 | IT Return, Bank Statement, PAN Card. B/S and P/l account of creditors is enough explain creditors |
| Posted on 06 November 2012 by Apurba Ghosh | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefThe brief facts of the above case are that while doing the scrutiny assessment the AO has added an amount of Rs.65,96,859/- under the head 'unexplained loan creditors' and Rs.2,44,256/- under the head interest paid on the above loan creditors by observing as under :- "It is seen from the records that the assessee showed Rs. 65,96,859/- as unsecured loans Rs. 65,96,859/- and Interest paid thereon of Rs.244256 out of which the assessee debited Rs.180483/- in the P & L A/C. after adjusting the interest from debtors. During the course of hearing, while the A/R of the assessee was asked to produce the loan confirmation and present address of the loan creditors. He failed to file the details of the loan creditors merely a statement of names of some persons/concern, to whom the assesses paid interest. Therefore, in absence of loan confirmation it is established that the assessee showed bogus outstanding liabilities in the balance sheet as on 31.03.09 and debited interest Rs.244256 as interest paid to the loan creditors to reduce the tax liability. Hence, I add back the bogus unsecured loan of Rs. 65,96,859/- U/s.68 as the unexplain cash credit and as the existence of the loan creditors not established and the interest of Rs.244256/- as the interest not paid but only debited in the P&L A/C to reduce the profit." CitationNived Anoopkumar Dhandhania, Kolkata (PAN: AIVPD 6867 H) (APPELLANT) Vs I.T.O., Ward-43(3), Kolkata (RESPONDENT) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "C", KOLKATA Before Shri Mahavir Singh, Judicial Member. and Shri C.D.Rao, Accountant Member ITA No.1064/Kol/2011 Assessment Year : 2007-08 Nived Anoopkumar Dhandhania, Kolkata (PAN: AIVPD 6867 H) (APPELLANT) Vs I.T.O., Ward-43(3), Kolkata (RESPONDENT) For the Appellant: Shri P.K.Bhagania For the Respondent: Shri S.P.Lahiri, Sr.(DR) Date of Hearing: 04.09.2012. Date of Pronouncement: 04.09.2012. ORDER Per Shri C.D.Rao, AM The above appeal is filed by assessee against order dated 31.05.2011 of the ld. CIT-(A)-XXX, Kolkata pertaining to A.Yr. 2007-08. 2. The grounds raised by assessee in this appeal are as under:- "1) For that under the facts and circumstances of the case the learned C.I.T.(Appeals) erred and acted un judiciously in doubting the genuineness of and confirming the addition of unsecured loans from five parties totaling Rs.6,02,714/- to the appellant's total income. 2) For that under the facts and circumstances of the case the learned CIT(Appeals) erred and acted un judiciously in also confirming addition of Rs.2,714/- paid as interest to the said five parties." 3. The brief facts of the above case are that while doing the scrutiny assessment the AO has added an amount of Rs.65,96,859/- under the head 'unexplained loan creditors' and Rs.2,44,256/- under the head interest paid on the above loan creditors by observing as under :- "It is seen from the records that the assessee showed Rs. 65,96,859/- as unsecured loans Rs. 65,96,859/- and Interest paid thereon of Rs.244256 out of which the assessee debited Rs.180483/- in the P & L A/C. after adjusting the interest from debtors. During the course of hearing, while the A/R of the assessee was asked to produce the loan confirmation and present address of the loan creditors. He failed to file the details of the loan creditors merely a statement of names of some persons/concern, to whom the assesses paid interest. Therefore, in absence of loan confirmation it is established that the assessee showed bogus outstanding liabilities in the balance sheet as on 31.03.09 and debited interest Rs.244256 as interest paid to the loan creditors to reduce the tax liability. Hence, I add back the bogus unsecured loan of Rs. 65,96,859/- U/s.68 as the unexplain cash credit and as the existence of the loan creditors not established and the interest of Rs.244256/- as the interest not paid but only debited in the P&L A/C to reduce the profit." 3.1. On appeal after taking into consideration of the written submissions and other documents filed before ld. CIT(A) the ld. CIT(A) called for the remand report from the AO. Based on the two remand reports he deleted the addition of Rs.59,94,145/- on account of loan creditors and the corresponding interest accrued on the above. However, he confirmed the loan creditors to the extent of Rs.6,02,714/- and interest on the above amounting to Rs.2,714/- by observing as under:- "Creditors have not independently confirmed their loan transaction to the A.O despite the issue of notice u/s. 133(6) by him and despite efforts by the appellant these creditors have not sent their confirmations independently to the A.O for his verification. Considering all these facts the genuineness of the loan from these five parties is not stablished. The appellant has been unable to discharge the onus of establishing the genuineness of these unsecured loans, The details of these unsecured loans are as under 1. Jagadish Prasad M. Devmura 1,00,699/- 2. Ghisaram M. Nirban 1,00,699/- 3. Rajesh Kailashchand Vyas 1,00,411/- 4.Sushilkumar Hanumandas Sarda 2,00,740/- 5.Krishanlal M Dawyama 1,00,165/- 6,02,714/ - Accordingly the addition on account of unsecured loan from these parties (Rs. 1,00,699+1,00,699+1,00,411+2,00,740+1,00,615) i.e. Rs. 6,02,714/- is confirmed." 3.2. Aggrieved by this the assessee is in further appeal before us. 4. At the time of hearing the ld. Counsel appearing on behalf of assessee by referring to the paper book at page nos.9 to 31 which contain copies of Kishanlal M.Dayama's I.T.Return Ack., P&L A/c Capital A/c, Balance Sheet and Banker's Certificate, Copies of Rajesh Kaishchand Vyasa's I.T.Return Ack; Brokerage A/c, Interest A/c., Capital A/c, Balance Sheet and PAN Card, Banker's Certificate and Bank statement, Jagdishprasad M.Devmurari's I.T.Return Ack., Income & Expenditure A/c. Bank Statement and Banker's Certificate, Ghisaram M.Nirban's I.T.Return Ack., Capital A/c, Balance Sheet, PAN card, Banker's Certificate, Bank statement and Cash A/c. and Sushilkumar Hanumandas Sarda's Loan confirmations and Bank statement, submitted that the revenue is not justified in ignoring these documents and made the additions though the transactions are entered through banking channels and the assessee has discharged his onus of identification of the creditors with PAN Nos., copies of balance sheet and bank statements. He further filed affidavits of Kishanlal M.Dayama and Rajesh Kailashchand Vyas which are placed at pages 4&5 and 6&8 dated 12th December, 2011 and 7th December, 2011 respectively as additional documents. When the Bench proposed to set aside the issue to the file of AO since both AO as well as ld. CIT(A) has contended that the assessee has not filed any confirmations and not discussed regarding the bank statements and other documents which are filed before them. Both the parties have fairly conceded that the matter may be set aside to the file of AO for further verification. Therefore, in the interest of justice, we consider it fit to set aside the issue to the file of AO to give one more opportunity of being heard to the assessee to substantiate its claim. 5. In the result the appeal of assessee is allowed for statistical purposes. Order pronounced in the open court on 04.09.2012 Sd/- Sd/- Mahavir Singh, C.D.Rao, Judicial Member Accountant Member. Date: 04.09.2012 R.G.(P.S.) Copy of the order forwarded to: 1. Shri Nived Anoopkumar Dhandhania, 180, Mahatma Gandhi Road, 2nd floor, Kolkata-700007. 2. I.T.O., Ward-43(3), Kolkata. 3. The C.I.T. 4. CIT (A)-XXX, Kolkata. 5. The CIT (DR), Kolkata Benches, Kolkata True Copy, By order, Deputy /Asst. Registrar, ITAT, Kolkata Benches |
| | Impact of cash deposited in creditors account before payment |
| Posted on 06 November 2012 by Apurba Ghosh | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefOn the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in deleting the addition of ` 1001500/- made u/s. 68 of Income Tax Act, 1961 especially when the identity and credit worthiness of the share applicants and genuineness of transaction was not established satisfactorily. CitationITO, WARD 17(4),ROOM NO. 238, CR BUILDING, I.P. ESTATE, NEW DELHI (Appellant) Vs. M/S VISHVDEVA LEASING & INVESTMENT PVT. LTD., B-13/68-A, JANAKPURI, NEW DELHI (PAN/GIR NO.: AAACV 1015 F) (Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "H", NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER I.T.A. No. 2104/Del/2010 A.Y.: 2003-04 ITO, WARD 17(4), ROOM NO. 238, CR BUILDING, I.P. ESTATE, NEW DELHI (Appellant) Vs. M/S VISHVDEVA LEASING & INVESTMENT PVT. LTD., B-13/68-A, JANAKPURI, NEW DELHI (PAN/GIR NO.: AAACV 1015 F) (Respondent) Assessee by: Mrs. Shumana Sen, Sr. D.R. Department by: S h. Ved Jain, Rano Jain & Sh. V. Mohan, CAs ORDER PER SHAMIM YAHYA: AM This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XIX, New Delhi dated 17.2.2010 pertaining to assessment year 2003-04. 2. The grounds raised read as under:- "1. On the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in deleting the addition of ` 1001500/- made u/s. 68 of Income Tax Act, 1961 especially when the identity and credit worthiness of the share applicants and genuineness of transaction was not established satisfactorily. 2. On the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in holding that the assessee has provided necessary details ignoring the fact that mere filing of assessment particulars does not tantamount to discharge of onus u/s. 68 of Income Tax Act. 3. On the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in holding that the Assessing Officer has simply acted on the information received from the investigation wing in complete disregard of the finding given in the assessment order. 4. On the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in holding that the Assessing Officer has not found any discrepancy in the books of the assessee especially when the cash credits appearing in assessee's books remained unexplained. 5. On the facts and in the circumstances of the case, Ld. Commissioner of Income Tax (A) has erred in holding that if there was any discrepancy in the books of the investing companies, there was a case for reopening of assessment of investing companies. Ld. Commissioner of Income Tax (A) has ignored the fact that it is the beneficiary who has obtained accommodation entries, is liable for tax." 3. In this case during the year assessee company had shown receipt of share application money/ share capital of ` 10 lacs from the following two parties (i) M/s J. Singh Tradinmg & Investments Pvt. Ltd. – 17.8.02 - ` 500000/- (ii) M/s Particular Manage Finlease (India) Pvt. Ltd. – 18.8.02 - ` 500000/- 3.1 The Assessing Officer received information from the Investigation Wing of the Department that the companies which contributed towards share application money/ share capital was involved in providing accommodation entries. In view of this information Assessing Officer initiated the action u/s. 148 of the I.T.Act. Before the Assessing Officer assessee submitted the confirmations from these parties, their addresses and PAN along with copy of the Income Tax Returns. However, the Assessing Officer noted that letters addressed to these parties could not be served. Assessing Officer asked the information from the State Bank of Patiala from where these cheques were issued to the assessee company. Assessing Officer noted that in both the cases cash was deposited before payment by way of cheques. Assessing Officer observed that the deposits of cash into the bank accounts of both the creditors leads him to irresistible conclusion that assessee has used its own undisclosed income in obtaining the cheques from these parties. Assessing Officer further observed that Ld. Authorised Representative of the assessee was required to produce the Directors of the assessee companies but has shown his inability to produce them for cross examination to determine the source of deposit of cash and to the genuineness of the transaction. Assessing Officer held that a sum of ` 10,01,500/- received by the assessee on share capital amount was to be added u/s. 68 of the I.T. Act to the income of the assessee. Further, the Assessing Officer observed that assessee must have paid commission @2% to obtain the cheque in lieu of cash and hence, commission paid @ 2% was also to be added to the income of the assessee. 4. Upon assessee's appeal Ld. Commissioner of Income Tax (A) noted that assessee had filed following documents in the course of assessment proceedings to prove the transactions. a) Name and address of the shareholders. b) Income Tax Particulars of shareholders. c) Share Application Forms. d) Confirmation of shareholders with regard to Share Capital subscribed by them. e) Affidavit of the shareholders with regard to share capital subscribed by them. 4.1 Ld. Commissioner of Income Tax (A) noted that Assessing Officer has not verified the details furnished by the assessee and Income tax records of the share holders/ investing companies. Ld. Commissioner of Income Tax (A) noted that Assessing Officer has not controverted this aspect and observed that assessee has discharged its burden of providing basic details which were required for verification to fulfill the conditions viz. identity of the creditor, creditworthiness of the creditor and genuineness of the transaction. Ld. Commissioner of Income Tax (A) thereafter referred the several case laws and held that he has no hesitation to conclude that assessee has provided necessary details and has discharged onus cast on it. He noted that the Assessing Officer has not brought anything on record to dispute that facts /details furnished by the assessee. In view of the above, Ld. Commissioner of Income Tax (A) deleted the addition of `10,00,000/- on share capital. 5. Against the above order the Revenue is in appeal before us. 6. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that in this case the Ld. Commissioner of Income Tax (A) has noted that assessee has submitted the various details which the Assessing Officer has not examined/enquired properly as follows:- a) Name and address of the shareholders. b) Income Tax Particulars of shareholders. c) Share Application Forms. d) Confirmation of shareholders with regard to Share Capital subscribed by them. e) Affidavit of the shareholders with regard to share capital subscribed by them. 6.1 We further find that the Assessing Officer has observed that letters were issued to the above parties which could not be served. Assessing Officer further observed that assessee was not able to produce the Directors of the creditor companies. Furthermore, Assessing Officer has found that cash was deposited in the bank account before issue of cheque for share capital. Accordingly, Assessing Officer has made the addition towards the share capital/ share application money. Ld. Commissioner of Income Tax (A) on the other hand has held that the assessee has discharged its onus and Assessing Officer has not brought anything on record to dispute the details/ facts furnished by the assessee. 6.2 In this regard, we note that it is not the case that, the enquiry the Assessing Officer has not made, was done by the Ld. Commissioner of Income Tax (A) himself. It is a settled law that the powers of the Commissioner of Income Tax is co-terminus with that of Assessing Officer. Under the circumstances, the particular enquiry that was not made by the Assessing Officer which was necessary in the facts of the case, should have been done by the Ld. Commissioner of Income Tax (A). 6.3 Furthermore, we find that in this case shares of ` 10 of face value has been issued at a share premium of ` 40/-. How this company was commanding ` 40/- premium on ` 10/- share has not been enquired. No cogent explanation was submitted in this regard before us. In this regard, we find that the Hon'ble Apex Court in the case of Kapurchand Shrimal Vs. CIT, 131 ITR 451, held that the appellate authority has jurisdiction as well as the duty to correct the errors in the proceedings under appeal and issue proper direction as necessary. Hence, in the interest of justice, we remit the issues raised in the appeal to the file of the Assessing Officer to consider the same de novo, in light of the our above observations. 7. In the result, the appeal filed by the Revenue stands allowed for statistical purposes. Order pronounced in the open court on 07/9/2012. Sd/- Sd/- [C.M. GARG] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Date 07/9/2012 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order, Assistant Registrar, ITAT, Delhi Benches |
Carbon Credits entitlement is capital receipt & can't be taxed as a revenue receipt
Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgement of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.
Further, as per guidance note on accounting for Self-generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs.
Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed.
IN THE ITAT HYDERABAD BENCH 'B'
My Home Power Ltd.
v.
Deputy Commissioner of Income-tax, Central Circle – 7
IT APPEAL NO. 1114 (HYD.) OF 2009
[ASSESSMENT YEAR 2007-08]
NOVEMBER 2, 2012
ORDER
Chandra Poojari, Accountant Member – This appeal by the assessee is directed against the order of the CIT(A)-I, Hyderabad dated 15th October, 2009 for assessment year 2007-08.
2. The assessee raised the following grounds of appeal:
1. The order of the learned CIT(A) is erroneous both on facts and in law.
2. The learned CIT(A) erred in finalising the appeal without providing proper opportunity to the appellant.
3. The learned CIT(A) erred in holding that the amount realised by transferring Carbon Credits – CER (Certified Emission Reductions) represent income from transfer of goods and that the entire amount was realised on sale of such goods represents income of the appellant.
4. The learned CIT(A) erred in holding that realisation of the Carbon Credits represent the revenue receipt and not a capital receipt and further erred in confirming the addition of Rs. 11,75,00,000 made by the Assessing Officer.
5. Without prejudice to the above, the learned CIT(A) erred in holding that the amount realised on Carbon Credits is not eligible for deduction u/s. 80IA of the IT Act.
6. The learned CIT(A) erred in confirming the order of the Assessing Officer in determining the total income of the appellant at Rs. 8,99,61,870 by treating the realisation from carbon credits of Rs. 11.75 crores as the taxable income of the appellant.
3. Brief facts of the issue are that the assessee had filed return of income for the assessment year under consideration on 28.2.2008 showing a loss of Rs. 86,54,970. The company is engaged in the business of power generation through biomass power generation unit. During the year under consideration it has received 1,74,037 Carbon Emission Reduction Certificates (CERs) popularly known as 'carbon credits' for the project activity of switching off fossil fuel from naphtha and diesel to biomass. It has sold 1,70,556 CERs to a foreign company M/s. Noble Carbon Credits Ltd., Ireland and had received an amount of Rs. 12.87 crores. The assessee had accounted this receipt as capital in nature and had not offered the same for taxation. The Assessing Officer dealt in detail the taxability of sale proceeds arising out of the sale of CERs and held the same to be a revenue receipt since the CERs are a tradable commodity and even quoted in stock exchange. Accordingly, added the net receipt of Rs. 11,75,00,000 to the returned income. After `giving effect to set off of brought forward losses the total income was determined at Rs. 8,99,61,870 and tax demand of Rs. 3,60,80,529 was raised. Being aggrieved, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the order of the also and also given a finding that the amount which was considered as income of the assessee cannot be considered as income from business and as such the same is not entitled for deduction u/s. 80IA of the Act. Against this the assessee is in appeal before us.
4. The learned AR submitted that for arriving at the conclusions, the first attempt is to know the nature of the receipt. The company's main business activity is generation of biomass based power. The receipt in question has no relationship with the process of production nor it is connected with the sale of power or with the raw material consumed. It is not even the sale proceed of any bye product. The CERCs are issued to every industry which saves emission of carbon and not limited to power projects. Further, the certificates were issued keeping in view the production relating to periods earlier to the previous year under consideration. The amount is not a compensation for the loss suffered in the process of production or expenditure incurred in acquisition of capital assets.
5. The AR submitted that the certificate issued by the United Nations Framework Convention on Climate Change (UNFCCC), Kyoto Protocol only indicates the achievement made by the assessee company in emitting lesser quantity of gases than the assigned quantity. It does not mention about either revenue or capital expenditure incurred by the assessee. The certificate by itself does not have any value unless there are other industries which are in need of such certificates. The certificate is not dependent on production. In a hypothetical situation where all the Industries in the world are able to limit emission of gases to the assigned level there would not be any value for the certificates issued by UNFCCC. The process of business commences from purchase of raw material and ends with the sale of finished product. The gain is not within any of the process in between and does not represent receipt to compensate the loss suffered in the process. Therefore, the amount does not represent any income in the process or during the course of business.
6. He submitted that the said amount does not represent subsidy for establishing the industry or for purchase of raw material or a capital asset. The UNFCCC does not reimburse either revenue or capital expenditure. In fact the UNFCCC does not provide any funds to the industry. It only certifies that the industry emitted a particular quantity of gases as against the permissible quantity. It is not, therefore, a subsidy granted to reimburse the losses. No payment is in fact made by the UNFCCC but only a certificate is issued without any consideration of profit or loss or the acquisition of capital assets. The amount cannot be considered to be a perquisite as this is not received from any person having a business connection with the company and is not received in the process of carrying on the business. The perquisites are those provided in addition to the profits or benefits by the beneficiaries. It is defined to be an incidental emolument in addition to the fixed income unless there exists a business connection no such benefit can be derived.
7. The learned AR submitted that, Therefore, the amount is not falling within any of the clauses of Sec. 2(24) of the I.T. Act. The amount also would not represent an incentive granted in the process of business activity as the amount is not received under any scheme framed by the Government or anybody to benefit the industry or to reimburse either the cost of the raw material or the cost of capital asset. The amount also cannot be considered as an award for the revenue loss suffered by the company as the amount is granted without relevance to the financial gains or losses. The payment is made absolutely without any relevance to the financial transactions of the assessee. There is no consideration for paying this amount. The amount is paid in the interest of international community and not either in the interest of Industry as such or in the interest of the assessee company or as a compensation for the loss/ expenditure during the course of business. Therefore, the amount is a sort of a gift given by the UNFCCC for the distinction achieved by the assessee company in achieving emission of lesser amount of gases than the "assigned amount". It cannot, therefore, be an income within the meaning of Sec. 2(24) or Sec. 28 of the LT. Act, 1961.
8. The learned AR submitted that the provisions of Sec. 2(24) define the word "income" which clearly indicates that this type of receipts are not covered by the said provision. No doubt sub section (24) of section 2 only provides inclusive definition for the word "Income". Even if it is an inclusive definition, it is to be considered whether the amount received by the company falls within any of the categories of income mentioned in the said sub section or not. This type of receipt is not included in the said sub section as income. The amount does not represent any consideration in the process of its business activity. As already mentioned in the earlier paragraph, the amount is not fitting within any of the items mentioned in Sec. 2(24) of the LT. Act nor relates to the year of account.
9. The AR further submitted that similar situations arose in the past. Certificates were issued by the Government for export of goods which were capable of sale. The sale consideration is held as not relating to the Industrial undertaking and was held to be related to the export promotion scheme announced by the Government (CIT v. Sterling Foods [1999] 237 ITR 579 . In the said situation, export is a part of trade and the certificate is granted during the course of and in connection with the export trade. Some other certificates were issued against payment of duty against purchase of raw material and such certificates acted as reimbursement of excise duty suffered. In the instant case the certificates are to be attributed to the climatic protection, which is not a part of the business. The scheme by UNFCCC is in the interest of Global protection from pollution and has no relevance to the business activities of the assessee. Therefore, the assessee is in a better situation for claiming exemption. Such certificates are later included as income both in Sec. 2(24) and in Sec. 28. The certificates received by the assessee are not included as income within Sec. 2(24) or in Sec. 28 of the Act. An attempt is made to include the same in DTC in the year 2010 itself and DTC is not introduced as Act so far. Though the DTC included the certificates as income, the Parliament in its wisdom did not amend the IT Act. Therefore, the intention of the Parliament is not to tax the CERs, otherwise when the same is included as income in the bill of DTC, there is no other reason as to why the same is not included in Sec. 2(24) or Sec. 28.
10. The AR submitted that in the past, industries received grants, subsidies and incentives. The treatment for such amount, may also be relevant. They are discussed hereunder w.r.t. the circulars issued by the CBDT
1. The CBDT in circular No. 142 dated 1-8-1974 reported in 95 ITR page 131(ST) observed that the subsidy received under this scheme for helping the growth of industries which is not meant for supplementing the profits is considered as not taxable. In the present case there is no question of supplementing the profits.
2. Circular No. 447 dated 22.1.1986 wherein the Board advised that award received by an amateur Sportsman is not taxable in his hands as it is a capital receipt.
11. The AR submitted that the assessee's case is far better than the above two situations. There is some relevant to the activities. But in the case of the assessee there is no relevance. In the above mentioned circulars, the CBDT expressed a view that if the amount is paid by way of subsidy to the industries established in the backward and remote areas would not represent the income. According to the CBDT if the amount is paid by the Government towards loss suffered on revenue account, such subsidy would be taxable. In case the subsidy is on capital account, it is a capital receipt and in case the subsidy is not for any of the two, then also such subsidy is to be treated as capital receipt and should be exempted. This is the view expressed by various judicial pronouncements as discussed hereinafter.
12. The AR submitted that the above circulars are cited just to show that the amount received otherwise than revenue account is not assessable as the income and does not represent revenue receipt. In the case of the assessee company, the amount received does not represent the compensation for the loss on revenue account. This amount also does not represent a gain during business activities. The amount also does not reimburse any capital expenditure. A reading of the following decisions of various courts would also indicate clearly that such receipts do not represent income of the company. The Andhra Pradesh High Court in the case of CIT v. Chitrakalpa reported in 177 ITR 540 held that subsidy received by the producer for the production of feature films in the state are capital in nature. It was also held that the said amount cannot be considered as the income of the assessee. The decision of the Gauhati High Court in the case of Lachit Films v. CIT 195 ITR 402 – The Gauhati High Court was considered the question whether the Grants-in-aid received by the assessee from the government for production of films is a revenue receipt or not. The Hon'ble High Court held that the Grants-in-aid was not a product of normal business activity and therefore, is not a revenue receipt. The Kerala High Court in the case of CIT v. 225 ITR 394 Udaya Pictures Private Ltd., also held the same view that the subsidy received by the producer of Cinematograph Films is not taxable. The Madras High Court in the case of CIT v. Kanyakumari District Co- operative Spinning Mills Ltd., 128 Taxman 544 held that the subsidy received from the State Government for recruiting the Adi Dravidas by the assessee as capital in nature. The Calcutta High Court in the case of CIT v. Anand and Company reported in 233 ITR page 18 observed that subsidy received from Federation without rendering any services is in the nature of voluntary assistance is in the nature of gift and further held that the same is not includable for the purpose of income. The Karnataka High Court in the case of CIT v. Gogte Minerals reported in 222 ITR page 245 observed that development grant received by an assessee for acquiring machinery and replacing the old machinery is capital in nature. The Kerala High Court in the case of CIT v. Rajagiri Rubber and Projects Company Ltd., reported in 182 ITR 393 held that subsidy received by a Rubber Plantation for replanting rubber trees under the re- plantation subsidy scheme is not taxable income. The Kerala High Court in the case of CIT v. Rubi Rubber Works Ltd., 178 ITR 181 observed that subsidy given for beneficial purposes of promoting public interest is capital receipt and not a revenue receipt.
13. The AR further relied on the decision of the Punjab and Haryana High Court in the case of Baghapurana Cooperative Marketing Society Ltd., v. CIT 44 Taxman 92 held that subsidy received by the Cooperative Marketing Society from Markfed is capital receipt and is exempt from tax. The decision of the Calcutta Bench-B in the case of Magnum Exports Pvt. Ltd. v ACIT reported in 54 ITD 425 wherein it is held that income on sale of export licence is a capital receipt. The Kerala High Court (Full bench) in the case of CIT v. Ruby Rubber Works Ltd., reported in 178 ITR 181 held that the rubber subsidy received is a capital receipt since it was for a public purpose and not with a view to reimburse the expenses incurred. The said decision of the Kerala High Court has the approval of the Hon'ble Supreme Court in the case of Kalpataru Estates Ltd., v. CIT reported in 221 ITR 601.
14. He further relied on The Calcutta High Court in the case of CIT v. Balrampur Chinni Mills Ltd., reported in 238 ITR 445 held that the surplus of the sale consideration permitted to be collected by the company with a stipulation to use same in repaying the loans taken from financial institutions is held as capital income. The Madras High Court in the case of CIT v. Madhurakantan Co-operative Sugar Mills reported in 263 ITR 388 held that the amount collected on sale of molasses is not income to the company as the said amount is to be utilized for the purpose of acquisition of the specified assets. There are various other decisions to the effect that such receipts are capital in nature.
15. The AR submitted that the Assessing Officer relied on the following decisions and the said decisions have no application to the facts of the case, in view of the explanations submitted hereunder:
(a) The Assessing Officer relied on the decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh reported in 271 ITR 401. According to the Assessing Officer, the CERs represent goods as they are capable of marketing. The said case has no application-to the facts of the assessee's case. In the said case, the company is engaged in the business of sale of computer software packages. The question was whether the items traded in are goods or not for the purpose of Sales Tax. The case of the assessee is totally different. The CERs were not the stock in trade of the assessee. There is no relevance of the decision of the Supreme Court to the case of the assessee's case.
(b) The Assessing Officer also relied on the decision of the Supreme Court in the case of Bharat Sanchar Nigam Ltd., v. Union of India reported in 282 ITR 273 to state that the CERs are goods. The Supreme Court was considering the case of BSNL which supplies the tele communication system. The Apex Court was considering the question whether the electromagnetic waves or the radio frequencies are the goods or not. The Hon'ble Supreme Court held that the radio frequencies are not goods. There is absolutely no relevance of the said decision to the facts of the assessee's case.
(c) The Assessing Officer relied upon the decision of the House of Lords in the case of Pontypride and Rhondda Joint' Water Board v. Ostime (H.M. Inspector of Tax), [1946] 14 ITR 45. In the said case, the House of Lords are dealing with a situation where subsidies from public funds were provided in carrying on the business are in the nature of profits and gains. It was found by the House of Lords that the subsidy received were to meet an estimated deficiency in the operation loss/trading activity and observed that the amounts were admittedly paid during the trading activity. The said case has no application to the facts of the assessee's case. The House of Lords are dealing with a situation where the subsidy was granted to reimburse the loss suffered by the Water Board. The amount received by the assessee is not such a receipt. Therefore, the decision of the House of Lords has no application to the facts of the assessee's case. Similar is the view taken in the case of Smart v. Lincolnshire Sugar Co. Ltd., reported in 20 TCU 643 referred to by the Assessing Officer. The Assessing Officer himself mentioned that the amount of subsidy was provided to subsidize the trading receipts. Therefore, the said case has no application to the facts of the assessee's case.
(d) The Assessing Officer also referred to the decision of Supreme Court in the case of V.S.S.V. Meenakshi Achi v. CIT reported in 60 ITR 253. In the said case, the Supreme Court found that the amount from the funds were earmarked for the assessee on the basis of the rubber produced by them and were paid against the expenditure incurred by them for maintaining the labour and producing the rubber. The facts in the said case indicate that the subsidy was received by the assessee to compensate the revenue expenditure incurred in the process of the trading activity which has absolutely no relevance to the facts of the assessee's case.
16. The AR submitted that from the analysis of the decisions cited by the assessee or the Assessing Officer, it can be seen that the subsidies granted are categorized into three types.
(a) Subsidy granted to compensate the trading loss or a manufacturing loss which is held as a revenue receipt.
(b) Subsidy granted to compensate the capital investment, purchase of specified plant and machinery etc. This subsidy is held to be capital receipt and also held that the same shall be reduced from the cost of the capital asset for the purpose of arriving at the depreciation.
(c) Subsidy granted for the public good is held as not taxable and not deductable from capital asset.
17. The AR submitted that in so far as the amount received from the International organizations, it is submitted that such amount is for public good and not to compensate either the revenue expenditure or the capital expenditure and, therefore, is not taxable. From the above explanations, it is clear that the subsidy received by a person unconnected with the trading or manufacture and meant for promotion of public good is capital in nature. It is clear from various decisions that any subsidy which compensate revenue expenditure is revenue in nature and which compensate revenue expenditure is revenue in nature and which compensates capital expenditure is capital in nature. When it is neither, the same cannot be included as income.
18. The AR submitted that the amount received is not to compensation either revenue type of expenditure nor the capital expenditure incurred by the assessee. Therefore, the said amount can neither be reduced from the cost of the assets nor added to the income of the assessee. Therefore, the assessee requests the Honourable Income-tax Appellate Tribunal to kindly consider the above explanations and allow the appeal holding that the amount received from CERs does not represent the revenue income.
19. Alternatively, the AR submitted that the amount received is not related to the business activity and that it does not represent a revenue receipt. The assessee explained as to how the amount cannot be considered as a revenue receipt. Without prejudice to any of the submissions, the assessee requests the Tribunal to kindly consider the following claims:
(a) If as held by the Assessing Officer (as per the extract at para 8 (c) above the amount represents a revenue receipt connected with the business activity, the same cannot be held as relating to the year of account as the certificate related to the emission of carbon during the earlier years. It is submitted in the earlier paragraphs that the CERs do not relate to the year of account. Hence, the income is not assessable for the assessment year under consideration.
(b) Even if it were to be considered as a revenue receipt for the year under consideration, it is to be exempt u/s. 80IA as the Assessing Officer himself clearly mentioned that it is connected to the production of power. In the words of the Assessing Officer they are directly linked to the generation of power. Therefore, the assessee would be entitled for deduction u/s. 80IA of the Act.
(c) With regard to rejection of the claim for deduction u/s. 80IA, the Assessing Officer relied on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co., Ltd., v. CIT reported in 113 ITR 84. The Supreme Court in the said case held that the income attributable to cover the receipts from sources other than the actual conduct of the business of the specific nature also is eligible for deduction. However, the Assessing Officer is of the view that the said decision was referred as the word 'attributable' as used in Sec. 80I and whereas the word 'derived from' is used in Sec. 80IA of the Act. Therefore, the Assessing Officer relied on the decision of the Supreme Court in the case of Ashok Leyland v. CIT reported in 224 ITR 122. In the said case, the Supreme Court considered the allowability of deduction u/s 80IA of the IT Act. The question before the Supreme Court was where the profit derived from sale of imported parts can be said to be attributable to the priority nature or not. The Supreme Court held that the receipt from sources other than the actual conduct of the business of generation and distribution of electricity also is eligible for deduction. Both the decisions referred to above i.e. 113 ITR 84 and 224 ITR 122 are in favour of the assessee and do not support the view of the Assessing Officer.
(d) The Assessing Officer relied on the decision of the Supreme Court in the case of Sterling Foods v. CIT reported in 237 ITR 579 and the decision of the Madras High Court in the case of Pandian Chemicals Ltd., v. CIT reported in 233 ITR 497. According to the Assessing Officer, the gain on sale of import entitlements is not attributable to the industrial activity and, therefore, the exemption u/s. 80IA is not allowed.
(e) The decisions of Punjab & Haryana High Courts in the case of Liberty Shoes Ltd. v. CIT reported in 293 ITR 478, Liberty India v. CIT reported in 293 ITR 520 and Shakti Foot Wear v. JCIT reported in 13 DTR 157 were also relied upon by the Assessing Officer.
(f) In this regard, the AR submitted that there is difference between the decision of the Apex Court and the facts of the assessee's case. In the case of the appellant, the Assessing Officer already held that the CERs are directly linked with the production of power and in the cases decided by various courts the same was in dispute.
(g) It is further submitted that firstly, the sale of import licenses is held as business receipt as the same is included in Sec. 28 of the IT Act. In so far as the grant of CERs is concerned, the same does not represent income within the meaning of Sec. 28 of the IT Act. Further, the Assessing Officer at page No. 5 of the assessment order extracted in the above mentioned paragraphs observed that the amount is directly attributable to the business of production of power. When the Assessing Officer after holding that the receipt is attributable to the business activity, cannot now say that the income is not derived from the industrial activity for the purposes of sec. 80IA of the IT Act. The observations of the Assessing Officer and the CIT (appeals) are contradictory.
(h) Further, if it is related to production relating to earlier years, the expenditure relatable to earning of certificates has to be arrived at by taking into consideration the assets used and the material consumed in the earlier years and such amount has to be reduced. The net income can only be subjected to tax and not the gross receipt. The certification report gives the data based on which such certificates are issued. The expenditure attributable to such activities has to be reduced from the receipts.
20. Without prejudice to any of the contentions, if the second view expressed by the learned CIT(A) that CERs represent goods were to be considered, as submitted earlier the said goods are capital goods and cannot be considered as stock in trade. The learned CIT (A) held that the certificates are akin to stocks or shares. In such an event, they represent capital goods The gain would be subject to tax as capital gain. In such an event, it is submitted that there is no cost of acquisition of such capital asset and hence the gain cannot be subject to capital gains in view of the decision of the Supreme Court in the case of CIT v. RC Srinivasa Setty reported in 128 ITR 294. It is further submitted that the amount spent for registration of the claim cannot be considered as the cost of acquisition. It only represents the process Cost for making applications etc. This view is supported by the decision of the ITAT, Hyderabad Bench in the case of ITO v. Uppala Venkatarao reported in 83 ITD 273. On the other hand if it were to be held that there is cost forming part of the manufacturing process, the proportion has to be determined and the cost suffered from the inception of the company has to be arrived at in which case there would be no gain. In view of the above submissions, the AR submitted that the Tribunal may pass appropriate orders allowing the appeal.
21. The learned DR submitted that the only grievance of the assessee is that the sale from out of transfer/sale of CERs popularly known as carbon credit is not taxable as per the provisions of the IT Act and if at all it is taxable, the provision of section 80IA would apply for said receipts. The concept of carbon trading is in its budding/infancy phase. But no doubt the growth of this business is tremendous worldwide. The concern for global warming arising out of emission of harmful gases into atmosphere, more precisely the emission of carbon dioxide has given rise to this concept of carbon trading. The famous Kyoto protocol tried to solve this global concern of high degree of emission of harmful gases. The idea was to divide the entire world into two, one which can make changes in the existing infrastructure and one who cannot. The idea behind this was that each country will have to cut down their emission by some percentage or else have to pay heavy fine by way of measuring how much they are polluting the air. This has given rise to the concept of "clean development mechanism'(CDM) which is a project executed in a country where they cannot on their own afford to bring that technological change in the existing industry, which can result in less carbon emission. For example, a company in a developed world would lend money to a company in a developing world to buy the necessary technology and in turn own units generated by bringing the technology change and thus meet the target set. This will help the developing countries to get much needed financial help and in turn help the developed countries to meet the emission cut targets set by their government. If the company in the developing country ends up with excess units than the permissible limit, it can sell the same for some profit out of it. Thus, the underlying intention behind the technological implementation by a company in the developing world is not only to reduce the pollution of atmosphere but also to earn some profit from out of excess units that can be generated by implementation of the CDM project. The Assessing Officer while considering the receipt to be revenue in nature has relied on the decision of Hon'ble Supreme Court in the case of TATA Consultancy Services v. State of Andhra Pradesh. The rationale laid down by Hon'ble Supreme Court in the above mentioned case is squarely applicable to the case of the assessee. In that case while dealing with the issue of levy of sales tax on computer software, the Hon'ble Supreme Court held that a 'goods' may be tangible property or intangible property. It would become 'goods' provided it has the attributes thereof with regard to (a) its utility (b) capability of being bought and sold (c) capability of being transmitted, transferred, delivered, stored and possess. The CER credits can be considered as 'goods' as they have all the attributes of goods as laid down in the decision of Hon'ble Supreme Court. This approach was reiterated by the Supreme Court in the case of BSNL v. Union of India [2006] (282 ITR 273). The different clauses in the purchase agreement between the assessee company and M/s. Noble Carbon Credit, Ireland clearly indicate that the sale transaction of CER is nothing but a transaction in 'goods'. The agreement had different clauses regarding the contract quantity, contract price, date of delivery and the receipt thereof, which are' basically the attributes in a transaction of sale of goods.
22. The DR submitted that, otherwise also, this issue can be viewed from a different angle. The assessee submitted that the certificates are in recognition of the achievement for reducing the pollution. No doubt by implementing the CDM Project the assessee gets the benefit of efficiency in respect of reducing the pollution. Had there been no other benefit attached to it, in the normal situation, the assessee company would not have bothered for obtaining the CERs. It is because whatever expenditure is incurred for implementation of the project as a pollution reduction measure, the assessee would have got the benefit of the expenditure incurred by claiming it in its profit and loss account. Since there is something more to this and since it is known that the certificates issued by UNFCCC have intrinsic value and has a ready market for its redemption/ trading, that the assessee obviously pursued to obtain the said certificates. He submitted that 'carbon credits' has a ready market worldwide and it is understood that these are also quoted in the international market. For Example there is regular trading in Carbon credit in European Climate Exchange based at London where the trading is apparently web-based. Similar trading also takes place through the website of Nordpool.com a Norway based website, Bluenext.com a Paris based website and Chicago Climate Exchange, Chicago USA. Of late, the trading has apparently commenced in India through MCX (Multi Commodity Exchange) and NCDEX (National commodity and derivative Exchange). Thus the certificates (CERs) are akin to shares or stock which are transacted in the stock exchange. Hence, the sale proceeds arising out of sale of the CERs by the assessee is a revenue receipt and rightly brought to tax by the Assessing Officer. Accordingly, the DR submitted that the stand taken by the Assessing Officer is justified and the receipt arising out of the sale of CERs is revenue in nature and hence taxable.
23. The DR submitted that the next question is whether the said receipt will entitle the assessee to claim deduction u/s. 80IA. The view of the Assessing Officer that the said receipts are not directly and inextricably related to the business of the undertaking is justified. It is obvious that generation and sale of CER is not the business of the assessee. However, the said CERs accrued to the assessee in view of implementation of the CDM project for its existing business the basic purpose of which was reduction of pollution. To that extent, though the CERs are accrued in course of the business operations of the assessee but are not directly connected to the business of the industrial undertaking. It is only incidental to the business. The Assessing Officer has relied on the decision of Hon'ble Punjab and Haryana High Court in the case of Liberty Shoe Ltd v. CIT and Liberty India v. CIT reported in 293 ITR. The Assessing Officer has also relied on the decision of Supreme Court in the case of Sterling Food Ltd and the decision of Madras High Court in the case of Pandian Chemicals. The contention of the assessee is that once the assessee qualifies for deduction u/s. 80IA of the Act by being covered by the description industrial undertaking any profit earned by the business of the assessee was eligible for deduction and it was not necessary that the business must be from the activity of the industrial undertaking. It has been held by various courts that if the income is from a different and independent source, the same may not be eligible for deduction u/s, 80IA/80IB. In the context of DEPB benefits, the Hon'ble Punjab and Haryana High Court held that for application of the words "derived from" there must be a direct nexus between profits and gains and the industrial undertaking. The income of the assessee from duty draw back cannot be held to be income derived from specified business. This view of Hon'ble Punjab and Haryana High Court has been confirmed by the Hon'ble Supreme court referred to above. Since the income from sale of CERs is independent of the main business of power generation it cannot be said that the receipt from sale of CERs would automatically be entitled for deduction u/s. 80IA by virtue of the fact that the power generation business of the assessee is entitled for deduction u/s. 80IA. Thus the argument of the assessee is not acceptable and hence deserves to be rejected. The judicial decisions relied upon by the assessee in its submission relate to taxability of subsidy. Accordingly, the sale proceeds of the CERs cannot be equated with subsidy and hence the applicability of the case-law relied on by the assessee does not arise. Thus, considering the totality of the facts, the DR was of the view that the Assessing Officer has rightly rejected the claim of deduction u/s. 80IA of the Act.
24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgement of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.
25. Further, as per guidance note on accounting for Self-generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs.
26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed.
27. As we have decided the main issue, the alternate ground of the assessee becomes infructuous and the same is dismissed.
28. In the result, assessee's appeal is allowed.
IT: Housing project - Where assessee had completed housing project well before final date but local authority, for technical reasons, granted business use permission after such date, assessee would be entitled to deduction
■■■
[2012] 26 taxmann.com 180 (Guj.)
HIGH COURT OF GUJARAT
Commissioner of Income-tax - IV
v.
Tarnetar Corporation*
AKIL KURESHI AND MS. HARSHA DEVANI, JJ.
TAX APPEAL NO. 1241 OF 2011†
SEPTEMBER 12, 2012
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings - Assessee got approval for development of housing project from local authority before 1-4-2004 - It completed construction in year 2006 and also applied for permission to local authority on 15-2-2006 - Local authority for technical reasons granted business use permission only on 19-3-2009 - Whether since assessee had completed housing project well within statutory time frame, it was entitled to deduction under section 80-IB(10) - Held, yes [Paras 6 & 7] [In favour of assessee]
FACTS
Facts
• The assessee claimed deduction under section 80-IB(10) on development of housing project.
• The Assessing Officer denied the deduction on the plea that the assessee did not complete the housing project within the statutory time frame. He held that the assessee had got approval for the housing project from the local authority before 1-4-2004 and thus it was required to complete the construction latest by 31-3-2008. Since the building use (BU) permission was granted after 31-3-2008, the construction must be deemed to have been completed after such date.
• On appeal, the Commissioner (Appeals) allowed the deduction under section 80-IB(10). He held that the assessee had completed the construction in the year 2006, i.e., well before 31-3-2008 and had also sold several units which were completed and actually occupied. It also applied for BU permission to the local authority on 15-2-2006. The local authority for technical reasons at one stage rejected such application in the year 2007 and thereafter upon revised efforts made by the assessee granted the same by order dated 19-3-2009.
• The Tribunal upheld the order of the Commissioner (Appeals).
Issue involved
• Whether the assessee was entitled to deduction ?
HELD
• The assessee had completed the construction well before 31-3-2008 is not in doubt. It is true that formally BU permission was not granted by the Municipal Authority by such date. It is equally true that Explanation (ii) to clause (a ) to section 80-IB(10) links the completion of the construction to the BU permission being granted by the local authority. However, not every condition of the statute can be seen as mandatory. If substantial compliance thereof is established on record, in a given case, the court may take the view that minor deviation thereof would not vitiate the very purpose for which deduction was being made available. [Para 6]
• The assessee had completed the construction two years before the final date and had applied for BU permission. Such BU permission was not rejected on the ground that construction was not completed, but some other technical ground. In that view of the matter, granting benefit of deduction cannot be held to be illegal. [Para 7]
EDITOR'S NOTE
• Also the assessee could not be denied the benefit of deduction under section 80-IB(10) merely on the ground that it was not a developer. [Para 2]
Ms. Paurami B. Sheth for the Appellant.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Tribunal dated 24.5.2011 raising following question for our consideration :
"Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of deduction of Rs. 1,02,69,964/- made u/s.80-IB(10) of the Act ?"
2. The issue pertains to deduction claimed by the assessee under section 80-IB(10) of the Act on development of housing project. The Assessing Officer was of the opinion that such deduction was not justified. Revenue's stand appears to be that the assessee was not a developer and that therefore, would not be qualified for deduction under section 80-IB(10) of the Act. Additional contention of the Revenue was that the assessee did not fulfil one of the essential conditions required for claiming deduction under section 80-IB(10) of the Act. With respect to the first contention, the learned counsel for the Revenue candidly agree that such issue was discussed by this Court at considerable length in the case of CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/ 17 taxmann.com 156 (Guj.) and under similar circumstances held that the assessees cannot be denied the benefit of deduction. Without further elaboration, therefore, such contention is turned down.
3. With respect to the second contention, we may record that the contention of the Revenue is that the assessee did not complete the housing project within the statutory time frame. Under sub-clause (i) of clause (a) of section 80-IB(10), the assessee since had got approval for the housing project from the local authority before 1st April, 2004 was required to complete the construction latest by 31st March, 2008. Relying on explanation (ii) to clause (i) , Revenue contends that since BU permission was granted after March 2008, the construction must be deemed to have been completed after such date. Explanation (ii) reads as under:
"(ii) the date of completion of construction of the housing project shall be taken to be the date on which the completion certificate in respect of such housing project is issued by the local authority."
4. CIT (Appeals) as well as the Tribunal after detailed discussion came to the conclusion that such requirement was not mandatory in nature. In the present case, the assessee had completed the construction well before the last date, namely, 31st March, 2008 and had also sold several units which was completed and actually occupied, and it also applied for BU permission to the local authority. The local authority, however, for technical reasons, at one stage rejected such application in the year 2006 and thereafter upon revised efforts from the assessee granted the same by order dated 19th March, 2009.
5. We have perused the detailed discussion of the CIT (Appeals) as well as the Tribunal on the issue. In particular, the Tribunal noted that the construction was completed in 2006. Application for BU permission to the Municipal authorities was filed on 15.2.2006 which was rejected on 1.7.06. Several residential units were occupied since the same was done without necessary permission. The assessee had also paid penalty and got such occupation regularized. Several tenements were sold long before the last date.
6 In the present case, therefore, the fact that the assessee had completed the construction well before 31st March, 2008 is not in doubt. It is, of course, true that formally BU permission was not granted by the Municipal Authority by such date. It is equally true that explanation to clause (a) to section 80-IB(10) links the completion of the construction to the BU permission being granted by the local authority. However, not every condition of the statute can be seen as mandatory. If substantial compliance thereof is established on record, in a given case, the court may take the view that minor deviation thereof would not vitiate the very purpose for which deduction was being made available.
7. In the present case, the facts are peculiar. The assessee had not only completed the construction two years before the final date and had applied for BU permission. Such BU permission was not rejected on the ground that construction was not completed, but the some other technical ground. In that view of the matter, granting benefit of deduction cannot be held to be illegal.
8. In the result, the Tax Appeal is dismissed.
IT : Daily payment for purchase vis-a-vis sec. 40A(3) - Where assessee made payment for purchase of asset in such a way that a sum of less that Rs. 20 thousand in cash was credited in seller's account every day without there being any business expediency for same, payment to be disallowed under section 40A(3)
IT : Objection to jurisdiction of AO to pass assessment order - Where assessee did not raise objection relating to jurisdiction of AO to pass assessment order in course of assessment proceedings within specified time period, such an objection could not be raised for first time in appellate proceedings
IT : Issue of notice on transfer of assessment proceeding - At time assessment proceedings can be transferred; there is no requirement to issue a notice under section 143(2) again
■■■
[2012] 25 taxmann.com 464 (Jodh.)
IN THE ITAT JODHPUR BENCH
Vaishali Builders & Colonizers
v.
Additional Commissioner of Income-tax, Range-1, Jodhpur*
BHAVNESH SAINI, JUDICIAL MEMBER AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NO. 391 (JODH.) OF 2011
[ASSESSMENT YEAR 2008-09]
JULY 25, 2012
I. Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limits - Assessment year 2008-09 - Assessee, a dealer in real estate, purchased a piece of land for Rs. 1.12 crore - Since assessee made said payment in cash, Assessing Officer disallowed same by invoking provisions of section 40A(3) - It was noted that assessee credited whole amount in seller's account in such a way that payment of less than Rs. 20,000 was made in a day - Further, no business expediency was proved as to why every day cash payment was made in instalments - Rule 6DD(j) would also not apply to assessee's case because assessee failed to prove that on date of payment banks were closed either on account of holiday or strike - Whether on facts, impugned disallowance made by Assessing Officer was to be upheld - Held, yes [In favour of revenue]
II. Section 124 of the Income-tax, 1961 - Assessing Officer - Jurisdiction of - Assessment year 2008-09 - Assessee filed instant appeal challenging jurisdiction of Assessing Officer to pass assessment order - It was noted that assessee did not raise such objection before Assessing Officer within one month from date of service of notice under section 142(1) till completion of assessment - Assessee also participated in assessment proceedings before Assessing Officer - Whether since no objection regarding jurisdiction was raised as required under section 124(3) within specified time period, it could not be raised for first time in appellate proceedings - Held, yes - Whether, therefore, assessee's objection was to be set aside - Held, yes [In favour of revenue]
III. Section 127, read with section 143, of the Income-tax Act, 1961 - Income-tax authorities - Power to transfer cases - Assessment year 2008-09 - Whether transfer of case from one Assessing Officer to another of same city, locality or place can be made at any stage of assessment proceedings and there is no requirement to issue notice to assessee under section 143(2) again at any time; once such a notice has already been issued within prescribed time period by Assessing Officer from whom case is transferred - Held, yes [In favour of revenue]
FACTS-I
• The assessee was dealing in real estate. During relevant assessment year, assessee purchased a piece of land for which a payment of Rs. 1.12 crore was made in cash.
• The Assessing Officer taking a view that payment had been made in violation of provisions of section 40A(3), disallowed same.
• The Commissioner (Appeals) upheld the order of Assessing Officer.
• On second appeal :
HELD-I
• The assessee is dealing in real estate and land purchased is stock-in trade. Therefore, the payment made for purchase of land is expenditure in the business of the assessee and attracts the provisions of section 40A(3). It is also admitted fact that the assessee has purchased chunk of land from different parties and the payment has been staggered over a period of time. Thus, the land is stock in-trade of the business of the assessee and was not merely an asset. The assessee pleaded before the authorities below that the parties insisted for cash payment, therefore, the cash payment is made on different dates, but the plea taken before the authorities below have not been established by any evidence or material on record or confirmation from the parties. The assessee has credited the whole amount in the account of the above parties and have staggered the payment almost every day at less than Rs. 20,000 in a day and further credit balance was carried forward in the next year. Therefore, it is not a case of the assessee that each bill was less than Rs. 20,000.
• The whole payment of purchase of land is not less than Rs. 20,000/-. It is only the payment, which has been staggered over a period of time. The assessee failed to prove that the bank facility is not available on each day when cash payment was made. No business expediency is also proved as to why every day cash payment was made in instalments. The assessee deliberately staggered the part payment to circumvent the provisions of law. The explanation of the assessee is not supported by any evidence or confirmation that the concerned parties insisted for cash payment everyday in whole of the year. The books of account of the assessee are, thus, manipulated in such a way which suits to the convenience of the assessee. [Para 11]
• Regarding the business expediency, the assessee has not filed any evidence before the authorities below and nothing is clarified as to what were the other relevant factors, for which the cash payment has been made and no specific rule has been explained under rule 6DD, which is applicable to the case of the assessee. The assessee argued that for purchase of agricultural land and payment made to the villagers, the provisions of section 40A(3) may not be applied as provided in exception to rule 6DD. The assessee is dealing in real estate and in land and as such, it was for the assessee to establish that the cash payments have been made for business exigencies, which the assessee has failed to prove in this case. Further, rule 6DD(j) would not apply in this case because the assessee failed to prove that on the date of payment whether banks were closed either on account of holiday or strike. The Commissioner (Appeals), therefore, rightly noted in his finding that the assessee has not satisfied as to under which Rule, the assessee's case would fall.
• Considering the facts and circumstances and above discussion, it is clear that the assessee consciously split up the payments in whole of the year, which is impracticable, illogical and it was done just to circumvent the provisions of law. There was no justification for the assessee to split up the transactions of crores of rupees in small payments of Rs. 15,000 to Rs. 20,000 everyday. Whatever plea was taken before the authorities below was not supported by any evidence. Therefore, the assessee failed to prove any business expediency or other facts for making staggered payments in cash. The case of the assessee would not fall in any exception to rule. The assessee deliberately and consciously split up the payments in part so as to circumvent the provisions of law. Therefore, there is no justification to interfere with the orders of the authorities below. There is no merit in these grounds of appeal by the assessee. Same are accordingly dismissed. [Para 11.3]
CASE REVIEW
Shri Salasar Overseas (P.) Ltd. v. Dy. CIT [2012] 66 DTR 9 (JP), Attar Singh Gurumukh Singh v. ITO [1991] 191 ITR 667/ 59 Taxman 11 (SC), Pack India v. ACIT38 ITD 01, CIT v. CPL Tannery [2009] 318 ITR 179 /[2008] 175 Taxman 316 (Cal.),Kanti Lal Purshottam & Co. v. CIT [1985] ITR 519/ 22 Taxman 241 (Raj.) and CIT v.Union Agencies [1987] 166 ITR 529 / 33 Taxman 572 (Delhi) (para 11.3)distinguished.
Hindustan Transport Co. v. IAC [1991] 189 ITR 326 /[1992] 63 Taxman 426 (All.) (para 5.1), Triveni Engg. & Industries Ltd. v. Dy. CIT [2005] 93 ITD 561 (Delhi) (para 5.2), Kanshi Ram Madan Lal v. ITO [1983] 3 ITD 290 (Delhi) (para 7), CIT v.Balchand Ajit Kumar [2003] 263 ITR 610 /[2004] 135 Taxman 180 (MP) (para 7), CITv. President Industries [2002] 258 ITR 654 / 124 Taxman 654 (Guj.) (para 7), Shri Salasar Overseas (P.) Ltd. v. Dy. CIT [2012] 66 DTR 9 (JP) (para 9), Attar Singh Gurumukh Singh v. ITO [1991] 191 ITR 667/59 Taxamn 11 (SC) (para 9), CIT v.CPL Tannery [2009] 318 ITR 179/[2008] 175 Taxman 316 (Cal.) (para 9), Kanti Lal Purshottam & Co. v. CIT [1985] 155 ITR 519/ 22 Taxman 241 (Raj.) (para 9), CIT v.Union Agencies [1987] 166 ITR 529/ 33 Taxman 572 (Delhi) (para 9), Ingenieurs & Agents v. ITO [2005] 5 ITD 696 (All.) (para 10), Shri Radhika Prakashan (Raipur) (P.) Ltd. v. CIT [2002] 257 ITR 675 / 123 Taxman 213 (MP) (para 11), Aggarwal Steel Traders v. CIT [2001] 250 ITR 738 /[2000] 109 Taxman 283 (Punj. & Har.) (para 11.1), CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) (para 11.2), Sumati Dayalv. CIT [1995] 214 ITR 801 / 80 Taxman 89 (SC) (para 11.2).
Amit Kothari for the Appellant. Subhash Chandra for the Respondent.
ORDER
Bhavnesh Saini, Judicial Member - This appeal by the assessee is directed against the order of the ld. CIT(A), Jodhpur dated 13.10.2011 for the assessment year 2008-09 on the following grounds :
"1. The impugned order passed by the Ld. CIT(A) and the impugned assessment order is contrary to the provisions of law, contrary to facts, material and evidence existing on records, contrary to all cannons of natural justice.
2. The Ld. CIT(A) has erred in not accepting the assessee's contention that the impugned assessment order passed by the Ld. Assessing Authority is patently without jurisdiction and is void ab initio.
3. The Ld. CIT(A) has erred in confirming the disallowance of Rs. 1,12,00,000/- made by the Ld. AO by wrongly invoking the provisions of section 40A(3).
4. That on the facts and circumstances of the present case, the provisions of section 40A(3) are not applicable in respect of the agricultural land purchased by the assessee. The Ld. CIT(A) ought to have deleted the aforesaid addition of Rs. 1,12,00,000/- made in the declared income,
5. The Ld. CIT(A) ought to have accepted the assessee's contention that the payment so made by the assessee for purchase of agricultural land is covered by the exceptional circumstances mentioned in Rule 6DD. The entire disallowance made by the Ld. AO amounting to Rs. 1,12,00,000/- ought to have been deleted by the Ld. CIT(A).
6. The Ld. CIT(A) have ought to have cancelled the interest charged u/s 234A, 234B and 234C."
2. We have heard the ld. Representatives of both the parties, perused the findings of the authorities below and considered the material available on record.
3. On ground No.1 & 2, noted above, the assessee challenged the jurisdiction of the Assessing Officer (Addl. CIT, Range-I, Jodhpur) in passing the assessment order in question. The assessee submitted before the ld. CIT(A) that the return was filed with the ACIT, Circle-1 and notice u/s. 143(2)/142(1) were issued by the ACIT. However, subsequently, the case was transferred and commenced by the ACIT, Circle-1, Jodhpur and the order is also passed by the Additional CIT u/s. 143(3) on December, 2010. It was further stated that the ACIT, Range-1, Jodhpur had already started the assessment proceedings and the notice u/s. 143(1) was issued by him and the final order being made by some other officer not having jurisdiction over the matter. The ld. CIT(A) called for the report from the Assessing Officer, in which he has stated that the assessee has challenged the assessment order passed by the Additional CIT, Range-1, Jodhpur at the appellate stage. As per section 120, the Additional CIT is also an Assessing Officer. From the assessment record, it is clear that the Addl. CIT, Range-I, Jodhpur has issued the notice u/s. 142(1) on 09.09.2010 and after that the assessee filed the details before him and participated in the assessment proceedings in compliance to his query letters dated 05.10.2010, 14.10.2010, 09.11.2010, 23.11.2010, 30.11.2010 and 02.12.2010. Therefore, it was not justifiable to challenge the notice issued by the Addl. CIT and his jurisdiction at the appellate stage. The AO relied upon section 124(3) of the IT Act, which provides that no person shall be entitled to call in question the jurisdiction of an Assessing Officer where he has filed return of income u/s. 139(1), after expiry of one month from the date on which he was served with the notice u/s. 142(1) or 143(2) or after the completion of assessment, whichever is earlier. The ld. CIT(A) considering the explanation of the assessee in the light of the report submitted by the AO and order sheets, dismissed the objection of the assessee regarding jurisdiction of the AO (Addl. CIT, Range-1, Jodhpur). The findings of the ld. CIT(A) in the appellate order in para 3.3 are reproduced as under :
"3.3 I have considered the submission of the appellant and report of the Assessing Officer and I find that no such issue was raised by the appellant before the Assessing Officer while finalizing the assessment order. The appellant complied with reference to notices/letters issued by the Addl. CIT, Range - 1, Jodhpur. The appellant has furnished all the details before the Addl. CIT as required by him on various occasions. On all these occasions, the assessee has neither raised this point before the Addl. CIT, Range - 1, Jodhpur. The Addl. CIT, Range - 1, Jodhpur is having concurrent jurisdiction over the cases pertain to Range - 1, of Jodhpur. The Addl. CIT in exercise of power conferred in sec. 120 has rightly issued the notices. Further, as per sec. 124(3) no person shall be entitled to call in question the jurisdiction of an Assessing Officer. So, the point raised during the appellate proceeding cannot be accepted. The appellant cannot be validly raised as any challenge to order of transfer shall be raised by the assessee in independent proceeding; if no such challenge was made at the initial stage, the issue cannot be raised in an appeal against assessment order, as has been clarified by Hon'ble Punjab & Haryana in the case of Jaswindeer Kaur Kooner ( 291 ITR 80 P&H). In view of this, the ground of appeal is dismissed."
4. The ld. counsel for the assessee reiterated the submissions made before the ld. CIT(A) and submitted that first notice u/s. 143(2) was issued by the ACIT, Circle-1, Jodhpur. Therefore, Addl. CIT, Range-1 Jodhpur cannot pass the assessment order without further issue of notice u/s. 143(2). He has, however, admitted that the assessee participated in the proceedings before the Addl. CIT in response to the statutory notices and no objection regarding jurisdiction was raised before the AO. He has referred to section 120(5) of the IT Act and submitted that since ACIT and Addl. CIT Range-1, Jodhpur were having concurrent jurisdiction, therefore, ACIT should have passed the assessment order. He has submitted that there was no jurisdiction order in favour of the Addl. CIT. On the other hand, the ld. DR relied upon the order of the AO and submitted that there is no need that further notice u/s. 143(2) should be issued by the Addl. CIT. As per scheme of the Act, Addl. CIT is also Assessing Officer. The assessee appeared before the Addl. CIT as Assessing Officer and participated in the assessment proceedings before him and no objection regarding jurisdiction was raised before him. Therefore, the objection of the assessee has been rightly turned down by the ld. CIT(A). The ld. DR filed copy of jurisdiction order u/s. 127(1) dated 25.08.2010 in favour of Addl. CIT, Range-1, Jodhpur in the case of the assesse for the assessment year under appeal as issued by the CIT-I, Jodhpur. He has, therefore, submitted that Addl. CIT was having jurisdiction over the case of the assessee.
5. We have considered the rival submissions and the material on record and do not find any justification to interfere with the order of the ld. CIT(A). Section 124 of the IT Act provides as under :
"Jurisdiction of Assessing Officers.
124. (1) Where by virtue of any direction or order issued under sub-section (1) or sub-section (2) of section 120, the Assessing Officer has been vested with jurisdiction over any area, within the limits of such area, he shall have jurisdiction-
(a) in respect of any person carrying on a business or profession, if the place at which he carries on his business or profession is situate within the area, or where his business or profession is carried on in more places than one, if the principal place of his business or profession is situate within the area, and
(b) in respect of any other person residing within the area.
(2) Where a question arises under this section as to whether an Assessing Officer has jurisdiction to assess any person, the question shall be determined by the Director General or the Chief Commissioner or the Commissioner; or where the question is one relating to areas within the jurisdiction of different Directors General or Chief Commissioners or Commissioners, by the Directors General or Chief Commissioners or Commissioners concerned or, if they are not in agreement, by the Board or by such Director General or Chief Commissioner or Commissioner as the Board may, by notification in the Official Gazette, specify.
(3) No person shall be entitled to call in question the jurisdiction of an Assessing Officer-
(a) where he has made a return 21[under sub-section (1) of section 115WD or] under sub-section (1) of section 139, after the expiry of one month from the date on which he was served with a notice under sub-section (1) of section 142 or 21[sub-section (2) of section 115WE or] sub-section (2) of section 143 or after the completion of the assessment, whichever is earlier;
(b) where he has made no such return, after the expiry of the time allowed by the notice under 22[sub-section (2) of section 115WD or sub-section (1) of section 142 or under sub-section (1) of section 115WH or under section 148 for the making of the return or by the notice under the first proviso to section 115WF or under the first proviso to section 144] to show cause why the assessment should not be completed to the best of the judgment of the Assessing Officer, whichever is earlier.
(4) Subject to the provisions of sub-section (3), where an assessee calls in question the jurisdiction of an Assessing Officer, then the Assessing Officer shall, if not satisfied with the correctness of the claim, refer the matter for determination under sub-section (2) before the assessment is made.
(5) Notwithstanding anything contained in this section or in any direction or order issued under section 120, every Assessing Officer shall have all the powers conferred by or under this Act on an Assessing Officer in respect of the income accruing or arising or received within the area, if any, over which he has been vested with jurisdiction by virtue of the directions or orders issued under sub-section (1) or sub-section (2) of section 120."
5.1 On reading the provisions of section 124 (2) of the IT Act above, the issue of jurisdiction to assess the person shall be determined by the Director General, Chief Commissioner or the Commissioner or in other cases, by the Board and sub-sec.(4) of section 124 provides that where the assessee questioned the jurisdiction of the AO as per section 124(3), then the AO shall, if not satisfied with the correctness of the claim of the assessee, refer the matter for determination under sub-section (2) before the assessment is made, i.e., the question to be referred to the Director General, CCIT, CIT or the Board, as the case may be. Hon'ble Allahabad High Court in the case of Hindustan Transport Co. v. IAC [1991] 189 ITR 326 /[1992] 63 Taxman 246 , considering the objections to the jurisdiction of the Assessing Officer held that objection cannot be raised after the assessment is completed. In this case, the assessment order under consideration of the assessment year 1985-86 and Hon'ble Allahabad High Court considering the provisions of section 124 of the IT Act considered the following points :
(i) What is the nature of the power of transfer conferred by the Act ? and
(ii) How the Act itself views a defect of the nature involved in the present case ?
We may mention that the provisions of section 124 as were applicable in assessment year 1985-86 are almost similar to the provisions contained in section 124 of the IT Act after amendment, which are applicable to the present case. Hon'ble Allahabad High Court further held -(page 331)
"Being an enactment aimed at collecting revenue, the Legislature did not intend collection of revenue to be bogged down on account of technical plea of jurisdiction. It has, therefore, prescribed the limit up to which the plea of jurisdiction may be raised. As provided in section 124(5)(a), the right is lost as soon as the assessment has been completed. Even where the right is exercised before the assessment is completed, the question is to be decided by the Commissioner or by the Board. Courts do not come into the picture.
From the above provisions of the Act, it is apparent that the Act does not treat the allocation of functions to various authorities or officers as one of substance. It treats the matter as one of procedure and a defect of procedure does not invalidate the end action. The answer to the first question, therefore, is that the power is administrative and procedural and is to be exercised in the interest of exigencies of tax collection and the answer to the second question is that, under the Act, a defect arising from allocation of functions is a mere irregularity which does not affect the resultant action."
5.2 The ITAT, Delhi Bench in the case of Triveni Engg. & Industries Ltd. v. Dy. CIT[2006] 280 ITR (AT) 210/[2005] 93 ITD 561 , following the above decision of Hon'ble Allahabad High Court, decided the issue against the assessee.
5.3 It is admitted fact that the assessee did not raise any objection before the AO (Addl. CIT) within one month from the date of service of notice u/s. 142(1) till the completion of the assessment. The assessee participated in the assessment proceedings before the AO. The assessee, therefore, cannot raise issue of jurisdiction before the ld. CIT (A) at the appellate stage. Since no objection regarding jurisdiction was raised as required u/s. 124(3) within the period of specified under law, as above, therefore, the objection of the assessee is not tenable. The Addl. CIT is also the Assessing Officer as per scheme of the Act having concurrent jurisdiction over the case of the assessee. Further, section 127 of the IT Act provides the powers to transfer the cases and reads as under :
"Power to transfer cases.
127. (1) The Director General or Chief Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him.
(2) Where the Assessing Officer or Assessing Officers from whom the case is to be transferred and the Assessing Officer or Assessing Officers to whom the case is to be transferred are not subordinate to the same Director General or Chief Commissioner or Commissioner,-
(a) where the Directors General or Chief Commissioners or Commissioners to whom such Assessing Officers are subordinate are in agreement, then the Director General or Chief Commissioner or Commissioner from whose jurisdiction the case is to be transferred may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, pass the order;
(b) where the Directors General or Chief Commissioners or Commissioners aforesaid are not in agreement, the order transferring the case may, similarly, be passed by the Board or any such Director General or Chief Commissioner or Commissioner as the Board may, by notification in the Official Gazette, authorise in this behalf.
(3) Nothing in sub-section (1) or sub-section (2) shall be deemed to require any such opportunity to be given where the transfer is from any Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) and the offices of all such officers are situated in the same city, locality or place.
(4) The transfer of a case under sub-section (1) or sub-section (2) may be made at any stage of the proceedings, and shall not render necessary the re-issue of any notice already issued by the Assessing Officer or Assessing Officers from whom the case is transferred.
Explanation.-In section 120 and this section, the word "case", in relation to any person whose name is specified in any order or direction issued thereunder, means all proceedings under this Act in respect of any year which may be pending on the date of such order or direction or which may have been completed on or before such date, and includes also all proceedings under this Act which may be commenced after the date of such order or direction in respect of any year.
5.4 The ld. DR produced the copy of the order u/s. 127 of the IT Act dated 25.08.2010 passed by CIT-I, Jodhpur transferring the jurisdiction of the case of the assessee with Addl. CIT, Range-1, Jodhpur. Thus, the concurrent jurisdiction with Addl. CIT, Range-1, Jodhpur was conferred with the "jurisdiction" to pass the assessment order in the case of the assessee. According to sub-sec. (3) of section 127, there was no need to give any opportunity to the assessee for transfer of case of the assessee from earlier AO, ACIT to Addl. CIT, Range-1, Jodhpur because both were situated in the same city, locality or place. Further, sub-sec. (4) of section 127 provides that the transfer of the case can be made any stage of proceedings and shall not render necessary the re-issue of any notice already issued by the Assessing Officer or Assessing Officers from whom the case is transferred. Therefore, there is no need to issue notice u/s. 143(2) of the IT Act again and there is no further requirement under the law to issue another notice u/s. 143(2) of the Act because once such a notice is issued within the period of limitation, there is no requirement by law to issue such notice u/s. 143(2) again and again at different stages. The Explanation to section 127 also clarifies regarding concurrent jurisdiction of the officer of the same range which would clearly negate the objection of the ld. counsel for the assessee. Therefore, the Addl. CIT, Range-1, Jodhpur was having proper jurisdiction over the case of the assessee to pass the assessment order in the matter. There is compliance of section 127 of the IT Act in the matter and the assessee has not raised any objection of jurisdiction within the period of limitation as provided u/s. 124(3) of the Act. Therefore, the objection of the assessee has been rightly rejected by the ld. CIT(A). Considering the above discussion, we do not find any merit in ground No. 1 & 2 of appeal of the assessee. The same are, accordingly, dismissed.
6. On ground Nos. 3 to 5, the assessee challenged the disallowance of Rs. 1,12,00,000/- u/s. 40A(3) of the IT Act. According to the AO, during the assessment proceeding, the assessee submitted that there have been purchases of Rs. 5,37,57,500/- and the assessee has made sales amounting to Rs. 5,84,30,300/-. Vide note sheet entry dated 5-10-2010, the assessee was asked to furnish mode of payment to parties to whom payments for purchase have been made. The assessee furnished the details of purchases vide letter dated 23-11-2010 wherein the mode of payment was mentioned. In these details the following two details were noticed:-
| F.Y. | Party Name | Address | Payment | Gross Amount |
| 2007-08 | Shivya Bijiya & Dhaliya | Vill & Post Choka, Jodhpur | Cash | 1,80,60,000/- |
| 2007-08 | Shivya Bijiya & Dhaliya | Vill & Post Choka, Jodhpur | Cheque | 10,00,000/- |
During the discussion, the assessee was asked as to why payment for purchase of land has been made in cash. The first reply of the assessee was that the persons receiving the money insisted for payment through cash only. However, it was indicated to him that next payment to the same person has been made in cheque. So the reply of the assessee is contradictory. The Assessing Officer further stated on the same day vide order sheet entry dated 23-11-2010, the assessee was asked to explain why the expenditure made in cash for purchase of land should not be disallowed u/s 40A(3). The assessee furnished the details of mode of payment as under :-
| F.Y. | Party Name | Address | Payment | Gross Amount |
| 2007-08 | Shivya Bijiya & Dhaliya | Vill & Post Choka, Jodhpur | Cash | 1,80,60,000/- |
| 2007-08 | Bijaran/Kirtaram | Vill & Post Choka, Jodhpur | Cash | 10,00,000/- |
| | | Total | | 1,90,60,000/- |
6.1 The assessee replied vide letter dated 30-11-2010 before the Assessing Officer as under :-
The assessee has relied on the provision of Section.40A(3).
The condition when an assessee can claim exemption is given in Rule 6DD of the Income Tax Rules. However, the assessee has not cited any provision of this Rule and the only explanation of the assessee that the payment has been made within the limit of Rs. 20,000/- specified by the Act. The idea behind the introduction of such provision was to curb the transaction in cash. However, a limit was specified so that small traders/businessmen do not fell the pinch of the provision and their small day to day activities are not affected. The explanation of the assessee may be applied to a case where each bill is less than Rs. 20,000/- and the payment for such bills is being made in cash. Here the assessee has credited whole amount as given below :-
| F.Y. | Party Name | Address | Payment | Gross Amount |
| 2007-08 | Shivya Bijiya & Dhaliya | Vill & Post Choka, Jodhpur | Cash | 1,80,60,000/- |
| 2007-08 | Bijaran/Kirtaram | Vill & Post Choka, Jodhpur | Cash | 10,00,000/- |
| | | Total | | 1,90,60,000/- |
In the account of the above mentioned person and then has shown cash payment of less than Rs. 20,000/- in a day. At the year end a credit balance of Rs. 78,60,000/- has been carried forward to the next year. Thus, it is not a case of each bill being less than Rs. 20,000/-. The whole payment for purchase of one chunk of land is not less than Rs. 20,000/-. It is only the payment which has been staggered over a period of time. In view of this, the Assessing Officer concluded that the assessee has violated the provision of Sec.40A(3). However the total amount of payment in this manner during Financial Year 2007-08 relevant to A.Y. 2008-09 is only Rs. 1.12 crore (i.e. Rs. 1,90,60,000/- - Rs. 78,60,000/-). So in view of the provision of Sec. 40A(3), an amount of Rs. 1,12,00,000/- was disallowed and added to the total income.
7. The assessee before Ld. CIT(A) has submitted in its submission dated 7-12-2010 that the payment made for purchase of land and the assessee had not made any violation of the provision of Section 40A(3) of the I.T. Act, 1961 during the year under consideration, the account copies of the parties to whom the payments made toward the purchase of land was enclosed. In this regard, it is submitted that the payment for purchases are made otherwise than by an account payee cheque within the limits specified under the provision of law. Further the assessee submitted that the payment was made for purchase of agricultural land which cannot be regarded as expenditure within the meaning of Sec. 40A(3) until the land is converted according to prevailing law. It is further submitted that the payment made toward purchase of agriculture land is an asset until the same is sold. The unsold land cannot be regarded as expenditure but the same will have to be shown as an asset in the balance sheet. Therefore, until the sale deed is executed and registered the amount paid toward purchases of the land cannot be regarded as an expenditure referred to in Section 40A(3). In this regard, the assessee has relied the decision of Hon'ble ITAT Delhi in the case of Kanshi Ram Madan Lal v. ITO [1983] 3 ITD 290 in which it has been held that the Sec.40A(3) is not attracted in the case of capital expenditure. The assessee has further submitted that apart from the non availability of the banking facility the consideration of the business expediency and other relevant factors are also applicable for deciding the applicability or non-applicability of Sec.40A(3). The assessee has further stated that it is engaged in the business of purchase and sale of land and real estate. It is impossible to carry on the aforesaid business of the real estate without at least occasionally receiving/paying money in cash in relation to transaction of the land. Such payments are not only necessary in the interest of the business expediency but it becomes a business necessity in relation to some transactions. Further, the assessee has stated that the said second proviso also recognizes other relevant factors. The other relevant factors will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of the land or other immovable property. In this regard the assessee has relied various decisions. Further, the assessee has stated that disallowance of the cash payment made for purchase of land by invoking Sec.40A(3) will result in levy up tax on gross sale value of the land and not on the real income derived by way of profit on sale of land and this will clearly violate the concept of the levy of tax on real and actual income and not on gross receipt. Therefore, the disallowance u/s 40A(3) in respect of the cash payment made on account of business expediency and business necessity are therefore, clearly covered by the exceptional provided in second proviso to Sec.40A(3). In this regard, the appellant has relied the decision of Hon'ble MP High Court in the case of CIT v. Balchand Ajit Kumar [2003] 263 ITR 610 /[2004] 135 Taxman 180 (MP) and CIT v. President Industries [2002] 258 ITR 654 / 124 Taxman 654 (Guj).
8. The ld. CIT(A), considering the explanation of the assessee in the light of the findings of the AO and several other decisions confirmed the order of the AO and dismissed the grounds of appeal of the assessee. His findings in the appellate order from para 4.3 to 4.3.1 are reproduced as under :
"4.3 I have considered the submission of the appellant and order/report of the Assessing Officer and I find that appellant is dealing in real estate and he is engaged in the business of developer and builder of real estate. During the course of the assessment proceeding, the Assessing Officer has noticed that the appellant has made the payment of Rs. 1,90,60,000/- in cash for purchase of land. The Assessing Officer has made disallowance of Rs. 1.12 crores (Rs. 1,90,60,000/- - Rs. 78,60,000/-) for the payment made during the year. The appellant has taken argument that the payment has been made for purchase of agriculture land, so until the land is sold the expenditure cannot be referred to in Sec.40A(3) is not acceptable being as already mentioned that the appellant is dealing in real estate and the land purchased is stock in trade, therefore, the payment made for land purchase is clearly contravention of Sec.40A(3). Further, the appellant has stated that each payment has been made which is below Rs. 20,000/-. The appellant has purchased a chunk of land from the person concerned and it is only the payment which has been staggered over a period of time. The idea behind the introduction of such provision was to curb the transaction in cash. However, a limit was specified so that small traders, businessman do not feel the pinch of the provision and their small day to day activity are not effect. The explanation of the appellant may be applied to a case where each bill is for less thanRs.20,000/- and the payment for such bill is being made in cash. Here the appellant has credited whole amount (1,80,60,000/- + Rs. 10,00,000/-) in the accounts of the above mentioned persons and then has shown cash payment of less than Rs. 20,000/- in a day. At the year end a credit balance of Rs. 78,60,000/- has been carried forward to next year. Thus, it is not a case of each bill being less than Rs. 20,000/-. The whole payment for purchase of one chunk of land is not less than Rs. 20,000/-. It is only the payment which has been staggered over a period of time. The appellant has made these payments below Rs. 20,000/- on various occasions so that the provision of this section should not affect it. Further, the appellant has also argued that payment was required due to non availability of banking facility and consideration of business expediency and other relevant factor also applicable. The argument of the appellant in this is also not tenable as one of its payment of Rs. 10,00,000/- was made through cheque to the same person. Therefore, it is not correct to argue that due to non availability of banking facility the payments were made in cash. Regarding business expediency, the appellant has taken only argument but supporting evidences were not furnished before the Assessing Officer or before the undersigned that what the urgent need which required to payment made in cash. Actually, the appellant has made the payment on various occasions and it cannot be said that there was urgent need on each and every day when payment was made. Further, the appellant also stated regarding other relevant factors that it will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of land or other immovable properties, therefore, all the judgments on old rule 6DDJ prior its omission where cash payment were made on account of impracticability or impossibility of payment by cheque and other compelling reasons still continued to be valid justification in view of the exemption so carved out in second proviso of section 40A(3). In this regard, it is observed that provision of 6DD(J) was omitted by the Finance Act, 1995 w.e.f. 1.4.1996. First proviso to Sec. 40A(3) provides that no disallowance shall be made u/s 40A(3), where any payment in sum exceeding Rs. 20,000/- is made other than a account payee cheque drawn on a bank in such cases and such circumstances as may be prescribed having regard to the nature and extent of banking facility available, consideration of business expediency and other relevant factors. The appellant has not mentioned impracticability or impossibility of payment by cheque and other compelling reasons which enable it to make payment in cash. It is also not acceptable because appellant's has not specified Rule 6DD(J) under which the appellant's case falls. Therefore, under this situation, applicability of the cases relied by the appellant cannot be liked to the facts of the present case and the argument in this regard is rejected. Further, I also rely the decision of Hon'ble Rajasthan High Court, in the case of Nahgi Lal vs. CIT, reported in 167 ITR 139 (Raj) where on the issue of disallowance u/s 40A(3) under Rule 6DD(J), it is held that it is not sufficient for the assessee merely to establish that the purchases were genuine and the payments were identifiable. The assessee is further required to prove that due to exception and unavoidable circumstances, or because payment by cheques was not practicable, cash payments were made. Further, the Hon'ble Gujarat High Court in the case of Associated Engineering Enterprises. vs. CIT, reported in 216 ITR 366 (Guj.) held on the issue of disallowance u/s 40A(3) regarding exception and unavoidable circumstances that certificate given by the payee does not even remotely indicate any genuine difficulty faced by parties necessitating cash payments. It cannot be said that cash payments were made by the assessee due to any exceptional or unavoidable circumstances as envisaged by cl(j) of Rule 6DD, It is also held that it is not merely the genuineness of the transaction but also the existence of the circumstances warranting payments by cash which is required to be proved.
4.3.1 The appellant also before the Assessing Officer pleaded that person receiving money insisted for payment though cash only. For this purpose, the appellant has not submitted corroborative evidences before the Assessing Officer or before the undersigned. In this regard, the Hon'ble MP High Court has decided in the case of Bhilai Motors Vs. CIT reported in 167 ITR 147 that where the assessee produced a mere statement that the seller insisted upon cash payment, the Tribunal held justified in sustaining disallowance made by the ITO u/s 40A(3). Further, the Hon'ble A.P. High Court has decided in the case of Jyothi Chellaram vs. CIT, reported in 173 ITR 358 that cash payment in excess of the specified limit made by the assessee through bearer cheque could not be held allowable on a mere unilateral statement of the assessee that the sellers insisted on cash payment without any corroborative evidences. Further, I also rely the decision of Hon'ble M.P. High Court in the case of Sh. Radhika Prakashan (Raipur) P. Ltd. vs., CIT, reported in 257 ITR 675 (MP) where it is held that "Tribunal has recorded the findings that the assessee had failed to furnish any evidence in support of the explanation that the payee had insisted on payment in cash. There is further finding that the assessee had consciously split up the payments in seal parts so as to circumvent the provisions of law. Finding based on appreciation of evidence. Not shown to be perverse or unreasonable. Appeal dismissed in limine". Facts of the case of Shri Radhika Prakashan (Raipur) P. Ltd. are squarely applicable to the present case. Considering the above decisions and facts discussed, the appellant's case does not fall either in exceptional circumstances provided in Rule 6DD(J) or in 6DD. So plea taken by the appellant is not acceptable.
In view of the above discussion, I hold that the Assessing Officer rightly made the disallowance u/s 40A(3). The ground of appeal in this regard is dismissed."
9. The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that though the assessee deals in real estate, but unless and until the land is converted into urban land and user thereof for non-agricultural purpose is allowed, the provisions of section 40A(3) cannot be applied in respect of purchase of agricultural land. Further regard should be had of the nature and extent of banking facility available and consideration of business expediency and other relevant factors and relied upon the order of the ITAT, Jaipur Bench in the case of Shri Salasar Overseas (P.) Ltd. v. Dy. CIT [2012] 66 DTR 9. He has submitted that genuine and bona fide transactions should not be considered for the purpose of making the addition. He has relied upon the decision of Hon'ble Supreme Court in the case of Attar Singh Gurumukh Singh v.ITO [1991] 191 ITR 667/ 59 Taxman 11 . The proviso to section 40A(3) would apply in the case of the assessee. PB-53 to 86 are the lists of payments staggered in several part payments ranging from 15,000/-, Rs. 18,000/-, Rs. 19,000/- and Rs. 20,000/- everyday. He has also relied upon the order of ITAT, Jaipur Bench in the case of Pack India v. ACIT 38 ITD 01 Sic. He has submitted that Rule 6DD(f) is exception of rigor of section 40A(3) and relied upon the decision of Calcutta High Court in the case of CIT v. CPL Tannery [2009] 318 ITR 179/[2008] 175 Taxman 316 . He has also relied upon the decision of Rajasthan High Court in the case of Kanti Lal Purshottam & Co. v. CIT [1985] 155 ITR 519 / 22 Taxman 241 and order of ITAT Ahmedabad Bench in the case of Trivedi Corporation Pvt. Ltd. dated 13.01.2010 on the proposition that when the genuineness of the payments had been established, the default was only technical. Therefore, the assessee was entitled for exemption u/r. 6DD of the IT Rules. He has also relied upon certain other decisions in the list of case laws that the addition could be made of real income earned. The transactions are supported by sale deed and identity of the payees is also known to the department. He has relied upon the decision of Delhi High Court in the case ofCIT v. Union Agencies [1987] 166 ITR 529/ 33 Taxman 572 in which it was held that large quantities of goods are involved daily and it would, therefore, be impracticable to carry on such business through cheque payments. Therefore, disallowance u/s. 40A(3) rightly deleted. The ld. counsel for the assessee, therefore, submitted that the business exigencies and other relevant factors as provided in exception Rule 6DD may be considered favourably to the assessee and addition may be deleted.
10. On the other hand, the ld. DR relied upon the orders of the authorities below and submitted that the assessee deals in the business of real estate and is a builder. He has purchased land worth Rs. 5.37 crores and made sales of Rs. 5.84 crores and the assessee made purchase of land from two parties only and no evidence was filed before the authorities below that both these parties insisted for cash payments. He has submitted that the details of cash payment submitted at Paper Book page 53 to 86 support the findings of the authorities below that almost daily payment is made to the sellers of the amounts in cash, which is staggered to small payments of Rs.15,000/-, Rs. 18,000/-, Rs. 19,000/- and Rs. 20,000/- every day, which is impossible and impracticable. He has submitted that the payments have been staggered to circumvent the provisions of law and could not be treated as genuine payments. No exception has been specifically explained in Rule 6DD of the Income-tax Rules, in which the case of the assessee would fall. He has relied upon the order of the ITAT, Allahabad Bench in the case of Ingenieurs & Agents v. ITO [2005] 5 ITD 696, wherein it was held -
"Where the assessee made payments in cash for less than Rs. 2,500 more than once on the same day to the same party under continuous voucher Nos. aggregating to more than Rs. 2,500, disallowance under s. 40A(3) was rightly made."
10.1 He has submitted that the decisions cited by the ld. counsel for the assessee are not applicable to the facts of the case.
11. We have considered the rival submissions and the material available on record. There is no dispute about the facts noted above in this order. The assessee is dealing in Real Estate and land purchased is stock in trade. Therefore, the payment made for purchase of land is expenditure in the business of the assessee and attract the provisions of section 40A(3) of the IT Act. It is also admitted fact that the assessee has purchased chunk of land from parties mentioned above and it is only the payment, which has been staggered over a period of time. Thus, the land is stock in trade of the business of the assessee and was not merely an asset. The assessee pleaded before the authorities below that the parties insisted for cash payment, therefore, the cash payment is made on different dates, but the plea taken before the authorities below have not been established by any evidence or material on record or confirmation from the parties. The assessee has credited the whole amount in the account of the above parties and have staggered the payment almost every day at less than Rs. 20,000/- in a day and further credit balance was carried forward in the next year. Therefore, it is not a case of the assessee that each bill was less than Rs. 20,000/-. The whole payment of purchase of land is not less than Rs.20,000/-. It is only the payment, which has been staggered over a period of time. PB-53 to 86 are the details of cash payment in which almost everyday payments have been made in a sum of Rs. 15,000/-, Rs. 18,000/-, Rs. 19,000/- and Rs.20,000/-. The assessee failed to prove that the bank facility is not available on each day when cash payment is made. No business expediency is also proved as to why every day cash payment is made in instalments. It is difficult to believe that villagers from Choka Village would come everyday almost in whole of the year to collect the petty payments at Jodhpur for sale of land. The distance between village Choka and Jodhpur is more than 10 K.M. and rather it is risky for the villager to go everyday to Jodhpur to collect payment in installment and to return to his village with cash. Thus, the assessee deliberately staggered the part payment to circumvent the provisions of law. The explanation of the assessee is not supported by any evidence or confirmation that the concerned parties insisted for cash payment everyday in whole of the year. The books of account of the assessee are, thus, manipulated in such a way which suits to the convenience of the assessee. Hon'ble M.P. High Court in the case of Shri Radhika Prakashan (Raipur) (P.) Ltd. v. CIT [2002] 257 ITR 675 / 123 Taxman 213, dismissed the appeal of the assessee. In this case, before the Assessing Officer, it was submitted that the payments were made number of times in a day and each transaction was below Rs. 10,000/- and the provisions of section 40A(3) are not attracted. The AO, however, did not accept the contention of the assessee. The Tribunal recorded a finding of fact that the assessee has failed to furnish any evidence in support of the explanation that the party insisted on payment in cash and it had consciously split up the payment so that each payment did not exceed Rs. 10,000/-, only to circumvent the provisions of law. Accordingly, the addition was confirmed. Hon'ble High Court dismissed the appeal of the assessee.
11.1 Hon'ble Punjab and Haryana High Court in the case of Aggarwal Steel Traders v. CIT [2001] 250 ITR 738 /[2000] 109 Taxman 283 , considering the Board's Circular on Rule 6DD held-
"Held, (i) that the explanation rendered by the assessee in respect of the payments of Rs. 24,000 and Rs. 40,000 would be covered by the exceptional circumstances as provided in the Board's circular, yet that by itself would not entitle the assessee to claim the relief. There is a further requirement provided in the Board's circular itself of furnishing a confirmatory letter from the concerned parties. Admittedly, no such letter in the above terms had been furnished by the assessee. Hence, the Tribunal was justified in sustaining the addition ofRs.64,000 in view of the provisions of section 40A(3) read with rule 6DD of the Income-tax Rules, 1962."
11.2 The assessee did not produce sale deed or the agreement during the course of arguments to prove that part cash payments were made in instalments for purchase of land. If it was advance money given to the villagers for purchase of land in instalment, there was no necessity to make payment in cash in instalment. It could be paid by cheques/drafts. Further if the amount was paid at the time of execution of sale deed, the villager/seller would not accept cash payments in instalments everyday during the whole year after the execution of sale deed. Therefore, it is clear that the books of account of the assessee have been manipulated to circumvent the provisions of law. The assessee has, thus, failed to prove genuine payments in instalments to the villagers in cash. Hon'ble Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 and in the case of Sumati Dayal v. CIT [1995] 214 ITR 801 / 80 Taxman 89 (SC) held that "the Courts and Tribunals have to judge the evidences before them by applying the test of human probabilities after considering the surrounding circumstances."
11.3 Regarding the business expediency, the assessee has not filed any evidence before the authorities below and nothing is clarified as to what were the other relevant factors, for which the cash payment has been made and no specific Rule has been explained u/r 6DD, which is applicable to the case of the assessee. The ld. counsel for the assessee argued that for purchase of agricultural land and payment made to the villagers, the provisions of section 40A(3) may not be applied as provided in exception to Rule 6DD. We have gone through the Rule 6DD applicable now and prior to amendment also, in which none of the exception has been provided for making payment in cash for purchase of land. It is, however, provided that above rule can be avoided if payment is made for purchase of agricultural produce which is not the case of the assessee at all. The assessee is dealing in real estate and in land and as such, it was for the assessee to establish that the cash payments have been made for business exigencies, which the assessee has failed to prove in this case. Further Rule 6DD(j) would not apply in this case because the assessee failed to prove that on the date of payment whether banks were closed either on account of holiday or strike. The ld. CIT(A), therefore, rightly noted in his finding that the assessee has not satisfied as to under which Rule, the assessee's case would fall. In the case of Trivedi Corporation Pvt. Ltd. (supra), ITAT Ahmedabad Bench considered the issue of disallowance u/s. 40A(3) in respect of cash payment made to Gujrat State Electricity Board, which was considered as one of the undertaking of the State Government. Therefore, it was considered to be a payment made to Government Body and was falling in exception. The case law cited by the ld. counsel for assessee would not support the case of the assessee because they are based on their own facts and that the theory of real income would not apply for dealing with the issue of section 40A(3) of the IT Act. Considering the facts and circumstances and above discussion, it is very clear that the assessee consciously split up the payments in whole of the year, which is impracticable, illogical as noted above and it was done just to circumvent the provisions of law. There was no justification for the assessee to split up the transactions of crores of rupees in small payments of Rs. 15,000/- to Rs. 20,000/- everyday. Whatever plea was taken before the authorities below was not supported by any evidence. Therefore, the assessee failed to prove any business expediency or other facts for making staggered payments in cash. The case of the assessee would not fall in any exception to Rule. The assessee deliberately and consciously split up the payments in part so as to circumvent the provisions of law. We, therefore, do not find any justification to interfere with the orders of the authorities below. There is no merit in these grounds of appeal by the assessee. Same are accordingly dismissed.
12. On ground No. 6, the assessee challenged charging of interest u/s. 234A, 234B and 234C and this ground is not argued by the ld. counsel for the assessee. Otherwise also, charging of interest is mandatory and consequential in nature. Therefore, this ground is, accordingly, dismissed.
13. No other point is argued or pressed.
14. In the result, the appeal of the assessee is dismissed. Stay granted is vacated.
IT : Loan advanced by company to its Managing director as per her pre-condition of granting bank guarantee and a collateral security for benefit of company would not partake character of deemed dividend
■■■
[2012] 24 taxmann.com 75 (Chennai)
IN THE ITAT CHENNAI BENCH 'A'
Assistant Commissioner of Income-tax, Company Circle-V(3)
v.
Smt. G. Sreevidya*
N.S. SAINI, ACCOUNTANT MEMBER AND VIKAS AWASTHY, JUDICIAL MEMBER
IT APPEAL NO. 1270 (MDS.) OF 2011
[ASSESSMENT YEAR 2006-07]
JUNE 28, 2012
Section 2(22) of the Income tax Act, 1961 - Deemed dividend - Assessment year 2006-07 - Assessee was a managing director in a company - She had taken a loan of Rs. 17,65,517 from company - Assessing Officer treated said amount as 'deemed dividend' - Assessee contended that said amount was advanced to her as per her pre-condition of granting bank guarantee and collateral security for funding of company and at time of extending guarantee/security she had sought liberty to withdraw funds from company as and when required by her for personal purposes - It was thus in this background, she had withdrawn certain amount from company periodically and had also repaid same - Whether on facts it could be said that arrangement between assessee and company was merely for sake of convenience arising out of business expediency, which could not partake character of deemed dividend - Held, yes [In favour of assessee]
FACTS
The assessee was a managing director in a company. She had taken a loan of Rs. 17,65,517 from said company which was subsequently repaid by the assessee. The Assessing Officer treated the said amount as 'deemed dividend' under the head 'other sources' invoking the provision of section 2(22)(e). On appeal, the Commissioner (Appeals) set aside the order of Assessing Officer. In the instant appeal, the revenue contended that the amount advanced by the company to the assessee fell within the ambit of definition of 'deemed dividend' under section 2(22)(e) as the company was having accumulated profits to that extent when the amount was advanced to the assessee. It was further submitted that the repayment of loan amount as alleged by the assessee could not be criteria to take out the said amount from the ambit of the provisions of section 2(22)(e). On the other hand, the assessee contended that the amount was advanced to her as per her pre-condition of granting bank guarantee and a collateral security for funding of the company. She further, submitted that she had given personal guarantee and had given collateral security to facilitate availing of credit facility by the company. At time of extending guarantee/security she had sought liberty to withdraw funds from company as and when required by her for personal purposes. It was thus in this background, the assessee had withdrawn certain amount from the company and had also repaid the amounts withdrawn periodically. Therefore, the transaction between the assessee and the company was purely out of business consideration and could not be termed as deemed dividend.
HELD
In order to attract the provisions of section 2(22)(e ), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e ). [Para 7]
The Commissioner (Appeals) has rightly deleted the addition made on account of 'deemed dividend' by the Assessing Officer.
CASE REVIEW
Pradip Kumar Malhotra v. CIT [2011] 338 ITR 538 /203 Taxman 110/ 15 taxmann.com 66 (Cal.) (para 8) followed.
Miss. P. Sarada v. CIT [1998] 224 ITR 444/ 96 Taxman 11 (SC); CIT v. P.K. Abubucker [2003] 259 ITR 507/[2004] 135 Taxman 77 (Mad.) and Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) (para 9) distinguished.
CIT v. Creative Dying & Printing (P.) Ltd., [2009] 318 ITR 476 / 184 Taxman 483(Delhi) (para 4), CIT v. Ambassador Travel (P.) Ltd. [2009] 318 ITR 376 /[2008] 173 Taxman 407 (Delhi) (para 4), CIT v. Rajkumar [2009] 318 ITR 462 / 181 Taxman 155(Delhi) (para 4), Miss. P. Sarada v. CIT [1998] 229 ITR 444/ 96 Taxman 11 (SC) (para 4), Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) (para 4), CIT v. P.K. Abubucker [2003] 259 ITR 507/[2004] 135 Taxman 77 (Mad.) (para 4) and Pradip Kumar Malhotra v. CIT [2011] 338 ITR 538/203 Taxman 110/ 15 taxmann.com 66(Cal.) (para 5).
Shaji P. Jacob for the Appellant. Dr. Anita Sumanth for the Respondent.
ORDER
Vikas Awasthy, Judicial Member - The present appeal has been filed by the Revenue impugning the order of the CIT(A)-V, Chennai dated 06.04.2011.
2. The facts in brief of the case are that the assessee had filed return of income relevant to the assessment year 2006-07 on 31.10.2006 declaring total income of Rs. 6,78,056/-. The case of the assessee was selected for scrutiny and notice under section 143(2) and 142(1) were issued. The assessee is a Managing Director of M/s. Ravindra Services (P) Ltd. (hereinafter referred to as RSPL) having substantial ownership of shareholding and 10% of voting power. The assessee had taken a loan of Rs. 17,65,517/- from RSPL which was subsequently repaid by the assessee. The Assessing Officer treated the said amount as deemed divided and made addition under the head "other sources" invoking the provisions of section 2(22)(e)of the Act. Apart from the above, the Assessing Officer made addition of Rs. 2,62,035 towards the rent received from RSPL under the head 'Income from House Property'. Further, an addition of Rs. 1,20,718/- was made in the total income of the assessee as 'undisclosed income'. The assessee preferred an appeal against the assessment order dated 10.02.2008. The CIT(A) allowed the appeal of the assessee vide order dated 6.4.2011 deleting the additions under the provisions of section 2(22)(e) as well as additions made under other heads.
3. The present appeal has been filed by the Revenue assailing order of the CIT(A) only on the ground that CIT(A) has erred in deleting the addition of Rs. 17,65,517/- made by the Assessing Officer as deemed dividend under section 2(22)(e) of the Act.
4. Mr. Shaji P. Jacaob, DR appearing on behalf of the Revenue vehemently opposed the order of the CIT(A). He submitted that the loan was granted by RSPL to the assessee who is having substantial interest in the company having more than 10% voting power. The amount advanced by the company to the assessee falls within the ambit of definition of "deemed dividend" under section 2(22)(e) of the Act as the company was having accumulated profits to that extent when the amount was advanced to the assessee. He further submitted that the repayment of loan amount as alleged by the assessee cannot be criteria to take out the said amount from the ambit of the provisions of section 2(22)(e). He strongly contended that the CIT(A) has erred in relying on the following cases:-
The D.R. submitted that case of the assessee is squarely covered by the judgement of the Hon'ble Supreme Court of India in the case of Miss P. Sarada v.CIT [1998] 229 ITR 444/ 96 Taxman 11 as well as Smt. Tarulata Shyam v. CIT [1977]108 ITR 345 (SC). He further relied on the judgement of the Hon'ble Madras High Court in the case of CIT v. P.K. Abubucker [2003] 259 ITR 507 /[2009] 135 Taxman 77 (Mad).
5. On the other hand, Dr. Anita Sumanth, counsel appearing on behalf of the assessee submitted that the order passed by the CIT(A) is a well reasoned and detailed order. She submitted that the amount was advanced to the assessee as per her pre-condition of granting bank guarantee and a collateral security for funding of the company. The counsel submitted that the assessee had given personal guarantee and had given collateral security to facilitate availing of credit facility by the company. At the time of extending guarantee/security the assessee had sought liberty to withdraw funds from the company as and when required by her for personal purposes. It was thus in this background, the assessee had withdrawn certain amount from the company and had also repaid the amounts withdrawn periodically. Therefore, the transaction between the assessee and the company was purely out of business consideration. The counsel further contended that if the assessee would not have given bank guarantee and collateral security, the operations of the company would have come to a standstill. The counsel submitted that the amount was advanced by the company to the assessee purely on the terms of commercial expediency. In order to support her contentions the counsel relied on the judgement of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT [2011]338 ITR 538/203 Taxman 110/ 15 taxmann.com 66 and the judgements of the Hon'ble Delhi High Court in the following cases:-
(i) Creative Dyeing & Printing (P.) Ltd. (supra )
(ii) Ambassador Travels (P.) Ltd. (supra)
(iii) Rajkumar (supra).
6. We have heard the submissions made by the respective parties and have gone through the documents on record, orders of the lower authorities as well as the judgements referred to by the respective parties. The provisions of section 2(22)(e) are reproduced herein below:-
"2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
but "dividend" does not include-
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
[(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;]
(ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)."
The definition laid down by section 2(22) is inclusive and not exhaustive. The following payments of distributions by a company to its shareholder are deemed as dividends to the extent of accumulated profits of the company although these payments may not be dividends under the provisions of Companies Act:-
(a) any distribution or release of company's assets;
(b) any distribution of debentures, debenture stock, deposit certificates and bonus to preference share- holders;
(c) distribution on liquidation of company;
(d) distribution on reduction of capital
(e) any payment by way of loan or advances by a closely held company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money lending should not be a substantial part of the company's business.
7. In order to attract the provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e) of the Act.
8. The case of the assessee is squarely covered by the Division Bench judgement of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra), wherein the facts were similar to the facts of the instant case. InPradip Kumar Malhotra's case (supra) assessee had substantial holding in a private company. The assessee permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. The Board of Directors of the company passed a resolution to obtain interest free deposit upto Rs. 50 lakhs as and when required. The assessee obtained from the company a sum of Rs. 20,75,000/- by way of security deposit. Out of this amount, a sum of Rs. 20 lakhs was returned by the assessee to the company. The Assessing Officer added the sum of Rs. 20,75,000/- as deemed dividend. The Hon'ble High Court while allowing the appeal of the assessee held that for retaining the benefit of loan availed of from the bank, if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of Rs. 20,75,000/- could not be treated as deemed dividend. The Division Bench of the Hon'ble Calcutta High Court followed the decision of the Hon'ble Delhi High Court in the case of Creative Dyeing & Printing (P.) Ltd. (supra). In the instant case also the assessee was allowed to withdraw funds from the company as per requirement for personal purposes against the personal guarantee and the collateral security given by her to facilitate her availing of credit facility of the company.
9. It is a well settled law that loan or advance given to a shareholder by a company in which public is not substantially interested and which had accumulated profits, the amount advanced as loan to such shareholder is deemed to be dividend as per the provisions of section 2(22)(e) of the Act. However, the facts and circumstances of each case have to be scrutinized before applying the ratio of the cases holding above well settled law. In the facts and circumstances of the instant case, judgements relied upon by the DR in the cases of Miss P. Sarada (supra), P.K. Abubucker (supra) and Smt. Tarulata Shyam(supra) are not applicable.
10. The Commissioner of Income Tax (Appeals) vide order dated 6.4.2011 has rightly deleted the addition made on account of "deemed dividend" by the Assessing Officer. We do not find any infirmity in the order passed by the Commissioner of Income Tax (Appeals). In view of our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any merit.
IT : Rent received from letting out a portion of administrative building space to maintenance-contractor of industrial park is eligible for deduction under section 80-IA(4)(iii)
■■■
[2012] 25 taxmann.com 178 (Hyd.)
IN THE ITAT HYDERABAD BENCH 'A'
VITP (P.) Ltd.
v.
Additional Commissioner of Income-tax, Range-3, Hyderabad*
D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SAKTIJIT DAY, JUDICIAL MEMBER
IT APPEAL NOS. 801 & 802 (HYD.) OF 2011
[ASSESSMENT YEARS 2006-07 & 2007-08]
JUNE 28, 2012
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment years 2006-07 and 2007-08 - Assessee was engaged in business of providing infrastructure facilities, such as, developing, operating and maintaining industrial parks - For providing smooth hassle free and quality service to tenants of industrial park, assessee entered into an agreement with 'A' Ltd. for maintenance and management of industrial park and they were provided space in administrative building on rent - Assessee claimed deduction under section 80-IA(4)(iii) in respect of rental income so received - Revenue authorities rejected assessee's claim holding that administrative building allotted to 'A' Ltd. did not form part of 'allocable area' within industrial park - Whether as per provisions of section 80-IA, deduction under section 80-IA(4)(iii) is not restricted to income derived from 'allocable area' only - Held, yes - Whether, therefore, impugned order passed by authorities below was to be set aside and, assessee's claim was to be allowed - Held, yes [In favour of assessee]
Circulars and Notifications : Notification Nos. 262/2005, dated 29-12-2005 and S.O. 193(E), dated 30-3-1999
FACTS
The assessee was engaged in developing, operating and maintaining industrial parks. As per the industrial parks scheme of Govt. of India, the assessee applied for approval to the Department of Industrial Policy and Promotion Ministry, Ministry of Industry, Govt. of India and obtained necessary permission. The CBDT also issued notification under sub-rule (2) to rule 18C as required for claiming deduction under section 80-IA(4)(iii) of the Act. In the first phase, the assessee was to develop 'M' block of industrial park. The assessee had given on rent administrative building to 'A' who was managing agency for maintenance and operation of industrial park. The assessee's claim for deduction under section 80-IA(4)(iii) in respect of rental income received from 'A' was rejected by revenue authorities on ground that administrative building let out to 'A' was not a part of 'allocable area' of industrial block.
On appeal :
HELD
Rent received from letting out a portion of administrative building space to maintenance contractor of industrial park is eligible for deduction under section 80-IA(4)(iii ). As is apparent from the orders of the revenue authorities rental income from 'A' was considered ineligible for deduction under section 80-IA(4)(iii) on two grounds, i.e., (i) the administrative building is not a part of 'M' block and (ii) it is not a part of the 'allocable area'. A copy of the building plan, reveals that 'M' Park has 5 buildings and one administrative building. This fact also finds support from the letter dated 2-8-1999 of the assessee to the Department of Industrial Policy and Promotion, Ministry of Industry, Govt. of India. In this letter, the assessee has clarified that the 'M' block in Phase 1 comprises of 5 buildings with 23 floors and common built up area for common facilities which includes administrative building consisting of 2 floors. These facts clearly prove that administrative building is part of Phase I i.e., 'M' Block. Having come to the conclusion that Administrative Building is part of 'M' Block, now it has to be seen whether the rent received from 'A' can still be considered as ineligible for deduction under section 80-IA(4)(iii) since the administrative building is not part of the allocable area. The Central Government in exercise of power conferred under section 80-IA read with rule 18C(2) issued a Notification on 30-3-1999 framing a scheme for industrial park. [Para 8]
Clause 2 of the scheme provides that an undertaking desiring to set up an industrial park has to apply for an approval from Deptt. of Industrial Policy and Promotion, Ministry of Industry, Govt. of India. In terms with the scheme, the assessee had applied for approval and DIPP in its letter dated 16-9-1999, granted its approval for setting up the industrial park. Clause 3 of the approval letter specifies that allocable area will mean the net area available for industrial, commercial or residential purpose but will exclude area used for common facilities. Clause 4 of the approval letter provides that infrastructure development shall include expenditure on common facilities. In terms with the approval by the DIPP, the CBDT also issued a notification on 29-12-2005 notifying the assessee as an industrial park for the purpose of section 80-IA(4)(iii). Similar to clause 4 of the approval letter of DIPP, the CBDT notification also provided that infrastructure development shall include common facilities for common use for industrial activity. As is clear from the letter dated 2-8-1999 of the assessee, administrative building is part of the common facilities. For providing smooth hassle free and quality service to tenants of industrial park, assessee entered into an agreement with 'A' Ltd. for maintenance and management of industrial park and they were provided space in the administrative building on charging of rent. This was done with an objective of providing world class service to the tenants of the industrial park. Thus, providing space to 'A' is part of operation and maintenance of the industrial park. The conclusion of the Commissioner (Appeals) that income derived from the allocable area is only eligible for deduction under section 80-IA(4)(iii ), therefore, is not acceptable. A reading of the provision contained in section 80-IA also does not provide any scope for interpreting that the deduction under section 80-IA(4)(iii ) shall be restricted to impose derived from 'allocable area' only. In view of aforesaid discussion and findings, it is held that the assessee is eligible to claim deduction under section 80-IA(4)(iii ) on the rental income from 'A' Ltd. Accordingly, the orders of the Commissioner (Appeals) are set aside in both the years under consideration and allow the grounds of appeal raised by the assessee on this count. [Para 9]
In the result, the assessee's appeal is allowed. [Para 10]
S. Raghunathan for the Appellant. V. Srinivas for the Respondent.
ORDER
Saktijit Dey, Judicial Member - Both these appeals filed by the assessee are directed against the respective orders of the CIT(A)-IV, Hyderabad for the assessment years 2006-07 and 2007-08. Since identical issues are involved in both these appeals, they were heard together and, therefore, we find it convenient to dispose of these appeals by way of consolidated order.
2. Common grounds raised in both the appeals and the same are extracted from AY 2006-07, as under:-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in denying the benefit of deduction u/s 80-IA of the Act in respect of rental income earned from Ascendas Property Management Services Ltd. ('Ascendas').
2. Without prejudice to the above, on the facts and circumstances of the case, the ld CIT(A) has erred in not admitting the additional ground of appeal, of excluding the corresponding expenditure incurred towards earning rental income earned from Ascendas, while computing deduction u/s 80-IA of the Act."
3. To dispose of these appeals, we refer to the facts from AY 2006-07.
4. Briefly the facts of the case are that the assessee is engaged in the business of providing infrastructure facilities, such as, developing, operating and maintaining industrial parks. For the purpose of development, operation, and maintenance of industrial parks, the assessee developed an industrial park on 19.39 acres at Madhapur, Hyderabad. This project of the assessee started in the year 1977-78. As per the scheme, the assessee has to develop industrial park in five phases. In the first phase, the assessee is to develop Mariner Industrial Park and Auriga Industrial Park in the second phase. As per the industrial parks scheme of Govt. of India, the assessee applied for approval to the Department of Industrial Policy and Promotion Ministry, Ministry of Industry, Govt. of India and obtained necessary permission. The CBDT also issued notification under sub-rule (2) to Rule 18C as required for claiming deduction u/s 80-IA(4)(iii) of the Act. The assessee filed its return of income for the assessment year 2006-07 declaring total income of Rs. 8,35,33,685/-. In course of assessment proceedings u/s 143(3) of the Act, the Assessing Officer on examination of the accounts of the assessee found that the assessee had claimed deduction u/s 80-IA(4)(iii) from the income received from Mariner and Auriga Blocks. From the details furnished by the assessee, the Assessing Officer found that the assessee had received rent from M/s Ascendas Property Management Services (India) Ltd., (in short 'M/s Ascendas') for the period June, 2005 to March, 2006 @ Rs. 1,32,800/- per month and received a total amount of Rs. 13,28,000/- for 10 months period, for which the said company occupied the premises. In reply to the queries made by the Assessing Officer, the assessee explained that M/s Ascendas is the managing agency for maintenance and operation of industrial park and has set up its office in the Mariner Block. The Assessing Officer after making physical enquiry through the Inspector, came to a conclusion that the premises, which M/s Ascendas has occupied, and from which the assessee had received rent, was in a separate stand alone building, which did not form part of the structure called Mariner Block. The Assessing Officer further came to the conclusion that the administrative building does not form part of Mariner Block or Auriga Block and, therefore, the assessee is not covered by the Notification issued by the CBDT. On the aforesaid conclusions, the Assessing Officer held that the assessee is not eligible to claim deduction u/s 80-IA(4)(iii) of the Act, for the receipts from M/s Ascendas. Aggrieved by the order of the Assessing Officer, the assessee carried the mater in appeal before the CIT(A).
5. Before the CIT(A), the learned AR of the assessee reiterated its stand/submissions as made before the Assessing Officer and contended that the administrative building forms part of the Mariner Block and, therefore, the rent received there from is eligible for deduction u/s 80-IA(4)(iii) of the Act. It was argued that such deduction from the administrative building has been allowed since AY 2002-03. In support of its contention, the learned AR of the assessee submitted technical plan of the Mariner block approved by the HUDA and contended that at the time when the plan was approved only Mariner Block was being developed. The CIT(A) was not convinced with the contention of the assessee and concurred with the view of the Assessing Officer that the administrative building, which was given on rent to M/s Ascendas was not part of the Mariner Block and, therefore, rent received there from will not qualify for deduction u/s 80-IA(4)(iii). The CIT(A) further held that administrative building is also not part of the allocable area as mentioned in the approval letter and also the notification of the CBDT. He, therefore, held that the income derived from the administrative building cannot be claimed as deduction u/s 80-IA(4)(iii) of the Act. Still aggrieved, the assessee is in appeal before us.
6. The learned counsel for the assessee submitted before us that the building plan of the Mariner Block was approved by the HUDA in the year 1998-99 and from the approved plan, it can be seen that the administrative building is part of the Mariner Block. It was contended that in the Communication Letter forwarded to the Department of Industrial Policy and Project (DIPP), the assessee has clearly mentioned that the administrative building is part of the common facilities. In this regard, the assessee invited our attention to page 53 of the paper book. Referring to the lease deed entered with M/s Ascendas on 26/05/2005, the learned counsel for the assessee contended that the lease deed clearly mentiones the administrative building to be a part of the Mariner Block. It was further contended by the learned counsel for the assessee that during the relevant period the assessee was operating only Mariner Industrial Park and Auriga Industrial park, therefore, the administrative building must be forming part of either of the industrial park. In so far as the CIT(A)'s finding that administrative building is not part of the allocable area, and the assessee is not entitled for the deduction of the rent received u/s 80-IA(4)(iii), the learned counsel for the assessee referring to the Industrial Park Scheme, 1989, floated by the Central Government, which is at page 65 of the paper book submitted that the objective of the scheme does not restrict the benefit of section 80-IA only to the allocable area. It was the contention of the learned counsel for the assessee that the industrial park is not only allocable area but also includes areas for providing other infrastructure and common facilities. In support of his contention, the learned counsel referred to the DIPP's approval letter placed at page 32 of the paper book and the CBDT notification at page 36 of the paper book. The learned counsel contended that the term relating to 100% utilisation of industrial use is only with respect to allocable area and it is not disputed that the assessee has utilized 100% allocable area for industrial use. The learned counsel for the assessee further contended that the assessee entered into a contract with M/s Ascendas in order to ensure World class services to the tenants of industrial parks. To facilitate this, M/s Ascendas was given space in the administrative building on consideration of rent. Charging of rent for the space provided in the administrative building, therefore, is eligible for deduction u/s 80-IA(4)(iii) of the Act. The learned counsel for the assessee contended that neither section 80-IA(4)(iii) nor notification issued by the CBDT provides that the deduction u/s 80-IA(4)(iii) should be restricted to income derived from the allocable area only.
7. The learned DR, on the other hand, besides supporting the orders of the authorities below, contended that neither administrative building is of Mariner Block nor the rent received for allowing the administrative building to M/s Ascendas is from the allocable area. Therefore, he contended that the assessee is not entitled to deduction u/s 80-IA(4)(iii) of the Act, in so far as receipt of the rent is concerned.
8. We have heard the arguments of the parties and perused the record as well as gone through the orders of the authorities below. We have also considered the written submissions of the learned counsel for the assessee. As found from the material on record, there is no dispute to the fact that the assessee was operating and maintaining two industrial parks, which are Mariner Industrial Park and Auriga Industrial Park. The dispute lies within a narrow compass as to whether rent received from M/s Ascendas towards letting out a portion of the Administrative building space is eligible for deduction u/s 80-IA(4)(iii) of the Act. As is apparent from the orders of the revenue authorities rental income from M/s Ascendas was considered ineligible for deduction u/s 80-IA(4)(iii) on two grounds, i.e., (i) the administrative building is not a part of mariner block and (ii) it is not a part of the 'allocable area'. The assessee was allocated 19.96 acres of land for developing an industrial park in four phases, which are Mariner Block in Phase I, Auriga block in Phase II, Orion Block in Phase III, and Capella Block in Phase IV. Mariner was the first project off the block and during the relevant assessment years under dispute only Mariner Block and Auriga Block have been completed. The building plan of Mariner Industrial Park was approved by HUDA in the year 1998-99. A copy of the building plan, which is at page 44 of the paper book reveals that Mariner Industrial Park has 5 buildings being B1, B2, B3, B4 and B5 and one administrative building. This fact also finds support from the letter dated 02/08/1999 of the assessee to the Department of Industrial Policy and Promotion, Ministry of Industry, Govt. of India, a copy of which is placed at page 51 of the paper book. In this letter, the assessee has clarified that the mariner block in Phase 1 comprises of 5 buildings with 23 floors and common built up area for common facilities which includes administrative building consisting of 2 floors. These facts clearly prove that administrative building is part of Phase I i.e., Mariner Block. Having come to the conclusion that Administrative Building is part of Mariner Block, now it has to be seen whether the rent received from M/s Ascendas can still be considered as ineligible for deduction u/s 80-IA(4)(iii) since the administrative building is not part of the allocable area. The Central Government in exercise of power conferred u/s 80-IA read with Rule 18C(2) issued a Notification on 30/03/1999 framing a scheme for industrial park. The objectives of the scheme under clause 1(b) provides as follows:
"an industrial park for development of infrastructural facilities in an area as well as provision of built-up space and common facilities for the specialised purpose activity like software development, gems and jewellery, electronics hardware."
9. Clause 2 of the Scheme provides that an undertaking desiring to set up an industrial park has to apply for an approval from Dept. Of Industrial Policy and Promotion, Ministry of Industry, Govt. of India. In terms with the scheme, the assessee had applied for approval and DIPP in its letter dated 16/09/1999, (which is at page 31 of the paper book) granted its approval for setting up the industrial park. Clause 3 of the approval letter specifies that allocable area will mean the net area available for industrial, commercial or residential purpose but will exclude area used for common facilities. Clause 4 of the approval letter provides that infrastructure development shall include expenditure on common facilities. In terms with the approval by the DIPP, the CBDT also issued a notification on 29/12/2005 notifying the assessee as an industrial park for the purpose of section 80-IA(4)(iii) of the Act. Similar to clause 4 of the approval letter of DIPP, the CBDT notification also provided that infrastructure development shall include common facilities for common use for industrial activity. As is clear from the letter dt. 02/08/1999 of the assessee, administrative building is part of the common facilities. For providing smooth hassle free and quality service to the tenants of industrial park, the assessee entered into an agreement with M/s Ascendas for maintenance and management of the industrial part and they were provided space in the administrative building on charging of rent. This was done with an objective of providing world class service to the tenants of the industrial park. Thus, providing space to M/s Ascendas is part of operation and maintenance of the industrial park. The conclusion of the CIT(A) that income derived from the allocable area is only eligible for deduction u/s 80-IA(4)(iii), therefore, is not acceptable. A reading of the provision contained in section 80-IA also does not provide any scope for interpreting that the deduction u/s 80-IA(4)(iii) shall be restricted to income derived from the 'allocable area' only. In view of our aforesaid discussion and findings, we hold that the assessee is eligible to claim deduction u/s 80-IA(4)(iii) on the rental income from M/s Ascendas Property Management Services (India) Ltd. Accordingly, we set aside the orders of the CIT(A) in both the years under consideration and allow the grounds of appeal raised by the assessee on this count.
No decision is required on ground No. 2 since it has become academic.
10. In the result, appeals of the assessee are allowed.
IT : In service contract, which is spread over to various years, income has to be recognized in proportion to services rendered in a particular year
■■■
[2012] 24 taxmann.com 142 (Delhi)
IN THE ITAT DELHI BENCH 'A'
Dr. Aman Khera
v.
Deputy Commissioner of Income-tax, Circle 25(1)*
R.P. TOLANI, JUDICIAL MEMBER AND SHAMIM YAHYA, ACCOUNTANT MEMBER
IT APPEAL NO. 475 (DELHI) OF 2011
[ASSESSMENT YEAR 2006-07]
MAY 4, 2012
Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment year 2006-07 - Whether in service contract, which is spread over to various years income has to be recognized in proportion to services rendered in a particular year - Held, yes - Assessee entered into an agreement with a hospital for rendering services as a hospital management consultant for a period of 5 years and received Rs. 1.22 crores - During relevant year, he declared his professional income from hospital at Rs. 6.09 lakhs which was in proportion to period for which services were rendered - Assessing Officer taxed entire amount of Rs. 1.22 crores - Whether since assessee had not rendered services for period of five years, entire amount could not be considered as income in year of receipt and, hence, assessee correctly declared his income in proportion to period for which services were rendered - Held, yes [In favour of assessee]
FACTS
During the year under consideration, the assessee entered into an agreement with 'UG' who were the owners of metro chain of hospitals, as a hospital management consultant for a period of five years for a total emolument of Rs. 1,15,00,000 plus TDS Rs. 6,83,494 totalling to Rs. 1,21,83,494. As under the agreement, the assessee was committed to render the services to 'UG' for five years, for the year under consideration, he declared the professional income from UG in proportion to the period for which he had rendered the services during the year under appeal. Rest of the emoluments was spread over and declared in subsequent years in proportion to the period of services rendered in those years. The Assessing Officer, being of the opinion that the entire amount had to be taxed in the year of its receipt, treated the entire amount as income of the concerned year. On appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer.
On second appeal :
HELD
Admittedly, the assessee has not served for the period of five years. The assessee has not rendered enough services to warrant emoluments of Rs. 1,21,83,494. It is assessee's submission that during the year under consideration he has not created a debt or a right to receive the payment equivalent to Rs. 1,21,83,494. Hence, it cannot be said that the income equivalent to total emolument of Rs. 1,21,83,494 has accrued to the assessee. [Para 8.3]
In this regard, the assessee's reliance on AS-9 issued by the ICAI is also relevant. AS-9 deals with the system of recognition of revenue in the rendering of services. In para 7.1 it states that revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method. It further specifies that in proportionate completion method, the revenue is recognized proportionately by reference to the performance of each act, and when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period. In other words, AS-9 also prescribes that in case of service contracts which are spread over to various years, the revenue is recognized on proportionate basis. [Para 8.4]
From the above discussion and some judicial precedents, it is amply clear that in service contract the income has to be recognized in proportion to the services rendered in a particular year. In the instant case, admittedly the assessee has not rendered services for the period of 5 years. Hence, there is no question of recognizing the entire amount as income of the assessee in the year of receipt. It cannot be said that assessee has created such a debt or right against the 'UG' that the income for the entire 5 years had accrued to the assessee. In the background of the aforesaid discussion, the assessee has correctly declared professional fee from the 'UG' in proportion to the period of services rendered during the year.
CASE REVIEW
E.D. Sasson & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) (para 8.2); CIT v. Dinesh Kumar Goel [2011] 331 ITR 10 /97 Taxman 375/ 9 taxmann.com 188 (Delhi) (para 8.5);Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414 /[2010] 10 taxmann.com 242 (Delhi) (para 8.6); Asstt. CIT v. Mahindra Holidays & Resorts (India) Ltd. [2010]39 SOT 438 (Chennai) (para 8.7); CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144(SC), Parimisethi Seetharamamma v. CIT [1965] 57 ITR 532 (SC); Beta Cellcom Ltd.v. ITO [I.T. Appeal No. 133 (Delhi) of 2009, dated 30-6-2011]; CIT v. D.C. Gandhi Associates [1994] 210 ITR 929 (Guj.) and Jitendra Sharma v. Dy. CIT [I.T. Appeal No. 1765 (Delhi) of 2002, dated 3-2-2006 (para 8.7) followed.
CIT v. Shah Construction Co. Ltd. [1998] 230 ITR 51 (Bom.); Magnum Power Generation Ltd. v. Addl. CIT [2009] 311 ITR 332 /[2008] 173 Taxman 146 (Delhi); P.L. Ganapathi Rao v. CIT [2006] 285 ITR 501 (A.P.); Moti Lal Chhadami Lal Jain v. CIT[1991] 190 ITR 1/56 Taxman 4A (SC); Dalmia Cement Ltd. v. CIT [1991] 191 ITR 331/[1992] 62 Taxman 186 (Delhi) (para); Airport Authority of India v. CIT [2012] 205 Taxman 84/ 18 taxmann.com 174 (Delhi); R.M. Arunachalam v. CIT [1997] 227 ITR 222/ 93 Taxman 423 (SC) and Jt. CIT v. Khanna & Annandhanam [IT Appeal No. 3444 (Delhi) of 2001, dated 18-1-2008] (para 7) distinguished.
CIT v. Shah Construction Co. Ltd. [1998] 230 ITR 51 (Bom.) (para 8), Magnum Power Generation Ltd. v. Addl. CIT [2009] 311 ITR 332 /[2008] 173 Taxman 146 (Delhi) (para 8), P.L. Ganapathi Rao v. CIT [2006] 285 ITR 501 (AP) (para 8), Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1/56 Taxman 4A (SC) (para 8), Dalmia Cement Ltd. v. CIT [1991] 191 ITR 331 /[1992] 62 Taxman 186 (Delhi) (para 8),Airport Authority of India v. CIT [2012] 205 Taxman 84 / 18 taxmann.com 174 (Delhi) (para 8), R. M. Arunachalam v. CIT [1997] 227 ITR 222/ 93 Taxman 423 (SC) (para 8), Jt. CIT v. Khanna & Annandhanam [IT Appeal No. 3444 (Delhi) of 2001, dated 18-1-2008] (para 8), E.D. Sasson & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) (para 8.2), CIT v. Dinesh Kumar Goel [2011] 331 ITR 10 / 197 Taxman 375 / 9 taxmann.com 188 (Delhi) (para 8.5), Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414/[2010] 10 taxmann.com 242 (Delhi) (para 8.6) and Asstt. CIT v. Mahindra Holidays & Resorts (India) Ltd. [2010] 39 SOT 438 (Chennai) (para 8.7).
M.P. Rustogi and Mrs. Lalitha Krishnamurthy for the Appellant. Ms. Y. Kakkar for the Respondent.
ORDER
Shamim Yahya, Accountant Member - This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 24.11.2010 pertaining to assessment year 2006-07.
2. The grounds of appeal read as under:-
"1. That the lower authorities had erred on facts and under the law in assessing the entire amount of consultancy fees of Rs. 1,21,83,494/-, received from UG Hospitals Pvt. Ltd., for the term of five years, even pertaining to the unexpired period of the contract, in the year under appeal and consequently the addition of Rs. 115,74,319/- in the income of the appellant is arbitrary, unjust and at any rate very excessive.
2. That the lower authorities had erred on facts and under the law in assessing the entire consultancy fees amounting to Rs. 1,21,83,494/-, received from UG Hospitals Pvt. Ltd. for the term of five years, instead of yearly accrual, which is against the law and principle of commercial accountancy.
3. That without prejudice to Grounds No.1 and 2 above, the disallowance of expenses of Rs. 42,65,000/- @ 35% allowed by the Assessing Officer and enhanced by Ld. Commissioner of Income Tax (Appeals) is without any basis, arbitrary, unjust and bad in law.
4. Without prejudice to above grounds that in case the entire amount of consultancy fees is assessable during the year then the revenue authorities ought to have also allowed the expenses is incurred in relation thereto in the subsequent years.
5. That the assessee denies his liability to pay interest charged under section 234B and 234C of the Income Tax Act, 1961.
6. The above grounds of appeal are independent and without prejudice to one another.
Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing."
3. Facts, in brief, are that the assessee, a doctor/ surgeon, has filed return showing income of Rs. 5,46,616/-. The assessee has shown professional receipts of Rs. 6,09,175/-, out of receipts of Rs. 1,21,84,494/-form UG Hospitals Private Limited (UGH) in the relevant year on the fact that the entire receipts of Rs. 1,21,83,494/- belongs to 5 years as per agreement. The receipts pertaining to this year (for three months) out of receipts of Rs. 1,21,83,494/- from UGH has been offered as revenue receipts for taxation and remaining as advance. The Assessing Officer, observing as under in the impugned order, assessed this claimed advance as income:-
"Receipt from M/S U.G. Hospital Pvt Ltd: It was seen during the assessment proceeding that the assessee has received total amount of Rs 1,21,83,494 from M/S U.G. Hospital. From the TDS certificate issued by M/S U.G. Hospital it is seen that a total sum of Rs. 6,83,494 has also been deducted which has been made on payment of the above sum of Rs. 1,21,83,494 as professional to the assessee by M/S U.G. Hospital for the period 1-1-06 to 31-03-06. During the hearing proceeding the assessee claimed that the above sum received were as advance on account of his appointment as Hospital Consultant for 5 years by M/S U.G. Hospital. The assessee reply has been examined & found devoid of any merit in it for the following reasons:
Similar payments have been received by assessee's father- Dr. K.L. Khera , Brother - Sh. Raman Khera as well as Sister- Miss Jyoti Khera. The amount received are claimed to have been received for one and only reason for all of them i.e. their being appointed as Hospital Consultant simultaneously & having been also paid simultaneously in crores -in advance for 5 years. It is simply unbelievable that a hospital will need- all of a sudden - so many Hospital Consultants from a single family -all closely related to each other by blood - & pay all of them in advance for 5 years -hefty sum amounting in crores -for the service as claimed! More puzzling is the fact that the father Dr K. L. Khera who is senior-most among all the recipients has been paid only Rs 58,26,888 as advance for the same period i.e. 5 years where as the assessee & his sister Miss Jyoti Khera being much junior in experience compared to their father have both received Rs 1,21,83,494 each. The basis of advance payment received therefore is beyond comprehension & therefore the reasons as advanced by the assessee for receipt of the payment are simply not acceptable & therefore rejected. From the period mentioned on the TDS certificate i.e. 1-1-06 to 31-03-06 also it is clear that the assessee claim of advance receipt for 5 years is not correct. Also it is beyond comprehension why a business entity like M/S U.G Hospital - would advance such a huge sum to only - members of a particular family - for such a long period without any formal written agreement or contract. The assessee and the Hospital both were requested to furnish copy of agreement if any signed at any point of time, but no such agreement has been furnished & accordingly it is presumed that there is no written agreement or contract between the payer & the payees of so called -advance for hospital consultancy. The non- appearance of the assessee as well as his father in response to summons issued u/s 131 of the IT. Act, 1961 as discussed above without any valid reasons or grounds do also clearly prove that the assessee or his father do not want to disclose the full facts & therefore what has been stated in writing with regard to receipt of Rs. 121,83,494 by the assessee cannot be accepted under any circumstance.
However, in order to provide one more opportunity a letter dt. 7-12-08 was sent to the assessee as to why the entire receipt of Rs 12183494 by him - professional fee as claimed - during the year- & further claimed as advance- should not be taxed for the reasons as mentioned in the above letter in the year of receipt that is in the A.Y. under consideration 06-07. In response to the above cited letter, the assessee filed a written submission dt 11-12-2008 which is placed on records. The reply of the assessee has been perused & examined. There is no further evidence or disclosure of facts in the written submission furnished by the assessee. In, the submission it has been requested not to take the entire receipt for taxation during the year under consideration as proposed by the undersigned in the letter dt. 7th Dec 08.
However, the request of the assessee cannot be acceded to considering the overall facts & circumstances of the case and as no further acceptable evidence in support of what has been claimed have been furnished .There is no regular books of accounts maintained by the assessee under any system cash- or-mercantile as mentioned and discussed above. The assessee should have maintained regular books of account keeping in view huge receipt of payment & nature of claim as being advanced by him! There is not a single line devoted by the assessee in his letter dt 11th Dec, 2008 as to why the assessee & Dr K. L. Khera -his father - both failed to appear in person when opportunity after opportunity, were offered to them! The reply of U/G hospital in this regard is also not acceptable for the reasons as mentioned above & totality of facts & circumstances of the case in absence of any formal written agreement or contract as discussed in details above. I, therefore considering the overall facts & circumstance of the case and the fact that no regular books of accounts has been maintained by the assessee under any system -mercantile or cash - am convinced that the entire receipt deserve to be taxed in the year of receipt only rejecting the theory of "advance" in absence of any written agreement or contract or non maintenance of regular books of accounts under any system under the circumstances mentioned above from undisclosed sources only. I accordingly treat the entire receipt of Rs. 1,21,83,494 as receipt from disclosed sources i.e. U.G. Hospital for undisclosed reasons under the circumstances mentioned above. However to tax the entire receipt without allowing any expenses which might have been incurred by the assessee would not be in the interest of natural justice! out of the above receipt, therefore, an amount of Rs 42,65,000 being roughly 35% of the total receipt i.e. Rs. 1,21,83,494 is allowed as possible expenditures which might have been incurred on earning the above income on estimate & only balance of Rs 79,18,494 is taken as income of the assessee not disclosed & added accordingly to the total income of the assessee ... ".
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) elaborately discussed the assessee's submissions. Ld. Commissioner of Income Tax (Appeals) observed that it is undisputed that fact that M/s UGH has paid substantial sums as mentioned above to four persons of the assessee group. On the basis of material available on the record, Ld. Commissioner of Income Tax (Appeals) opined that he was convinced and of the considered view that there is no direct live link between payment made by the UGH and services rendered by the assessee and thus hold that the receipts under reference being irrevocable; has become due for taxation in the relevant year because the UGH, after paying the sum, has no power to enforce the rendering of services by the assessee and other members of this group and the assessee alongwith the other members of this group are not under any obligation to refund the receipt in part or in full at any point of time under any circumstances. Even the assessee failed to produce the relevant bills, vouchers of any third party pertaining to the relevant year and, or to the subsequent years as evident from the order sheet dated 10.11.2010, which may establish beyond that the expenses have been claimed for rendering services to the UGH. Thus, there is no evidence establishing that the services have been undoubtedly rendered. Ld. Commissioner of Income Tax (Appeals) observed that on the basis of facts on the record, following queries were kept in mind with following answers while deciding this appeal:-
"i. How the capability of all three persons, namely, Dr. Aman Khera, Dr. Raman Khera and Ms. Jyoti Khera, as for as rendering of services to UGH is concerned, will be same for which the similar payment has been done? The answer is that the capability of two people cannot be same. The consultant normally gets the charges depending on their potentiality as per terms and agreement and mainly after rendering the services, but here it is just reverse. Ms. Jyoti Khera is not a doctor also and not having any management degree in hospital management. Then how her expertise was utilized by the UGH is not understandable.
ii. If the above named persons of the appellant group are so management expert then why have they failed to run the hospital of KCT since quite long time? Answer: the payments are not for their expertise but for other wise.
iii. If the above named persons of the appellant group are so management expert then why other hospital groups have not taken over them when they are free to join/take any job as per the agreement with UGH? Answer: the payments are not for their expertise but for other wise and that is why the appellant did not get any other assignment in subsequent years till 2009.
iv. Amongst how many consultants, the above named persons of the appellant group were selected by UGH? NO answer was given by the appellant.
v. How and why have all these four persons of the appellant group taken over by the UGH at one point of time? The answer is that the agreement is not person specific but here it is group specific.
iii. Why the agreement and payments made to the appellant group are irrevocable?
Answer: Because it is not related with the specific services.
iv. Why articles relating to the recovery of consultancy charges, in absence of services rendered by the appellant, were not brought into the agreement? Answer: Because it is not related with the specific services.
v. Why agreement was entered after the lapse of four and half year? Answer: Because the payment is not related with the specific services.
vi. How the UGH can enforce the services of the appellant, in case he denies/refuses to render services? In such situation, what step can be taken by the UGH? Answer: There is no such provision as the payment is not related with the specific services. The appellant is not under any obligation to refund/repay the fees.
vii. How the payment is related to the services? Answer: Not established by the appellant.
viii. Has any similar agreement entered into by the UGH with any consultant where the payment in advance has been done to a third party in a group without entering into any agreement? Answer: No such agreement was brought to my notice though the appellant was specifically called for many times.
ix. Why UGH has not made monthly payment to Dr R. L. Khera Charitable Trust, whose hospital has been taken over as per agreement? Answer: The UGH, instead of making payment to KCT, made payment to the appellant group.
x. Is it not payments to the members of the appellant's group in lieu of hospital belonging to KCT taken over by the UGH and given colour of consultancy charges? Answer: Circumstantial evidences say yes.
xi. How the AD 'has allowed/appellant met expenses in this year and or subsequent year when the major part of the receipt as such was invested either in the house or FDR? Answer: Not established with the cash flow in this year.
xii. Why there is no third party evidence, which may establish the direct live nexus between the receipts and the claimed corresponding expenses of the appellant? Answer: Expenses are not verifiable as these have not been incurred.
xiii. Whether the disclosure of the receipt from the UGH in the period of 5 years by the appellant has minimized the tax incident? Answer: Yes. This arrangement has directly benefited the appellant and UGH both."
4.1 In view of the factual and circumstantial evidence gathered by the AO and as discussed in his order. Ld. Commissioner of Income Tax (Appeals) held that it is held in principle that the receipts of Rs. 1,21,83,494/- is chargeable to tax in the relevant year. Ld. Commissioner of Income Tax (Appeals) further held that the allowance of Rs. 42,65,000/- as expenses @ 35% of the receipt of Rs. 1,21,83,494/- from the UGH is not in accordance with the law because expenses more than what have been incurred/ claimed in the relevant year cannot be allowed. The Assessing Officer has already allowed the claimed expenses while determining the business income of Rs. 2,55,808/- Hence, the allowance of 35% of the receipt of Rs. 1,21,83494/- as expenses over and above the claimed expenses by the Assessing Officer in the impugned order is not justified at all. Ld. Commissioner of Income Tax (Appeals) further held that it is double allowance of the expenses against the proportionate receipt of Rs. 6,09,175/- offered out of receipt from the UGH. Ld. Commissioner of Income Tax (Appeals) further observed that it was brought to the notice of the Ld. Authorised Representative that why not the allowance of Rs. 42,65,000/- be withdrawn as it is against the accounting principle and provisions of the law. It was argued before the Ld. Commissioner of Income Tax (Appeals) that since the receipt from the UGH is not taxable in entirety in this year therefore, the question of disallowance the expenses of Rs. 42,65,000/- does not arise. Ld. Commissioner of Income Tax (Appeals) further held that in view of the finding that the entire receipt of Rs. 1,21,83,494/- is chargeable to tax in the relevant year, therefore, the allowance of expenses over and above the claimed expenses is held unjustified. Ld. Commissioner of Income Tax (Appeals) concluded that on the basis of above facts, he was enhancing the income of the assessee by Rs. 42,65,000/-. Ld. Commissioner of Income Tax (Appeals) further held that the assessee has offered proportionate receipt of Rs. 6,09,175/- out of receipt from the UGH has been taxed by the Assessing Officer as business income. Therefore, Ld. Commissioner of Income Tax (Appeals) held that he was of the view that the amount of Rs. 6,09,175/- has been doubly taxed by the Assessing Officer in the sum of Rs. 79,18,494/- again. Hence, he deleted it and gave relief of Rs. 6,09,175/-. Ld. Commissioner of Income Tax (Appeals) concluded that in view of the above findings, the Assessing Officer is directed to complete the assessment at Rs. 1,21,20,934/- (Rs. 84,65,109/- plus Rs. 42,65,000/- less Rs. 6,09,175/-).
5. Against the above order the assessee is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon.
7. Ld. counsel of the assessee has made the following submissions in this regard:-
"(i) The charging provisions are Section 4 and 5 of the Income Tax Act, 1961 (the Act), whereas the provision of Section 145 of the Act which deals with the method of accounting is only a procedural section. Section 4 states that tax is chargeable on the total income at the rate prescribed.
(ii) Section 5 deals with the scope of total income and states that in the case of resident, the total income includes all income from whatever source derived which:
(a) is received or is deemed to be received in India;
(b) accrues or arises or is deemed to accrue or arise to him in India;
(c) accrues or arises to him outside India.
(iii) In the case of Shoorji Vallabhdas in 46 ITR 144 , the Hon'ble Supreme Court observed that the income-tax takes into account two points of time on which the liability to tax is attracted:
(a) accrual of income; and
(b) receipts of income.
The Hon'ble Supreme Court says that in both the cases, the substance of the matter is income.
(iv) In the case of Parimisethi Seetharamamma v. CIT in 57 ITR 532 , the Hon'ble Supreme Court stated that all incomes are receipts but all receipts are not income. It is only those receipts which bear the characteristic of income that can be taxed under the Act.
(v) In the case of E.D. Sasoon & Co. Ltd. v. CIT in 26 ITR 27 , at page 50, the Hon'ble Supreme Court explained what is income.
The Hon'ble Supreme Court stated that income means what comes in as the periodical produce of one's work.
At pages 51-52, the Hon'ble Supreme Court observed as under:
" .... If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in prasenti, solvendum in futuro it cannot be said that any income has accrued to him .... ".
(vi) The Institute of Chartered Accountants of India, which is also one of the important institution dealing with accountancy in the commercial world, has prescribed Accounting Standards (AS-9) for the recognition of revenue. AS-9 in paragraph 7 deals with the system of recognition of revenue in the rendering of services. In paragraph 7.1 it states that revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method. It further specifies that in proportionate completion method, the revenue is recognized proportionately by reference to the performance of each Act and when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period. In other words, AS-9 also prescribes that in case of service contracts which is spread over to various years, the revenue is recognized on proportionate basis.
(vii) In the case of CIT v. Dinesh Kumar Goel in 331 ITR 10 (Del), the said assessee was running an institute of coaching students and had received the total fee of the 'entire course having the duration of two years. The fee was non-refundable. The said assessee claimed that the fee should be spread over to the years for which the coaching was to be made, whereas the Revenue was of the view that because the money was non-refundable and as per the agreement the students have to pay the entire fee in advance at the time of admission, therefore it is assessable in the year of receipt. The Jurisdictional Delhi High Court negatived the contention of the Revenue and held, after following the judgment of E.D. Sasoon & Co. (supra) that because the services had to be rendered in two years, therefore the entire fee had to be spread over in two years and had to be assessed proportionately.
(viii) In the case of Career Launchers (India) Ltd. v. ACIT in 131 ITD 414 at pages 431-433/434, the Coordinate Delhi Bench of the ITAT has also held that even if the amount is non-refundable, it has to be assessed on proportionate basis on the basis of duration of services rendered. The Delhi Bench of the ITAT followed another Coordinate Bench's decision in the case of K.K. Khullar v. DCIT in 116 ITD 301 (Del) wherein the Delhi Bench of the ITAT held that even in the case of cash system of accounting, the income has to be assessed on the basis of services rendered because the income can be said to have accrued on the rendering of the services and not otherwise.
(ix) The Chennai Special Bench of the Tribunal in the case of ACIT v. Mahendra Holidays & Resorts (India) Ltd. in 131 TTJ 1 has also held that where the services are required to be rendered in various years, the receipts have to be spread over the years for which the services are required to be rendered. The Special Bench of the ITAT further observed that recognizing entire receipt in the year of receipt can lead to a distorted picture.
(x) In the case of Beta Cellcom Ltd. v. ITO in ITA No. 133/Del/2009 for Assessment Year 2002-03 vide order dated 30th June 2011 in 2011-TIOL-706-ITAT-DEL, the Coordinate Delhi Bench of the ITAT, after following the judgment of Delhi High Court in CIT v. Dinesh Kumar Goel (supra) and Special Bench decision in the case of Mahindra Holidays & Resorts (supra), held that where the services are required to be rendered in various years, the receipts have t8 be spread over the years for which the services are required to be rendered (copy attached).
(xi) In the case of CIT v. D.C. Gandhi & Associates in 210 ITR 929 , the Gujarat High Court has held that even in the cash system of accounting, the income is accrued only on the rendering of services and not otherwise. The case of D.C. Gandhi was of an advocate who had received the amount in advance from the client. As and when any services were rendered by Gandhi to the client, the necessary amount out of the advance so received was appropriated towards the fee and credited to the profit & loss account.
(xii) In the case of Jitendra Sharma v. DCIT in ITA No. 1765/De1/2002 vide order dated 3rd February 2006, the Coordinate Delhi Bench held that even in the cash system of accounting it is only that portion of the amount, out of advances, that accrued to the assessee as income for which the services have been rendered and not the whole amount (copy attached).
In the instant case also, the payment has been made by UG Hospitals to the assessee for rendering of services for five years. Though the amount was non-refundable, but the same is irrelevant for the purpose of chargeabi1ity of income. Under the law, in both systems of accounting, whether it is mercantile or cash, the income can be said to have accrued only on the rendering of services and if as per the contract the assessee has to render the services for various years, then the income can be said to have accrued in proportion to the services rendered by the assessee.
Case laws relied by Revenue are distinguishable both on facts & law:
In this case there was no issue before the Bombay High Court about the spread over of income. The issue before the Bombay High Court was whether in a case where the relevant amount in the hands of the payer has been disallowed, cannot be assessed in the hands of the payee on this ground. The Hon'b1e High Court held that disallowance of a particular amount in the hands of payer cannot be a ground for its non-assessability in the hands of payee because in the hands of payee the amount already accrued as per the agreement.
(b) 311 ITR 332 (Del), Magnum Power Generation Ltd. v. Addl. CIT - Distinguishable on facts and law.
In this case, the issue was the accrual of interest on inter-corporate deposits. The said assessee had made inter-corporate deposit with another company. Such inter-corporate deposits were renewed from time to time. A large part of the amount was not returned by the company and the cheques issued were dishonoured for want of funds. The said assessee initiated proceedings under the Negotiable Instruments Act, 1881 and filed a winding up petition under the Companies Act, 1956 for recovery of principal as well as interest thereof. On directions issued by the Company Court, the company made payment of the entire principal amount and the interest for the entire period which was received by the said assessee in December 2005. The case before the High Court was for the earlier years prior to the receipt of the amount from the company as per court orders. In those very years, the assessee claimed that the interest amount due for these periods was not liable to be taxed even though the assessee was maintaining a mercantile system of accounting as the debt was a sticky debt. The Hon'ble High Court found that in the absence of any evidence, the debt cannot be considered as a sticky debt and all the three authorities below had found that the debt was not a sticky debt. On such facts, the High Court held that the interest accrued to the assessee in those years.
The said assessee had leased out a film for five years. As per the agreement executed between the assessee and the lessee, the amount of Rs 4 lakhs accrued to the assessee on the date of the execution of the agreement. On such basis, the Andhra Pradesh High Court stated that as per the agreement, the amount accrued to the assessee on the date of the execution of the agreement, hence assessable in that year.
In the instant case, no such clause existed in the agreement.
(d) The cases of Moti Lal Chhidami Lal in 191 ITR 1 (SC) and the Dalmia Cement Ltd. v. CIT in 191 ITR 331 (Del) are not applicable to the facts of the present case. In both the cases, the courts were examining the principle of overriding charges and diversion of income, which is not the issue in the instant case.
(e) In Airport Authority of India v. CIT in ITA No. 432/2008 dated 16th December 2011 reported in 20 12-TIOL-09-HC-DEL-IT-LB, the issue before the Hon'ble Delhi High Court was whether merely on the issue of proforma invoice, the income can be said to have accrued more particularly when the assessee has not received the amount. The Delhi High Court, after following the judgment of Godhra Electricity Co. Ltd. v. CIT in 225 ITR 746 (sq, held that merely on the basis of issuance of a proforma invoice, the income does not accrue in the real sense unless the other party accepts it.
It has no relevance in the facts of instant case.
(f) In R.M. Arunachalam v. CIT in 227 ITR 222 (SC), the issue before the Hon'ble Supreme Court was whether while computing the capital gain on sale of inherited property, the estate duty is deductible as cost of acquisition or cost of improvement. The Hon'ble Supreme Court answered the issue in negative and held that the estate duty is not a deductible item while computing the capital gain on sale of property.
It has no relevance in the facts of instant case.
(g) In JCIT v. Khanna & Annandhanam in ITA No. 3444/Del/2001 dated 18th January 2008 in 2008- TIOL-377-ITAT-DEL, the issue was totally different. In that case, the issue was whether the amount received for the sterilization of future professional earnings is taxable or not.
In the instant case, no such issue is there.
(h) As per DR the amount is not refundable; hence it accrued during the year of receipt on cash basis.
The amount refundable or not refundable is not the criteria to tax the amount in Income Tax Act. In the Income Tax Act as per the provision of Sections 4 and 5, it is only the income which is chargeable to tax as held by Supreme Court in the case of Shoorji Vallabhdas (supra). Moreover, in the case of Career Launchers (India) Ltd. (supra) and Dinesh Kumar Goel (supra) the amounts received were also not refundable.
Conclusion:
The contention of DR that the payer UG Hospitals has deducted the TDS on the entire amount during the year under consideration hence it should be assessed in the year of its receipt, is not correct and are based on misconception of law. The manner of deduction of TDS is not a criterion of the assessability of the receipt in the hands of payee. As for the provision of Section 194C or 194J of the Act, the TDS is deductible either at the time of making payment or at the time of credit of the amount in the books of account, whichever IS earlier. However, in the case of Transmission Corporation of AP in 239 ITR 587 , the Hon'ble Supreme Court held that the deduction of TDS is only a tentative assessment and not a final assessment. The final assessment has to be made by the AO in accordance with the provisions of law in the hands of payee.
It is not out of place to mention here that from the arguments of DR it appears that there is a little bit confusion in the mind of Department about types of services rendered by the assessee because according to them, assessee is not doing any job as a professional doctor, i.e. patient check-up or surgery etc. but they failed to understand that now-a-days the big hospitals are being run on commercial lines just like a business organization wherein Hospital Management also plays a key role. The UG group of hospitals used to run 14 hospitals at the time of contract. After the completion of contract with UG Group, now the assessee has joined Pushpanjali Crosslay Hospital, Sahibabad which is runmng only one hospital, as a Senior Consultant Business Development almost on the same fee as that of UG Hospital (copy of appointment letter and visiting card to prove this fact is attached).
The takeover of management operation by UG Group is an independent transaction and has no co-relation with the assessee. The UG Group has engaged the assessee on account of his own qualification and experience.
The non refundability of amount is not a criteria to assess the amount in the year of receipt but the criteria is the accrual of income out of the receipts and the same is accrued with reference to the services rendered on proportionate basis in both systems of accountancy whether it is mercantile or cash as discussed in the case laws (above) though the books of account was also maintained by the assessee wherein the assessee has duly shown the proportionate receipts with reference to the period of services rendered during the year under appeal.
The remaining receipts were also shown and assessed in subsequent years proportionately"
8. Ld. Departmental Representative on the other hand relied upon the orders of the Assessing Officer and Ld. Commissioner of Income Tax (Appeals). She further pointed out that from the financial year 2007, assessee is following cash system of accounting. She further referred to clause 2.7 of the agreement which indicated that the fixed consultancy fees paid to the assessee Sh. Aman Khera is non-refundable even on prior determination of agreement. She pointed out that the assessee has claimed full TDS credit of Rs. 6,09,175/- on professional receipts of Rs. 12183494/- in the computation of income. Hence, as per section 199 of the Act the whole income is taxable. Ld. Departmental Representative further relied upon the catena of cases laws including the following :-
(d) The cases of Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 /56 Taxman 4A (SC) and the Dalmia Cement Ltd. v. CIT [1991] 191 ITR 331 /[1992] 62 Taxman 186 (Delhi).
(g) In Jt. CIT v. Khanna & Annandhanam [IT Appeal No. 3444 (Delhi) of 2001 dated 18-1-2008].
8.1 Ld. Departmental Representative further in written submission gave a number of citations without explaining how the same are relevant in the present case. Hence, we are not dealing with the same.
8.2 We have carefully considered the submissions and perused the records. During the year under consideration, the assessee entered into an agreement M/s UG Hospitals Pvt. Ltd. who are the owners of Metro chain of hospitals as a Hospital Management Consultant for a period of five years w.e.f. 1st January, 2006 for a total emolument of Rs. 1,15,00,000/- plus TDS Rs. 6,83,494/-, thereby working out the total taxable emoluments at Rs. 1,21,83,494/-. The duration of the agreement was for five years and the assessee was committed to render the services to the UG Hospitals for five years, hence for the year under consideration the assessee declared the professional income from UG Hospitals in proportion to the period for which the assessee had rendered the services during the year under appeal. Rest of the emoluments was spread over and declared in subsequent years in proportion to the period of services rendered in those years. Assessing Officer was of the opinion that the entire amount has to be taxed in the year of its receipt and accordingly, he treated the entire amount of Rs. 1,21,83,994/- as income of the year under appeal. Ld. Commissioner of Income Tax (Appeals) confirmed this action of the Assessing Officer. Now it is the submission of the ld. counsel of the assessee that the assessee was committed as per agreement to serve for 5 years for the UG Hospitals. Under the circumstances, the only income from UG Hospitals in proportion to the period for which the assessee had rendered the services during the concerned year should be recognised. This proposition draw support from the decision of the Hon'ble Apex Court in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. In this case at pages 51-52, the Hon'ble Supreme Court has observed as under:-
"If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in prasenti, solvendum in futuro it cannot be said that any income has accrued to him.".
8.3 Now we examine the present case on the touch-stone of the aforesaid decision. Admittedly, assessee has not served for the period of five years. Assessee has not rendered enough services to warrant emoluments of Rs. 1,21,84,494/-. It is assessee's submission that during the year under consideration he has not created a debt or a right to receive the payment equivalent to Rs. 1,21,84,494/-. Hence, it cannot be said that the income equivalent to total emolument Rs. 1,21,84,494/- has accrued to the assessee.
8.4 In this regard, assessee's reliance of AS-9 issued by the ICAI is also relevant. AS-9 deals with the system of recognition of revenue in the rendering of services. In para 7.1 it states that revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method. It further specifies that in proportionate completion method, the revenue is recognized proportionately by reference to the performance of each Act and when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period. In other words, AS-9 also prescribes that in case of service contracts which is spread over to various years, the revenue is recognized on proportionate basis.
8.5 We further find that the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Dinesh Kumar Goel [2011] 331 ITR 10 / 197 Taxman 375 / 9 taxmann.com 188 (Delhi) also supports the case of the assessee. In this case assessee was running an institute of coaching students and had received the total fee of the entire course having the duration of two years. The fee was non-refundable. The said assessee claimed that the fee should be spread over to the years for which the coaching was to be made, whereas the Revenue was of the view that because the money was non-refundable and as per the agreement the students have to pay the entire fee in advance at the time of admission, therefore, it is assessable in the year of receipt. The Jurisdictional High Court negative the contention of the Revenue and held, after following the judgment ofE.D. Sassoon & Co. Ltd. (supra) that because the services had to be rendered in two years, therefore the entire fee had to be spread over in two years and had to be assessed proportionately.
8.6 Furthermore, in the case of Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414/[2010] 10 taxmann.com 242, the Coordinate Delhi Bench of the ITAT has also held that even if the amount is non-refundable, it has to be assessed on proportionate basis on the basis of duration of services rendered.
8.7 The Chennai Special Bench of the Tribunal in the case of Asstt. CIT v.Mahindra Holidays & Resorts (India) Ltd. [2010] 39 SOT 438 (Chennai) has also held that where the services are required to be rendered in various years, the receipts have to be spread over the years for which the services are required to be rendered. The Special Bench of the ITAT further observed that recognizing entire receipt in the year of receipt can lead to a distorted picture. We further find that the other case laws relied by the ld. counsel of the assessee also support the assessee's case.
8.8 From the above discussion and precedents, it is amply clear that in service contract the income has to be recognized in proportion to the services rendered in a particular year. In the present case, admittedly the assessee has not rendered services for the period of 5 years. Hence, there is no question of recognizing the entire amount as income of the assessee in the year of receipt. It cannot be said that assessee has created such a debt or right against the M/s UG Hospital that the income for the entire 5 years had accrued to the assessee. In our considered opinion, in the background of the aforesaid discussion and precedent, we find that the assessee has correctly declared professional fee from the UG Hospital in proportion to the period of services rendered during the year. Under the circumstances, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
9. In the result, the appeal filed by the assessee is allowed.
IT: Where assessee had invested total sale consideration in construction of a residential house within three years after transfer of plot, she was entitled to exemption under section 54F though house was completed after three years
■■■
[2012] 25 taxmann.com 188 (ASR.)
IN THE ITAT AMRITSAR BENCH
Smt. Usha Vaid
v.
Income-tax Officer, Dasuaya*
H.S. SIDHU, JUDICIAL MEMBER AND B.P. JAIN, ACCOUNTANT MEMBER
IT APPEAL NO. 98 (ASR.) OF 2011
[ASSESSMENT YEAR 2006-07]
JULY 27, 2012
Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house - Assessment year 2006-07 - Assessee sold a commercial plot of land on 14-10-2005 and invested total sale consideration in construction of a residential house within three years after transfer of plot - Said house was completed by end of October, 2008 - Assessee claimed exemption under section 54F in respect of capital gain arising from sale of plot - Whether once assessee had invested total sale consideration into construction of a residential house within three years after transfer of plot, she was entitled to exemption under section 54F even though house was completed after expiry of three years from transfer of plot - Held, yes [In favour of assessee]
FACTS
The assessee had sold a commercial plot of land on 14-10-2005 and invested the total sale consideration in the construction of a residential house within three year after the transfer of the plot. However, the said house was completed by the end of October, 2008. During the course of assessment proceedings for the assessment year 2006-07, the assessee through a letter dated 2-6-2008 claimed exemption under section 54F in respect of capital gain arising from sale of the plot contending that she had invested total sale consideration in the construction of the house before the completion of three years from the date of transfer of plot though the house was completed after expiry of three years from the transfer of the plot. The lower authorities disallowed the assessee's claim of exemption under section 54F.
On second appeal:
HELD
As per section 54F, if the assessee being an individual, the capital gain which arises from the transfer of any long term capital asset, not being a residential house, and the assessee had after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, referred to as the new asset, then the capital gain is exempt, if whole of the net consideration of the original asset is invested in the new asset, i.e. , residential house. Now the question arises as to whether the assessee had fulfilled the conditions under section 54F or not. The assessee had invested the total sale consideration (net consideration) within three years after the transfer of the original asset. The words mentioned in section 54F are that the amount should be invested in the construction of a residential house. Therefore, once the assessee having been invested total sale consideration into construction of a residential house, then it is not necessary that the residential house should have been completed within three years of the transfer of the original asset. The residential house may be completed even after completion of three years of the transfer of the original asset. In such a situation, when a house is completed after expiry of three years from the transfer of the original asset, the assessee is entitled to exemption under section 54F. [Para 5]
Therefore, the assessee having sold an asset had invested the net sale consideration into the construction of a residential house, claim of the assessee under section 54F is allowable. Accordingly, the appeal of the assessee deserved to be allowed. [Para 5.1]
CIT v. Sardarmal Kothari [2008] 302 ITR 286 (Mad.) (para 5), Mrs. Seetha Subramanian v. Asstt. CIT [1996] 59 ITD 94 (Mad.) (para 5) and Smt. Ranjit Sandhuv. Dy. CIT [2010] 133 TTJ 46 (Chd.)(UO) (para 5).
Surinder Mahajan for the Appellant. Laxman Singh for the Respondent.
ORDER
Per Bench - This appeal of the assessee arises from the order of the CIT(A), Jalandhar, dated 28.01.2011 for the assessment year 2006-07.
2. The assessee has raised following grounds of appeal:
"1. That on the facts & circumstances, Ld. CIT(A) has grossly erred in not admitting additional evidence in the shape of electric bills, letter towards transfer of electric connection to new residential house, and report of approved value filed during appellate proceedings to substantiate the claim that residential house stood completed after assessment proceedings. Rejection of additional evidence is illegal and bad in law.
2. That on the facts & circumstances, Ld. CIT(A) has grossly erred in confirming action of the A.O. of reducing Rs. 12,000/- from cost of shop plot being cost of boundary wall & gate constructed in the year 1987-88 in the absence of vouchers for the same. Action of the Ld. AO is not admitting cost of boundary wall & gate confirmed by the Ld. CIT(A) is illegal and bad in law.
3. That on the facts & circumstances, Ld. CIT(A) has grossly erred in confirming the action of the AO that the amount spent by the assessee on purchase of land and cost of boundary wall and purchase of other material does not qualify for deduction u/s 54F of the Act though the assessee has invested the entire consideration of sale of capital asset in purchase of land, cost of foundation & boundary wall & also purchase of material at the time of visit of the Inspector. Action of the Ld. CIT(A) is illegal and bad in law.
4. That there is no justification in not allowing deduction claimed u/s 54F of the Act by holding that house was not constructed on the date of inspection by the Inspector when entire consideration of sale of capital asset stood invested within the stipulated period of three years in purchase of land, construction of foundation, boundary wall and purchase of material for further construction. House considering of one bedroom, kitchen & bathroom along-with boundary wall, stood completed in November 2009 within 3 years & one month of sale of capital assets.
5. That the assessee requests for leave to add or amend the grounds of appeal before the appeal is heard or disposed off."
3. The brief facts of the case are that the assessee with her husband had purchased a commercial plot at Faridabad in 1987 for a sum of Rs. 43,075/-. The said plot was sold on 14.10.2005 for Rs. 9,00,000/-. After deducting indexed cost of acquisition from her half share as sale consideration, long term capital gain was calculated at Rs. 3,58,759/-. Out of the sale consideration by the assessee, a claim for the purchase of agricultural land for Rs. 3,11,480/- was made. The assessee later on corrected her claim that the assessee had purchased the residential plot and not the agricultural land along-with co-owner at Rs. 1,65,833/- and Rs. 2,20,000/- were spent for construction of a house and the sources were explained. The Income Tax Inspector was deputed to make on the spot inquiry regarding construction of alleged residential house, who on 25.08.2008 submitted that the assessee had made a boundary wall on this land which is only 2 feet in height. The AO observed that the assessee has neither constructed any residential house nor made any claim for exemption under section 54F in the return of income. The claim under section 54F was made through a letter dated 02.06.2008. As regards construction of the boundary wall, the bills and vouchers were not produced since the construction was made 21 years back. The construction was made by Sh. Ganshyam Kathuria brother of Mr. Pritam Kathuria of Reliance Estate Agencies, Neelam Chowk, Faridabad. The notice under section 131 was issued to Mr. Ganshyam Kathuria. The letter sent to Mr. Ganshyam Kathuria was received back with postal remarks that "No such person". The same was confronted to the assessee and the assessee in response thereto submitted that Sh. Ganshyam Kathuria had died but no evidence of his death was produced by the assessee. The assessee submitted to verify the contents from one Sh. O.P. Jhanb, partner of Reliance Estate Agency. The AO not being satisfied with the explanation of the assessee did not allow the claim of long-term capital gain and accordingly made the addition.
4. Before the Ld. CIT(A), the assessee submitted an application under Rule 46A being the electricity bill and report of the Approved Valuer that the assessee had completed the construction by the end of October, 2008 and three years had expired on 14.10.2008. The Ld. CIT(A) did not accept the application under Rule 46A of the Act. The claim of the assessee that the assessee had invested total sale consideration in the construction of the house before the completion of three years though the house was completed after expiry of three years. The claim under section 54F which was allowable was not allowed by the ld. CIT(A). The cases relied upon by the assessee before the ld. CIT(A) did not help the assessee. Accordingly, the ld. CIT(A) rejected all the grounds of the assessee.
5. We have heard the rival contentions and perused the facts of the case. There is no dispute to the fact that the assessee had purchased the property in 1987. On verification by the Inspector, the boundary wall and gate was also found, is also not under dispute. The assessee had claimed vide letter dated 02.06.2008 exemption under section 54F of the Act during the assessment proceedings before the AO is also not under dispute. The sale consideration has been invested in the construction of the house has been explained by the assessee before both the authorities below. Though house was not completed before the expiry of three years from the sale of the plot at Faridabad, but the same was completed immediately after few days of the expiry of three years. As per section 54F, if the assessee being an individual, the capital gain which arises from the transfer of any long term capital asset, not being a residential house and the assessee had after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, referred to as the new asset, then the capital gain is exempt, if whole of the net consideration of the original asset is invested in the new asset i.e. residential house. Now the question arises in the present case whether the assessee had fulfilled the conditions under section 54F or not, has to be perused. In the present case, the assessee had invested the total sale consideration (net consideration) within three years after the transfer of the original asset. The words mentioned in section 54F are that the amount should be invested in the construction of a residential house. Therefore, once the assessee having been invested total sale consideration into construction of a residential house, then it is not necessary that the residential house should have been completed within three years of the transfer of the original asset. The residential house may be completed even after completion of three years of the transfer of the original asset. In such a situation, when a house is completed after expiry of three years from the transfer of the original asset, the assessee is entitled to exemption under section 54F of the Act. This view is supported by the decision of the Hon'ble Madras High Court in the case of CIT v. Sardarmal Kothari [2008] 302 ITR 286 . The Ld. counsel for the assessee has also placed reliance on the following decisions :
(ii) Smt. Ranjit Sandhu v. Dy. CIT [2010] 133 TTJ 46 (Chd)(UO).
5.1 The assessee had submitted application under Rule 46A on having completed the house, after the expiry of three years from the transfer of the original asset along-with electricity bill which was not accepted by the Ld. CIT(A), which in fact, could not be submitted by the assessee before completion of the assessment. The same should have been accepted by the ld. CIT(A). Therefore, as held hereinabove, the assessee having sold an asset which is not a residential house being a long-term capital asset had invested the net sale consideration into the construction of a residential house and therefore, claim of the assessee u/s 54F is allowable. Accordingly, all other claims of the assessee are allowable. The addition made by the AO. is directed to be deleted and the order of the ld. CIT(A) is reversed. Thus, all the grounds of appeal of the assessee are allowed.
6. In the result, the appeal of the assessee in ITA No.98(Asr)/2011 is allowed.
----- Forwarded Message -----
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Wednesday, 7 November 2012 1:41 AM
Subject: Scrutiny by ROC
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Wednesday, 7 November 2012 1:41 AM
Subject: Scrutiny by ROC
EXAMINATION OF BALANCE SHEETS BY ROCs
GENERAL CIRCULAR NO. 37/2012, DATED 6-11-2012
It is considered expedient to issue the following circular for general information.
2. Every company registered under the provisions of the Companies Act, 1956 is required to file its balance sheet annually with the office of the Registrar of Companies within whose jurisdiction the registered office of the company is located. Presently, there are more than 8 lakh companies registered with various offices of the RoCs located all over the country. Balance sheets of all the companies who carry out the filing are available for public inspection on the portal of this Ministry (http://www.mca.gov.in). The underlying idea behind the filing of balance sheets and other documents which require similar filings is to publicly disclose information which reflects various aspects of the working of a company so that the company's public accountability is maintained. It is neither intended nor feasible for the Registrars to scrutinize or verify the contents of filing except on a random basis. Companies and its Directors and officials are liable to be penalized for any incorrect, false or misleading information that such filing disclose. In the following cases, however, the Registrars routinely scrutinize balance sheets:
(i) of companies against whom there are complaints;
(ii) of companies which have raised money from the public through public issue of shares/debentures etc.;
(iii) in cases where the auditors have qualified their reports.
(iv) Default in payment of matured deposits and debentures.
(v) References received from other regulatory authorities pointing out violations/irregularities calling for action under the Companies Act, 1956.
3. After the scrutiny suitable steps are initiated wherever necessary to obtain explanation and clarification and to institute inspections, investigations and prosecutions wherever warranted.
Best Wishes
CA. V.M.V.SUBBA RAO
Chartered Accountant
Door No.24-2-1885,
I Floor, Flat No.5,
Siddivinayaka Residency, I Cross,
Central Avenue, MSR Nagar,
Magunta Layout,
Nellore-524 003
Andhra Pradesh
India
Mobile:+91 - 0 9390221100
+91 - 0 9440278412
e-Mail: vmvsr@rediffmail.com
vmvsr@yahoo.co.uk
http://pdicai.org/MyPage/203038.aspx
__._,_.___
No comments:
Post a Comment