S.4: Charge of income-tax- Undisclosed income- Search and seizure-On money- Paper seized from third party
addition is deleted.(S. 132)
In the course of search and seizure action against third party, from the Director of the said company certain loose
papers were seized which recorded the alleged payments to artists. One of the name was of the assessee. On the basis
of said paper the assessment of the assessee was reopened. Assessing Officer treated the said amount of Rs. 20 lakhs as
undisclosed income of assessee. In the course of cross examination the director of the company has stated that he did
not recollect the year of payment either 1996 or 1999 nor the person to whom he has given the money. The Tribunal
held that under the circumstances the statements given by Director had no evidentiary value, hence the addition could
not be taxed in the assessment year 1999-2000. (A. Y. 1999-2000).
Saif Ali Khan Mansuraliv.v. ACIT (2012) 13 ITR 204 (Mum.)(Trib.)
IT : On demerger of STPI unit before period of 10 years, neither deduction will be allowable to such unit for year of demerger nor will income of such year be assessable in its hands
■■■
[2012] 27 taxmann.com 148 (Bangalore - Trib.)
IN THE ITAT BANGALORE BENCH 'B'
Joint Commissioner of Income-tax (OSD), Circle-12(5), Bangalore
v.
Valdel Engineers & Constructors (P.) Ltd.*
N.V. VASUDEVAN, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER
IT APPEAL NO. 1370 (BANG.) OF 2011
[ASSESSMENT YEAR 2005-06
SEPTEMBER 28, 2012
Section 10A, read with sections 2(19AA) and 72A, of the Income-tax Act, 1961 - Free trade zone - Sub-section (7) - Assessment year 2005-06 - Before a period of 10 years assessee's STPI unit was demerged and transferred to another company on 1-10-2004 - Whether in view of section 10A(7), assessee was to be denied deduction under section 10A for entire previous year relevant to assessment year 2005-06 - Held, yes - Whether income for this period was also not assessable in assessee's hands but in transferee company's hands which was also entitled to deduction under section 10A - Held, yes [Paras 8.2,11.4 & 11.5] [Partly in favour of assessee]
Interpretation of Statutes : Rule of harmonious construction
FACTS
• The assessee company set up an approved STPI in the assessment year 2002-03. On 1-10-2004, i.e., in assessment year 2005-06, the STPI undertaking was demerged and transferred to LTVE in a scheme of demerger after due approval by the High Court.
• The assessee filed its return of income for assessment year 2005-06 claiming deduction under section 10A in respect of income attributable to the export turnover of the STPI unit from 1-4-2004 to 30-9-2004, i.e., the date of the demerger.
• The Assessing Officer disallowed the assessee's claim for deduction under section 10A holding; inter alia that in view of demerger, the provisions of section 10A(7A) become applicable and, accordingly, the assessee-company was not eligible to claim deduction under section 10A of the Act for assessment year 2005-06.
• The Commissioner (Appeals) allowed the assessee's appeal.
• On appeal to the Tribunal:
HELD
Assessee not entitled to benefit of deduction in view of section 10A(7)
• From a reading of section 10A(7A), it is clear that its provisions apply to a situation where an undertaking whose income is deductible under section 10A is transferred in a scheme of amalgamation or demerger before the end of the specified 10 years. In the present case the STPI undertaking of the assessee stands transferred in a scheme of demerger before the completion of the specified period and, therefore, provisions of section 10A(7A) apply. Further, clause (a) of section 10A(7A) specifically mandates that no deduction shall be admissible in the hands of the demerged company for the pervious year in which the demerger takes place. In the instant case, the assessee is the demerged company and is to be denied deduction under section 10A for the previous year 2004-05 relevant to assessment year 2005-06 as the demerger took place in the course of this period. [Para 8.2]
Income of demerged unit not taxable in assessee's hands
• The alternate contention of the assessee was that no part of the income of the STPI undertaking which got demerged from the assessee and came to be merged with the resulting company on and from 1-10-2004, be assessed in the hands of the assessee for assessment year 2005-06 as the same is to be assessed only in the hands of the resulting company [Para 9.1]
• It is clear from the definition of 'demerger' in section 2(19AA) that an STPI unit is seen as a distinct and separate business entity by the Income-tax Act which mandates that separate set of books of account be maintained in respect of the STPI undertaking and the income of the STPI unit be determined from the books of account so maintained. The Income-tax Act also does not regard the demerger as a sale. It is only because of this reason that the Act does not consider the transfer of an undertaking upon demerger as amounting to a sale or splitting up of an existing unit and allows the resulting company to continue to enjoy the benefits bestowed under section 10A. [Para 9.2]
• After perusal and consideration of the provision of sections 2(19AA), 10A(1), 10A(7A) and 72A(4), it is necessary to arrive at a harmonious construction to assume that the intention of legislature is not frustrated. [Para 11.1]
• The assessee (the demerged company) has shown the income of the STPI undertaking for the period 1-4-2004 to 30-9-2004 as its income and the resulting company has shown the income of the STPI undertaking for the period 1-10-2004 to 31-3-2005 as its income. In view of the provisions of section 10A(1), the entire income of the STPI undertaking from 1-4-2004 to 31-3-2005 is exempt from tax. In accordance with the provisions of section 10A(7A), the assessee (the demerged company) is not entitled to any deduction under section 10A for assessment year 2005-06 as it is the resulting company which is entitled to deduction for assessment year 2005-06. [Para 11.2]
• If the income of the STPI undertaking for the period 1-4-2004 to 30-9-2004 were to be assessed in the hands of the assessee, then the income become fully taxable as in accordance with the provision of section 10A(7A), the same is not eligible for deduction in the hands of the assessee and in which event it runs contrary to the provisions of section 10A(1). This leads to what the Apex Court termed as an absurdity, or unjust result or mischief, keeping in view the object, intent and purpose of legislating section 10A. [Para 11.3]
• In order to avoid absurdity or unjust result or mischief, it is necessary that the income of the undertaking for the entire year from 1-4-2004 to 31-3-2005 is deemed to be the income of the resulting company and no part of it be deemed to belong to the assessee. [Para 11.4]
• It would also be only proper to set right the anomalies, if any, and ensure that the correct taxable income be assessed in spite of the fact that the assessee may have returned income not belonging to it. [Para 11.5]
• Further, the benefits of section 10A being beneficial provision, has to be available completely and no portion of it is to be denied on the ground that the same has not been claimed by the right person. [Para 11.7]
• No part of the income of the STPI undertaking for the assessment year 2005-06 is to be treated as income of the assessee. The Assessing Officer is directed to delete the income pertaining to the demerged STPI undertaking from the taxable income of the assessee and pass necessary orders to give effect to the same so that the said income is treated as income of LTVE. [Para 11.8]
CASE REVIEW
Bhandari Metals & Alloys (P.) Ltd. v. State of Karnataka [2004] 136 STC 292 (Kar.); CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42/172 Taxman 258 (Delhi); Choksi Metal Refinery v. CIT [1977] 107 ITR 62 (Guj.); Parekh Bros. v. CIT [1984] 150 ITR 105/[1983] 15 Taxman 539 (Ker.); CIT v. Shoorji Vallabhdas & Co.[1962] 46 ITR 144 (SC) and Godhra Electricity Co. v. CIT [1997] 225 ITR 746/91 Taxman 351 (SC) (paras 11.5 and 11.6) followed.
CASES REFERRED TO
CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC) (para 5.3.4), K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) (para 11.1), Bhandari Metals & Alloys (P.) Ltd. v. State of Karnataka [2004] 136 STC 292 (Kar.) (para 11.5), CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42/172 Taxman 258 (Delhi) (para 11.5), Choksi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.) (para 11.5),Parekh Brothers v. CIT [1984] 150 ITR 105/[1983] 15 Taxman 539 (Ker.) (para 11.5), CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144(SC) (para 11.6), Godhra Electricity Co. v. CIT [1997] 225 ITR 746/91 Taxman 351 (SC) (para 11.6) and Bajaj Tempo Ltd. v.CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 11.7).
V. Chandrashekar for the Appellant. Farhat Husain Qureshi for the Respondent.
ORDER
Jason P. Boaz, Accountant Member - This appeal by Revenue is directed against the order of Commissioner of Income Tax (Appeals)-V, Bangalore dt.21.10.2011 for Assessment Year 2005-06.
2. The facts of the case, in brief, are as under :
2.1 The assessee company, set up an approved STPI in the period relevant to Assessment Year 2002-03. In the course of the period relevant to the impugned Assessment Year 2005-06, the STPI undertaking was demerged and transferred to M/s. L & T Valdel Engineering Pvt Ltd. (i.e. the 'Resulting Company') in a scheme of demerger after due approval by the Hon'ble High Court of Karnataka vide its order in Co. P. No. 12/2005 dt.23.2.2005. In terms of the said court order, the 'Appointed Date' of demerger was 1.10.2004. The assessee i.e. the demerged company has been claiming deduction under section 10A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') in respect of the income of the STPI unit for and from Assessment Year 2002-03 onwards.
2.2 The assessee filed its return of income for Assessment Year 2005-06 on 31.10.2005 declaring income of Rs.2,12,73,211 after claiming deduction of Rs.1,16,68,627 under section 10A of the Act being the income attributable to the export turnover of the STPI unit from 1.4.2004 to 30.9.2004 i.e. the date of the demerger. The Assessing Officer disallowed the assessee's claim for deduction under section 10A of the Act in the order of assessment passed under section 143(3) of the Act on 30.11.2007 for the following reasons :
(i) That it is clear from the record that the STPI unit was started only by splitting up of existing infrastructure and the undertaking formed by splitting up of business already in existence, as had been held in the course of assessment proceedings for the Assessment Year 2002-03 and therefore the assessee's STPI unit is not eligible for deduction under section 10A of the Act.
(ii) In view of the fact that the STPI unit was demerged and transferred to M/s. L & T Valdel Engineering (P) Ltd. (Resulting Company) during the relevant period w.e.f. 1.10.2004, in accordance with the provisions of section 2 (19AA) of the Act, the provisions of section 10A (7A) become applicable and accordingly the assessee company is not eligible to claim deduction under section 10A of the Act for Assessment Year 2005-06.
2.3 Aggrieved by the order of assessment dt.30.11.2007, the assessee went in appeal before the CIT(A) challenging the denial of deduction under section 10A of the Act. The deduction under section 10A of the Act was allowed by the learned CIT(A) in his order dt.21.10.2011 following the decision of the co-ordinate bench of this Tribunal in assessee's own case for Assessment Year 2003-04 and 2004-05 in ITA Nos.616 to 618/Bang/2008 dt.10.11.2010.
3. Revenue is now in appeal before us against the order of the learned CIT(A) dt.21.10.2011. The grounds of appeal raised by revenue are as under :
"1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.
2. The learned CIT (Appeals) erred in allowing the relief without appreciating that no new unit was set up by the assessee company and the undertaking was formed only by splitting the existing business and therefore, the assessee is not eligible to claim deduction under section 10A of the IT Act, 1961.
3. The learned CIT (Appeals) erred in allowing the relief, relying on the decision of the Tribunal in the assessee's own case for earlier years, which has not been accepted by the department and appeals have been filed before the High Court under section 260A of the IT Act, 1961 against the decision of the ITAT.
4. The learned CIT (Appeals) erred in allowing the relief, relying on the order of CIT (Appeals) in the case of L & Tribunal Valdel Engineering Pvt. Ltd which has not been accepted by the department and an appeal has been filed before Tribunal against the CIT (Appeals)'s order.
5. The learned CIT (Appeals) erred in allowing the relief to the assessee without considering the provisions of section 10A(7A) which lay down that where any undertaking of an Indian Company is transferred to another Indian Company in a scheme of amalgamation or demerger, no deduction shall be admissible to the amalgamating or demerged company for the previous year in which the amalgamation or demerger took place.
6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
7. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above."
4. The grounds raised at S.Nos.1, 6 and 7 are general in nature and therefore no adjudication is called for thereon.
5.1 The grounds raised at S.Nos.2 to 5, are relevant to the issues of dispute in this appeal which need to be addressed.
5.2 The learned Departmental Representative's arguments mainly relied on the order of assessment. The learned Departmental Representative conceded that the order of the ITAT in assessee's own case for Assessment Years 2003-04 and 2004-05 in ITA Nos.616 to 618/BANG/2008 dt.10.11.2010 squarely apply to the issues raised in the grounds of appeal raised at S.Nos.2 and 3. He, however, argued that the learned CIT(Appeals) erred in granting relief in respect of the issues raised in grounds at S.Nos.4 and 5 by not considering the fact that the assessee is just not entitled to the deduction under section 10A of the Act for this impugned Assessment Year 2005-06 in terms of the provisions of section 10A(7A) of the Act which were introduced w.e.f. 1.4.2004 and hence applicable for the relevant period. The learned Departmental Representative took us through the provisions of section 10A(7A) and stated that it was amply clear from the provisions that under no circumstances was this assessee entitled to deduction under section 10A of the Act for Assessment Year 2005-06 in respect of income attributable to the STPI unit which stood demerged w.e.f. 1.0.2004 and thereby ceased to belong to the assessee w.e.f. 1.10.2004.
5.3.1 Per contra, the learned counsel for the assessee argued that the provisions of section 10A(1) of the Act state that a deduction of such profits and gains as are derived by an undertaking from the export of article or things or computer software shall be allowed under section 10A of the Act to the assessee in whose income, the income of the undertaking which is entitled to deduction under section 10A, is included and no part of such income shall be taxed for a period of ten years. In the instant case, it is the assessee who has shown the income of the undertaking for the period 1.4.2004 to 30.9.2004 as its income and has claimed the deduction under section 10A of the Act on such income which was correctly allowed by the learned CIT(Appeals), in as much as the same was not claimed or allowed as a deduction in the hands of the resulting company viz. M/s. L & T Valdel Engineering (P) Ltd.
5.3.2 The learned counsel for the assessee further stated that the provisions of section 10A(7A) are not in conformity with those of section 10A(1) of the Act. Whereas, section 10A(1) states that the deduction is to be allowed to the assessee who has included the income of the undertaking in its return of income vis-à-vis section 10A(7A) which states that it is the resulting company which is eligible for deduction under section 10A and not the demerged company. In the present case, it is the assessee, the demerged company, which has included the income for the period 1.4.2004 to 30.9.2004 in its return of income and not the resulting company.
5.3.3 The learned counsel for the assessee further reiterated the contention taken before the learned CIT(Appeals), that if it were to be held that the provisions of section 10A(7A) override the provisions of section 10A(1) and is applicable in the present instance, then as a natural corollary to this proposition the following situations would emerge :
(i) The income of the STPI unit, arising out of export of computer software from 1.4.2004 to 30.9.2004 will be allowed as a deduction in the hands of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and not in the hands of the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd.
(ii) More importantly, in the eyes of law, for the purposes of income tax, the entire undertaking i.e. STPI unit, which has carried out the export activity, shall be treated as one belonging to the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. for the entire relevant period 1.4.2004 to 31.3.2005 in which such demerger taken place and not as a unit belonging to the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd. even for the period 1.4.2004 to 30.9.2004. In effect, this would mean that the turnover of the STPI undertaking for the entire previous year ought to be treated as turnover of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and no part of it should be treated as turnover of the demerged company i.e. the assessee company. Consequently the income arising from the export turnover of the STPI unit for the period 1.4.2004 to 30.9.2004 should be excluded from the total income of the assessee and be included as income of the resulting company i.e. M/s. L & T Valdel Engineering (P) Ltd. for the year ended 31.3.2005 relevant to Assessment Year 2005-06 and therefore the deduction under section 10A of the Act ought to be allowed in the hands of the resulting company i.e. M/s. L & T. Valdel Engineering (P) Ltd.
5.3.4 The learned counsel for the assessee placed reliance on the decision of the Hon'ble Apex Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 in support of the contention that the income of the STPI unit for the entire year accrues only at the end of the year on 31.3.2005 and accrues to its owner on the said date i.e. the resulting company. The fact that in terms of the demerger the STPI unit was transferred to the resulting company as a going concern with all its assets and liabilities as on the date of transfer and without consideration only demonstrates that the resulting company is entitled to enjoy all the assets on the date of transfer and also be responsible for all the liabilities as on the said date irrespective of the fact whether the asset was acquired or the liability was contracted by the demerged company. The learned counsel for the assessee drew our attention to the petition filed before the Hon'ble High Court seeking permission for demerger and stated that the schedule contains assets and liabilities as on 30.9.2004 which stand transferred to the resulting company which includes the income of the STPI undertaking for this period amounting to Rs.1,16,68,627. The learned counsel for the assessee submitted that this transfer of income to the resulting company demonstrates that this income should therefore not be treated as income of the assessee.
5.3.5 The learned counsel for the assessee also argued that a harmonious reading of section 2(19AA) (which defines demerger) with section 72A(4) (which deals with the provisions relating to carry forward and set off of business losses and unabsorbed depreciation of an undertaking in the event of demerger) and section 10A(7A) (which states that only the resulting company is entitled to the benefits of section 10A for the year in which the demerger takes place) leads us to the following conclusions when an undertaking which enjoys the benefit of deduction under section 10A is demerged during the course of a financial year.
(i) The demerged company will not get any deduction under section 10A for the Assessment Year in which the demerger takes place, in respect of the said undertaking which stands demerged;
(ii) The resulting company shall be entitled to avail the deduction under section 10A for the Assessment Year during which the demerger takes place, in respect of the said undertaking which stands demerged;
(iii) The demerged company shall not be entitled to carry forward the business losses and unabsorbed depreciation relatable to the said undertaking for and from the assessment year during which the demerger takes place;
(iv) The resulting company shall be entitled to carry forward the business loss and unabsorbed depreciation relatable to the said undertaking for and from the assessment year in which the demerger takes place;
(v) The entire activities and operation of the said undertaking pertaining to the entire financial year during which the demerger takes place and the resultant profits / losses arising therefrom shall be assessable to tax in the hands of the resulting company for the assessment year during which the demerger takes place and not in the hands of the demerged company.
5.3.6 The learned counsel for the assessee has also filed written submissions, a paper book and the company petition filed before the Hon'ble High Court seeking permission for demerger.
6. We have heard both parties and carefully perused the material on record and proceed to decide the issues as under :
6.1 The grounds at S.Nos.2 & 3 : On the issue raised by Revenue in these grounds challenging the learned CIT(Appeals)'s action in granting of deduction under section 10A of the Act to the assessee, we find that the co-ordinate bench of this Tribunal in its order in ITA Nos.616 to 618/Bang/2008 dt.10.11.2010 has dealt with the very same issue therein in the assessee's own case for earlier years and have held in favour of the assessee. We, therefore confirm the learned CIT(Appeals)'s order on this point as covered and consequently dismiss these two grounds raised by Revenue.
7. The grounds at S.No.4 : As regards the grounds of appeal raised by Revenue at S.No.4, we find that there is a factually incorrect statement in as much as it is claimed that the learned CIT(Appeals) has given relief to the assessee only based on the fact that the resulting company's appeal, as regards its eligibility to be entitled to deduction under section 10A of the Act, was allowed by the jurisdictional CIT(Appeals). We find from a perusal of the impugned order of the learned CIT(Appeals) that he clearly states in para 6 thereof that respectfully following the decision of the ITAT, he allows the assessee's deduction of Rs.1,16,68,627 under section 10A of the Act. We, therefore, dismiss the ground No.4 as factually incorrect.
8. The ground No.5 : In this ground Revenue submits that the learned CIT(Appeals) erred in allowing relief to the assessee without considering the provisions of section 10A(7A) of the Act which mandates that where any undertaking of an Indian company is transferred to another Indian company in a scheme of amalgamation or demerger, no deduction shall be admissible to the amalgamating or demerged company for the previous year in which the amalgamation or demerger took place. In order to see whether the provisions of section 10A(7A) apply to the facts of the case, its provisions are extracted hereunder :
"(7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,-
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place."
8.2 From a reading of section 10A(7A), it is clear that its provisions apply to a situation where an undertaking whose income is deductible under section 10A is transferred in a scheme of amalgamation or demerger before the end of the specified 10 years. In the present case the STPI undertaking of the assessee stands transferred in a scheme of demerger before the completion of the specified period and therefore provisions of section 10A(7A) of the Act apply. Further, clause (a) of section 10A(7A) specifically mandates that no deduction shall be admissible in the hands of the demerged company for the previous year in which the demerger takes place. In the instant case, the assessee is the demerged company and is to be denied deduction. 10A for the previous year 2004-05 relevant to Assessment Year 2005-06 as the demerger took place in the course of this period. It is clear from the aforesaid provisions that the assessee is not entitled to deduction under section 10A by virtue of the provisions of section 10A(7A) for Assessment Year 2005-06. We, therefore, allow the ground raised by revenue at S.No.5 to the extent of holding that the assessee is not entitled to any deduction under section 10A of the Act for Assessment Year 2005-06 in view of the provisions of section 10A(7A) of the Act.
9.1 Having held as above regarding ground No.5, we examine the alternate contention of the assessee, that no part of the income of the STPI undertaking which got demerged from the assessee and came to be merged with the resulting company on and from 1.10.2004, be assessed in the hands of the assessee for Assessment Year 2005-06 as the same is to be assessed only in the hands of the resulting company i.e. M/s. L & T Valdel Engineering (P) Ltd. In this regard, the provisions of section 2(19AA) which define demerger and deal with the consequences thereof are extracted here below :
"(19AA) "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that -
(i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.
Explanation 1.- For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2. - For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include -
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger.
Explanation 3.- For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored.
Explanation 4.- For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central Government."
9.2 It is clear from the above definition that an STPI unit is seen as a distinct and separate business entity by the Income Tax Act which mandates that separate set of books of accounts be maintained in respect of the STPI undertaking and the income of the STPI unit be determined from the books of accounts so maintained. The I.T. Act also does not regard the demerger as a sale. It is only because of this reason that the Act does not consider the transfer of an undertaking upon demerger as amounting to a sale or splitting up of an existing unit and allows the resulting company to continue to enjoy the benefits bestowed under section 10A of the Act. In fact from the scheme of amalgamation as referred to in para 16 of the Hon'ble High Court order (filed before us as part paper book) approving the demerger, it is stated that all liabilities, dues and obligations of the demerged undertaking including accretions and appurtenances thereto be transferred and vested in the resulting company as a Going Concern so as to become as and from the appointed date, the estate, assets, rights, claims, titles and interest of the resulting company. By virtue of the fact that the STPI undertaking is transferred to the resulting company as a Going Concern, it is the resulting company that is going to enjoy the profits or losses of the STPI unit as on 31.3.2005.
10. It is also necessary to refer to the provisions of section 72A(4) of the Act which deals with the carry forward and set off of business losses and unabsorbed depreciation in case of demerger, etc and therefore the relevant provision is extracted here below :
"72A(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall-
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be."
A perusal of the provisions of section 72A(4) reveal that it considers the undertaking which is demerged as a distinct and separate business entity in as much as once it stands demerged, the carry forward losses and unabsorbed depreciation allowance which are relatable to the said undertaking and available for set off only in the hands of the resulting company and no part of it is allowed to be set off in the hands of the demerged company after the demerger.
11.1 After perusal and consideration of the provision of sections 2(19AA), 10A(1), 10A(7A) and 72A(4) of the Act, it is necessary to arrive at a harmonious construction to assume that the intention of legislature is not frustrated especially in view of the decision of the Hon'ble Apex Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 wherein the Hon'ble Apex Court has ruled that a literal construction of a statute that leads to an absurdity, or unjust result or mischief is to be avoided.
11.2 In the instant case as per the provision of section 10A(1) of the Act, the income of the STPI undertaking for the period relevant to Assessment Year 2005-06 is exempt from tax and in respect of which fact there is no dispute. The assessee (the demerged company) has shown the income of the STPI undertaking for the period 1.4.2004 to 30.9.2004 as its income and the resulting company has shown the income of the STPI undertaking for the period 1.10.2004 to 31.3.2005 as its income. In view of the provisions of section 10A(1) of the Act, the entire income of the STPI undertaking from 1.4.2004 to 31.3.2005 is exempt from tax. In accordance with the provisions of section 10A(7A) of the Act, the assessee (the demerged company) is not entitled to any deduction under section 10A for Assessment Year 2005-06 as it is the resulting company which is entitled to deduction for Assessment Year 2005-06.
11.3 If the income of the STPI undertaking for the period 1.4.2004 to 30.9.2004 were to be assessed in the hands of the assessee, then the income become fully taxable as in accordance with the provision of section 10A(7A), the same is not eligible for deduction in the hands of the assessee and in which event it runs contrary to the provisions of section 10A(1) of the Act. This leads to what the Hon'ble Apex Court termed as an absurdity, or unjust result or mischief, keeping in view the object, intent and purpose of legislating section 10A of the I.T. Act, 1961.
11.4 In order to avoid this absurdity or unjust result or mischief, it is necessary that the income of the undertaking for the entire year from 1.4.2004 to 31.3.2005 is deemed to be the income of the resulting company and no part of it be deemed to belong to the assessee. This finding of ours is also in consonance with the decision of the Hon'ble Apex Court in the case of Ashokbhai Chimanbhai (supra) relied on by the assessee. Further, as submitted by the learned counsel for the assessee, Schedule 9 forming part of the application made before the Hon'ble High Court demonstrates that the resulting company is the destination for the surplus of the STPI undertaking for the period 1.4.2004 to 30.9.2004 and this fact is also in line with the proposition laid down by the Hon'ble Apex Court in the said case.
11.5 It would also be only proper for us to set right the anomalies, if any, and ensure that the correct taxable income be assessed inspite of the fact that the assessee may have returned income not belonging to it. This would be in accordance with the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of Bhandari Metals & Alloys (P) Ltd. v. State of Karnataka [2004] 136 STC 292 as well as other High Courts -
(i) CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42/172 Taxman 258 (Delhi)
(ii) Choksi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)
(iii) Parekh Bros v. CIT [1994] 150 ITR 105/[1983] 15 Taxman 539 (Ker.)
11.6 The fact that the book entries made by the assessee may not by themselves lead to the conclusion arrived at by us is not material as the book entries at best represent hypothetical income and did not represent the real income which had actually accrued to the assessee during the impugned assessment year 2005-06. This legal proposition also finds support in the decision of the Hon'ble Apex Court in the following cases :
(i) CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)
(ii) Godhra Electricity Co. v. CIT [1997] 225 ITR 746/91 Taxman 351 (SC).
11.7 Further, the benefits of section 10A of the Act being a beneficial provision, has to be available completely and no portion of it is to be denied on the ground that the same has not been claimed by the right person. The decision of the Hon'ble Apex Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 highlights the importance of ensuring that the benefits conferred by a beneficial section reached the intended person.
11.8 In the light of the discussions above, with respect to the alternate contention of the assessee w.r.t. the ground raised at S.No.5, we hold that no part of the income of the STPI undertaking for the Assessment Year 2005-06 is to be treated as income of the assessee. The Assessing Officer is directed to delete the income of Rs.1,16,68,627 pertaining to the demerged STPI undertaking from the taxable income of the assessee and pass necessary orders to give effect to the same so that the said income of Rs.1,16,68,627 is treated as income of the resulting company namely M/s. L & T Valdel Engineering (P) Ltd for Assessment Year 2005-06 and be brought to tax accordingly in its hands in accordance with the directions laid down in this order.
12. In the result, this appeal is disposed off as indicated above.
IT : Where construction of housing project was in accordance with building layout plan approved on 22-1-2002 section 80-IB deduction could not be denied to assessee merely because first lay out plan was sanctioned on 28-8-1997
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[2012] 27 taxmann.com 149 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'H'
Income-tax Officer-8(1)1, Mumbai
v.
Ashray Premises (P.) Ltd.*
B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NOS. 2969, 2970 & 4870 (MUM.) OF 2008
[ASSESSMENT YEARS 2004-05 TO 2006-07]
APRIL 30, 2012
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertaking - Housing project - Assessment years 2004-05 and 2006-07 - Assessee started a housing project on basis of building plan of 22-1-2002 - He claimed deduction under section 80-IB - Assessing Officer denied deduction on grounds that first layout plan was sanctioned on 28-8-1997 - thus, project started before 1-10-1998 and some expenditure was incurred towards said project before 31-3-2002 - It was found that construction of project was as per revised plan and expenses incurred were not towards development and construction of housing project - Whether, therefore, assessee was eligible for section 80-IB deduction - Held, yes [Para 6] [In favour of assessee]
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertaking - Housing project - Assessment years 2004-05 to 2006-07 - Whether in view of facts stated under heading 'Deductions - Profits and gains of industrial undertakings other than infrastructure development undertaking', since departmental valuation officer had certified that area of even combined flat was les that 1500 sq. ft. deduction under section 80-IB could not be denied to assessee - Held, yes [Para 8] [In favour of assessee]
FACTS
Facts
• The assessee started a housing project and took approval for layout plan on 22-1-2002.
• However, the Assessing Officer found that the housing project started before 1-10-1998 as the date of approval for layout plan was 28-8-1997 and that some expenditure was incurred towards said project and held that assessee was not eligible for section 80-IB deduction.
• The CIT(A) held that the construction of housing project was in accordance with the plan approved on 22-1-2002. And that the expenditure incurred before 31-3-2002 was clearly not on the development and construction of housing project.
Arguments of revenue
• The plan was originally approved in 1997. He relied on Explanation to section 80-IB(10) to submit that assessee was not eligible for deduction.
Arguments of assessee
• He submitted that the plans were revised on 22-1-2002 and expenditure was incurred towards purchase of land and construction of compound wall, municipal taxes, etc.
Issue Involved
• Whether assessee was eligible for section 80-IB deduction ?
HELD
Issue as to sanctioned plan
• Explanation to section 80-IB(10) provides that where the approval was obtained more than once, such housing project shall be deemed to have been approved on the date on which the building plan of such housing project is first approved by the local authority. This Explanation was brought on statute when the said provision was amended with effect from 1-4-2005. So claim in assessment year 2004-05 being first year of claim cannot be disallowed on this reason. Moreover, the Explanation cannot be invoked for the projects approved earlier. Further, what was approved in 1997 was only a layout plan and not a building plan; entire plan was revised and the constructed project was based on the project approved in 2002. [Para 5]
• There is no correlation with the project approved in 1997 by the P.M.C. to the subsequent project approved. The plans which are approved on which the basis for construction of the present building was approved in 2002 and accordingly, they are within the provisions of section 80-IB(10). The revenue could not counter the finding of the Commissioner (Appeals) that project commenced only in 2002. These findings are based on record. [Para 6]
• As seen from the nature of expenditure, they cannot be considered as evidencing that the project has commenced before 1-10-1998 as only cost of land, construction of compound wall and Municipal taxes and various expenditures for plan approvals were incurred. There was no expenditure incurred on construction activity on the project. Thus, the assessee was eligible for deduction. [Para 7]
Issue as to area of flats
• With reference to the other reason on denying the claim that the assessee has sold adjoining flats of more than 1500 sq. ft., the measurements were taken again and post survey even Departmental Valuation Officer had certified that even the combined flat was less than 1500 sq. ft., thus, there is no need to differ from the findings of the Commissioner (Appeals) who not only considered the facts but also validity of the measurements taken during the survey and subsequent statement recorded from the Director on the issue. [Para 8]
CASE REVIEW
CASES REFERRED TO
Nirmiti Construction v. Dy. CIT [2005] 4 SOT 383 (Pune) (para 3.1) and CIT v. Vandana Properties [2012] 206 Taxman 584/19 taxmann.com 316 (Bom.) (para 7).
Goli Srinivas Rao for the Appellant. Rajan Vora for the Respondent.
ORDER
Per Bench:
1. These three appeals are Revenue appeals against the orders of the CIT (A)-8 Mumbai or A.Y 2004-05 to 2006-07 on the issue of deduction under section 80IB (10). It's Assessing Officer's case that assessee was not eligible for deduction under section 80IB(10) as the said housing project should commence on or after 1/10/1998, whereas the assessee's project named "Gold Coast" started much earlier. The other reason for not considering the deduction was on the reason that the built up area of some residential units exceed 1500 sft and therefore the assessee was not eligible to claim deduction under section 80IB(10).
2. The CIT(A) after considering the submissions of the assessee gave relief on both issues and accordingly Revenue raised only one ground in all the three years commonly stating that the CIT(A) erred in deleting the disallowance of deduction of Rs. 8,24,36,363 in AY 2004-05, Rs. 2,66,09,494 in AY 2005-06 and Rs. 2,91,58,525 in AY 2006-07 under section 80IB(10) without appreciating the facts of the case.
3. Briefly stated, assessee undertook a project named "Gold Coast" at Lohegaon, Pune. The Project was initiated in 1995-96 by purchase of land and showing some work in progress of Rs. 4,67,701/-. First lay out plan was sanctioned on 28.8.1997. Subsequently the plans were revised twice, once on 30/05/2000 and then on 22/01/2002. The assessee got non-agricultural use permission (NA order) by 5/4/2012. Assessee started the project after the plan was approved on 22.01.2002. The first plinth checking certificate was issued by the Pune Municipal Corporation on 17.7.2002. It is also on record that Bhumi Puja of the project was started on 26.01.2002 and subsequently the assessee received advance for sale of apartment.
3.1 There was a survey on the assessee's business on 10/01/2006 and in the course of the survey, some apartments were measured by the Assessing Officer which indicated that the built up area exceed 1500 sft. A statement was recorded from one of the Director who on the basis of the measurements taken thereon and on the advice of the Counsel withdrew the claim in the course of survey. This was reiterated on the next day of the survey in the office of the Assessing Officer. However, subsequently the statement was withdrawn by filing affidavit and contending that the flats were never having an area of more than 1500 sft and in support filed architect certificate, revised plans from the Pune Municipal Corporation. The Assessing Officer also referred the matter to the DVO who certified that area of the flats was less than 1500 sft. In the assessment proceedings the Assessing Officer however, considered that the housing project started before 1.10.1998 and relied on the expenditure incurred by assessee towards the project as stated in Balance Sheet of those years. It was also the contention that even though the plans were revised subsequently, the date of approval was to be taken as August, 1997. Therefore, AO held that assessee was not eligible for deduction on the said project under section 80IB(10). The contention of the assessee that the N.A. permission, Bhumi Puja, receipt of advance and relying on the Pune ITAT decision in Nirmiti Constructions v. Dy. CIT [2005] 95 TTJ 117/4 SOT 383 (Pune) Pune were not acceptable to AO. In addition to the above, the Assessing Officer also, based on the survey report and rejecting DEO's findings, denied the deduction under section 80IB(10) on the reason that the assessee constructed the apartment of more than 1500 sft particularly of adjoining flats which were enquired in the course of survey.
3.2 Before the CIT(A), assessee has contested all the issues, placed necessary evidences and the plans to submit that even though the plan was originally approved in 1997, the assessee could not go ahead as there was no approach land and therefore, the assessee acquired some more land and got the plans revised and re-approved and construction was according to the revised plan approved in 2002. It was also submission that plinth beams were certified in 2002 and certificate from District Collector, Pune regarding confirmation of N.A. land was also received in 2002. With reference to the built up area of the flat, assessee submitted the architect certificate, revised measurements and further relied on DVO report that the flats were less than 1500 sq. ft. On considering the assessee submissions, the CIT(A) gave the following findings on the two issues as under:
(A) on Project commencement:
I have carefully considered the stand of the A.O. as well as the submission of the appellant. The facts which emerge are -
(a) The NA order was granted by the Collector of Pune on 5th April 2002 and this is a crucial date for reckoning the whole issue.
(b) The construction of housing project is in accordance with the building layout plan approved on 22nd January,2002 and is not in accordance with earlier approved plan dated 20th August 1997. The A.O. is not justified in holding that the placement of the plinths of the buildings is not an important issue as the appellant changed the building layout plan in the middle of the project. If the project would have started - before 1 October 1998 the placement of the plinths of the building would have according to the building layout plan sanctioned on 20th August 1997. In this connection, I am in agreement with the appellant that it is not possible to remove plinths.
(c) The building commencement certificate is dated 22nd January 2002 which has not been properly appreciated by the A.O.
(d) The first plinth checking certificate is dated 17th July 2002. The A.O. clearly fell into error in holding that speed of the work is slow then the plinth checking certificate shall be automatically at a later stage of the project. The speed can not be so much slow that construction started in 1997 would get first plinth checking certificate in the year 2002. Secondly, no expenditure is incurred by the appellant before financial year 2001-02.
(e) The advertisement in the news paper regarding the commencement of the project is dated l5 May 2002 and this fact cannot be brushed aside as has been done by the A.O.
(f) The first receipt of advance booking money was in the financial year 2002-03 is clearly indicative of the fact that the construction would have started around the date of receipt of advance.
(g) The expenditure incurred before 31st March, 2002 was clearly not on the development and construction of housing project, but was for payment to land owners, development charges paid to local authority, NA charges, site survey expenses, advances paid to Architect for preparation of the plan etc. There is difference between the steps taken for the development of land for making it suitable for development and construction of project and commencement of development and construction of the project. Steps taken for development of land suitable for construction cannot be considered as commencement of housing project.
(h) The A.O. is not justified in brushing aside the decision of Pune ITAT decision in the case of Nirmiti Construction even though it is not binding on him without appreciating the provisions of Maharashtra Land Revenue Code. The A.O. clearly fail into error in holding that the appellant is able to evade the penalty under the provisions of Maharashtra Land Revenue Code without making any reference to the office of collector of Pune as to whether any penalty proceedings were initiated against the appellant by the said office.
(i) Statement of Mr. B L Darekar can not be taken at the face value as there are glaring inconsistencies and contradictions in the same and therefore, it can not be considered of any significance or relevance.
(j) The A.O. is also not justified in holding that Bhoomi Poojan is done cording to the convenience of the appellant. Such events are very important in India.
Therefore, in view of the above facts and issues involved, I am of the view that the housing project indeed commenced during the financial year 2002-03 and not before 1st October 1998".
(B) With reference to the area of each flat:
The issues raised in this ground has been carefully perused and examined. The facts which come to light are as under:-
(a) The statement of the director of the appellant company was taken after 27 hours of survey action.
(b) The reconfirmation of the withdrawal of claim was recorded in the office of the A.O. with a gap of one day after the conclusion of the survey. The appellant did not get any opportunity to carry out the measurement independently.
(c) Mr. Kantilal Lunkad made admission of withdrawal of claim on the basis of built up measurement of flat no. D 1/701+701A was shown to him. The declaration was under the mistaken belief of fact that the built up area of the adjoining units taken together exceeds 1500 Sq. ft built up.
(d) Mr. Vipin Gujarathi, Chartered Accountant advised Mr. Kantilal Lunkad on the basis of the measurement carried out by survey party and therefore, the counsel was also under mistaken belief of fact.
(e) The statement recorded during the course has evidentiary value. However, the assessee can rebut the statement if it is given under mistaken belief of fact or mistaken belief of law or the assessee is able to bring out the mistake or contradiction to the surface. In case of the appellant the whole issue ranges on the built up area of the residential unit. The survey party measured the flat no D-1/701+701A at 2040 sq. ft whereas the AVO, the expert deputed by the assessing officer, measured the same flat at 1478 sq. ft. The A.O. has at no place explained or justified the built up area of 2040 sq. ft. instead he has preferred to find faults with his own departmental valuer. Therefore, the admission of the appellant regarding withdrawal of claim which is based solely on the area statement of the flat no. D1/701+701A is not corroborated with any material or evidence.
The survey party recorded the statements of the flat holders/occupants at the time of survey action. The assessing officer has relied on these statements for making disallowance and the appellant has challenged the same. The A.O. reproduced the statements of the flat holders in which questions regarding two doors, structural changes, two kitchens etc were asked. The entire endeavor of the A.O. was to bring home the point that the appellant had joined the adjoining the flats and which were not separate units. However, the appellant is not disputing the same. Therefore, statements of the flat holders as far as joining of unit is not important.
As far as the built up area of the flat is concerned, the occupants/flat holders have stated super built up area. The appellant has submitted the copies of the agreement with the said flat holders from which it is clear that the appellant has sold flats on carpet area basis. The carpet area inclusive of Balcony area and Air Handling Unit area of the said flats as per agreements on record are as follows -
| Name of the flat holder | Flat No. | Carpet area of the flat including Balcony and AHU Area | Balcony & AHU area | Net Carpet Area | |
| Mr. Satyendra Sain | B 3/301+301A | 943.78 | 148.11 | 795.68 | |
| Mr. Rajshekhar Sajjan | Z-1/303+303A | 1089.62 | 149.30 | 9430.33 | |
| Mr. Adarsh Kanodia | A-1/401+401A | 1137.86 | 74.93 | 1062.93 | |
| Mrs. Priti Berry | D-1/701+701A | 1347.22 | 233.90 | 1113.32 |
Therefore, if the net carpet area excluding the balcony area and the air handling unit area is considered and the thickness of the wall is added the built up area of the unit can not exceed 1500 Sq. ft.
Mrs. Priti Berry stated the super built up area of the flat no. D-1/701+701A at 1800 sq. ft. of the flat under consideration is 1347 sq. ft. it is surprising to note that the measured the same flat at 1700 sq. ft (Carpet area) and 2040 built up. The appellant has submitted the reconciliation between the measurement taken by survey party and measurement certified by valuer. The A.O. has preferred not to address the reconciliation issue. There is no whisper about the same in the assessment order.
Similarly, the appellant is not allowed the opportunity to cross examine Mrs. Priti Berry.
The claim of the appellant that Mrs. Priti Berry is not the flat purchaser and therefore, her statement can not be relied upon. I have verified the agreement of flat purchase. It is between the appellant and Mr. Sunil Berry.
During the course of survey action statements of the employees of the appellant Mr. Ratiesh Malhotra and Mr. Ramesh Kadam were recorded. No specific instances of any flat more than 1500 Sq. ft built up is shown by any of these two employees. They have made general statements that the built up area of two flats taken together is more than 1500 Sq. ft. In fact, Mr. Ratiesh Malhotra has stated that the built up area of the residential unit is about 1250 Sq. ft. Therefore, the statements of the employees are not important or relevant from the view point of determination of the issue under consideration.
The appellant has submitted a copy of "Record Plan" as approved by Pune Municipal Corporation after the completion of the buildings. Pune Municipal Corporation has approved the Record Plan along with FSI of each floor area of the buildings. From the FSI statements approved by PMC, the built up area of each residential unit seems to be much less than 1500 Sq. ft. The Assessing Officer has not considered the Recorded Plan at all. The assessment order is silent on this issue.
The A.O. has rejected the architect's certificate of built up area of residential units on the ground that the certificates has been issued without verifying the area of the units and the certificate does not mentioned that the residential units have been constructed in accordance with the approved plan. I have verified the certificate. The claim of the appellant that architect has issued certificate on the basis of Record Plan cannot be disputed and is correct. Therefore, the A.O. is not justified in rejecting the certificate as vague or incomplete.
The appellant got two flats measured by the Government Approved Valuer and submitted the certificate during the course of assessment proceedings. The A.O. did not refer to the certificate at all in the assessment order. The Assessing Officer neither accepted nor rejected nor even acknowledged the fact that the appellant has submitted the certificate in respect of built up area issued by approved valuer.
The A.O. at Para no. 24(d) has reproduced the area statement as per the booking/sales register found during the course of survey action and has reach the conclusion that many flats are more than 1500 Sq. ft or more. The appellant has claimed that the areas mentioned in the register are super built up areas of the flats. The appellant has reproduced the same list with the additional columns such as total carpet area of the unit including balcony and air handling unit area, balcony area, air handling unit area and net carpet area of the flats against which the built up area certified by architect is mentioned. From the list it is clear that the area mentioned in the sales register is super built up area and not the built up area.
The Assessing Officer did not accept the built up area certified by Assistant Valuation Officer entirely on the ground that the AVO has considered ½ area of the balcony and did not considered the terrace area. Accordingly to the Assessing Officer if 50% of the balcony area and terrace area is added the built up area of the flat will exceeds 1600 sft. The Assessing Officer in arriving at this conclusion has relied on the definition of "Built Up Area" as per newly inserted section 80-IB(14) of the Act. Section 801B(14) is brought on statue by the Finance (No. 2) Act, 2004 with effect from P' April 2005. The section and the Notes on the clauses makes it clear that the newly inserted section is applicable prospectively and not retrospectively. The amendment is not clarificatory. The appellant has relied on two Supreme Court cases namely Govindas and Others v. Income Tax Officer 103 ITR 123 (1976) Virtual Soft Systemts Ltd v. CIT289 ITR 83 to substantiate the proposition that while interpreting the amending provision it is not retrospectively applicable unless expressly stated or clearly implied. I am in agreement with the appellant that the expression built up area should have been construed in accordance with definition of built up area as per Development Control Rule for development of Pune which excludes the balcony area.
The perusal of the built area certificate issued by the Government Approved Valuer and AVO shows that the flats of the similar type Flat for e.g. Flat No 701+7014 of Building No. D-1 is measured by AVO at 1471 sq. ft. built up and Flat No 101+IOIA Building No. D-1 is measured by Government Approved Valuer at .448 sq. ft. built up. From the typical floor plan of the building D-1 it is absolutely clear that Flat No 101 is exactly below the flat no 701. These flats can not have different area as per the RCC design. The built up areas certified by both the valuers is more or less same i. e 1478 sq. ft and 1448 sq.ft. the aspect which has been totally ignored by the A.O.
Therefore, I am of the view that the built up area of none of the residential flat exceeded the threshold limit of 1500 sq. ft built up and the Assessing Officer is not justified in denying the deductions under section 80-IB(10) in respect of the profit derived from housing project.
In view of compliance of the conditions prescribed by section 80-I0,), I am of the view that the appellant is entitled to deduction claimed under section 80-IB(10) for the assessment year 2004-05 Rs. 8,24,36,363/- and for the assessment year 2005-06 Rs. 2,66,09,494/-.
To conclude, the appellant succeeds in respect of first ground of appeal and the ground of appeal is hereby allowed.
The Revenue is aggrieved.
4. The learned Departmental Representative reiterated the arguments of the Assessing Officer to submit that the plan was originally approved in 1997 i.e. prior to 1/10/1998. He relied on Explanation to Sec 80IB(10) to submit that assessee was not eligible for deduction. The learned Counsel, however, reiterated the submissions made before the CIT(A) and also drew our attention to the plan approved in 1997 and plan approved in 2002 to submit that the plans were entirely revised, alignments were difficult and with reference to the expenditure incurred in every year 1995, he drew our attention to the nature of the expenditure to submit that assessee has never started the project but only incurring expenditure towards purchase of land and construction of compound wall, municipal taxes etc. and relied on the findings of the CIT(A).
5. We have examined the issue, rival contentions and facts on record. The learned Departmental Representative relied on the Explanation to section 80IB(10) that where the approval was obtained more than once, such housing project shall be deemed to have been approved on the date on which the building plan of such housing project is first approved by the local authority. This Explanation was brought on statute when the said provision was amended with effect from 01-04-2005. So claim in AY 2004-05, being first year of claim, cannot be disallowed on this reason. Moreover the Explanation cannot be invoked for the projects approved earlier. For these reasons we are not impressed by the argument of Ld. DR. Further what was approved in 1997 was only a lay out plan and not a building plan. The entire plan was revised and the constructed project was based on the project approved in 2002.
5.1 Benefit of deduction to developers of housing projects was first introduced by the Finance Act, 1998 with effect from 1-4-1999 in the form of sub-section (4F) to section 80-IA of the Act. Those provisions read as follows:
"This section applies to an undertaking engaged in developing and building housing projects approved by a local authority subject to the condition that the size of a plot of land has a minimum area of one acre and the residential unit has a maximum built-up area not exceeding one thousand square feet:
Provided that the undertaking such undertaking commences development and construction of the housing project on or after the 1st day of October, 1998 and completes the same before 31st day of March, 2001."
5.2 By the Finance Act, 1999 with effect from 1-4-2000, the benefit of the above deduction was available under section 80-IB(10). The said provisions read as follows:
"(10) The amount of deduction in the case of an undertaking developing and building housing projects approved by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project if,
(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998 and completes the same before 31st day of March, 2003;
(b) the project is on the size of a plot of land which has a minimum area of one acre;
(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the city of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place;"
5.3 By the Finance Act, 2000 with effect from 1-4-2001, the words "Before 31st day of March, 2001" were inserted after the words "housing project approved". Thus, all conditions for grant of deduction remained the same except that the approval of local authority for the development has to be obtained before 31st day of March, 2001.
5.4 For assessment year 2002-03, the law applicable was that the condition regarding completion of the project before 31-3-2003 was dispensed with.
5.5 For assessment years 2003-04 and 2004-05, the law applicable was that all conditions remained the same except the condition regarding approval of the project by the local authority which could be before 31-3-2005. Another important change was that the period of completion of the construction on or before 31-3-2003 was dispensed with and there was no time-limit given for completion of the construction.
5.6 By the Finance Act, 2004 with effect from 1-4-2005, clause (d) to section 80-IB(10) was introduced which provided that built-up area of shops or other commercial establishments included in the housing project should not exceed 5 per cent of the aggregate built-up area of the housing project or 2,000 sq.ft., whichever is less. The provision as they read applicable from assessment year 2005-06 is as follows:
"(10) The amount of deduction in the case of an undertaking developing and building housing projects approved by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project if,
(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998 and completes such construction :
(i) in a case where a housing project has been approved by the local authority before the 1st day of April, 2004, on or before the 31st day of March, 2008;
(ii) in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority.
Explanation.-For the purposes of this clause,-
(i) in a case where the approval in respect of the housing project is obtained more than once, such housing project shall be deemed to have been approved on the date on which the building plan of such housing project is first approved by the local authority;
(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 :
Provided that nothing contained in clause (a) or clause (b) shall apply to a housing project carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law for the time being in force and such scheme is notified by the Board in this behalf;
(b) the project is on the size of a plot of land which has a minimum area of one acre;
(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the city of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place;
(d) the built-up area of the shops and other commercial establishments included in the housing project does not exceed five per cent of the aggregate built-up area of the housing project or two thousand square feet, whichever is less."
As per the amended law in view of insertion of clause (d) the built-up area of shops and other commercial establishment included in the housing project should not exceed five per cent of the aggregate built-up area of the housing project or 2,000 sq.ft., whichever is less".
6. As can be seen from the above explanation brought in statute, the same was not applicable to the projects approved prior to 01-04- 05 and as can be seen from the plans and the findings of the CIT(A), there is no co-relation with the project approved in 1997 by the P.M.C. to the subsequent project approved. The plans which are approved on which the basis for construction of the present building was approved in 2002 and accordingly they are within the provisions of Section 80-IB(10).
7. Moreover, the statute prescribes that 'such undertaking commenced or commences development and construction of the housing project on or after 1st day of October, 1998. Approval of plans and the date there of has no relevance unless the project commences or commenced as prescribed. The Revenue could not counter the findings of the CIT(A) that project commenced only in 2002. These findings are based on record with which we agree. AO relies on certain amounts spent prior to 2002 from A.Y 1995-96 onwards to state that the project has started much earlier. As seen from the nature of expenditure, they cannot be considered as evidencing that the project has commenced before 1st October 1998 as only cost of land, construction of compound wall and Municipal taxes and various expenditures for plan approvals were incurred. There is no expenditure on construction activity on the project. Principles laid down by Hon'ble Bombay High Court in the case ofCIT v. Vandana Properties [2012] 206 Taxman 584/9 taxmann.com 316 also support our view. For these reasons, we uphold the orders of the CIT(A) and agree with his findings that assessee is eligible for deduction under section 80(IB)(10).
8. With reference to the other reason on denying the claim that the assessee has sold adjoining flats of more than 1500 sft, the measurements were taken again and post survey even Departmental Valuation Officer has certified that even the combined flat was less than 1500 sft. In view of these, there is no need to differ from the findings of the CIT(A) who not only considered the facts but also validity of the measurements taken during the survey and subsequent statement recorded from the Director on the issue. We agree with his findings and affirm his order. Accordingly the grounds raised by the Revenue in all the three years are dismissed.
9. In the result, Revenue appeals are dismissed.
IT : Where business of assessee was principally in area of manufacturing of plastic pouches it could not claim foreign education expenses incurred on sponsoring of trainee for education in software development and accounting
IT : Payment of commission for providing expertise to apply for tenders and follow-up action for acceptance of tender, etc., being impermissible in law is not business expenditure
IT : For disallowance of short-term capital loss incurred by a company in respect of purchase and sale of shares as speculation loss, a part of business of company must relate to purchase and sale of shares
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[2012] 27 taxmann.com 150 (Calcutta)
HIGH COURT OF CALCUTTA
Standipack (P.) Ltd.
v.
Commissioner of Income-tax, Kolkata-IV*
K.J. SENGUPTA AND JOYMALYA BAGCHI, JJ.
IT APPEAL NOS. 98, 99 & 265 OF 2003†
AUGUST 30, 2012
I - Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Employees' welfare expenses - Assessee-company, which was principally in area of manufacturing plastic pouches, incurred expenditure for sponsoring a trainee for overseas education in computer software development and accounting - Whether such expenditure could not be allowed - Held, yes [Para 30] [In favour of revenue]
II - Section 37(1) of the Income tax Act, 1961 - Business expenditure - Allowability of - Illegal expenses - Assessee paid commission for providing expertise to apply for tender and follow-up action for acceptance of tender and for restraining certain party from participating in tender floated by public sector organization - Whether such expenditure being prima facie impermissible in law was not allowable as business expenditure - Held, yes [Paras 35 & 36] [In favour of revenue]
III - Section 73 of the Income tax Act, 1961 - Losses - In speculation business - Whether condition precedent for disallowance of loss in share dealing as speculation loss is that part of business of assessee-company must relate to purchase and sale of shares - Held, yes - Whether, therefore, disallowance of short term capital loss arising from purchase and sale of shares by assessee-company not engaged in business of purchase and sale of shares, on account of business speculation loss was not justified - Held, yes [Para 43] [In favour of assessee]
FACTS - I
• The assessee company was engaged in manufacturing and supplying of pockets/pouches to oil manufacturers for filing and packaging their products.
• It appointed a trainee who was minor and within two days of appointment, i.e., on 4-6-1990 took decision to send the trainee abroad for computer education and agreement was also signed with the trainee to the same effect and also a surety bond was executed on behalf of trainee and on attaining majority the trainee ratified the said agreement.
• The assessee company made necessary amendments in its memorandum to enable it to enter the business of computer operation and data processing in the assessment year 1992-93.
• The trainee had already secured admission for such course in foreign university and applied for release of foreign exchange with regard thereto five weeks prior to his appointment.
• The assessee claimed said expenses in respect of education and on account of foreign travel as business expenditure which was disallowed by the Assessing Officer.
• Both the Commissioner (Appeals) and the Tribunal affirmed the order of Assessing Officer.
HELD - I
• It is true that the letter of appointment of the trainee was issued at a time when he was a minor. However, it must be borne in mind that subsequently the minor on attaining majority had ratified such contract and also his liability arising therefrom. [Para 23]
• In view of such fact it may not be correct to hold that there was no binding contract between the company and the trainee. [Para 24]
• It is an admitted position that the principal business of the company was manufacturing and supplying of packets/pouches to oil manufactures for filing and packaging their products. It was only in assessment year 1992-93 that the company made necessary amendment in its memorandum to enable it to enter the business of computer operation and data processing while the decision to send trainee abroad for computer education was on 4-6-1990. [Para 25]
• Sponsoring of trainee for education abroad was not for business of company. Therefore, it cannot be said that the sponsoring of the trainee for overseas computer education was for the business of the company at the time when such decision was taken on 4-6-1990. Furthermore, the trainee had already secured admission for such course in the foreign university and applied for release of foreign exchange with regard thereto five weeks prior to his appointment.
• Hence, the finding of the Tribunal that the sponsorship of the trainee was colourable in nature and not for the purpose of business of the company, is wholly justified and borne out from the materials on record. [Para 26]
• Subsequently, whether the company was marginally engaged in the business of computer software development or that after his foreign sojourn the trainee worked for some period in the assessee company does not change the attending circumstances that the time when the board took resolution to sponsor his overseas education of the trainee on 4-6-1990, the company had no business expediency so as to treat the same as being business expenditure. [Para 28]
• The business of the company which is principally in the area of manufacturing and marketing of plastic pouches cannot justify the sponsoring of the trainee for overseas education in computer software development and accounting. Even for accounting purpose of the company no employee is required to be sent abroad; it must be borne in mind that this was also not a regular practice of the company inasmuch as no one before or thereafter had been selected by the company for such preferential treatment in the matter of obtaining overseas education. [Para 30]
• For the aforesaid reasons, the findings of the Tribunal do not require interference. [Para 31]
FACTS - II
• The assessee company under an agreement, paid certain amount to 'T' for providing expertise to apply for tender and follow up action for acceptance of tender and for restraining 'T' from participating in tender.
• Assessee claimed the said payment as business expenditure which was disallowed by the Assessing Officer.
• The Tribunal, on appeal, also affirmed the order of Assessing Officer.
HELD - II
• Bearing in mind the nature of the contract namely providing expertise in preparation and procurement of tender in favour the appellant company with regard to tender floated by Public Sector organization there is no doubt that scope and ambit of payment of such commission transcended the lawful or permissible limits of participation in such tender.
• Furthermore, the Tribunal has rightly held that the nature of such expertise in preparation of tender documents and follow-up action for obtaining such tender has not been clearly spelt out. When the commission payments had been made in for purposes which are prima facie impermissible in law the question of permitting such expenses on the anvil of commercial expediency does not arise at all. [Para 35]
• The issue of payment for ensuring non-participation of 'T' in the tender and also for follow up action to procure such tender in favour of the opposite party also smacks of creating a cartel in the matter of public tender which is equally impermissible in law. Furthermore, the finding of the Tribunal that such agreement does not shut out other companies from contesting the tender also a justifiable ground for such disallowance. [Para 36]
• We, therefore, hold that the findings of the Tribunal are clearly justified and the confirmation of the aforesaid disallowance is justly warranted in law. [Para 37]
FACTS - III
• The assessee company purchased some shares of two other companies.
• Soon after taking the delivery of shares the assessee company sold the shares held by it at a loss because of rapid fall in the value of shares.
• The Assessing Officer disallowed such short term capital loss suffer by the assessee company.
• On appeal, both the Commissioner (Appeals) and the Tribunal confirmed the disallowance made by Assessing Officer on the ground that same was speculative loss as provided in the Explanation to section 73.
HELD - III
• A plain reading of the Explanation to section 73 would show that if a part of the business of the company consisted of purchase and sale of shares of other companies, the said company would be deemed to be in speculation business and loss suffered by such company in such activity, i.e., purchase and sale of shares, would be deemed to be speculation loss and would not be deductible from the profits and losses of the said company in respect of other businesses. Hence, the condition precedent for attracting the said provision is that a part of the business of the company must relate to purchase and sale of shares. [Para 41]
• Indisputably Commissioner (Appeals) as well as the Tribunal had come factually to a conclusion that the appellant company was not involved in the business of sale and purchase of shares. Merely indulging in purchase and sale of shares for investment is not business activity in sale and purchase of share of other companies for the purpose of this section. [Para 42]
• In view of such fact, precondition necessary for attracting the Explanation to section 73 is absent in the instant case and the disallowance of this loss treating the same being speculation one is wholly unwarranted. [Para 43]
• Furthermore, the conduct of the company in selling the shares in questions soon after taking delivery of the shares when it is found that the value of such shares were rapidly decreasing cannot be said to be unjustified or imprudent. The reasoning of Commissioner (Appeals) that there was no pressing need for the appellant company to sell the shares within a short span of time of its acquisition was clearly perverse in the admitted facts of the instant case. [Para 44]
• The confirmation of the disallowance of such short term capital loss suffered by the company as speculation loss is illegal and, therefore set aside. [Para 45]
CASE REVIEW
Gour Nirya Tea Industries Ltd. v. CIT [IT Appeal No. 249 of 2005, dated 24-6-2010 (para 29), Sasoon J. David & Co. (P.) Ltd. v.CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 30) and SA Builders Ltd. v. CIT [2007] 288 ITR 1/157 Taxman 74 (SC) (para 35)distinguished.
CASES REFERRED TO
Dhurandhar Prasad Singh v. Jai Prakash University AIR 2001 SC 2552 (para 12), Gour Nitya Tea Industries Ltd. v. CIT [IT Appeal No. 249 of 2005, dated 24-6-2010) (para 15), Ram Nagina Singh Pltf v. Governor General in Council Delhi. AIR 1952 Cal. 306 (para 17), Hari Satya Banerjee v. Mahadev Banerjee AIR 1983 Cal. 76 (para 17), Sasoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 21) and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/157 Taxman 74 (SC) (para 33)
J.P. Khaitan, D. Mitra and S. Das for the Appellant. R.N. Bandhopadhyay, S.B. Sarof, Aniket Mitra, Siddartha Chatterjee, Dipak Som and Prithu Dindhuria for the Respondent.
JUDGMENT
Joymalya Bagchi, J. - The aforesaid appeals have been heard analogously and are being disposed of by a common judgement and order since they relate to similar questions of law and facts.
I.T.A. No. 98 of 2003 was admitted in respect of assessment year 1991-92 on the following questions of law :
(I) Whether on the facts and in the circumstances of the case the tribunal misdirected itself in law and it adopted a wholly erroneous approach in confirming the disallowance of overseas travel (Rs. 40,443/-) and educational expenditure (Rs. 3,37,084-/) in the aggregate sum of Rs. 3,77,527/- incurred by the appellant/assessee company herein in respect of his trainee employee, Sri Saumya Meattle and whether its findings on the aforesaid issue are vitiated in law having been recorded by it without any material and/or in disregard of the undisputed material facts including the relevant and vital evidences on record and whether such findings are wholly unreasonable and/or otherwise perverse.
(II) Whether on the facts and in the circumstances of the case the tribunal misdirected itself in law and it adopted a wholly erroneous approach in confirming the disallowances of Rs. 1,66,660/- representing commission paid by the appellant/assessee company to M/s. Telecom Ancillaries Pvt. Ltd. and whether its findings on the aforesaid issue are vitiated in law having been recorded by it without any material and/or in disregard of the undisputed material facts including the relevant and vital evidences on record and whether such findings are wholly unreasonable and/or otherwise perverse.
(III) Whether on the facts and in the circumstances of the case the and on a correct interpretation of Section 73 of the Income Tax Act, 1961 the tribunal misdirected itself in law and it adopted a wholly erroneous approach in confirming the disallowances of short term capital loss in the aggregate sum of Rs. 4,17,550/- suffered by the appellant/assessee company in purchase and sale of shares of M/s. Reliance Industries Ltd. and M/s. JCT Ltd. the two quoted Public Limited Companies and whether its findings on the aforesaid issues are vitiated in law having been recorded by it without any material and/or in disregard of the undisputed material facts including the relevant and vital evidences on record and whether such findings are wholly unreasonable and/or otherwise perverse.
1. I.T.A. No. 99 of 2003 was admitted in respect of assessment year 1993-94 on a question of law similar to question no. II in I.T.A. No. 98 of 2003 as follows :
Whether the tribunal could confirm the disallowance of Rs. 12,00,000/- representing payment made by the appellant/assessee company to M/s. Telecom Ancillaries Pvt. Ltd. on the erroneous finding that the agreement was made on 25th March, 1992 not on 25th January, 1992 and thereby holding that this was entered at the fag end of the year and was not followed by a business necessity or expediency and even then the agreement would not eliminate competitors other than M/s. Telecom Ancillaries Pvt. Ltd. and hold that it was not an arrangement out of prudent business planning but was made to reduce tax liability and thus had come to a perverse finding.
2. I.T.A. No. 265 of 2003 was admitted in respect of assessment year 1996-97 on a question of law similar to question (I )in I.T.A. No. 98 of 2003, save and except the fact that the disallowance for overseas travel and educational expenses was to the tune of Rs. 3,043,591/- for the said assessment year.
For the sake of convenience question no. I in I.T.A. No. 98 of 2003 and that in I.T.A. No. 265 of 2003 are taken up for consideration simultaneously.
3. The factual background from which such question of law emanates is set out hereinbelow.
The appellant company was mainly engaged in the business of manufacturing and trading of corrugated sheets, curtains, flexible plastic bags and pouches, filling machines, filling of oil and other materials in plastic pouches and supplying them to Public Sector Oil Companies. The company also carried on investment in shares and securities of quoted companies. On or about 28.05.1990 the company appointed one Saumya Meattle, minor, aged about 17 years two months, who had passed the 10 + 2 examination as a trainee in the appellant company for a remuneration of 2000/- per month. In terms of his letter of appointment, Saumya Meattle was to join the company on or before 1st June, 1990. Within a few days from his date of joining, the company took a resolution in its Board meeting held on 04.06.1990 for sponsoring the aforesaid Saumya Meattle for advance study in Computer Science from University of South California Lose Angles, USA as an employee of the company on condition, inter alia, that he shall continue be an employee of the company for seven years after completing his course in USA and the he along with his guarantor Ms. Gnan N. Swarup, would execute a surety bond for a sum of Rs. 2,00,000/- plus all costs and charges that shall/may be incurred by the company in that regard.
Pursuant to such understanding it appears that a surety bond was got to be duly executed by the Saumya Meattle and Ms. Gnan Swarup as his guarantor. On attaining majority, the said Saumya Meattle by a further undertaking dated 21.08.1991 ratified his liabilities under the contract and the said bond. It is apposite to mention that even prior to his appointment the said Saumya Meattle made an application on 23.04.1990 to the banker for release of foreign exchange for studies abroad which was granted by the banker on 22.06.1990. Saumya Meattle completed his studies in the University of South California, USA and obtained a bachelor degree in the field of Computer Science in May, 1995.
In the meantime, the company in its Board meeting held on 16.05.1994 took another resolution to sponsor the said Saumya Meattle for pursuing his Master Degree in Accounting at the self-same University, inter alia, on the condition that the said Saumya Meattle along with his guarantor Ms. Gnan Swarup shall execute fresh surety bond to the tune of Rs. 3,50,000/- plus all costs and charges that shall or may be incurred by the company in that regard and that he shall serve as an employee of the company for a minimum period of seven years after completing his degree. The said Saumya Meattle along with Ms. Gnan Swarup duly executed such bond and he successfully completed his course and obtained a Master Degree in Accounting from the said University on 12.05.1995. Thereafter, Mr. Meattle obtained practice training in the reputed International Private Company Group of Marlin, London as an intern from July, 1995 to July, 1996.
4. By letter dated 15.07.1996 the appellant company appears to have confirmed the service of Saumya Meattle with effect from the self-same date and it appears that thereafter Mr. Meattle worked in the appellant company.
The company filed return of income for the assessment year 1991-92 showing a total income declaring an assessable income of 11,30,410/- .
5. The Assessing Officer after examining the relevant records and/or evidence produced in the course of the assessment proceeding completed income assessment for the said year and by the impugned assessment order dated 21.03.1994 passed under Section 143(3) of the Act determined total income of the appellant company for the said year to the tune of Rs. 22,14,416/- by inter alia disallowing the educational expenses and expenses of account of foreign travel undertaken by the company in connection with the aforesaid Saumya Meattle to the tune of Rs. 3,37,084/and Rs. 40,443/- respectively.
6. The assessee company appealed against such order before the Commissioner of Income Tax (Appeals) and the said Commissioner (Appeals) dismissed the said appeal by its order dated 19.02.1999.
7. Being aggrieved by the said appellate order dated 19.02.1999 the appellant company filed an appeal before the tribunal which was being I.T.A. 698 (Cal) of 1999. The said appeal was heard along with another appeal filed by the appellant company being I.T.A. No. 699 (Cal) of 1999 arising out of assessment year 1992-93 and both the appeals were disposed of by the learned tribunal by its impugned order dated 28th November, 2002. Hence, the present appeal being I.T.A. No. 98 of 2003 has been filed in respect of assessment year 1991-92.
8. Similarly, in respect of the assessment year 1996-97 the Assessing Officer passed an assessment order dated 30.03.1999 under Section 143(3) of the Income Tax Act by disallowing the overseas educational and training expenses to Saumya Meattle to the tune of Rs. 2,44,991/- and his overseas travel expenses to the tune of Rs. 98,600/- for the said assessment year.
9. Such order was also appealed before the Commissioner of Income Tax-X, (Appeals) Calcutta who dismissed the same by his order dated 09.03.2000 inter alia on the ground that on similar ground such disallowance had been confirmed in the earlier assessment year 1991-92, as aforesaid. The appellant company thereafter approached the tribunal against the said order of C.I.T. (Appeals). The tribunal dismissed the said appeal being I.T.A. No. 1177 (Cal) of 2000 by impugned order dated 10th June, 2003 in view of its earlier order dated 28th November, 2002 passed in respect of the assessment year 1991-92 in I.T.A. No. 698 (Cal) 1999, as aforesaid. The present appeal being I.T.A. No. 265 of 2003 has been filed challenging the said order of the tribunal in respect of assessment year 1996-97.
10. Hence in both these appeals the self-same issue falls for decision as to whether the confirmation of disallowance of overseas educational expenses and foreign travel expenses undertaken by the appellant company in respect of its trainee Saumya Meattle was vitiated in law or was based on findings which are wholly unreasonable or otherwise perverse.
11. Mr. Khaitan, learned Senior Counsel appearing for the appellant submitted that the appointment was made to Saumya Meattle after assessing his academic achievement with the intention sponsoring his overseas education on the understanding that the trainee would serve the appellant company for a minimum period of seven years. The Board resolutions to that effect were passed by the appellant company and the trainee and his surety executed necessary bonds. He assailed the finding of the learned tribunal on the ground that the minority of Saumya Meattle at the time of his appointment was not material inasmuch as he subsequently ratified the surety executed by him upon attaining majority and that a contract executed by a minor is good against the whole world and the minor if he wishes to have the same annulled has to take recourse to appropriate proceeding.
12. In support of his contention he relied on a decision reported in Dhurandhar Prasad Singh v. Jai Prakash University AIR 2001 SC 2552. That apart, he submitted that under Section 68 of the Indian Contract Act, 1972 the appellant was entitled to be reimbursed from the property of the minor inasmuch as "necessaries" within the meaning of the said section included educational expenses. Recourse could also be taken against the surety in terms of the Section 120 of the Contract Act.
13. Mr. Khaitan further challenged the finding of the tribunal that the sponsorship was colourable in nature. He strongly disputed the finding of the tribunal that such expenditure was personal expenditure in the guise of "staff welfare expenses". He submitted that such finding was wholly perverse as the trainee had no relation with any of the directors of the appellant company. He however admitted that the mother of the trainee was a partner in a firm in which the company was also a partner and that in respect of the assessment year 1996-97 relating to I.T.A. No. 265 of 2003 a relative of the trainee held substantial shares in the appellant company.
14. He further submitted that the findings of the tribunal were based on mere surmise and the expenses incurred by the company for overseas educational foreign travel were clearly deductible in terms of Section 37 (1) of the Income Tax Act.
15. Mr. Khaitan relied on a unreported decision of this Court in I.T.A. No. 249 of 2005 (M/s. Gour Nitya Tea Industries Ltd. v. CIT) delivered on 24th June, 2010 in support of his contention that since there are materials on record that the appellant had served the company after returning from abroad it cannot be said that the expenditure undertaken by the company was colourable and not wholly and exclusively for the purpose of its business.
16. Mr. Khaitan also submitted certain additional documents to bolster his contention that the appellant had in fact been in the service of the company till 31st March, 2009 and salaries had been duly paid to him.
17. Mr. Som, learned senior advocate appearing for the revenue in I.T.A. No. 265 of 2003 hotly contested the submissions of Mr. Khaitan. He submitted that the letter of appointment of Saumya Meattle on 28.05.1990 was void inasmuch as he was a minor at that time. In support of his contention he relied on decisions reported in AIR 1941 Bom 215 (Sic), 32 ITR 550 (Sic), Ram Nagina Singh Pltf v. Governor General in Council Deft. AIR 1952 Cal 306 and Hari Satya Banerjee v. Mahadev Banerjee AIR 1983 Cal 76.
18. He further submitted that the action of the company to sponsor the aforesaid trainee was clearly a colourable one and is device to keep aside a portion of income from the purview of tax liability inasmuch as the decision to sponsor his overseas education was taken within a couple of days of his joining as a trainee and that there was no exceptional circumstance to justify the same, particularly, bearing in fact that the company had not undertaken such sponsorship in respect of any employee either in the past or thereafter.
19. He further submitted that Saumya Meattle had already been selected for the overseas course prior to his appointment on 28.05.1990 which is evident from the date of his application for release of foreign exchange i.e. 23.04.1990. He submitted that additional documents submitted before this Court should not be taken into consideration inasmuch as the same have not been admitted in terms of order 41 Rule 27 of the Civil Procedure Code.
20. Learned Counsel further submitted that the decision in the case of Gour Nitya Tea Industries (supra) is clearly distinguishable from the facts of the instant case.
21. Learned counsel appearing in I.T.A. no. 98 OF 2003 adopted the submission of Mr. Som and further submitted that the decision inSasoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) is clearly distinguishable in the facts of the instant case.
22. In view of the aforesaid submissions of the parties one requires to test whether the finding of the tribunal that the sponsorship for overseas studies and the travel expenses undertaken by the company was colourable or not or in other words was such expenditure wholly and exclusively for the business of the company or the same was merely the designed for ulterior purpose.
23. It is true that the letter of appointment of the trainee was issued at a time when he was a minor. However, it must be borne in mind that subsequently the minor on attaining majority had ratified of such contract and also his liabilities arising therefrom.
The judgements cited by Mr. Som in this regard are clearly distinguishable on facts as in none of the cited cases the minor on attaining majority had ratified his liabilities arising from such contract. On the other hand, in the case reported in Dhurandhar Prasad Singh such a contract is held to be good against the whole world.
24. In view of such fact it may not be correct to hold that there was no binding contract between the company and the trainee in the instant case. However, a more relevant issue in the matter is whether the act of the company in sponsoring such a minor trainee within a couple of days of his appointment for pursuing the studies in Computer Science, without assessing his competence and capability, can be construed to be a bonafide act on its part or a colourable devise for ulterior purposes. The Tax Authorities below have rightly come to conclusion on facts that the appellant company without assessing the competence of the trainee and within a couple of days from his joining sponsored him for pursuing study in software development - an area which was unconnected with the business activity of the company at the time when such decision was taken.
25. It is an admitted position that the principal business of the company was manufacturing and supplying of packets/pouches to oil manufactures for filling and packaging their products. It was only in the assessment year 1992-93 the company made necessary amendments in its memorandum to enable it to enter the business of computer operation and data processing while the decision to send the trainee abroad for computer education was in 04.06.1990.
26. Therefore, it cannot be said that the sponsoring of the trainee for overseas computer education was for the business of the company at the time when such decision was taken on 04.06.1990. Furthermore, the trainee had already secured admission for such course in the foreign University and applied for release of foreign exchange with regard thereto five weeks prior to his appointment. Hence, the finding of the tribunal that the sponsorship of the trainee was colourable in nature and not for the purpose of business of the company his wholly justified and borne out from the materials on record.
27. We, however, do not agree with the tribunal that the trainee was a relation of one of the directors of the company but that is neither here nor there inasmuch as the purpose for which the trainee was being sent abroad, namely, computer education was admittedly not one of the businesses in which the company was indulging in at the time when the board resolution was taken to sponsor his foreign education.
28. Subsequently, whether the company was marginally engaged in the business of computer software development or that after his foreign sojourn the trainee worked for some period in the appellant company does not change the attending circumstance that at the time when the board took resolution to sponsor his overseas education of the trainee on 04.06.1990. The Company had no business expediency so as to treat the same as being business expenditure.
29. In this regard, it has been rightly argued on behalf of the revenue that the ratio in the case of Gour Nitya Tea Industries Ltd. v. CIT is clearly distinguishable on facts. In that case, the appellant had been sent abroad after working as a trainee for more than nine months in the assessee company and the purpose of overseas education was in an area which the principal business of the assessee company. The said facts are significantly absent in the instant case to justify the deduction claimed by the appellant company under Section 37(1) of the Income Tax Act.
30. The ratio of the case reported in Sasoon J. David & Co. (P.) Ltd. (supra) is not applicable in the facts of the instant case since the business of the company which is principally in the area of manufacturing and marketing of plastic pouches cannot justify the sponsoring of the trainee for overseas education in computer software development and accounting. Even for accounting purpose of the Company no employee is required to be sent at road. It must be borne in mind that this was also not a regular practice of the company, inasmuch, as no one before or thereafter had been selected by the company for such preferential treatment in the matter of obtaining overseas education.
31. For the aforesaid reasons, we find that the findings of the tribunal in this regard are wholly justified and do not require interference. The question No. I in I.T.A. No. 98 OF 2003 and I.T.A. No. 265 OF 2003 is therefore answered in the negative in favour of the revenue and against the appellant.
32. The question No. II in I.T.A. No. 98 of 2003 and the sole question of I.T.A. No. 99 of 2003 are taken up for consideration simultaneously. The issue involved herein is whether the confirmation of disallowance with regard to commission paid by the company to M/s. Telecom Ancillaries Pvt. Ltd. to the tune of Rs. 1,66,6660 in assessment year 1991-92 (in I.T.A. No. 98 of 2003) for providing expertise to apply for tender and follow up action for acceptance of tender and a sum of Rs. 12,00,000/- to the said M/s. Telecom Ancillaries for the assessment year 1992-93 (in I.T.A. No. 99 of 2003) for restraining the latter from participating in the tender and for taking follow up action for acceptance of the tender in favour of the appellant company was justified or not.
33. Mr. Khaitan appearing for the appellant company argued that the finding of the tribunal that the said agreements were entered into at the end of the financial year was perverse and that the disallowance was confirmed on the basis of irrelevant considerations. He emphasized that this was a standard practice which was adopted by the company in earlier and subsequent years and that due to the arrangement of non-participation of M/s. Telecom Ancillaries in the tender the appellant company earned substantial profit in the subsequent years. He further relied on the decision reported in SA Builders Ltd. v. CIT [2007] 288 ITR 1/157 Taxman 74 (SC) that if the expenses are incurred as a measure of commercial expediency, the revenue cannot put itself in the armchair of the businessman and decide the reasonableness of such expenditure.
34. The learned counsel appearing for the revenue resisted such contention on the ground that the findings of the tribunal were wholly justified. It was submitted that the purpose for entering such agreement with M/s. Telecom Ancillaries Pvt. Ltd. in the matter of providing expertise for applying for tender and follow up action for obtaining the same were woefully vague and were wholly impermissible in the matter of public tender floated by Public Sector Companies. It was his submission that in the event the gist of the agreement appeared to be one which was impermissible in the factual backdrop of the transaction, the question of commercial expediency did not arise.
35. It is true that the agreement between M/s. Telecom Ancillaries Pvt. Ltd. and the appellant company was executed on 25.01.1992 (in the assessment year 1992-93) instead of 25.03.1992 as wrongly recorded by the tribunal in paragraph 11 of its order in I.T.A. No. 99 of 2003. However, bearing in mind the nature of the contract namely providing expertise in preparation and procurement of tender in favour the appellant company with regard to tender floated by Public Sector organization we have no doubt in our mind that scope and ambit of payment of such commission transcended the lawful or permissible limits of participation in such tender. Furthermore, the tribunal has rightly held that the nature of such expertise in preparation of tender documents and follow up action for obtaining such tender has not been clearly spelt out. When the commission payments had been made in for purposes which are prima facie impermissible in law the question of permitting such expenses on the anvil of commercial expediency does not arise at all. The decision in S.A. Builders Ltd.'s case (supra) is not of any assistance to the appellant as it did not relate to legally impermissible expenditure as in the instant case.
36. The issue of payment of 12 lakh inter alia, for ensuring non-participation of M/s. Telecom Ancillaries Pvt. Ltd. in the tender and also for follow up action to procure such tender in favour of the opposite party also smacks of creating a cartel in the matter of public tender which equally impermissible in law. Furthermore, the finding of the tribunal that such agreement does not shut out other companies from contesting the tender also a justifiable ground for such disallowance. We, therefore, hold that the findings of the tribunal are clearly justified and the confirmation of the aforesaid disallowance is justly warranted in law. The question no. II in I.T.A. No. 98 of 2003 and the sole question in I.T.A. NO. 99 OF 2003 is accordingly answered in the negative in favour of the revenue and against the appellant.
38. Question no. III in I.T.A. No. 98 of 2003 relates to the confirmation of disallowance of short term capital loss to the tune of Rs. 4,17,550/- suffered by the appellant company in the purchase and sale of shares of M/s. Reliance Industries Ltd. and M/s. JTC Ltd. for the assessment year 1991-92.
39. Mr. Khaitan has argued that the tribunal after holding that the appellant company is not in the business of purchase and sale of shares ought not to have disallowed such short term capital loss on the ground that the same are speculation losses as provided in the explanation to Section 73. Learned counsel appearing for the revenue opposed such submission. He submitted that the appellant company need not be primarily into the business of purchase and sale of shares and even if a few transaction of that nature are evident the loss suffered in such transactions shall be construed to be speculation loss by the deeming provision contained in the explanation to Section 73 of the Income Tax Act.
40. This issue therefore calls for an interpretation of the explanation to Section 73 of the Income Tax Act.
Explanation to Section 73 of the Income Tax Act is read as follows :
"Losses in speculation business.
Explanation : Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares."
41. A plain reading of the aforesaid provision of law would show that if a part of the business of the company consisted of purchase and sale of shares of other companies, the said company would be deemed to be in speculation business and loss suffered by such company in such activity, i.e. purchase and sale of shares, would be deemed to be speculation loss and would not be deductible from the profits and losses of the said company in respect of other businesses. Hence, the condition precedent for attracting the said provision is that a part of the business of the company must relate to purchase and sale of shares.
42. Indisputably CIT (Appeals) as well as the tribunal had come factually to a conclusion that the appellant company was not involved in the business of sale and purchase of shares. Merely indulging in purchase and sale of shares for investment is not business activity in sale and purchase of share of other companies for the purpose of this section.
43. In view of such fact, precondition necessary for attracting the explanation to Section 73 is absent in the instant case and the disallowance of this loss treating the same being speculation one is wholly unwarranted.
44. Furthermore, the conduct of the company in selling the shares in questions soon after taking delivery of the shares when it is found that the value of such shares were rapidly decreasing cannot be said to be unjustified or imprudent. The reasoning of CIT (Appeals) that there was no pressing need for the appellant company to sell the shares on 18.12.1990 within a short span of time of its acquisition was clearly perverse in the admitted facts of the instant case.
45. The confirmation of the disallowance of such short term capital loss suffered by the company in the assessment year 1991-92 as speculation loss is illegal and therefore set aside. Question No. III in I.T.A. No. 98 of 2003 is accordingly answered in affirmative in favour of the assessee and against the revenue.
46. I.T.A. No. 98 of 2003 is allowed in part, as aforesaid. I.T.A. No. 99 of 2003 and I.T.A. No. 265 of 2003 are dismissed. The interim order, if any, stands vacated. The Assessing Officer is directed to recompute the total income and the tax payable by the appellant company in respect of the assessment year 1991-92 in terms of the findings in the instant judgement and order.
Income tax - Whether when assessee fails to deduct tax at source from payments made but deposits TDS due before end of FY, even then disallowance u/s 40(a)(ia) is warranted - NO: ITAT
By TIOL News Service
By TIOL News Service
LUCKNOW, NOV 16, 2012: THE issue before the Bench is - Whether when assessee fails to deduct tax at source from the payments made but deposits the TDS sum before the end of the FY, even then disallowance u/s 40(a)(ia) is warranted. NO is the Tribunal's answer.
Facts of the case
AO observed that out of the total amount debited under the head "freight and cartage", a sum of Rs.10,18,825 was paid to five persons exceeding the prescribed limit of Rs.50,000 on which no tax was deducted at source. According to the AO, since no tax was deducted at source, the said expenditure was not allowable. He made disallowance by invoking provisions of section 40 (a)(ia). The CIT(A) deleted the addition after having observed that there was no violation of provisions of section 194C and therefore the AO was not right in invoking the provisions of section 40 (a)(ia).
On Appeal before the Tribunal the DR submitted that the assessee had not placed challan for deposit of Rs.25,398 before the AO. Since the assessee had failed to produce evidence with regard to the deposit of TDS, the AO had rightly disallowed the claim of the assessee. The AR contended that the challan for deposit of Rs.25,398 was produced before the CIT(A) and he had verified the factum of the deposit. The counsel also submitted that all the payments were made before the end of the F.Y, therefore, no disallowance can be made in the light of the order of the Special Bench of the Tribunal in Merilyn Shipping & Transports.
Having heard the parties, the Tribunal held that,
++ we find that the assessee has made deposit of the TDS though it might not have been deducted from the payments made to the payee, but it related to those payments. The fact that all the payments have been made before the end of the financial year has not been disputed by the Revenue. Therefore, even if the TDS was not deducted on these payments but these payments were made before the end of the financial year, disallowance u/s 40(a)(ia) cannot be made in the light of the order of the Special Bench of the Tribunal in Merilyn Shipping & Transports;
++ on the issue of disallowance of Rs.3,66,241 on account of application of section 14A, we find that both the lower authorities have examined the issue in dispute on different aspects. They have not examined whether the assessee has maintained separate account for making investments. Undisputedly the assessee has borrowed some funds but according to him these funds were utilized for business purposes. Since there is no categorical finding of the lower authorities in this regard, we are of the view that let the matter go back to the AO for examination whether investments were made from separate account of the assessee in which he has not made any deposit of the borrowed funds. If the borrowed funds were not utilized in investments on which tax free income was generated, no disallowance u/s 14A is called for.
AO observed that out of the total amount debited under the head "freight and cartage", a sum of Rs.10,18,825 was paid to five persons exceeding the prescribed limit of Rs.50,000 on which no tax was deducted at source. According to the AO, since no tax was deducted at source, the said expenditure was not allowable. He made disallowance by invoking provisions of section 40 (a)(ia). The CIT(A) deleted the addition after having observed that there was no violation of provisions of section 194C and therefore the AO was not right in invoking the provisions of section 40 (a)(ia).
On Appeal before the Tribunal the DR submitted that the assessee had not placed challan for deposit of Rs.25,398 before the AO. Since the assessee had failed to produce evidence with regard to the deposit of TDS, the AO had rightly disallowed the claim of the assessee. The AR contended that the challan for deposit of Rs.25,398 was produced before the CIT(A) and he had verified the factum of the deposit. The counsel also submitted that all the payments were made before the end of the F.Y, therefore, no disallowance can be made in the light of the order of the Special Bench of the Tribunal in Merilyn Shipping & Transports.
Having heard the parties, the Tribunal held that,
++ we find that the assessee has made deposit of the TDS though it might not have been deducted from the payments made to the payee, but it related to those payments. The fact that all the payments have been made before the end of the financial year has not been disputed by the Revenue. Therefore, even if the TDS was not deducted on these payments but these payments were made before the end of the financial year, disallowance u/s 40(a)(ia) cannot be made in the light of the order of the Special Bench of the Tribunal in Merilyn Shipping & Transports;
++ on the issue of disallowance of Rs.3,66,241 on account of application of section 14A, we find that both the lower authorities have examined the issue in dispute on different aspects. They have not examined whether the assessee has maintained separate account for making investments. Undisputedly the assessee has borrowed some funds but according to him these funds were utilized for business purposes. Since there is no categorical finding of the lower authorities in this regard, we are of the view that let the matter go back to the AO for examination whether investments were made from separate account of the assessee in which he has not made any deposit of the borrowed funds. If the borrowed funds were not utilized in investments on which tax free income was generated, no disallowance u/s 14A is called for.
(See 2012-TIOL-651-ITAT-LKW)
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