.

JUDGMENT

B.N. Mahapatra, J. - This writ petition has been filed with a prayer to quash the warrant of authorization and follow up action including search and seizure of stock-in-trade and stock hypothecated and to declare the seizure of stock-in-trade and stock hypothecated as unconstitutional being without jurisdiction and contrary to 3rd proviso to Section 132(1) of Income Tax Act, 1961 (for short 'the Ac'). The further prayer of the petitioner is for return of the seized stock-in-trade to the petitioner with compensation.

2. The petitioner's case in a nutshell is that the petitioner is an assessee bearing Permanent Account Number (PAN) AAMHP1514Q in the files of ITO-W-2(4), Khurda, who exercises jurisdiction over the petitioner. The petitioner assessee has been filing his return of income and is assessed to tax regularly. The petitioner started trading in gold and silver jewellery in a retail counter since the year 2000. On 9th September, 2011 basing upon the information provided to the Income Tax department as a routine procedure by the local police a search and seizure operation was conducted at the residential-cum-business premises of the petitioner. Subsequently, panchanamas were prepared and statements were recorded under Section 132(4) of the Act. Inventories were made and jewelleries item bearing serial No.1 to 10 and 13 to 22 i.e. totalling 22 items valued at Rs.62,10,585 (Rupees Sixty two lakhs ten thousand five hundred eighty five) have been seized even though the same represented stock-in-trade of the business and stock hypothecated. Hence, the present writ petition.

3. Learned counsel appearing on behalf of the petitioner submitted that statements were recorded under Section 132(4) of the Act with regard to books of Account, other documents or assets found as a result of search and also in respect of all matters relevant for the purpose of investigation. The petitioner who happens to be the Karta of HUF files the returns in his dual capacity, i.e., karta of HUF and individual before the ITO, Ward-2(4), Khurda and is assessed to tax regularly and is not a defaulter so far any income tax is concerned. Neither there has been any non-compliance to summons under Sections 131(1) nor notice under Section 142(1). There existed no apprehension regarding non-cooperation or attempted evasion or avoidance of tax. The petitioner was not in possession of any undisclosed money, billion, jewellery or other valuable articles or thing which can validate the authorization and subsequent issuance of search warrant. Therefore, the entire action under Section 132(1) of the Act was vitiated. The Central Board of Direct Taxes (CBDT), who is empowered by the legislatures to frame rules under Section 132(14) disapproves this kind of search seizure of the present nature vide instruction No.7 of 2003 dated 30.07.2003, the guidelines of which should have been strictly adhered to. The petitioner is running a jewellery business and its part of business is to purchase old gold items, remaking them for trading purpose. Gold is a precious metal, accumulated by people for its monetary value and easy liquidation and anybody in possession of a gold ornament can dispose of the same in the market without any proof of its ownership as a general practice and being a trader in jewellery, the petitioner purchases old ornaments from people in need. Assuming and not admitting for the moment that the search conducted was valid, the seizure of the items in trade cannot be said to be valid. The seizure of stock-in-trade violates the 3rd proviso of Section 132(1) of the Act. Such action of the authority violates the constitutional right guaranteed to the petitioner under the Constitution. The petitioner who traded with silver jewellery and filigree works in his individual capacity also deals with gold jewellery in his HUF business and to finance his HUF business availed a cash credit facility (CC) by hypothecation of stock-in-trade to State Bank of India prior to the search. The opp. parties-Department is debarred from seizure of stock-in-trade in view of the 3rd proviso of Section 132(1) of the Act whether disclosed or undisclosed, whether explained or unexplained.

4. It was further submitted that the warrant of authorization and follow up action including search and seizure of stock-in-trade and stock hypothecated are void ab initio and deserve to be quashed on the ground that mere information received from local police and recovery of two items of alleged stolen jewellery from the petitioner who purchased both the items on good faith from the seller, without any further investigation or cogent material or reason, does not constitute information within the meaning of Section 132(1) particularly when search was conducted on the very same day the local police intimated the matter to the Department. Such opinion can at best provide a "reason to suspect" and does not give rise to "reason to believe" and thus does not fulfil any of the conditions precedent for invocation of Section 132 of the Act.

5. Mr. A. Mohpatra, learned Senior Standing Counsel appearing for the opp. parties submitted that there is valid reason to initiate the search and seizure proceedings as contemplated under Section 132 of the Act and the warrant of authorization issued to conduct search and seizure operation in the residential-cum-business premises of the petitioner is valid in law. In support of his contention, he produced the relevant record for perusal of this Court.

6. Mr. Mohapatra further submitted that in course of search and seizure operation, if the search party finds that the stock-in-trade and stock hypothecated either wholly or partly represents undisclosed income or property of the assessee, the search party is fully empowered to seize the stock-in-trade.

7. On the rival contentions urged on behalf of the parties, the questions that fall for consideration by this Court are as follows:-

(i) Whether the condition(s) precedent to initiate search and seizure operation as contemplated under Section 132 of the Income Tax Act are fulfilled/satisfied in the present case so as to make the search and seizure operation conducted in residential-cum-business premises valid in law?

(ii) Whether under Section 132 of the Income Tax Act, no power/authority is vested with the Authorized Officer to seize any bullion, jewellery or valuable article of thing being stock-in-trade?

(iii) Whether the authorized officer in course of search and seizure operation cannot seize stock-in-trade even if he comes to a conclusion that the said stock-in-trade represents wholly or partly undisclosed income or property of the Assessee ?

8. In order to decide above questions, it is necessary to examine the scope and ambit of Section 132 of the Act. The relevant provisions of Section 132 are quoted below:-

"132. Search and seizure

(1) Where the [Director General or Director] or the [Chief Commissioner or Commissioner] [or any such] [Joint] Director or [Joint] Commissioner as may be empowered in this behalf by the Board], in consequence of information in his possession, has reason to believe that

(a) any person to whom a summons under sub-section (1) of Section 37 of the Indian Income Tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income Tax Act, 1922 (11 of 1922), or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or

(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or wouldn't, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income Tax Act, 1922 (11 of 1922), or under this Act, or

(c) any person is in possession of any money, bullion, jewellery or other valuable article or things and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property [which has not been, or would not be disclosed] for the purposes of the Indian Income Tax Act, 1922 (11 of 1922) or this Act (hereinafter in this section referred to as the undisclosed income or property),

[then,-

(A) the [Director General or Director] or the [Chief Commissioner or Commissioner], as the case may be, may authorize any [Joint] Director, [Joint] Commissioner, [Assistant Director] [or Deputy Director] [Assistant Commissioner [or Deputy Commissioner] or Income-tax Officer], or

(B) such [Joint] Director] or [Joint] Commissioner, as the case may be, may authorize any [Assistant Director] [or Deputy Director], [Assistant Commissioner [or Deputy Commissioner] or Income-tax Officer], (the officer so authorized in all cases being hereinafter referred to as the authorized officer) to-

(i) enter and search any [building, place, vessel, vehicle, or aircraft] where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;

(ii) break open the lock of any door, box, locker, safe almirah or other receptacle for exercising the powers conferred by clause (i) where the keys thereof are not available;

[(iia) search any person who has got out of, or is about to get into, or is in the building, place, vessel, vehicle or aircraft, if the authorized officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing;]

[(iib) require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in clause (t) or sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorized officer the necessary facility to inspect such books of account or other documents;]

(iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search:

[Provided that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, found as a result of such search shall not be seized but the authorized officer shall make a note or inventory of such stock-in-trade of the business;]

(iv) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies there from;

(v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing:

Provided further that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to its being of a dangerous nature, the authorised officer may serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it, except with the previous permission of such authorised officer and such action of the authorised officer shall be deemed to be seizure of such valuable article or thing under clause (iii).

Provided also that nothing contained in the second proviso shall apply in case of any valuable article or thing, being stock-in-trade of the business.

(underlined for emphasis)

9. Section 132 prescribes that the competent authorities are empowered to permit the authorized officers to enter, search, break open, seize, place marks of identification and take other steps as contemplated under sub-clauses (i) to (v). However, such powers can be exercised against a person upon fulfilment of certain conditions. Firstly, the competent authority must have the information in its possession and, secondly, on the basis of such information it must have the reason to believe that the condition as stipulated in sub-clause (a) or (b) or (c) of Section 132(1) of the Act exists. Search and seizure cannot be sustained unless it is clearly shown that it was done by the authority duly authorized and any of the conditions precedent in relation thereto existed.

10. The opinion or the belief so recorded must clearly show whether the belief falls under clause (a) or (b) or (c) of Section 132(1) of the Act. The satisfaction note should itself show the application of mind and the formation of opinion by the officer ordering the search. If the reasons recorded do not fall within in any one of the clauses (a), (b) or (c) then the authorization under Section 132(1) would not be valid. In order to justify the action the authority must have relevant materials on the basis of which he can form an opinion that he has reason to believe that action to be initiated against a person under Section 132 of the Act is needed. The belief should not be based on some suspicion or doubt. Section 132 speaks of reason to believe and not reason to suspect or reason to doubt.

11. The reason to suspect that the petitioner is having undisclosed asset and there is likelihood that the same would not be disclosed is not equal to "reason to believe" that petitioner is in possession of undisclosed assets and intends to evade tax. Therefore, search and seizure carried out on the basis of reason to suspect is not valid because reason to believe is mandatory requirement of law for search and seizure {See Mahesh Kumar Agarwal v. Dy. DIT [2003] 260 ITR 67/133 Taxman 520 (Cal.)

12. The words "reason to believe" postulate application of mind and assigning of reasons. There is a rationale nexus between "reason" and "believe" {See Ganga Saran & Sons (HUF) v. I.T.O. [1981] 130 ITR 212/6 Taxman 248 (Delhi).

13. In absence of any relevant material, authority would be acting in excess of his power and in violation of the mandatory power of Section 132 of the Act and the action of the authority cannot be sustained. Before taking action under Section 132 the competent authority must assure and reassure about the truthfulness and correctness of the information. A search which is conducted under Section 132 is a serious invasion into the privacy of the citizen. Therefore, Section 132(1) has to be strictly construed and the information of the person or reason to believe by the authorizing officer must be apparent from the note recorded by him.

14. Clause (c) of Section 132(1) concerns money, bullion, jewellery or other valuable article or thing. In order to proceed under clause (c) there must be information with the authorizing authority relating to two matters, firstly, that any person is in possession of money bullion, jewellery or other valuable article or thing; and secondly such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been or would not be disclosed for the purpose of the Act.

15. Thus, in order to bring a case within the sweep of section 132(1)(c) or section 132A (1)(c) the belief of the authorizing authority as to mere possession of the assets mentioned in that section by a person is not sufficient. The information in possession of the authorizing authority must be such that he may have reason to believe that the assets represent undisclosed income of the person in whose possession the asset is possessed. Thus, where the authorizing authority issues warrant of authorization without there being any reason to believe that the asset which was in possession of a person represented wholly or partly his undisclosed income, his action is to be held to be without jurisdiction.

16. So far the first question is concerned, Mr. Mohapatra, learned Senior Advocate for the Department produced the connected records for our perusal and we find that there are materials available on record for which the specified authority had reason to believe that the condition precedent to issue the warrant of authorization to conduct search and seizure operation in terms of Section 132 of the Income Tax Act at the residential-cum-business premises of the petitioner existed. Therefore, we are not inclined to quash the warrant of authorization.

17. Question nos.(ii) and (iii) relate to seizure of stock-in-trade found in course of search operation by authorized officer. These two questions being inter-related they are dealt with together. Section 132(1)(iii) empowers the Authorized Officer to seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search which represent either wholly or partly undisclosed income or property of the person.

However, the proviso craves out an exception. It provides that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, found as a result of such search shall not be seized but the authorized officer shall make a note or inventory of such stock-in-trade of the business. Therefore, even if the Authorized officer is of the view that any bullion, jewellery or other valuable article or thing which is in form of stock-in-trade either wholly or partly represents the undisclosed income or property of the person/ assessee searched, he cannot seize the same. But he shall make a note or an inventory of such stock-in-trade of business.

18. Prior to insertion of proviso to Section 132(1)(iii) with effect from 01.06.2003 stock in trade can be seized at the time of seizure if it represents either wholly or partly the undisclosed income or property of the person/assessee searched. However, after insertion of the proviso with effect from 01.06.2003 it shall not be seized but a note or inventory of such stock in trade shall be prepared. The obvious purpose is to use it at the time of assessment and for other follow up actions.

19. The second proviso to Section 132(1)(v) provides that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to its being of a dangerous nature, the authorised officer may serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it, except with the previous permission of such authorised officer and such action of the authorised officer shall be deemed to be seizure of such valuable article or thing under clause (iii).

The 3rd proviso to Section 132(1)(v) provides that nothing contained in the second proviso shall apply in case of any valuable article or thing, being stock-in-trade of the business.

20. At this juncture, it is necessary to refer to Circular No. 8 of 2003 dated 18th September, 2003 issued by the Central Board of Direct Taxes (CBDT), which read as follows:-

"60. Amendment in Section 132 to provide that stock-in-trade not to be seized during search:

60.1 The existing provisions of clause (iii) in sub-section (1) of section 132 provide for seizure of any books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of search.

60.2 The Finance Act, 2003, has amended Section 132 to provide that any bullion, jewellery or other valuable article or thing being stock-in-trade of the business, found as a result of search shall not be seized but the authorized officer shall make a note or inventory of such stock-in-trade. Thus, stock-in-trade of business cannot be seized during search and seizure operations conducted on or after June 1, 2003.

60.3 The existing provisions of the second proviso to sub-section (1) of section 132 provide that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to its being of a dangerous nature, the same could not be placed under deemed seizure, wherein the Authorized Officer may serve an order on the owner or the person in immediate possession that he shall not remove or part with it except with the previous permission of the authorized officer.

60.4 The Finance Act, 2003, has inserted a third proviso providing that nothing contained in the second proviso shall apply in case of any valuable article or thing, being stock-in-trade or the business.

60.5 These amendments will take effect from June 1, 2003 [Section 59(a)]"

21. In view of the specific provision contained in proviso to Section 132(1)(iii) and third proviso to Section 132(1)(v) of the Income Tax Act that bullion, jewellery or other valuable article or things being stock-in-trade of business found as a result of search shall not be seized, contention of Mr. Mohapatra that the authorized officer is fully empowered to seize stock-in-trade if he comes to the conclusion in course of seizure that said stock-in-trade represents wholly or partly undisclosed income or property of the assessee is not tenable in law.

22. Law is well-settled that interpreting a statute, effort should be made to give effect to each and every word used by the Legislature. The Courts always presume that the Legislature inserted every part thereof for a purpose and legislative intention is that every part of the statute should have effect. (See Nathi Devi v. Radha Devi Gupta AIR 2005 SC 648).

23. Courts being custodian of law have a solemn duty to uphold the rule of law under all circumstances by directing the authorities concerned to act in accordance with law. If the rule of law is not enforced, it will certainly become a casualty in the process a costly consequence to be zealously averted by all, and at any rate, by the Court. [See Salkia Businessmen's Association v. Howrah Municipal Corporation Ltd. [2001] 6 SCC 688.

24. The Hon'ble Supreme Court in Goodyear India Ltd. v. State of Haryana [1990] 2 SCC 71, held as fiscal laws must be strictly construed, words must say what these means, nothing should be presumed or implied, these must say so. True test must always be language used. Assumptions and presumptions are not permissible under fiscal provision.

25. A Constitution Bench of the Hon'ble Supreme Court in S. Narayana Swami v. G. Panneerselvam AIR 1972 SC 2284 held that the statute requires to be interpreted giving plain meaning of literal construction, and modification of words used in statutory provisions is not permissible.

26. In Union of India v. Hansoli Devi [2002] 7 SCC 273, the Hon'ble Supreme Court held that if the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves alone do, in such case, best declare the intention of the lawgivers.

27. In view of the above, we are of the view that the seizure of jewellery being stock-in-trade by the authorized officer is wholly without authority of law and contrary to the statutory provision contained in proviso to Section 132(1)(iii) and third proviso to Section 132(1)(v). Therefore, the opposite parties-Income Tax Department are directed to return the jewellery (gold and silver ornaments) seized by the Authorized Officer in course of search on 9.9.2011 forthwith to the petitioner-assessee after complying with the requirement provided, i.e., making a note or inventory.

28. In the result, the writ petition is allowed to the aforesaid extent.

IT-I : Computation of deduction - Carry forward business losses and depreciation cannot be set off against profits of an undertaking while working out claim under section 10B

IT-II : Schedule VI of the Companies Act, 1956 - Working under section 115JB has to be considered on basis of book results disclosed in profit and loss account in accordance with provisions of Part II and Part III of Schedule VI of the Companies Act, 1956

IT-III : FBT - Amount of fringe benefit tax has to be excluded in computation of book profits under section 115JB

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[2012] 26 taxmann.com 87 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'A'

ASB International (P.) Ltd.

Deputy Commissioner of Income tax, Circle-1*

I.P. BANSAL, JUDICIAL MEMBER

AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER

IT Appeal Nos. 245, 7040 to 7042 (Mum.) of 2011

[Assessment years 2005-06 to 2007-08]

JUNE 29, 2012

I Section 10B of the Income-tax Act, 1961 - Export oriented undertaking - Assessment years 2005-06 to 2007-08 - Whether carry forward business losses and depreciation can not be set off against profits of an undertaking while working out claim under section 10B - Held, yes [Para 9] [In favour of assessee]

II Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment years 2005-06 to 2007-08 - Whether working under section 115JB has to be considered on basis of book results disclosed in profit and loss account in accordance with provisions of Part II and III of Schedule VI of the Companies Act, 1956, without taking recourse to normal computation of income under provisions of Act - Held, yes - Whether amount of fringe benefit tax has to be excluded in computation of book profits under section 115JB - Held, yes [Para 21] [In favour of assessee]

Circulars and Notifications : Circular No. 8 dated 29-8-2005

CASE REVIEW-I

CIT v. Black & Veach Consulting (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727 (Bom.) (Mag.) and Asstt. CIT v. Yokogawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 (para 5) followed.

CASE REVIEW-II

Moser Baer India Ltd. v. Dy. CIT [2007] 17 SOT 510 (Delhi); Dy. CIT v. Roxy Investments (P.) Ltd. [2008] 24 SOT 227 and CIT v. Bhari Information Tech. Systems (P.) Ltd. [2012] 204 taxman 85/17 taxmann.com 62 (SC) (Mag.) (para 15) followed.

CASES REFERRED TO

CIT v. Black & Veach Consulting (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727 (Bom.) (Mag.) (para 5), Asstt. CIT v. Yokogawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 (Kar.) (para 6), Moser Baer India Ltd. v. Dy. CIT [2008] 17 SOT 510 (Delhi) (para 11), Dy. CIT v. Roxy Investments (P.) Ltd. [2008] 24 SOT 227 (Delhi) (para 11), CIT v. Bhari Information Tech. Systems (P.) Ltd. [2012] 204 taxman 85/17 taxmann.com 62 (SC) (Mag.) (para 12), Asstt. CIT v. Balarampur Chini Mills Ltd. [2007] 109 ITD 146/14 SOT 372 (Cal.) (para 18) and ITO v. Vintage Distillers Ltd. [2010] 130 TTJ 79 (Delhi) (para 18).

Girish Dave for the Appellant. Mrs. Usha Nair for the Respondent.

ORDER

1. These are assessee's appeal for assessment years 2005-06, 2006-07 and 2007-08. ITA No.245/Mum/2011 is against the order of the CIT under section 263 dated 29.3.2010 for AY 2005-06. Since AO has passed consequential order and assessee's appeal in ITA Nos.7040 to 7042 have been contested on merits, assessee during the course of the arguments withdrew the appeal as infructuous. Accordingly ITA No.245/Mum/2011 was dismissed as withdrawn.

2. In the three appeals, there are common issues with reference to exemption under section 10B and computation of book profits under section 115JB. For assessment years 2005-06, AO originally computed the assessment under section 143(3) which was subsequently revised under section 263 and in the consequential orders AO adjusted the brought forward business losses and unabsorbed depreciation before allowing the deduction under section 10B, thereby affecting the claim of section 10B and carry forward losses. While calculating the computation of book profit under section 115JB, AO similarly made adjustment under section 10B as well. In assessment year 2007-08 the assessment was completed under section 143(3) on similar lines, whereas on assessment year 2006-07 the order was modified under section 154 by AO. Assessee is contesting the issues both on merits as well as on legal principles. For the sake of record, the grounds in assessment year 2005-06 are extracted below:

"Exemption under section 10B:

1. The learned CIT (A) erred in confirming the action of AO in holding that the deduction under section 10B is to be allowed after set off of brought forward business losses and unabsorbed depreciation. On that basis, the learned CIT (A) erred in upholding the action of AO in disallowing the deduction under section 10B of Rs. 11,15,23,091/-.

2. The CIT (A) erred in holding that this is now settled position of law that all brought forward losses and depreciation are first to be set off against the business profits of the current year before deduction are computed.

3. The CIT (A) erred in observing that from the assessment year 2001-02, the provisions of section 10A and 10B have been brought at par with other sections dealing with deductions under Chapter VI-A.

Computation of Book Profit under section 115JB:

4. The learned CIT (A) erred in upholding the action of AO of computing book profits under section 115JB at Rs. 313,07,040 without adding/deducting the amount credited/debited as income/expenses relatable to unit eligible for tax holiday under section 10B as per the books of account of the appellant.

5. The learned CIT (A) erred in confirming the view of AO that the income/expenses of units whose profit is exempt under section 10B can be considered for computation of book profit under section 115JB only when there is some income available to be claimed exemption of.

6. The learned CIT (A) erred in confirming the action of AO of computing book profit under section 115JB by reducing the amount of loss brought forward or unabsorbed depreciation as per books of account at Rs. 11,85,60,095/- instead of Rs. 15,06,70,261/-.

Others:

7. The learned CIT (A) erred in confirming the interest charged under section 234B of Rs. 16,47,651/-.

8. The learned CIT (A) erred in confirming the interest charged under section 234D of Rs. 20,126/-.

9. The learned CIT (A) erred in dismissing the ground in relating to initiation of penalty by AO under section 271(1)(c).

10. Each one of the above grounds of appeal is without prejudice to the other".

3. We have heard the learned Counsel and the learned CIT (DR) in detail.

4. Ground No.1 is with reference to the claim of exemption under section 10B. It was the contention that it was an exemption provision and brought forward business losses and unabsorbed depreciation were to be given set off after allowing claim u/s 10B.

5. This issue is to be decided in favour of assessee and against the Revenue, in view of the judgment of the jurisdictional High Court in the case of CIT v. Black & Veach Consulting (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727 (Bom.) (Mag.) as well as the judgment of the Hon'ble Karnataka High Court in the group of cases Asstt. CIT v. Yokogawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 and others vide order dated 9th August, 2011.

6. The Hon'ble High Court of Bombay in ITA No.1237 of 2011 dated 9th April, 2012 considered the following question:

"(A) Whether on the facts and circumstance of the case and law, the ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit, the income which is not eligible for deduction under section 10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under section 10A of the I.T. Act."

7. The Hon'ble High Court held as under:

"2. The Assessing Officer, during the course of the order of assessment under Section 143(3) observed as follows:

"Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head 'Profits and gains of business and profession'. However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head 'Profits and gains of business and profession'. In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head 'Profits and gains of business or profession'."

Nonetheless, while computing the total income of the assessee the Assessing Officer took the net profit as per the profit and loss account and after, inter alia, making certain disallowances and allowances, arrived at the total business income at Rs. 86.07 lakhs. A set off was effected of the brought forward business loss of AY 2003-04 and AY 2004-05 upon which the Assessing Officer came to the conclusion that there was nil income which would qualify for deduction under Section 10A. The CIT (A) held that the Assessing Officer was justified in adjusting the brought forward losses of earlier years before arriving at the gross total income, for allowing a deduction under Section 10B. In appeal, the Tribunal has relied upon a decision of its Special Bench in the case of Scientific Atlanta v. ACIT 129 TTJ 273 in which it has been emphasized that the provision contained in Section 10A is not an exemption but a deduction under Chapter III. Following that decision, the Tribunal held that the deduction under Section 10A in respect of the allowable unit under Section 10A has to be allowed before setting off brought forwarded losses of a non 10A unit.

3. Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd. v. Deputy Commissioner of Income Tax 2 [2010] 325 ITR 102 at Para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs".

8. On similar question, the Hon'ble Karnataka High Court in the batch of cases of Yokogawa India Ltd. (supra) vide order dated 9th August, 2011 examined this issue elaborately and decided as under:

"1st Substantial question of law

9. The benefit of tax holiday was originally enacted as an absolute exemption under Chapter III of the Income-tax Act, 1961. It remained as exemption for almost two decades. The heading of Chapter III under which the relevant provisions were placed is titled as "Incomes which do not form part of the total income". The second heading read as "Special conditions in respect of newly established industrial undertakings in free trade zones". Section 10 begins as "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not he included", whereas section 10A as originally enacted provided that the profits and gains of the eligible undertaking shall not be included in the total income of the assessee. The Finance Act, 2000, recast section 10A. It came into effect from April 1, 2001. The second heading continues with a marginal change by way of addition of the word "etc." to read as "Special provisions in respect of newly established undertakings in a free trade zone, etc". The new section provides for deduction of profits and gains of eligible undertaking from the total income of the assessee.

10. Section 10B which is also substituted by the Finance Act, 2000, and which came into effect from April 1, 2001, deals with the special provisions in respect of newly established 100 per cent export oriented undertakings.

11. Section 10A reads as under:

"10A. Special provision in respect of newly established undertakings in free trade zone, etc.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the under-taking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section, as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :

Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone :

Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent. of the profits and gains derived by an undertaking from the export of such articles or things or computer software :

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012, and subsequent years. . . .

(4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the under-taking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. . .

(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,-

(i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment year (ending before the 1st day of April, 2001), in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub A-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction ;

(ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of April, 2001 ;

(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking ; and

(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year . . .

Explanation 2.-. . .

(ii) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force ;

(iii) 'electronic hardware technology park' means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry ;"

12. A literal reading of the above provision requires deduction from the total income. There can be a deduction in computing the total income. How-ever, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 10A is different from the one adopted in section 80A. Section 10A provides for deduction from the total income. In the scheme of the Act, while various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to the total income is envisaged. The scheme of the Act provides for deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income.

13. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of the Income-tax Act. Section 14 provides that "save as otherwise provided by the Income-tax Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income". Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as section 10A is covered in Chapter III, the phrase "total income" used in section 10A cannot be understood in the same sense as in section 2(45).

14. The phrase "total income" has been used in the Income-tax Act in several places with different connotations and shades. The phrase "total income" used in section 10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the under-taking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP under-taking as understood in its commercial sense.

15. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. The purpose of classification of any income under any head of income is to compute the same. The twin conditions of section 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under section 10A is in the nature of exemption although termed as deduction and the said relief is in respect of commercial profits, such income is neither subject to charge of income-tax nor includible in the total income. Therefore, the twin provisions of section 14 are not existing in the case of income of STP under-taking and accordingly such income is not liable to be computed under Chapter IV. Therefore, the correct view would be that the relief under section 10A will have to be given before Chapter IV. The deduction shall be given first and process of computation of "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits.

16. The substituted section 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of total income". It may be noted that when section 10A was recast by the Finance Act, 2001, Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If Parliament intended that the relief under section 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restricting and limiting provisions like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament it is to be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being con-versant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.

17. If section 10A is to be given effect to as a deduction from the total income as defined in section 2(45), it would mean that section 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term "gross total income" is defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include section 10A. In other words, the gross total income would be arrived at after considering section 10A deduction also. There-fore, it would be inappropriate to conclude that section 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted.

18. It is after the deduction under Chapter VI-A that the total income of an assessee as arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions.

19. From the aforesaid discussion it is clear that the income of the section10A unit has to be excluded before arriving at the gross total income of the assessee. The income of the section10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level.

2nd substantial question of law

20. Prior to the introduction of sub-section (6) of sections 10A and 10B of the Finance Act, 2000, which came into effect from April 1, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year. Sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A. Clause (ii) of sub-section (2) of section 33 and sub-section (4) of section 35 of the Act or the second proviso to clause (ix) of sub-section (1) of section 36 shall not be applicable in relation to any such allowance or deduction. Similarly, no loss as referred to in sub-section (1) or in section 72 or sub-section (1) or sub-section (3) of section 74 in so far as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years.

21. It is in this background the Finance Act, 2003, was introduced by inserting the words "the year ending up to the first day of April, 2001, for that in clauses (i) and (ii) of sub A- section (6) restricting the disallowance only up to the first day of April, 2001, and granting the benefit, of those provisions even in respect of units to which sections 10A and 10B is applicable. The Finance Act, 2003, amended this sub- section with retrospective effect from April 1, 2001, by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the assessment year 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post-tax holiday. This is supported by Circular No. 7 of 2003 wherein the Board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dated September 5, 2003, reads as under ([2003] 263 ITR (St.) 62, 77) :

"20. Providing for carry forward of business losses and unabsorbed depreciation to units in special economic zones and 100 per cent export oriented units:

20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a special economic zone (under section 10A) and 100 per cent export oriented units (EOU's) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation.

20.2 With a view to rationalize the existing tax incentives in respect of such units sub A-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward, of business losses and unabsorbed depreciation.

20.3 The amendments have been brought into effect retrospectively from April 1, 2001, and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001-02 and subsequent years."

22. It is interesting to note that such relaxation has not been made in section 10C which provides for exemption in respect of profits of certain under-takings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in section 10A but not in section 10C.

23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post-tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to the provisions of sections 70, 71, 72 and section 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post-tax holiday period.

24. Chapter VI deals with the aggregation of income and set off or carry for-ward of loss. Section 72(1) deals with the carry forward and set off of business loss which reads as under :

"72.(1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward, to the following assessment year, and-

(i) it shall be set off against the profits and gains, if any, of business or profession carried on by him and assessable for that assessment year ;

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :

Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and-

(a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year ; and

(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding."

25. In fact, the Bombay High Court in the case of Hindustan Unilever Ltd. v. Deputy CIT [2010] 325 ITR 102 (Bom) interpreting section 10B as amended held as under :

" . . . section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies 'shall not be included in the total income of the assessee'. The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the crab stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B."

The aforesaid principle equally applies to a case falling under section 10A of the Act.

26. The Madras High Court in the case Madras Machine Tools Manufacturers Ltd. v. CIT reported in [1975] 98 ITR 119 (Mad) has explained the difference between a company and an undertaking which is owned or run by such company. It was held as under (page 127) :

"A company may own or run many undertakings, some of which may be entitled to the benefit of section 84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company in general. When we apply section 84 to a particular undertaking it has to be seen when that undertaking commenced the manufacture or production of articles. It is true that the word 'undertaking' has not been defined under the Income-tax Act. But in common parlance it is taken as a concern started or formed for a specific purpose or a project engaged in. In this case though the objects of the company as set out in its articles of association cover a variety of objects, the object of the undertaking is only to manufacture lathes and bench grinders as is clear from the licence issued to the company under the Industries (Development and Regulation) Act, 1951."

27. Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits.

28. In Schedule 9 at column No. 7 it is clearly mentioned the amount claimed/deductible under section 10A/10AA/10B or 10BA. Dealing with the scheme of the form it is stated that the scheme of this form follows the scheme of the law as outlined above in its basic form and with reference to Schedules 1, 9, 3 and 13 it is stated that "fill out Schedule 9 if you are claiming deduction under section 10A, 10AA, 10B or 10BA in respect of some specific business". Item 7 of Schedule 1 is to eliminate such income from computation of profits and loss and no separate declaration under section 10A(8) or 10B(8) if any is required to be made.

29. After making all such computations the assessee would be entitled to the benefit of set off or carry forward of loss as provided under section 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings under section 10B of the Act. The expression "deduction of such profits and gains as derived by an under-taking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.

30. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance, if any, thereafter can be carried forward for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment.

31. As the income of the section10A unit has to be excluded at source itself before arriving at the gross total income, the loss of the non-section 10A unit cannot be set off against the income of the section 10A unit under section 72. The loss incurred by the assessee under the head "Profits and gains of business or profession" has to be set off against the profits and gains, if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year's depreciation under section 32(2) is to be set off. As deduction under section 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to the assessee Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue".

9. Since the provisions of section 10A and 10B are similar in nature and as the jurisdictional High Court decided the issue while considering the provisions of section 10B also respectfully following the above, we uphold the contention of assessee that carry forward business losses and depreciation cannot be set off to the profits of the undertaking while working the claim u/s 10B. Therefore, AO is directed to do the needful in light of the above principles laid down. Ground No.1 is accordingly allowed.

10. Ground No.2 is with reference to exclusion of the amount under section 115JB which credited or debited as income or expenses relatable to units eligible for exemption under section 10B. AO proceeded to re-compute the income by giving affect to the working of income under the normal provisions to the computation under section 115JB. It was assessee's contention that the working under section 115JB has to be considered on the basis of the book results without taking recourse to the normal computation of income.

11. It was fairly admitted that this issue is also decided by the Coordinate Bench in the case of Moser Baer India Ltd v. Dy. CIT [2007] 17 SOT 510 (Delhi) Delhi Tribunal and Dy. CIT v. Roxy Investments (P.) Ltd. [2008] 24 SOT 227 Delhi Tribunal and this matter was ultimately decided by the Hon'ble Supreme Court in the case of CIT v. Bhari Information Tech. Systems (P.) Ltd. [2012] 204 Taxman 85/17 taxmann.com 62 (SC) (Mag.).

12. In the case of Moser Baer India Ltd. (supra), the issue was decided as under:

"Mode of Computation of book profit under section 115JB

For the purpose of computing book profit under section 115JB, profit is to be first arrived at as computed under Parts II and III of Schedule VI of the Companies Act, 1956. In so computing, the accounting policies and the accounting standards adopted for preparing such accounts and the method and rates adopted for calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts and rate by the company at its annual general meeting. Thus, under the scheme of provisions of section 115JB minimum alternate tax is levied with reference to the book profit disclosed in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, as opposed to 'profits or gains of business or profession' as computed as per the provisions of the Act. The book profit gets substituted for the total income as computed under the Act. The book profit has, therefore, to be wholly quarantined from the said total income. For the determination of book profits thus any mode and manner of computation of total income under the Act has not to be applied unless specifically provided, as held by the Apex Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 and as clarified in the memorandum explaining provisions of the Finance Bill, 2000 [242 ITR (St.) 117, 138]. In other words, for the purpose of levy of MAT, reference is to be made only to the annual accounts as prepared for the purpose of the Companies Act. Further, the Explanation to section 115JB(2) provides the manner of computation of book profit. The starting point is the book profit as disclosed in the profit and loss account prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. Such profit is subject to adjustments specified in the Explanation to said section. In terms of clause (ii) of Explanation to section 115JB(2), the amount of income to which provisions, inter alia, section 10A/10B apply if such amount is credited to profit and loss account, is to be reduced from the profit as per profit and loss account.

Similarly, clause (f ) of Explanation to section 115JB(2) provides that profit as shown in the profit and loss account be increased by the amount of expenditure relatable to any income to which, inter alia, section 10A or 10B apply. The amount of income to which, inter alia, section 10A/10B applies, if such amount is credited to the profit and loss account it would only refer to such amount as appearing in the books of account. Similarly, the amount of expenditure, including depreciation relatable to any income to which section 10A/10B applies, would certainly refer to the expenses and depreciation debited to the profit and loss account and not computed in the manner provided under sections 28 to 44 of the Act. The assessee, accordingly, while computing book profit under section 115JB, on which tax was paid, deeming the same to be the total income chargeable to tax in its hands, adjusted the profit as shown in the profit and loss account to the following extent : (i) expenditure and book depreciation in relation to two units were added back to the profit; (ii) income of the aforesaid two units minus other income, interest dividend, etc., were reduced from the profit. The Assessing Officer, on the other hand, reduced the book profit by deduction admissible under section 10A/10B in respect of the aforesaid units, calculated in accordance with the provisions of the Act. The major difference in the basis adopted by the assessee and the Assessing Officer was on account of adjustment of depreciation. In the books of account, depreciation had been calculated on straight line method and the book profit had been computed taking into account the aforesaid basis of book depreciation in terms of clear and unambiguous mandate contained in clause (iii) of the proviso to sub-section (2) of section 115JB providing that methods and rates adopted for calculating depreciation would be same as have been adopted for preparing the accounts that are laid before annual general meeting convened as per the provisions of section 210 of the Companies Act. The Assessing Officer, on the other hand, had sought to exclude depreciation calculated on the basis of written down value as provided in section 32 while adding back book depreciation. As a consequence of the aforesaid, exclusion of income net of expenses relatable to units eligible for deduction under section 10A/10B had been taken by the Assessing Officer at Rs. 9,825.14 lakhs as against Rs. 13,343.61 lakhs excluded by the assessee. The action of the Assessing Officer was contrary to the scheme of section 115JB, the unambiguous provisions of clause (f) and clause (ii) of Explanation to section 115JB(2) and the settled judicial precedent in this regard. While computing book profit under section 115JB amount to be reduced is income which is eligible for exemption under section 10A/10B as computed on basis of book profits as per Parts II and III of Schedule VI of the Companies Act and not on basis of provisions of Act. Further, the CBDT vide Circular No. 559, dated 4-5-1990 and also Circular No. 680, dated 21-2-1994 clarified that for the purpose of section 115J (which is pari materia to section 115JB) deduction under section 80HHC that needs to be excluded (from book profits) in terms of clause (iii ) of Explanation is to be calculated with reference to book profits. The Special Bench of the Tribunal in the case of Dy. CIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193 (Mum.) considering provisions of sections 115JA and 115JB held that the Assessing Officer is not permitted to deviate from the book profit while computing the deduction under section 80HHC of the Act that is to be excluded in terms thereof. Therefore, while computing book profit under section 115JB the adjustment, in terms of clause (ii) of Explanation to section 115JB(2) has to be for the amounts credited/debited to the profit and loss account, as the case may be. Therefore, while computing book profit the amount of Rs. 13,343.61 lakhs as claimed by the assessee was required to be reduced from the book profit and not the sum of Rs. 9,825.14 lakhs as computed by the Assessing Officer in accordance with the provisions of Act. Hence, the appeal was to be allowed. [Para 5]".

13. Similarly in the case of Roxy Investments (P.) Ltd. (supra) Delhi Tribunal, the issue was decided as under:

"Under the scheme of provisions of section 115JB Minimum Alternate Tax (MAT) is levied with reference to the book profit disclosed in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956, as opposed to 'profits or gains of business or profession' as computed as per the provisions of the Act. The book profit gets substituted for the total income as computed under the Act. The book profit has, therefore, to be wholly quarantined from the said total income. For the determination of book profit, thus, any mode and manner of computation of total income under the Act has not to be applied unless specifically provided for. The Explanation to section 115JB provides the manner of computation of book profit. The starting point is the book profit as disclosed in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Such profit is subject to adjustments specified in the Explanation to said section. In terms of clause (ii) of the Explanation to section 115JB (2) the amount of income to which provisions, inter alia, of section 10A/10B apply, if such amount is credited in profit & loss account, it is to be reduced from the profit as per profit & loss account. The amount of income to which, inter alia, section 10A/10B applies, if such amount is credited in the profit & loss account it would only refer to such amount as is appearing in the books of account. [Para 12].

A careful perusal of clause (ii) of the Explanation to section 115JB(2) reveals that, though the said clause speaks about the amount of 'income', yet it also speaks of 'if, any such amount is credited in profit & loss account'. Thus, while reading the said clause as a whole, it becomes clear that the amount of income which can be reduced by the Assessing Officer for computing the book profit under clause (ii) of the Explanation to section 115JB(2), it would be the amount which is credited to the profit & loss account and not the amount of income which is claimed by the assessee or determined by the Assessing Officer while assessing the income under the regular provisions of the Income-tax Act. [Para 13]

Therefore, the impugned order of the Commissioner (Appeals) was correct and deserved to be upheld".

14. The Hon'ble Supreme Court in the case of Bhari Information Tech. Sys. (P) Ltd (supra) considered the issue under the provisions of section 115JA and held as under:

"The assessee filed its return of income for assessment year 2000-01. The assessee claimed deduction under section 80HHE to the extent of Rs.1,56,33,719 against net profit as per the profit and loss account amounting to Rs. 3,07,84,105 to arrive at the book profit of Rs. 1,51,50,386 under section 115JA of the Income-tax Act, 1961 [See : Vol.R/1 of I.A. paper book A- page 6]. This claim for deduction made by the assessee was rejected by the Assessing Officer saying that since in normal computation there is no profit after carry forward loss, deduction under section 80HHE to the extent of Rs. 1,56,33,719 for computing book profit under section 115JA was not admissible.

According to the Assessing Officer, since in the present case in normal computation no net profit was left after the brought forward losses of the earlier years got adjusted against the current year's profit, the assessee was not entitled to deduction under section 80HHE to the extent of Rs. 1,56,33,719. In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer.

The assessee went in appeal, against the order of the Commissioner of Income-tax (Appeals), before the Tribunal which, following the judgment of the Special Bench of the Tribunal in the case of Deputy CIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193*, took the view that the MAT scheme which includes section 115JA did not take away the benefits given under section 80HHE. The said judgment of the Special Bench was with regard to computation of deduction under section 80HHC which, like section 80HHE, falls under Chapter VI-A of the Income-tax Act, 1961.

In the said judgment of Special Bench, which squarely applies to the facts of the present case, the Tribunal held that the deduction under section 80HHC (section 80HHE also falls in Chapter VI-A) is to be worked out not on the basis of regular income-tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA is applicable. In the said judgment, the dichotomy between regular income-tax profits and adjusted book profits under section 115JA is clearly brought out.

The Tribunal in the said judgment rightly held that in section 115JA relief has to be computed under section 80HHC(3)/(3A). According to the Tribunal, once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds, in a case where section 80HHC (80HHE in the present case) is operational, it becomes clear that computation for the deduction under those sections needs to be worked out on the basis of the adjusted book profit [See: Para 61 of the judgment of the Tribunal in Syncome Formulations*.]

In the present case, we are concerned with section 80HHE which is referred to in the Explanation to section 115JA, clause (ix). In our view, the judgment of the Special Bench of the Tribunal in Syncome Formulations* squarely applies to the present case. Following the view taken by the Special Bench in Syncome Formulations*, the Tribunal in the present case came to the conclusion that deduction claimed by the assessee under section 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business.

The judgment of the Tribunal has been upheld by the High Court. We see no reason to interfere with the impugned judgment. We agree with the view taken by the Special Bench of the Tribunal in the case of Syncome Formulations1 vide Para 61 of the judgment. Accordingly, the special leave petition filed by the Department stands dismissed with no order as to costs".

15. Since the principles laid down by the Hon'ble Supreme Court in the case of Bhari Information Tech. Sys. (P.) Ltd (supra) while working out deduction under section 80HHC are equally applicable to the provisions of section 10B while working out deduction under section 115JB, respectfully following the same and decisions of Coordinate Benches above, we uphold assessee's contentions. Accordingly, AO is directed to rework out the computation under section 115JB keeping in view the above principles. Assessee's ground is allowed.

16. The other ground relating to levy of interest are consequential in nature. The ground on initiation of penalty proceedings is also premature as the proceedings have only been initiated and not concluded. These grounds are therefore academic in nature.

17. Since the issues in assessment year 2005-06 and 2007-08 on the above issue are decided in favour of assessee, the appeals to that extent are allowed. In AY 2006-07, the issue on merits is same and accordingly assessee's grounds on merits are also allowed. In addition to the issue on merits, assessee is also contending that AO cannot rectify the issue under section 154 as the mistake should be obvious and patent and not something which can be established by long drawn process of reasoning on points on which there may conceivably of two opinions. Assessee's objections are valid as the issues cannot be rectified under section 154. However, since assessee's grounds on merits were considered in its favour, the decision on this is only academic in nature. Therefore, the appeal in assessment year 2006-07 is also decided in favour of assessee without adjudicating the Ground No.1 on the jurisdiction under section 154. AO is directed to modify the order accordingly in the light of the decision given above on sections 10B and 115JB claims and to restore the original 143(3) order.

18. One more ground raised in assessment year 2007-08 is with reference to the action of AO of not allowing the deduction on provisions of fringe benefit tax of Rs. 21,01,800/- and provision of wealth tax of Rs. 90,000/- while computing book profits under section 115JB. The issue arises in the order in a way that AO worked out the net profit from business at Nil after setting off the brought forward losses and depreciation against the current year income. While doing so AO added back the provisions of Fringe Benefit Tax, provision of wealth tax in the computation. It was the contention that these two amounts are to be allowed. While arguing it was informed that as far as wealth tax is concerned, the same is not covered by provisions of section 115JB and submitted that AO has added an amount of Rs. 90 lakhs as against Rs. 90,000/- offered by assessee. The learned Counsel submitted that the above mistake can be rectified. With reference to provisions of FBT, it was submitted that the decision of ITAT in the case of Asstt. CIT v. Balarampur Chini Mills Ltd. [2007] 109 ITD 146/14 SOT 372 (Kol.) and ITO v. Vintage Distillers Ltd. [2010] 130 TTJ 79 (Delhi) are applicable and CBDT Circular No.8 dated 29th August, 2005 is also applicable. However, the CIT (A) did not agree to the above arguments.

19. We have considered the issue. As far as the wealth tax is concerned, the same cannot be considered as part of Income Tax and assessee itself offered the income at Rs. 90,000/- for disallowance in the working of income under section 115JB. As seen from the order of the assessment, AO mentioned an amount of Rs. 90.00 lakhs against the provision of wealth tax which seems to be a typographic error as the amounts added was at Rs. 90,000/- only. The total amount added back was at Rs. 1,18,31,598/- which include provisions of warrantees Rs. 40,29,798/-, dividend distribution tax Rs. 56,10,100/-, provisions of FBT Rs. 21,01,800/- and provisions of Wealth Tax at Rs. 90,000/- which makes total to Rs. 1,80,31,598/-. Therefore, even though the Counsel submitted for rectification of the amount, since it is only a typographical error, there is no need to modify the order of AO. However, AO is directed to keep in mind Rs. 90,000/- only which can be disallowed as per the provisions of wealth tax while giving effect to this order.

20. With reference to the FBT, the Board Circular is very clear which is as under:

"Whether FBT would be allowable deduction while computing 'book profit' under section 115JB?.

103. FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. However, sub-clause (ic) of clause (a) of section 40 of the Income-tax Act expressly prohibits the deduction of the amount of FBT paid, for the purposes of computing the income under the head "profits and gains of business or profession". This prohibition does not apply to the computation of 'book profit' for the purposes of section 115JB. Accordingly, the FBT is an allowable deduction in the computation of 'book profit' under section 115JB of the Income Tax Act".

21. The Board circular treats it as part of Income tax. AO is bound by the Board circular. Therefore, he is directed to exclude the amount of FBT in the computation of book profits under section 115JB. Accordingly, the ground for assessment year 2007-08 is partly allowed.

22. In the result appeal in ITA Nos.7040

IT : Admission of partner, cand withdrawal of capital account balances by retiring partners don't give rise to taxable capital gains in firm's hands

FACTS

• Original Partnership (date 25-11-2005) consisted of 4 partners.

• On 6-7-2007,HDIL became a new partner with 50% profit sharing ratio.

• On 1-4-2008 firm's plot of land was revalued.

• Deed of retirement was signed on 27-5-2008. On that date out of the five, three partners retired.

• AO made addition (capital gains) to the total income of the assessee-firm on the basis that on admission of the new partner i.e. HDIL, existing partners had transferred 50% of their interest to it and thus there was re-distribution of the assets of the firm.

• As per the AO on 27-5-2008, when interest of three partners were transferred to HDIL, there was again re-distribution of assets of assessee-firm.

• CIT(A) allowed assessee's appeal and deleted the addition. Hence, Revenue preferred an appeal against the order of CIT(A).

HELD

• View taken by the AO is not based on sound legal footing.

• A bare perusal of Deed of Admission (dated. 6-7-2007) and Retirement (dated. 27-5-2008) prove that on both the occasions there was no distribution of assets of the assessee-firm.

• Admission of a new partner to the existing partnership-firm does not result in distribution of assets.

• Similarly, on 27th May, 2008, when three partners retired and remaining two partners continued the business of the firm; there was no redistribution of assets of the firm.

• It was not a case where firm was taken over by the new partner. Thus, provisions of section 45(4) of the Act cannot be invoked.

• In the case under consideration, asset of the firm i.e. plot of land, was never transferred to anybody. It always remained with the assessee firm only. From the date of purchase of the plot from the BMCL till 27-5-2008,when three partners retired, it was the asset of the firm. There was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by section 2(47) of the Act, in the case of assessee-firm.

• As per the settled principles of taxation revaluation of capital assets does not result in accrual or receipt of taxable income unless and until the capital asset is actually transferred.

• The basic ingredient for invoking provisions of section 45(4) of the Act is missing in the case under consideration.

• The twin requirements of the section 45(4) contemplate not only the retirement of the partners from the partnership firm but also the transfer by way of distribution of capital assets.

• It is a fact that retiring partners had withdrawn the sums to credit in their accounts, but such withdrawals cannot be treated as 'distribution of capital assets either on dissolution of firm or otherwise'.

• In the instant case , neither there was any dissolution nor other event took place that had an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, CIT(A) was justified in holding that conditions of section 45(4) were not fulfilled.

• The firm or the continuing partners were not liable to be taxed under the head 'capital gains', as held by the CIT(A).

• Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account.

• Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm.

• In the result, Revenue's appeals was dismissed.

■■■

[2012] 26 taxmann.com 202 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'F'

Income-tax Officer - 25(3)(4)

Fine Developers

D. MANMOHAN, VICE-PRESIDENT

AND RAJENDRA, ACCOUNTANT MEMBER

IT APPEAL NO. 4630 (MUM.) OF 2011

[ASSESSMENT YEAR 2008-09]

OCTOBER 12, 2012

ORDER

Rajendra, Accountant Member - Challenging the order dtd. 28-03-2011 of the CIT(A)-35, Mumbai, Assessing Officer (AO) has raised following Grounds of Appeal :

(i) "On the facts and in the circumstances of the case, and in law, the ld CIT(A) erred in directing the A.O. to delete the entire addition of capital gain u/s. 45(4) of the Income Tax Act-1961 without appreciating the fact that HDIL was admitted as partner in the partnership firm with 50% share of profit, by this arrangements 50% of the interest of the existing partners have been transferred in favour of incoming partner w.e.f. 06-07-2007 resulting in transfer of assets within the meaning of section 45(5) r.w.s. 2(47) of the Income Tax Act 1961."

(ii) The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the Assessing officer be restored."

(iii) The appellant craves leave to amend or alter any ground or add a new ground."

Assessee firm, engaged in the business of builders and developers, filed its return of income on 22.07.2008 admitting total income at Rs. Nil. Initially the return was processed u/s. 143(1) of the Income-tax Act, 1961 (Act). Later on the case was selected for scrutiny. AO completed the assessment u/s. 143(3) of the Act determining the total income at Rs. 86,72,80,450/-.

2. During the assessment proceedings, AO noted that the original partnership deed was signed on 25.11.2005 and following were the partners :-

SN.	Name of the Partner	% of profit/loss ratio
1.	Sapphire Land Developers	60
2.	Vision Finstock Pvt. Ltd.	20
3.	Nisha Capital Services Pvt. Ltd.	10
4.	Suraksha Developers Pvt. Ltd.	10

2.1. On 06.07.2007, Housing Development and Infrastructure Limited (HDIL) was introduced as a new partner and the profit sharing ratios of the partners was as under:

SN.	Name of the Partner	% of profit/loss ratio
1.	Sapphire Land Developers	10
2.	Vision Finstock Pvt. Ltd.	20
3.	Nisha Capital Services Pvt. Ltd.	10
4.	Suraksha Developers Pvt. Ltd.	10
5.	HDIL	50

2.2. AO further noticed that the assessee firm had purchased a piece of plot of land from Bhandary Metallurgical Corpn. Ltd. (BMCL) for a consideration of Rs. 28 Crores. He was of the opinion that 50% of the value of the plot of the land was transferred in favour of the HDIL on 06.07.2007 and thereby the assessee firm was liable to be taxed u/s. 45(4) of the Act. AO further found that on 15.10.2007 HDIL had entered into an agreement with Mumbai International Airport Ltd (MIAL). He held that agreement between MIAL & HDIL was the proof that the new partner had become 100% owner of the plot. On 01.04.2008, the said plot of land was revalued at Rs. 2,68,37,42,000/-. He issued a show cause notice to the assessee firm for taxing the entire value of plot amounting to Rs. 268.37Crores u/s. 45(4) of the Act under the head 'Capital Gains'. After considering the submissions of the assessee, he held that HDIL had already dealt with the property of the firm as its own property when it had signed an MOU with MIAL for rehabilitation of the slums on the land of the firm, that it had claimed that all the ownership rights of the plot of land belonged to it, that a copy of the MOU was furnished by the assessee during the course of the assessment proceedings, that no document supporting the MOU was submitted by the assessee-firm, that capital gain arising out of the transfer on land had to be calculated by adopting the market value of the land as on the date of the transfer. Finally, he held that the capital gains for the AY under consideration worked out to Rs. 1,86,72,80,452/- and he added the same amount to the total income of the assessee. AO relied upon the case of Gurunath Talkies delivered by the Hon'ble Karnataka High Court (328 ITR 59).

3. Assessee-firm preferred an appeal before the First Appellate Authority (FAA). After considering the assessment order and the submissions of the assessee, he held that during the relevant AY there was only admission of HDIL as new partner in the firm, that there was neither retirement nor distribution of assets, nor revaluation of plot of land during the assessment year under consideration. After referring to various clauses of the MOU entered between the HDIL and MIAL he held that HDIL never treated the property as its own as wrongly assumed by the AO, that the AO, while passing the Assessment Order, had not relied on any of the clauses of the agreement to show that HDIL had dealt with the property as its own, that the plot of land in question continued to be the stock-in-trade of the appellant-firm as on 31.03.2008 as per the balance sheet which was not disputed by the AO. With reference to the case of Gurunath Talkies (supra), FAA held that in that case new partners were admitted when old partners retired whereas in the case of the assessee-firm there was no retirement of any of the partners during the year under consideration, that above decision was not applicable to the case of the assessee-firm. He held that the case of Paru D Dave (110 ITD 410) was squarely applicable to the facts of the case under consideration, that mere admission of partners did not attract provisions of section 45(4) of the Act, that during the continuance of the partnership-firm rights of the partners were confined to obtaining the share of the profit and no partner could claim exclusive claim to any assets. He further held that even if there was liability u/s. 45(4) of the Act, same had to be considered in the next assessment year because the plot of land was revalued in the next year and retirement of three partners from the partnership firm also took place in the next year. He finally held that the assessee was not liable for capital gains u/s. 45(4) in the AY 2008-09. He deleted the addition made by the AO and observed that the AO was free to consider the applicability of section 45(4) of the Act in the next assessment year.

4. Before us, Departmental Representative (DR) submitted that the provisions of section 2(47) r.w.s.45(4) were applicable in the case under consideration, that purpose of the transaction as a whole, was to transfer the all the rights to HDIL by the assessee-firm, that assessee had relinquished its rights in the relevant AY in favour of the HDIL, that relinquishment of the rights was 'otherwise transfer' of rights as per the provisions of section 2(47) r.w.s 45(4) of the Act. He referred to various terms of Deed of Admission in this regard and submitted that old partners had surrendered their rights in favour of the new partner i.e. HDIL, that there was extinguishment of the rights in favour of the new partner. He referred to cases of Kartikeya Sarabhai (228 ITR 163), Mrs. Grace Collis (248 ITR 323) and Gurunath Talkies (supra). Authorised Representative (AR) submitted that the provisions of section 45(4) were not applicable in the present case, that admission of partner was not covered by word 'otherwise transferred used in the sections, that in the AY 2008-09 except admission of HDIL as a new partner nothing had happened, that the plot of land was shown as Stock-in-Trade and not as a Capital Asset in the Books of Accounts of the assessee-firm, that in the Balance Sheets for Financial Years 2005-06, 2006-07 and 2007-08 said plot was classified as 'Work-in-Progress-BMCL-Project' under the head 'Current Assets', that the AO in the past consistently and uniformly had accepted and endorsed that the impugned property was 'Stock-in-Trade', that orders for earlier years were also passed u/s. 143(3) of the Act, that revaluation of land had taken place on 01-04-2008, that appellant-firm was reconstituted after 1st April, 2008-when three of the partners retired, that both the events pertained to AY 2009-10, that HDIL had brought Rs. 60 Crores towards Capital contribution, that there was no transfer by the firm as contemplated by Section 45(4) r.w.s.2 (47) of the Act, that appellant was the owner of the property even till the end of the AY. He further relied upon the order of Paru D Dave (110 ITD 414) delivered by 'F' Bench of Mumbai Tribunal. He also referred to the cases of Texspin Engg. And Manufacturing works (129 Taxman 1) Girish Textiles Industries (10 SOT 474), Prashant S Joshi (189 Taxman 1), J. Keemat Roy & Co (11 SOT 462), P N Panjawani (21 Tax mann.com 458).

5. We have heard the rival submissions and perused the matter placed before us by the representatives of both sides. Before deciding the issue, it will be useful to summarise the basic facts and chronology of the case:

(i) Original Partnership (dt. 25-11-2005) consisted of 4 partners.

(ii) On 06-07-2007, HDIL became a new partner with 50% profit sharing ratio.

(iii) Assessee-firm and MIAL entered in to MOU on 15.10.2007.

(iv) On 0-04-2008 plot of land was revalued.

(v) Deed of retirement was signed on 27.05.2008 and on that date out of the five, three partners retired.

5.1 AO has made addition to the total income of the assessee-firm on the basis that on admission of the new partner i.e. HDIL, existing partners had transferred 50% to their interest to it and thus there was re-distribution of the assets of the firm. As per the AO on 27-05-2008, when interest of three partners were transferred to HDIL, there was again re-distribution of assets of assessee-firm. In our opinion view taken by the AO is not based on sound legal footings. FAA, after considering the facts of the case and legal provisions, has held that there was no distribution of assets in the case under consideration. A bare perusal of Deed of Admission (dtd. 06.07.2007) and Retirement Deed (dtd. 27.05.2008) prove that on both the occasions there was no distribution of assets of the assessee-firm. On 06.07.2007 HDIL was admitted as a new partner In our humble opinion admission of a new partner to the existing partnership-firm does not result in distribution of assets. Similarly, on 27th May, 2008; when three partners retired and remaining two partners continued the business of the firm; there was no redistribution of assets of the firm. After going through the above retirement deed we are of the opinion that it is not a case where firm was taken over by the new partner and thus provisions of section 45(4) of the Act can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of the each partner with reference to the assets of the firm cannot be isolated and carried out from the value of the partners' interest in the totality of the partnership assets. In the case under consideration, asset of the firm i.e. plot of land, was never transferred to anybody-it always remained with the assessee -firm only. From the date of purchase of the plot from the BMCL till 27.05.2008,when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by Section 2(47) of the Act, in the case of assessee-firm. Here, it will be useful to refer to a portion of decision of Paru D Dave (supra), delivered by the Tribunal-

"Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio do not entail any transfer as defined under s. 2(47) of the IT Act. The introduction of new partners to a partnership firm owning immovable assets and consequent reduction in the share ratio of present partners do not entail any relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any, of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under s. 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any nonexistent share in the partnership assets as the assets remained with the firm. Such an arrangement is not covered by the provisions of s. 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arise on such relinquishment of share ratio in the partnership firm."

5.2 Though the AO has held that HDIL had treated the plot of land, owned by the firm, as its own while it had signed the MOU with MIAL, yet he has not mentioned as how he arrived at the said conclusion. We have perused the said MOU and we have not found any clause which proves that the new partner of the assessee-firm was treating the said asset as its own. We fully agree with the FAA that MOU was not analysed by the AO in correct perspective.

5.3 As per the settled principles of taxation revaluation of capital assets does not result in accrual or receipt of taxable income unless and until the capital asset is actually transferred. Secondly, revaluation of assets before conversion of a firm into company cannot be equated with dissolution of firm/transfer of assets of firm. If the above principle is applied to the basic facts of the case, it can be safely held that re-valuation of the plot of land did not result in any profit or gain to the firm and hence question of distribution of profit by the firm does not arise. Thus, the basic ingredient for invoking provisions of section 45(4) of the Act is missing in the case under consideration. The twin requirements of the section 45(4) contemplate not only the retirement of the partners from the partnership firm but also the transfer by way of distribution of capital assets. It is a fact that retiring partners had withdrawn the sums to credit in their accounts, but such withdrawals cannot be treated as 'distribution of capital assets either on dissolution of firm or otherwise'.

5.3.1 Here, we would like to mention that sub-section 3 and 4 of the section 45 of the Act were brought on statute with specific purposes. For overcoming the difficulties, arising out of the decisions delivered by the Hon'ble Supreme Court in the cases of Malabar Fishries (2 Taxman 469) and Kartikeya Sarabhai (supra), said sub-sections were introduced. Sub-section 4 deals with the situation where a capital asset is transferred by a partnership firm and such transfer is via distribution. We find that in the case under consideration no capital asset was transferred by the assessee during the relevant AY. From the very beginning of the partnership the plot of land in question was treated stock in trade by the assessee firm. Even on 31.03.2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. AO has nowhere rebutted/ doubted this factual position. Considering the above we are inclined to agree with the FAA that no capital asset was transferred by the assess-firm and hence provisions of section 45(4) should not have been invoked.

5.3.2 Hon'ble Bombay High Court in the case of A.N. Naik (265 ITR 346) has explained the expression 'otherwise' used in Section 45 of the Act. It was held by Hon'ble Court that the expression otherwise has to be read with word 'transfer by way of distribution of capital asset' and not with the word 'dissolution'. Thus, from the above judgment also, it is clear that transfer of a capital asset is the pre-condition for invoking the provisions of Sec. 45(4) of the Act. Secondly, such a transfer should take place at the time of dissolution or other similar events such as retirement of the partners. Until such time, the shared rights of the partners become the exclusive right of any retiring partner and no occasion arises for to tax the same under the head 'capital gains' as envisaged by sec. 45(4) of the Act. As stated earlier, in the present case, there was no extinguishment of rights of any of the assets owned by the firm. In other words, continuing partners had not transferred any rights of the plot of the land in question in favour of the retiring partners and hence there was no transfer capital asset within the meaning of section 2(47) by the firm to the retiring/continuing partners. We would like to refer to the decision of the Hon'ble jurisdictional High Court, delivered in the case of A.N. Naik (supra):

"Section 45 of the Income-tax Act, 1961, is a charging section…..The Act of 1987 also brought on the statute book a new sub-section (4) in section 45 of the Act. The effect is that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place. From a reading of sub-section (4) to attract capital gains tax what would be required would be as under : (1) transfer of capital asset by way of distribution of capital assets : (a) on account of dissolution of a firm ; (b) or other association of persons ; (c) or body of individuals ; (d) or other-wise ; the gains shall be chargeable to tax as the income of the firm, association or body of persons. The expression "otherwise" has to be read with the words "transfer of capital assets…. It is now clear that when the asset is transferred to a partner, that falls within the expression "otherwise" and the rights of the other partners in that asset of the partnership are extinguished."

5.3.3 From the above, it can safely be held that allocation of assets of the firm to the retiring partners is the basis for invocation of provisions of Section 45(4). In the case under consideration, neither there was any dissolution nor other event took place that had an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, FAA was justified in holding that conditions of Section 45(4) were not fulfilled. In our opinion the firm or the continuing partners were not liable to be taxed under the head 'capital gains', as held by the FAA. Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm.

6. We have considered the cases relied upon by the DR and the AR. As far as matter of Gurunath Talkies (supra) is concerned, we are of the opinion that facts of the present case are distinguishable, as held by the FAA. In the case under consideration assets were not taken over by the new partners. As stated earlier, section 45 was amended to overcome the difficulties faced by the Revenue because of the decisions of Malabar Fishries and Kartikeya Sarabhai (Supra). So, in our opinion they are of no help after introduction of sub-section 3 and 4 to the Sec. 45 of the Act. Case relied upon by the AR support the view taken by the FAA.

6.1 As there was no transfer of a capital asset by the assessee-firm by way of distribution or otherwise in the AY under consideration, therefore, we do not see any reason to disagree with the logical findings given by the FAA. Upholding his order we decide the Grounds against the AO.

In the result, appeal filed by the AO stands dismissed.

IT : The expression "tax due" used in section 179 means tax as defined in section 2(43); "tax due" will not comprehend within its ambit penalty and interest

FACTS

• In the instant case, the petitioner was an individual and the only surviving director of a company after the expiry of other director who was his father.

• The petitioner was entitled to two refunds of Rs. 38,92,957 and another Rs. 15,00,276 but the revenue under section 179, proposed to set off the company's tax liability of Rs. 28,71,84,883 with the refund payable to the petitioner.

• In the context of recovery, the petitioner filed a writ petition and the Delhi High Court ordered that the petitioner will be given a hearing and fresh order under section 179 required to be passed.

• Acting on the order of the High Court, the revenue held the petitioner as the assessee in default liable for the company's outstanding dues of Rs. 27,93,05,184.

• The Petitioner filed for rectification/amendment against which the revenue enhanced the outstanding dues of the company, and consequently, of the petitioner to Rs. 35,13,35,804. The increase was due to charging of interest and penalty.

• The petitioner contended that the company's outstanding dues were in the form of interest and penalties whereas "tax due" under section 179 does not include within its ambit interest and penalty. It was submitted that the language of the provision is clear and has to be construed in its terms.

• The revenue, however, urged that section 179 intends to shift the tax liability, in cases of such dues which are of a private company and have not been recovered, upon the directors of such private company; and that whatever is recoverable from the private company, inclusive of interest and penalties due, becomes recoverable at the hands of the directors.

HELD

• In the instant case, the principal question requiring resolution is to understand the true ambit and scope of the provisions of section 179.

• Generally, the intention of the Legislature should primarily be gathered from the language used in the statute, which in turn means that attention should be paid to what has been said as also to what has not been said.

• Again, when in relation to the same subject matter, different expressions are used in the same statute, there exists a presumption that the legislature intended such different uses, and that the words are not to be used in the same sense.

• In H. Ebrahim v. The DCIT and The Tax Recovery Officer [2011] 332 ITR 122, the Karnataka High Court held that 'what is contemplated under section 179 is the tax component and not the penalty and interest'.

• In Dinesh T. Tailor v. Tax Recovery Officer [2010] 326 ITR 85, the Bombay High Court held that in section 179(1), the expression "tax due" and, for that matter the expression "such tax" must mean tax as defined for the purposes of the Act by section 2(43); "tax due" will not comprehend within its ambit a penalty.

• In view of the above, it was opined that the structure and construct of the Act has consciously used different words to create constructive liability on third parties. The treatment of the same subject matter by using different terms – in some instances expansive and in others, restrictive - means that the Court has to adopt a circumspect approach and limit itself to the words used in the given case (in the present case, "tax due" under section 179) and not "travel outside them on a voyage of discovery".

• Thus, it was to be held that the petitioner cannot be made liable for anything more than the tax as defined in section 2 (43). The revenue was consequently directed to determine the liability of the petitioner, in the light of the finding.

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[2012] 26 taxmann.com 203 (Delhi)

HIGH COURT OF DELHI

Sanjay Ghai

Assistant Commissioner of Income-tax

S. RAVINDRA BHAT AND R.V. EASWAR, JJ.

W.P.(C) Nos. 2303 & 5175 OF 2012

AND C.M. APPL. Nos. 4936 & 10572 OF 2012

OCTOBER 11, 2012

ORDER

S. Ravindra Bhat, J. - These writ petitions challenge the orders dated 3.11.2011 and 2.7.2012 passed by the first respondent under Sections 179/154/ of the Income Tax Act (the "Act") respectively.

2. The facts, to the extent necessary for the deciding the petitions, are that the petitioner is an individual and was a director of M/s Sarvodaya Realtors Pvt. Ltd (the "Company"), which has its registered office at New Delhi. The only other director of the company was late Shri D.K. Ghai, the petitioner's father. While the petitioner was assessed by DCIT Circle-1, Dehradun, the company was assessed with the first Respondent. By letter dated 15.3.2010, the petitioner was informed by DCIT Circle-1, Dehradun that he was entitled to tax refund of Rs. 38,92,957/- and Rs. 15,00,276/- in respect of A.Y. 1999-2000 and 2003-2004. However, at the same time, he was intimated that the first Respondent had computed the outstanding tax liability of the company at Rs. 28,71,84,883/-, and proposed that the refund payable to the petitioner, be set off with the tax liability of the company. The writ Petitioner wrote a letter to the ACIT, Dehradun, on 23rd March, 2010, and inspected the record in Delhi; he claims that at this stage, he became aware of the Income tax liabilities of the company, and the order made against him on 14th November, 2007, under Section 179 of the Act. The petitioner felt aggrieved by the order and the move to recover the arrears of the company's taxes and related liabilities, from him. He preferred a writ petition before this Court. That petition was disposed of in the following terms:

"5. We have examined the said contentions. We have also looked at the quantum of demand and the legal issues raised by the petitioner. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing, and a fresh order under Section 179 of the Act is passed. There is a dispute regarding service of notice dated 27th September, 2007. The respondent in the counter affidavit has stated that Abhay Singh had informed that the petitioner was out of station and intimation may be sent to him by writing to him another letter. However, the respondent did not communicate or correspond with the petitioner thereafter. It may be noted that the notice was received by Abhay Singh on 11th October, 2007 at 12.30 pm and hearing was fixed on 15th October, 2007, i.e. just four days later. Therefore, no communication was made by the respondent to the petitioner fixing the hearing or calling for reply. On 14th November, 2007 order under Section 179 was passed. It is not clear and there is no material/evidence whether the order under Section 179 of the Act dated 14th November, 2007 was ever served on the petitioner. No steps for recovery were undertaken even after passing of the order. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing and a fresh order under Section 179 of the Act is passed.

6. Accordingly, the impugned order dated 14th November, 2007 is set aside with a direction that the petitioner or his authorized representative will appear before the Deputy Commissioner of Income Tax, Circle 7(1), New Delhi on 29th August, 2011 at 2 p.m. He shall also file his reply to the notice under Section 179 of the Act on the said date. If required and necessary, the Assessing Officer can grant further opportunity of hearing to the petitioner. However, the proceedings under Section 179 of the Act will be disposed of within three months from the first date of hearing."

3. After the conclusion of the proceedings before the first Respondent, he made the impugned order dated 3.11.2011 holding the petitioner liable for the outstanding dues of Rs. 27,93,05,184/- of the company. It was held that the petitioner had not proved how he, the lone surviving director of the company, should not be treated as the assessee in default, and the whole amount should not be recovered from him in accordance with the provisions of Section 179(1) of the Act; furthermore, it was held that he was unable to show that the non-recovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

4. The Petitioner filed an application for rectification/amendment under section 154/155 of the Act. In these proceedings, the first Respondent, by the second impugned order dated 2.7.2012, enhanced the outstanding dues of the company, and consequently, of the petitioner to Rs. 35,13,35,804/-. The increase was on account of interest due under section 234A and section 234B, and penalty leviable under section 271(1)(b)/(c) of the Act.

5. The petitioner contends that the outstanding dues of the company were in the form of interest and penalties. He contended that "tax due" under Section 179 does not include within its ambit interest and penalty. It is submitted that the language of the provision is clear, and has to be construed in its terms; the Act makes a clear distinction between taxes, penalties and interest, which are distinct liabilities. Learned counsel relied on the definition of "tax" under Section 2(43) of the Act. Further, reliance was placed on the decision of the Bombay High Court in Dinesh T. Tailor v. Tax Recovery Officer [2010] 326 ITR 85 (Bom.), H. Ebrahim & Ors. v. Dy. CIT & Anr. [2011] 332 ITR 122 (Karn.), Harshad Shantilal Mehta v. Custodian [1998] 231 ITR 871 (SC) and Pratibha Processors v. Union of India, [1996] 11 SC 101.

6. Ms. Rashmi Chopra, counsel for the revenue, on the other hand, urged that a purposive interpretation of Section 179 has to be adopted. It was urged that Section 179 is intended to shift the tax liability, in cases of such dues which are of a private company and have not been recovered, upon the directors of such private company, and that whatever is recoverable from the private company, inclusive of interest and penalties due, becomes recoverable at the hands of the directors. Every director, she pointed out, is jointly and severally liable, to pay all the dues, including penalties, and interest, unless it is proved that the non-recovery was not due to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It was emphasized that in the present case, the company had only two directors, the petitioner, and his late father, and thus, there is no scope for the petitioner to escape the liability under Section 179 of the Act.

7. Counsel for the revenue relied on Union of India and others v. Manik Dattatreya Lotlikar 1988 172 ITR 1 (Bom.) and the Kerala High Court in Ratanlall Murarka and Ors. v. Income-tax Officer, "A" Ward and Ors., [1981] 130 ITR 797 (Ker.) in support of the proposition that all tax arrears would be payable by a director, under Section 179(1). It was also argued that a question of fact cannot be agitated in a writ petition and that whether the director, against whom proceedings for recovery of arrears of tax are initiated, has discharged the burden of proving that the non-recovery of the arrears of tax cannot be attributed to neglect, misfeasance or breach of duty on his part is a question of fact which should not be gone into in writ proceedings. The revenue relied on Union of India v. Praveen D. Desai [1988] 173 ITR 303 (Bom.), Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.), and Roop Chandra Sharma v. DCIT (Assessment) [1998] 229 ITR 570 (All.). It was, lastly, contended that Section 179 enacts a statutory presumption and places the burden on the director to prove that the non-recovery was not due to his gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. For this, reliance is placed on Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.) and the Gujarat High Court view in Indubhat T. Vasa (HUF) v. ITO [2006] 282 ITR 120 (Guj.).

8. The principal question which has to be resolved by the Court in this case is the true ambit and scope of the provisions of Section 179. Section 179(1), as it exists at present, reads as:

"(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

This provision, prior to its amendment, read as under:

"179. Notwithstanding anything contained in the companies Act, 1956 (1 of 1956), when any private company is wound up after the commencement of this Act, and any tax assessed on the company, whether before or in the course of or after its liquidation, in respect of any income of any previous year cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

9. Section 2 (43) defines "tax":

"2. In this Act, unless the context otherwise requires, -

(43) "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA;"

10. There are, apart from Section 179 (1), several other provisions of the Act which cast liability upon specified individuals or entities, in the event the assessee, (either an individual, partnership firm or other entity or concern, etc) defaults in payment of its dues. Section 170 provides for succession to a business "otherwise than on death" and enacts that where an assessee, carrying on any business or profession is succeeded to by another, who continues the business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession. The successor is to be assessed for the income of the previous year after the date of succession. Section 170 (3) says that when "any sum payable" under that Section in respect of the income of such business or profession for the previous year (in which the succession took place) up to the date of succession or for a previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the Assessing Officer shall record a finding to that effect and "the sum payable" by the predecessor shall be payable by and recoverable from the successor. Thus, "any sum payable" necessarily carries a wider connotation than "tax payable". Section 177 provides that where a business or profession is carried on has been discontinued or where an association is dissolved, the Assessing Officer has to make an assessment of the total income, as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions with respect to levy of a penalty or "any other sum" chargeable under the Act are to apply. Section 177 (3) mandates that every person who was, at the time of such discontinuance or dissolution, a member of an association of persons and a legal representative of any such person who is deceased "shall be jointly and severally liable for the amount of tax, penalty or other sum payable". This again is wider than what is provided for under Section 179 (1). Section 188A, prescribes that every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year. Section 189 too uses the same terms, i.e. "amount" of tax, penalty or other sum payable in respect of a firm (while creating liability of every partner at the time of discontinuance or dissolution of a firm). Section 221(1) deals with an assessee who, in addition to the amount of arrears and the amount of interest payable under Section 220 (2) is made liable by way of penalty, to pay such amount as the Assessing Officer may direct. Hence, in the case of an assessee in default, Parliament has made a specific provision making such a person liable to pay tax and in addition thereto the amount of interest payable under sub-section (2) of Section 220 and penalty.

11. It is a sound canon of construction that when Parliament or the legislature creates duties or liabilities, the task of the Court is to carefully interpret the provisions as they are. As held in Jumma Masjid v. Kodimaniandra AIR 1962 SC 847 (quoting Vickers Sons and Maxim Ltd v Evans 1910 AC 444):

"We are not entitled to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself"

Thus, it has been sometimes held that the intention of the Legislature is to, primarily, be gathered from the language used in the statute, which in turn means that attention should be paid to what has been said as also to what has not been said. (See Mohammed Alikhan v. Commissioner of Wealth Tax 1997 (3) SCC 511; Institute of Chartered Accountants v. Price Waterhouse AIR 1998 SC 74). Another rule of interpretation which the Court has to keep in mind, in cases like the present is that when, in relation to the same subject matter, different expressions are used, in the same statute, there exists a presumption that the legislature intended such different use, and that the words are not to be used in the same sense. This was stated in Commissioner of Income Tax v. East West Import & Export (P.) Ltd. AIR 1989 SC 836, in the following observations:

"..there has been no dispute before us that the requirement "if any such shares have been in the course of such previous year" would also apply to the last requirement "are in fact freely transferable by the holders to other members of the public". The only contentious aspect is as to whether "in the course of such previous year" would mean throughout the year or any part of it. There is no direct authority indicating the true meaning of this requirement in the Explanation one way or the other. The purpose of enacting s. 23A, as pointed out in Afro's case, was to control evasion of tax.

The Explanation has reference to the point of time at two places: the first one has been stated as "at the end of the previous year" and the second, which is in issue, is "in the course of such previous year". Counsel for the Revenue has emphasised upon the feature that in the same Explanation reference to time has been expressed differently and if the legislative intention was not to distinguish and while stating "in the course of such previous year" it was intended to convey the idea of the last day of the previous year, there would have been no necessity of expressing the position differently. There is abundant authority to support the stand of the counsel for the Revenue that when the situation has been differently expressed the legislature must be taken to have intended to express a different intention. 'Course' ordinarily conveys the meaning of a continuous progress from one point to the next in time or space and conveys the idea of a period of time; duration and not a fixed point of time. "In the course of such previous year" would, therefore, refer to the period commencing with the beginning of the previous year and terminating with the end of the previous year. If that be the meaning of the phrase "in the course of such previous year", it would necessarily mean that free transferability of the shares by the holders to other members of the public should be present throughout the previous year. Admittedly that was not the position in this case as transferability was acquired only on 26th of March, 1951." (Emphasis added)

12. In H. Ebrahim v. The DCIT and The Tax Recovery Officer, [2011] 332 ITR 122 (KAR.) relied on by the Petitioner, the Karnataka High Court, which dealt with the same issue that has arisen in the present petitions, held that:

"12. Whether the Nomenclature 'tax' would include the other two components namely the penalty as well as interest, fell for consideration before this Court in the case of Soma Sundarams (Private) Ltd. v. Commissioner of Income Tax Karnataka reported in [1979] 116 ITR 620. Indeed in the said case Section 2(43) of the Income Tax Act fell for consideration before a Division Bench of this Court. It had an occasion to examine whether interest, penalty and fine, which are payable under the provisions of the Act can be termed as income tax, this Court decidedly stated that the component 'income tax' does not include payment of penalty as well as interest. Indeed Section 179 of the Act indicates that the Directors would be liable to pay the tax due in the case, where the company is unable to satisfy the demands and gross negligence, misfeasance and breach of duty are attracted. Thus, what is contemplated under Section 179 of the Act is the Tax component and not the penalty and interest Indeed Section 126 of the Act would relate to notice of demand, which clearly indicates that the entire sum due to the Revenue is classified into three different components i.e., tax, interest, penalty or any other sum, which would not necessarily come under Section 179 of the Act. Indeed this reference would be only to the Directors of the Company. With reference to Section 222 of the Act the assessee undoubtedly is liable to pay the tax, interest and penalty. But however, the same cannot be said about the Directors of the Company. Indeed whether tax would include penalty and interest fell for consideration before the Apex Court in the case of Prathibha Processors and Ors. v. Union of India and Ors. reported in [1996] 11 SCC 101. Indeed the said decision was rendered under the Customs Act but however, the words and phrases "interest", "tax" and "penalty" fell for consideration and the Apex Court has observed thus:

"In fiscal statutes, the import of the words 'tax', Interest', penalty', etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty - which is penal in character."

Having regard to the decisions referred to above in relation to the import of words 'tax' interest and 'penalty' which would operate in different concepts, I am of the view that the said contention of Mr. Shankar is required to be accepted, inasmuch as, the phrase tax' as contemplated under Section 179 of the Act does not include penalty and interest insofar as the Directors of the Company are concerned. It is made clear that this interpretation of phrase 'tax' would not be' is under Section 179 of the Act and does not encompass the assessee. Indeed the Assessee as contemplated under Section 222 of the Act is liable to pay all the three components i.e., 'tax' 'interest' and 'penalty' and any other sum due or recoverable from him."

13. Earlier, the Bombay High Court, in Dinesh T. Tailor (supra) made a detailed analysis of the provisions of the Act, the effect of which has been discussed in the earlier part of this judgment, and after noticing the differing nature of the expressions, used by the Act, creating constructive liability, held that:

"7. … Section 179(1) refers to "any tax due from a private company" and every director of the company is jointly and severally liable for the payment of "such tax", which cannot be recovered from the company. The expression "tax due" and, for that matter the expression "such tax" must mean tax as defined for the purposes of the Act by Section 2(43). "Tax due" will not comprehend within its ambit a penalty.

8. The provisions of the Act make a clear distinction between the imposition of a tax on the one hand and a penalty on the other. Section 2(43) defines the expression "tax" in relation to an assessment year commencing on 1 April 1965 and any subsequent assessment year to mean inter alia Income Tax chargeable under the provisions of the Act.

10. [W]here Parliament has intended to make a specific provision imposing a liability to pay penalty apart from the tax which is due and payable, a specific provision to that effect has been made. Section 179, which falls for interpretation in the present case imposes a joint and several liability upon a director of a private company where tax due from the company cannot be recovered. The expression "tax due" cannot comprehend within the meaning of that expression a liability to pay a penalty that may have been imposed on the company."

14. In Harshad Shantilal Mehta (supra) The Supreme Court considered the provisions of Section 11(2)(a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, under which inter alia all revenues taxes, cesses and rates due from persons notified by the Custodian under Sub-section (2) of Section 3 to the Central Government or to any State Government or Local Authority have to be paid or discharged in full. The Supreme Court considered as to whether the expression "tax" under Section 11(2)(a) would include interest or penalty under the Income Tax Act, 1961. This question was answered in the negative:

"38. One other connected question remains: whether "taxes" Under Section 11(2)(a) would include interest or penalty as well? We are concerned in the present case with penalty and interest under the Income Tax Act. Tax, penalty and interest are different concepts under the Income Tax Act. The definition of "tax" Under Section 2(43) does not include penalty or interest. Similarly, Under Section 157, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed. Provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. Learned Special Court judge, after examining various authorities in paragraphs 51 to 70 of his judgment, has come to the conclusion mat neither penalty nor interest can be considered as tax Under Section 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection."

15. As far as the decisions cited by the revenue are concerned, the Court notices that none of them discussed, or analyzed the different expressions used, and varying liability cast on different classes of assesses, in event of the principal or main assessee/defaulter, if one can use that expression. Manik Dattatreya Lotlikar held that the liability created is joint and several with that of the company; the High Court looked at the expression "assessee" under Section 2 (7) which includes an assessee in default. Therefore, held the High Court, a director would be an assessee deemed under Section 179; he has to satisfy all demands. Ratanlal Murarka too went by Section 2 (7) and was concerned with interest liability under Section 220 (2); the Court held that such non tax liability would have to be borne by the director of the company "despite the distinction between tax and interest emphasised by counsel for the petitioner." This court is of the opinion that the absence of any discussion about the different treatment given by Parliament to the same nature of liability, i.e. tax default of an assessee, in one instance only providing for recovery of tax, and in other cases all "amounts" or "sums" points to different nature and content of the same class of liability, which cannot be ignored. The said two decisions do not, therefore help the revenue.

16. As regards the second contention, there is no doubt about the principle that the High Court would not decide questions of fact, in proceedings under Article 226, and that whether the presumption of liability can be rebutted under Section 179 has to be gone into before the tax authorities. Nonetheless, the Court here has to deal with the assessee's fundamental argument that he is not liable to pay anything more than the tax (i.e. not liable to pay penalty or interest). A decision on that question falls within the legitimate scope of this Court's jurisdiction, as it implicates the authority of the revenue to collect such amounts from the petitioner. The objection of the revenue, is therefore, rejected as meritless.

17. In view of the above discussion, the Court is of the opinion that the structure and construct of the Act has consciously used different words to create constructive liability on third parties, in the case of default in payment of taxes by an assessee. The treatment of the same subject matter by using different terms - in some instances expansive and in others, restrictive, mean that the Court has to adopt a circumspect approach and limit itself to the words used in the given case (in the present case, "tax due" under Section 179) and not "travel outside them on a voyage of discovery" (Magor & St. Mellons RDC v. Newport Corporation 1951 (2) All ER 839). Therefore, it is held that the petitioner cannot be made liable for anything more than the tax (defined under Section 2 (43)). The first respondent is consequently directed to determine the liability of the Petitioner, in the light of the finding; the impugned orders are therefore quashed. The writ petitions are allowed in the above terms, without any order on costs.

IT : If the revenue couldn't prove gross negligence on the part of the director causing non-recoverability of tax dues from the company the director couldn't be held liable under section 179 for recovery of such taxes

IT : Vicarious liability of director of a private company for 'tax due' under section 179(1) from it does not extend to interest and penalty

FACTS

• The Tax Recovery Officer (TRO) attached personal property of the petitioner-Director on account of dues of company. The petitioner contended that he couldn't be held liable for company's demands as requirement of section 179 was not fulfilled. In this regard he submitted that department could take necessary steps against the company to recover the demand as department had already issued a prohibitory order against the sale of the company's assets. The ACIT, however, was not convinced with the petitioner's argument, thus, this present writ was filed by the petitioner.

High Court's Ruling

• As per section 179(1) the director of company would be jointly and severally liable for payment of taxes due to company, unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company;

• The department had taken arduous steps to make recovery against the company, and had also issued recovery notices, orders of attachment of the property and issuance of prohibitory orders. Despite all these steps, no recovery could be made from the company;

• Over the attached immovable property of the company another company, namely, GSFC had first charge. Such property was sold by GSFC to recover its dues.

• Moreover, the company didn't have any other property from which dues could be recovered.

• Thus, it couldn't be said that basic requirement of section 179(1) of the Act was not satisfied;

• Another issue that arose before the High Court was the interpretation of term taxes due in section 179(1). The High Court dealt with this issue as follows:

(a) When we compare the language used in section 179(1) of the Act with that of section 156, it emerges that in section 179, the term used is 'tax due' whereas in section 156 which is a recovery provision refers to a notice of demand which would specify the sum payable;

(b) The sum payable as provided in section 156 includes tax, interest, penalty fine or any other sum which is payable in consequence of an order under the Act;

(c) It would, therefore, not be possible to stretch the language of section 179(1) of the Act to include interest and penalty also in the expression 'tax due';

(d) The director may be considered as an assessee under section 2(7) of the Act which provides that assessee means a person by whom any tax or any other sum of money is payable under the Act. However, the same must be qua the tax of the company which was due and remained unpaid. By virtue of section 179(1) of the Act, the director couldn't be held liable for interest and penalty and thereupon be treated as an assessee under section 2(7) of the Act as a person by whom any tax or any other sum of money is payable under the Act.

• Corporate veil of the company could be lifted under Sec 179(1) if the taxes couldn't be recovered from company and the director was unable to prove that non-recovery couldn't be attributed to gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company;

• However, the High Court considered the fact that as long as director could establish that the non-recovery of the tax could not be attributed to his gross neglect, etc, his liability under section 179(1) would not arise. The Court held that once the director placed his reasons as to why it could be held that non-recovery couldn't be attributed to gross negligence, etc., the authority would have to examine such grounds and come to a conclusion in this respect;

• The Legislature advisedly used the word 'gross neglect' and not a 'mere neglect' on his part;

• Nothing came to be stated by ACIT regarding gross negligence on part of the petitioner due to which the tax dues from the company could not be recovered and the entire focus of him was with respect to the petitioner's neglect in functioning of the company when the company was functional;

• The Court observed that the petitioner had put forth a detailed representation enumerating the steps taken by him and the circumstances due to which non-recovery of tax could not be attributed to his gross neglect;

• However, the factors, dates and events referred to by ACIT which, according to him, established gross negligence on part of the petitioner were without putting the petitioner to notice about such factors and events;

• Accordingly, the petitioner's writ was allowed.

RELATED CASE

Sanjay Ghai v. ACIT [2012] 26 taxmann.com 203 (Delhi)

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[2012] 26 taxmann.com 226 (Gujarat)

HIGH COURT OF GUJARAT

Maganbhai Hansrajbhai Patel

Assistant Commissioner of Income-tax & 1

AKIL KURESHI AND HARSHA DEVANI, JJ.

SPECIAL CIVIL APPLICATION No. 3910 & 4227 of 2012

September 25 & 26, 2012

JUDGMENT

Akil Kureshi, J. - The petitioner has challenged an order dated 27.2.2012 as at Exh.S to the petition passed by the Assistant Commissioner of Income Tax, Anand under section 179 of the Income Tax Act, 1961 ("the Act" for short).

2. Facts may be noted at the outset :

2.1 The petitioner was one of the two directors of one Agni Briquette Pvt. Ltd. (here-in-after to be referred to as "the said company"). For the assessment year 1997-1998, the said company filed its return of income declaring nil income. Such return was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment on 18.2.2000 holding that the said company had income of Rs. 26,55,117/- from undisclosed sources. He also issued a notice for imposing penalty under section 271(1)(c) of the Act.

2.2 The company challenged the order of the Assessing Officer before the Appellate Commissioner. The Commissioner however, dismissed the appeal whereupon the assessee approached the Income Tax Appellate Tribunal ("the Tribunal" for short). The Tribunal dismissed the assessee's appeal on 23.2.2007 on the ground that the notice of hearing of the appeal when sent to the company, the same was returned with a postal remark "left".

2.3 On 4.12.2002, the Income Tax Officer, Anand, issued a tax demand on the company stating that upon verification of records it was observed that an amount of Rs. 26,55,117/- and penalty of Rs. 11,41,702/- was payable by the company.

2.4 On 1.8.2001, the Tax Recovery Officer issued a prohibitory order stating that in view of the warrant of attachment issued on 19.1.2001, the machinery lying in the factory premises of the company shall not be sold or transferred or removed from the place of the factory without the permission of the Tax Recovery Officer of the Income Tax department.

2.5 On 8.10.2010, the Assistant Commissioner of income tax wrote a letter to the company stating that the arrears of amounts demanded are still outstanding for the assessment year 1997-1998 which included unpaid tax of Rs.20,77,896/- and penalty of Rs.11,41,701/-, i.e. total of Rs.32,19,597/-. He called upon the company to immediately make payment of such outstanding amount with interest under section 220 of the Act.

2.6 In response to such notice, the petitioner as a director of the company addressed a letter dated 8.11.2010 in which it was stated that the Assessing Officer had framed the assessment which was completely incorrect. The assessee had already filed appeal before the Tribunal.

2.7 There is further correspondence between the company and the income tax department which is not of much interest to us, except to record that on 29.8.2011 the Tax Recovery Officer even attached personal property of the petitioner namely, his share in an immovable property situated at survey no. 990/4 at Gujarat Saw Mill Compound, Anand.

2.8 On 14.2.2012, the Assistant Commissioner of income tax issued a notice to the petitioner pointing out that as per the records of the assessment year 1997-1998, amount of Rs.20,77,896/- and Rs.11,41,701/- has remained unpaid by the company. Such demand is outstanding since long. No efforts are made to make payments for such demands. It was pointed out that the petitioner was a director during the previous year relevant to the assessment year in which the demand related. He was called upon to state why he should not be personally held liable for payment of demands of the company with interest as per the provisions of section 179 of the Act.

2.9 The petitioner filed a detailed reply dated 21.2.2012 in response to such notice. He contended that the tax department had issued a prohibitory order against the sale of the company's assets as far back as in August 2001. The department therefore, could have taken necessary action for recovery of the dues. If proper care had been taken, dues of GSFC (in whose favour the company had created a first charge over its immovable properties) could have been recovered and residue could have been sufficient to cover company's tax dues. The petitioner also contended that he had filed a writ petition before the High Court questioning the action of the GSFC in auctioning the property. Despite the fact that negotiations were going on, GSFC had auctioned the property to recover its dues. The petitioner also contended that requirements of section 179 of the Act were not fulfilled. It cannot be stated that the dues of the company could not be recovered. He relied on decisions of this Court to contend that in such a situation recovery against the Director could not be effected. He pointed out that the department had not taken effective steps to recover the dues from the company. He also contended that non recovery of the tax arrears cannot be attributable to any negligence or breach of duty on his part. In this respect, he averred as under :

"13. It is submitted that I am the promoter Director of the Company and at the time when GSFC failed to release the balance amount of loan and the Company was facing acute working capital shortage, I arranged for funds from friends and relatives to keep the business of the Company moving. It was unfortunate that Shri Mahendrabhai died and the balance amount of his part of commitment remained unfulfilled due which thereafter the company's unit was forced to shut down. Even after the closure I have not repaid any of the depositors nor have I withdrawn any funds from the company for my personal use. During the period uptill today, I have been continuously trying to realize the assets for various outstanding payments including tax arrears. I have diligently carried on the affairs of the Company and have put in all efforts for realisation of the assets to settle off all the pending dues of the Company. It is strongly submitted that my submission be taken into consideration before making any adverse Order. The non recovery of tax arrears cannot be attributed to my negligence or breach of duty on my part in relation to the affairs of the Company. I have managed the affairs of the Company and I am in no way responsible for any tax arrears of the Company in my individual capacity. The above contention is supported by the following decision :

Jatinder Bhalla & Another v. ITO & Another (268 ITR 266) (DEL) (HC)."

2.10 Rejecting all such contentions of the petitioner, the Assistant Commissioner passed the impugned order on 27.2.2012 under section 179 of the Act. He recorded that various effective steps for recovery of outstanding dues of the company were taken by the department from time to time. He listed as many as 23 such different efforts made, of issuance of recovery notices, of orders of attachment of immovable properties, of summonses issued to the officers of the company and so on. He concluded that inspite of such various steps, the arrears of outstanding demand remained unpaid by the company. He also took into account various contentions of the petitioner raised in his communication dated 21.2.2012. He concluded that the petitioner as a director of the company had failed to prove that non recovery of arrears of outstanding demand cannot be attributed to his gross negligence, misfeasance or breach of duty in relation to the affairs of the company as required under section 179 of the Act. In this respect the discussion in the impugned order reads as under :

"f. In order to recover the demand by auction and sale, the TRO had made reference to the Valuation Officer, Baroda/Ahmedabad for valuation of plot No.614 & 615 at village : Uchchad and plot No. 990/4 at Anand. The at Para-2.3 of the Valuation Report dated 14/10/2003, it is categorically noted by the DVO, Ahmedabad that the defaulter has not submitted any details/documents to his office as called for valuation purpose. Thus there also, there was gross negligence, misfeasance or breach of duty on the part of the assessee company and the director to enable early recovery of the arrears of demand by the Department.

g. The assessee company's Plot No. 614 & 615 at vilalge Uchchad including building and machineries have been sold by GSFC for recovery of the loan given. These assets form major part of the assessee's fixed assets and after selling of the above assets by the GSFC, there remain meager assets with the assessee company from which whole recovery of the demand cannot be made by the Department.

h. In view of the discussion made in the foregoing paragraphs, it is found that Shri Maganbhai Hansrajbhai Patel, the director the assessee company has failed to prove that the non-recovery of the arrears of outstanding demand from the company cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company as required u/s. 179(1) of the I.T. Act, 1961."

2.11 After some more correspondence with the department's higher authorities, the petitioner filed the present petition in which in addition to challenging the said order dated 27.2.2012 passed by the Assistant Commissioner under section 179 of the Act, he has challenged various other consequential communications as also the very notice pursuant to which the said order came to be passed. The central challenge of the petitioner is however to the above-noted order passed under section 179 of the Act.

3. At this stage, we may notice that the petitioner and other co-owners of the immovable property situated at Gujarat Saw Mill compound, Anand first entered into an agreement to sale with one Siddhi Earth Infraspace Pvt. Ltd. Later on the parties also entered into a writing dated 2.8.2011 under which the purchaser was put in possession of the land in question. Since on account of the action initiated by the income tax department against the present petitioner, such sale transactions could not be completed, the purchaser Siddhi Earth Infraspace Pvt. Ltd. has filed Special Civil Application No.4227/2012 and prayed for reliefs for lifting the attachment of the said immovable property. Since the prayer of Siddhi Earth Infraspace Pvt. Ltd. is substantially in the nature of consequential relief to the challenge of the director of the company to the order passed by the Assistant Commissioner under section 179 of the Act, we have concentrated principally on such challenge.

4. Drawing our attention to the statutory provisions contained in section 179 of the Act and other applicable provisions, learned counsel Shri J.P. Shah for the petitioner raised following contentions :

(1) That in order to invoke the provisions of section 179 against a director of a private limited company, the department must first establish that tax dues from the company cannot be recovered. He submitted that in the present case such essential and prerequisite fact was not established. In absence of such essential fact, the Assistant Commissioner could not have proceeded against the petitioner under section 179 of the Act.

In support of such contention, counsel relied on decision of this Court in case of Amit Suresh Bhatnagar v. Income-tax officer reported in [2009] 308 ITR 113 (Guj.)

(2) Counsel contended that under section 179 of the Act, in any case, what could be recovered from the director of a private limited company is the tax due and not interest or penalty. In the present case, the department has sought to recover not only the principal tax dues but also the interest thereon and the penalty imposed against the company.

In this respect counsel relied on the decision of the Apex Court in case of Harshad Shantilal Mehta v. Custodian and others reported in [1998] 231 ITR 871 (SC) . Counsel also relied on decision of Bombay High Court in case of Dinesh T. Tailor v. Tax Recovery Officer and others reported in [2010] 326 ITR 85 (Bom) in which the decision in case of Harshad Mehta (supra) was followed.

(3) Counsel submitted that in the present case the authority was even other-wise not justified in seeking recovery of the dues against the petitioner. He contended that there was no negligence much-less, gross negligence on part of the petitioner to which non recovery can be attributed. He submitted that the petitioner had taken various steps to challenge the order of the Assessing Officer, as also to oppose the sale of the properties of the company by the GSFC. However, GSFC being the secured creditor and enjoying first charge over the property, had auctioned the same to recover its dues. Even the department who had attached the property did not object to any such sale by auction. No negligence therefore, can be attributed to the petitioner.

5. On the other hand learned counsel Shri Parikh for the department opposed the petition contending that after taking series of steps for recovery of the dues of the company, but having failed in effecting any recovery whatsoever, notice was issued against the petitioner why such dues be not recovered from the petitioner as the director of the company. After giving full opportunity, impugned order came to be passed in which at length the aspects of the petitioner's negligence have been recorded.

5.1 Counsel submitted that under section 179 of the Act, recovery of not only the tax but also the penalty and interest could be effected. In this respect, he relied on the following decisions :

(1) In the decision of Bombay High Court in case of Union of India and others v. Manik Dattatreya Lotlikar reported in 172 ITR 1.

(2) In the decision of Kerala High Court in case of Alex Cherian v. Commissioner of income-tax and others reported in [2010] 320 ITR 49 (Ker).

(3) In the decision of Punjab and Haryana High Court in case of S. Hardip Singh Sandhu v. Tax Recovery Officer and another reported in 166 ITR 759.

6. From the submissions made before us following three questions need to be answered :

(1) Whether before seeking recovery of the arrears from the petitioner, the pre-requirement of the department not being able to recover the tax from the company was satisfied?

(2) Whether under section 179 of the Act, it is only the principal dues of tax which can be recovered or the interest thereon and penalties also can be the subject matter of recovery?

(3) In facts of the case, whether the Assistant Commissioner was justified in ordering such recovery against the petitioner?

7. At this stage, we may notice the statutory provisions contained in section 179 of the Act which reads as under :

"179. [(1)] Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

[(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.]"

8. Sub-section (1) of section 179 provides for joint and several liability of the directors of a private company wherein the tax due from such company in respect of any income of any previous year cannot be recovered. First requirement therefore, to attach such liability of the director of a private limited company is that the tax due cannot be recovered from the company itself. Such requirement is held to be pre-requisite and a necessary condition to be fulfilled before action under section 179 of the Act can be taken. There are series of decisions of various High Courts on the point. We may notice three leading decisions of this Court.

(1) In case of Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in [1999] 238 ITR 127(Guj), Division Bench of this Court observed that :

"A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against director, to make them jointly and severally liable for such dues, it is necessary for the revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists ."

(2) In case of Indubhai T. Vasa (HUF) v. Income-tax officer reported in [2006] 282 ITR 120 (Guj.), following the decision in case of Bhagwandas J. Patel (supra), this Court observed that :

"In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase "cannot be recovered" requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impugned order as well as the affidavit-in-reply."

(3) In case of Amit Suresh Bhatnagar (supra) Division Bench upheld the assessee's challenge to the order under section 179 of the Act making following observations :

"6. Having heard the learned advocates for the parties, it is apparent that the controversy raised in the petitions stands concluded by judgment of this Court. The record reveals that except for accepting the amount paid by the Company from time to time, respondent-authority has not taken any steps to effect recovery from the Company. This High Court in the case of Indubhai T. Vasal (HUF) v. Income-Tax Officer (Supra) has stated that the phrase "cannot be recovered" requires the Revenue to establish that such recovery could not be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the Director or Directors responsible for conducting the affairs of the Company during the relevant accounting period."

9. Thus insofar as requirement of law is concerned, there is unanimity of view of this Court. In the present case however, from the impugned order itself we notice that the department had taken strenuous steps to make recovery against the company itself. As noted earlier, as many as 23 different steps were enumerated which included, issuance of recovery notices, of summonses to the directors of the company, of recovery letters to the company and its directors, of attachment of the property and issuance of prohibitory orders. Despite such detailed steps by the department spanning from the year 2001 till the year 2011, no recovery could be made from the company. Over the immovable property of the company which was attached by the Income Tax department, GSFC had first charge. Such property was sold by GSFC to recover its dues. It is not even the case of the petitioner that the company has other property from which the tax dues can be recovered. It therefore, cannot be stated that basic requirement of section 179(1) of the Act that the tax due cannot be recovered from the company was not satisfied.

10. Coming to the question no.2 controversy arises in view of the fact that under section 179 of the Act what is made recoverable from the director of a private company is "tax due". The Apex Court in case of Harshad Mehta (supra) interpreted such term "tax due" and commented that :

"The first question on which the arguments have been advanced, relates to the meaning of the phrase "tax due" used in Section 11(2)(a). Block's Law Dictionary at page 499 defines the word 'due', inter alia, as, "owing; payable; justly owed...Owed or owing as distinguished from payable. A debt is often said to be due from a person where he is the party owing it, or primarily bound to pay, whether the time for payment has or has not arrived. . . The word 'due' always imports a fixed and settled obligation or liability, but with reference to the time for its payment there is considerable ambiguity in the use of the term, the precise signification being determined in each case from the context." (underlining ours) Jowitt's Dictionary of English Law Vol. I, 2nd Edn. at page 669 defines 'due' as, "anything owing, that which one contracts to pay or perform to another. . . As applied to a sum of money, 'due' means either that it is owing or that it is payable; in other words, it may mean that the debt is payable at once or at a future time. It is a question of construction which of these two meanings the word ' due' has in a given case...."

""Tax due" usually refers to an ascertained liability. However, the meaning of the words 'taxes due' will ultimately depend upon the context in which these words are used.

In the present case, the words 'taxes due' occur in a section dealing with distribution of property. At this stage the taxes 'due' have to be actually paid out. Therefore, the phrase 'taxes due' cannot refer merely to a liability created by the charging section to pay the tax under the relevant law. It must refer to an ascertained liability for payment of taxes quantified in accordance with law. In other word, taxes as assessed which are presently payable by the notified person are taxes which have to be taken into account under Section 11(2)(a) while distributing the property of the notified person. Taxes which are not legally assessed or assessments which have not become final and binding on the assessee, are not covered under Section 11(2) (a) because unless it is an ascertained' and quantified liability, disbursement cannot be made. In the context of Section 11(2), therefore, "the taxes due" refer to "taxes as finally assessed"."

11. We are conscious that such interpretation was rendered in the background of the Special Court (Trial of offences relating to transactions in Securities) Act, 1992 and not in the context of section 179 of the Act. However, the above observations throw much light on the interpretation which we are trying to make. Bombay High Court in case of Dinesh T. Tailor (supra) had occasion to consider the decision in case of Harshad Mehta (supra) in context of the question whether penalty imposed under section 271(1)(c) of the Act can be part of "tax due" under section 179(1) of the Act. It was held and observed as under :

"7. The first submission which has been urged on behalf of the petitioner is that as a director of the company until 14 October 1989, he cannot be held liable in respect of the penalty that was imposed on the company under Section 271(1) (c). As already noted earlier, Section 179(1) refers to "any tax due from a private company" and every director of the company is jointly and severally liable for the payment of "such tax", which cannot be recovered from the company. The expression "tax due" and, for that matter the expression "such tax" must mean tax as defined for the purposes of the Act by Section 2(43) . "Tax due" will not comprehend within its ambit a penalty.

8. The provisions of the Act make a clear distinction between the imposition of a tax on the one hand and a penalty on the other. Section 2(43) defines the expression "tax" in relation to an assessment year commencing on 1 April 1965 and any subsequent assessment year to mean inter alia income tax chargeable under the provisions of the Act. Section 2(43) is as follows :

"2. In this Act, unless the context otherwise requires...

(43) "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income tax chargeable under the provisions of this Act, and in relation to any other assessment year income tax and super tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA;"

9. In several provisions of the Act, a distinction has been made by Parliament between a tax and a penalty.

16 The question which arises before the Court is not resintegra and is covered by the judgment of the Supreme Court in Harshad Shantilal Mehta v. Custodianl. The Supreme Court considered the provisions of Section 11(2) (a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, under which, inter alia, all revenues taxes, cesses and rates due from persons notified by the custodian under sub-section (2) of section 3 to the Central Government or to any State Government or local authority have to be paid or discharged in full. The Supreme Court considered as to whether the expression "tax" under section 11(2) (a) would include interest or penalty under the Income-tax Act, 1961. This question was answered in the negative."

12. We are not unmindful of the fact that before the decision of the Apex Court in case of Harshad Mehta (supra), Bombay High Court in case of Manik Dattatreya Lotlikar (supra) had held that the term 'tax due' under section 179(1) of the Act would include interest and penalties also. We may also notice that Kerala High Court in case of Ratanlall Murarka and others v. Income tax Officer, "A" Ward, Companies Circle, Ernakulam, and others reported in [1981] 130 ITR 797 (Ker) had taken a similar view making following observations :

"The only other question in the case relates to the petitioner's challenge of the levy of interest on the tax for the year 1963-64. Counsel for the petitioner maintained that the Act draws a distinction between tax and interest, as appears from Section 156, that tax does not take in interest and that as Section 179 is silent about interest, the demand for interest is unsustainable. The contention overlooks the petitioner's position and the consequences of his default. It is admitted in the original petition that a notice had been served on the company demanding arrears of tax for the years 1959-60, 1960-61 and 1963-64, as early as April 1, 1969, long before the order, Ex. P-7. The company was thus liable for interest under Section 220(2). The liability of the petitioner is co-extensive with that of the company. His obligation to pay the tax for the assessment year 1963-64 is obvious and is undisputed. That makes him an assessee within Section 2(7) of the Act. That being the position, we do not see how he could escape liability for interest under Section 220(2) despite the distinction between tax and interest emphasised by counsel for the petitioner. The contention is, therefore, futile."

13. Decision of Kerala High Court in case of Alex Cherian (supra) cited by the Revenue however, stands on a different footing. In the said decision the question whether under section 179(1) of the Act the tax dues would include even the interest and penalty did not come up for consideration. Similarly in the decision of Punjab and Haryana High Court in case of S. Hardip Singh Sandhu (supra), such a question did not arise.

14. From the above discussion, it can be seen that the Apex Court in case of Harshad Mehta (supra) had an occasion to interpret the term 'tax due'. It was noticed that the Act uses the terms the tax, interest and penalty differently. Ratio of the decision of the Apex Court in case of Harshad Mehta (supra) was applied by the Bombay High Court in case of Dinesh T. Tailor (supra). Additionally, Bombay High Court also gave its own interpretation to the statutory provisions contained in the Act and held that for the purpose of section 179(1) of the Act, term "tax due' would not include the penalty.

15. We may add that section 179(1) of the Act permits recovery of tax dues of any private company from its Directors under certain circumstances. Such circumstances being that such tax cannot be recovered from the company and unless the Director proves that the non recovery cannot be attributed to gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. Section 179(1) of the Act thus statutorily provides for lifting of corporate veil under given set of circumstances. The liability of tax dues which is basically fastened on the company, is permitted to be recovered from its Director in case of private company, provided the conditions set out in said section noted above are fulfilled.

16. In section 179 of the Act, term used is "tax due". Section 2(43) of the Act defines tax and reads as under :

"(43) 'tax' in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior tot he aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA."

17. Term 'penalty' has not been defined. Term 'interest' is defined in section 2(28A) of the Act but is in context of interest payable in any manner in respect of any moneys borrowed or debt incurred and has no relation to interest chargeable under various provisions of the Act on tax arrears. We may however, notice that as observed by the Apex Court in case of Harshad Mehta (supra), the Act uses the term 'tax', interest and penalties at various places having different connotations. Section 156 which pertains to notice of demand provides that where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable. Section 156 reads as under :

"156. Where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable :

(Provided that where any sum is determined to be payable by the assessee under sub-section (1) of section 143, the intimation under the sub-section shall be deemed to be a notice of demand for the purposes of this section.)"

18. When we compare the language used in section 179(1) of the Act with that of section 156, it emerges that in section 179, the term used is 'tax due' where as in section 156 which is a recovery provision refers to a notice of demand which would specify the sum payable. The sum payable may as provided in the section itself include tax, interest, penalty fine or any other sum which is payable in consequence of any order under the Act. Section 220 of the Act pertains to "when tax payable and when assessee deemed to be in default". Section 220(1) provides for time limit for payment of amount otherwise than advance tax specified in notice demand under section 156. Section 220(2) provides that if the amount so specified is not paid within such time, the assessee shall be liable to pay interest. Such interest thus would be on the entire sum payable which may include the tax, interest and penalty or any other source found payable. It would therefore, not be possible to stretch the language of section 179(1) of the Act to include interest and penalty also in the expression 'tax due'.

19. In case of Ratanlall Murarka and others (supra), as already noted, Kerala High Court did hold that under section 179 of the Act not only the tax dues but also interest can be recovered from the director of a public company. This was on the basis that according to the Court, the company was liable for interest under section 220(2) of the Act. The liability of the Director would be co-extensive with that of the company and that would make the director an assessee within section 2(7) of the Act. To our mind, the liability of the director to pay the dues of the company arises in terms of section 179(1) of the Act and such liability would be co-extensive as provided in the said provision which as we notice refers to tax dues. The director may be considered an assessee under section 2(7) of the Act which provides that assessee means a person by whom any tax or any other sum of money is payable under the Act. However, the same must be qua the tax of the company which was due and remained unpaid. By virtue of section 179(1) of the Act, the director cannot be held liable for interest and penalty and thereupon be treated as an assessee under section 2(7) of the Act as a person by whom any tax or any other sum of money is payable under the Act.

20. This brings us to the last question namely, whether in facts of the case respondent was justified in ordering recovery against the petitioner. In this respect we have noticed that the petitioner before the authority in response to the notice under section 179 of the Act made a detailed representation and contended that he had taken all the steps within his powers. He had not been negligent in his duties. The GSFC had auctioned the property for realisation of its dues. The tax department had issued attachment order but done nothing thereafter, to prevent the sale by GSFC. The Assistant Commissioner however, in the impugned order rejected all such contentions. He was of the opinion that the petitioner failed to establish that non recovery of arrears cannot be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company.

21. To our mind, the authority completely failed to appreciate in proper perspective the requirement of section 179(1) of the Act. We may recall that said provision provides for a vicarious liability of the director of a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of-course true that the responsibility of establishing such facts is cast upon the director. Therefore, once it is shown that there is a private company whose tax dues have remained outstanding and same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues. However, such liability can be avoided if he proves that the non recovery cannot be attributed to the three factors mentioned above. Thus the responsibility to establish such facts are on the director. However, once the director places before the authority his reasons why it should be held that non recovery cannot be attributed to any of the the three factors, the authority would have to examine such grounds and come to a conclusion in this respect. Significantly, the question of lack of gross negligence, misfeasance or breach of duty on part of the director is to be viewed in the context of non recovery of the tax dues of the company. In other words, as long as the director establishes that the non recovery of the tax cannot be attributed to his gross neglect, etc., his liability under section 179(1) of the Act would not arise. Here again the legislature advisedly used the word gross neglect and not a mere neglect on his part. The entire focus and discussion of the Assistant Commissioner in the impugned order is with respect to the petitioner's neglect in functioning of the company when the company was functional. Nothing came to be stated by him regarding the gross negligence on part of the petitioner due to which the tax dues from the company could not be recovered. In absence of any such consideration, the Assistant Commissioner could not have ordered recovery of dues of the company from the director. We would clarify that in the present case the petitioner had putforth a strong representation to the proposal of recovery of tax from him under section 179 of the Act. In such representation, he had detailed the steps taken by him and the circumstances due to which non recovery of tax cannot be attributed to his gross neglect. It was this representation and the factors which the petitioner had putforth before the Assistant Commissioner which had to be taken into account before the order could be passed. It is not even the case of the department that the petitioner paid the dues of other creditors of the company in preference to the tax dues of the department. It is not the case of the department that the petitioner negligently frittered away the assets of the company due to which the dues of the department could not be recovered. To suggest that the petitioner did not oppose the GSFC's auction sale is begging the question. GSFC had sold the property after several attempts through auction. It is not the case of the department that proper price was not fetched.

22. Additionally, we also notice that the Assistant Commissioner has referred to several factors, dates and events which, according to him, established gross negligence on part of the petitioner without even putting the petitioner to notice about such factors and events. Therefore, quite apart from our conclusion that the Assistant Commissioner did not record that the petitioner failed to prove that non recovery of tax from the company could not be attributed to his gross neglect, misfeasance or breach of duty, such findings were also based on materials relied upon by the Assistant Commissioner without notice to the petitioner. This is only an additional ground on which we are inclined to quash the order.

23. In the result, petition is allowed. Impugned order dated 27.2.2012 is quashed.

24. In view of such conclusions, it is not necessary to independently examine the prayers made by the purchaser of the property in Special Civil Application No. 4227/2012.

----- Forwarded Message -----
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: pragasamc@yahoo.com
Sent: Saturday, 20 October 2012 12:03 AM
Subject: MCA on XBRL

Press Information Bureau
Government of India
Ministry of Corporate Affairs

19-October-2012 17:59 IST

Quality of xBRL Filing Certified by Professional Members

The Ministry of Corporate Affairs has pressed upon for the need to improve the quality of xBRL (Extensible Business Reporting Language) filings. In a letter sent to the Presidents of the Institute of Chartered Accountants of India (ICAI) and the Institute of Company Secretary in India (ICSI) the ministry said it is the bounden duty of these institutes to improve the quality of XBRL filing for the financial year (FY) 2011-12 to be undertaken by its members. Further, the Institute may conduct further trainings, issue guidelines, etc so that such quality related issues are appropriately resolved.

As per the letter a random scrutiny of XBRL filing of financial statements by few companies to MCA for FY 2010-11 reveals significant variations in disclosures in published results and the xBRL filing due to 'incorrect' mapping of disclosures. It has been observed that few disclosures were 'mapped/ tagged' with incorrect accounting concept despite availability of appropriate element in taxonomy. It has also been observed that provisions of "Block Text tagging" and/ or "Footnote" have been inappropriately used to report disclosures like subsidiary details, related party transactions, Director's Report, etc. even when appropriate elements were available in the taxonomy for such disclosures.

Moreover, Such filing are inaccurate and do not adequately represent true and fair view of the state of affairs of the company as per Section 211 of the Companies Act, 1956. Such XBRL filing, apart from being misleading, also dilute the effectiveness of XBRL, for stakeholders' usage relating to the companies. It is unfortunate that professionals have certified the authenticity of such incorrect date, for which they are liable to be penalized. Such lapses defeat the very purpose of introducing XBRL filing which are meant to elicit more detailed and refined information as to the affairs of companies. Please note that XBRL filing are being minutely scrutinized to see if similar mistakes also appear in a larger sample.

It is note worthy that xBRL filing of financial statements by a select class of companies for FY 2010-11 was mandated vide Ministry of Corporate Affairs Notification GSR No: 748(E) dated 05.10.2011. The e-forms were duly certified by CA/CS/CWA professionals for their completeness and correctness in representation with respect to audited financial statement of the company.

*******

ST/-

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Best Wishes

CA. V.M.V.SUBBA RAO
Chartered Accountant
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Chartered Accountant Finance

Saturday, October 20, 2012

[aaykarbhavan] Fw: MCA on XBRL, Judgments,

All About Disallowance under Section 40(a)(3)

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