IT : Gold received by assessee on redemption of gold bond certificates issued under Gold Deposit Scheme, 1999, is a new asset and, therefore, income arising from sale of said gold within twelve months of its acquisition was to be taxed as short-term capital gain
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[2012] 28 taxmann.com 76 (Agra - Trib.)
IN THE ITAT AGRA BENCH
Shiv Kumar Agarwal
v.
Deputy Commissioner of Income-tax, 4(1), Agra*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NOS. 139 TO 142 (AGRA) OF 2012
[ASSESSMENT YEAR 2008-09]
SEPTEMBER 14, 2012
Section 2(42B), read with section 45, of the Income-tax Act, 1961 - Capital gains - Short term capital gains - Gold bonds - Assessment year 2008-09 - Whether gold received by assessee on redemption of gold bond certificates issued under Gold Deposit Scheme, 1999, is a new asset - Held, yes - Whether, therefore, when assessee sold said gold within a period of twelve months from date of its acquisition, income arising from sale transaction was to be taxed as short-term capital gain - Held, yes [In favour of assessee]
Circulars & Notifications : Circular No. 415, dated 14-3-1985
FACTS
• The assessee had deposited certain quantity of gold on 27-11-1999 in Gold Deposit Scheme, 1999. Thereafter, he redeemed the certificate of gold on 22-11-2006 and finally sold the gold on 7-11-2007 at an amount of Rs. 10,63,000. In the computation of income, the assessee treated the date of maturity, i.e., 22-11-2006 as the date of acquisition and 7-11-2007 as the date of sale and finally treated the income arising out from said sale as short term capital gains.
• The Assessing Officer opined that the assessee remained owner of the gold for the period gold was deposited in gold deposit scheme and the certificates were transferable at the option of the owner and further the assessee enjoyed tax free interest. He therefore, opined that the date of acquisition of gold was 27-11-1999 and computed the long term capital gains.
• The Commissioner (Appeals) upheld the order of the Assessing Officer.
• On second appeal:
HELD
Nature of asset held by assessee under Gold Deposit Scheme, 1999:
• The assessee deposited gold on 22-11-1999 in Gold Deposit Scheme, 1999. The redemption certificate of gold was issued on 22-11-2006 and the assessee sold the gold on 07-11-2007. Thus, the gold bond remained in possession of the assessee till redemption certificates was issued. The transfer can take place only if the transferor is in a position to do so. Therefore, it was necessary that the transferor should have a full title over the property, which he transfers and he must be in full possession of the property.
• When the assessee has deposited the gold in Gold Deposit Scheme, 1999, an agreement was created between him and the Government and gold bonds were issued in favour of the assessee subject to interest. The assessee was entitled to get back the gold on the date of maturity. Therefore, on the maturity date, the character of the gold bond certificate would change. On the maturity date, it was merely a document of title of the gold and on redemption of the certificate, the assessee would be entitled for possession of the gold as per the Scheme. Thus, the nature of the capital asset which was in possession of the assessee in the shape of gold became changed, i.e., from gold to gold bonds and at the time of redemption of the capital asset, which was in the shape of gold bond certificate in possession of the assessee, was further changed into the gold and thus, the gold which was received by the assessee on redemption was a new capital asset came in possession of the assessee on redemption of gold bond certificate. [Para 5]
• Circular No. 415, dated 14-3-1985 though pertained to National Defence Gold Bonds, but explained the similar issue, In the said circular, it was decided that for the purpose of computation of capital gains, the cost of acquisition of the gold would be the market value of the bonds on the date of redemption. [Para 5.5]
Taxability of income arising from sale of asset held under Gold Deposit Scheme:
• It was not in dispute that on the date of maturity, i.e., 22-11-2006, the certificates of gold were redeemed, therefore, 22-11-2006 should be considered as the date of acquisition of the gold for the purpose of computation of capital gains. The authorities below were, therefore, not justified in rejecting the claim of assessee for short term capital gains on redemption of bonds. The cost of acquisition of the gold was to be taken, i.e., value of gold on the date of redemption of certificates when a new capital asset has come into existence in possession of the assessee. Earlier, the gold in possession of the assessee had lost its identity when the same was converted into bonds. The Bonds could not be treated as gold nor the gold could be treated as bonds.
• Since no specific circular had been brought on record dealing with the gold Deposit Scheme, the authorities below were not justified in taking the date of acquisition as 22-11-1999 instead of 22-11-2006. Therefore, the orders of the authorities below were set aside and it was directed that the cost and the date of acquisition of the gold for the purpose of computing the capital gains be taken as the date on which the gold had been received by assessee on redemption of the gold bonds, i.e., 22-11-2006. In the result, the appeal of the assessee was allowed. [Para 5.5]
CASE REVIEW
CIT v. Debmalya Sur [1994] 207 ITR 996/77 Taxman 313 (Cal.); L.M. Parikh v. Sixth ITO [1990] 36 TTJ 29 (Bom.) and Vyavasaya v.ITO [1989] 30 ITD 205 (Ahd.) (para 5.5) followed.
CASES REFERRED TO
CIT v. Debmalya Sur [1994] 207 ITR 996/77 Taxman 313 (Cal.) (para 3), Smt. L.M. Parikh v. Sixth ITO [1990] 36 TTJ 29 (Bom.) (para 4) and Vyavasaya v. ITO [1989] 30 ITD 205 (Ahd.) (para 4).
Manuj Sharma for the Appellant. Km. Anuradha for the Respondent.
ORDER
Bhavnesh Saini, Judicial Member - All the appeals above by different assessees are directed against different orders of ld. CIT(A)-II, Agra dated 23.02.2012 for the assessment year 2008-09. Since the issue involved in all the appeals is same, therefore, all were heard together and we dispose of the same through this common/consolidated order. Both the parties mainly argued in the case of assessee, Shri Shiv Kumar Agarwal and have stated that the issue is same in other appeals. Therefore, for the purpose of disposal of all the appeals, we take the facts from the case of Shri Shiv Kumar Agarwal.
ITA No. 139/Agra/2012(Sh. Shiv Kumar Agarwal):
2. The assessee filed present appeal on the following grounds :
"1. That the Authorities below have erred on facts and in law while making of the assessment of the income under the head long term capital gain, as against short term capital gain shown by the assessee on the sale of gold acquired on the redemption of gold bond, short term capital gain as shown by the appellant is liable to be accepted and addition made on this score is liable to be deleted.
2. That, the Authorities below have erred on facts and in law while making the assessment of the income, on the sale of gold as long term capital gain as against short term capital gain shown by the" assessee. The cost and date of acquisition of the gold for the purpose of computing of the capital gain is to be taken i.e. the date on which the gold has been received to assessee on the redemption of the gold bond which is also clarified in the circular issued by the CBDT and also held by the various Hon'ble High Courts. The cost and date of acquisition of gold taken by the AO i.e. day on which it was deposited with gold bond scheme has wrongly been taken, income disclosed by the assessee on the sale of gold is liable to be assessed under the head short term capital gain.
3. That the Authorities below have erred on facts and in law while not following of the circular issued by the CBDT, dated 14.3.1985 No. 415 and also ignoring of the decision of Hon'ble High Court of Calcutta, the circular issued by the CBDT is binding upon all the subordinate authorities to the Central Board of Direct Taxes under section 119 of Income Tax Act. After taking into consideration the circular issued by the CBDT, date and acquisition cost of gold is to be taken i.e. date and value of the gold, on the day of redemption of the Gold Bond when the same was received to assessee, the short term capital gain as shown by the assessee on the sale of Gold is liable to be accepted.
4. That the appellate order passed by the Commissioner of Income Tax(Appeals)-II, Agra dated 23.2.2012 is bad in law."
3. The assessee has earned income from salary, other sources and income from capital gains. During the course of assessment proceedings, it was found that the assessee had deposited gold of 1.044 kg. on 27.11.1999 in Gold Deposit Scheme 1999. Thereafter, he redeemed the certificate of gold on 22.11.2006 and finally sold the gold on 07.11.2007 at an amount of Rs.10,63,000/-. In the computation of income, the assessee has treated the date of maturity, i.e., 22.11.2006 as the date of acquisition and 07.11.2007 as the date of sale and finally treated the income arising out from this sale as short term capital gains. There is no difference of opinion with regard to date of sale, however, the AO asked the assessee as to why the income should not be treated as long-term capital gains because the date of acquisition should be the date on which the assessee had deposited the gold in gold deposit scheme, 1999 on 22.11.1999 and the assessee had been enjoying tax free interest since then. The assessee submitted before the AO that the short-term capital gain has arisen on the sale of above gold being the gold which was in possession of the assessee in the year 1999 was transferred in the gold bonds immediately after the deposit of the same under the gold bond scheme. Thus, the nature of capital asset, which was in possession of the assessee in the shape of gold stood changed, i.e., from gold to gold bonds. Further, at the time of redemption, the capital asset which was in the shape of bond certificates in possession of the assessee was further changed into the gold. Thus, the gold, which was received by the assessee on redemption was a new capital asset came to be in possession of the assessee on redemption of gold bond certificate, therefore, the value/acquisition cost of the gold is to be taken as value of gold on the date of redemption of the certificate when a new capital asset has come into existence in possession of the assessee. Old gold, which was in possession of the assessee earlier, lost its identity with the same was converted into bond. The bond cannot be treated as gold nor gold can be treated as bond. The bond cannot be sold in the market at the rate of gold and both gold and bonds are of different identity. The assessee, therefore, rightly treated the same as short-term capital gains on sale of gold, which was received by the assessee on redemption from gold bond. The assessee relied upon the decision of Hon'ble Calcutta High Court in the case of CIT v. Debmalya Sur[1994] 207 ITR 996/77 Taxman 313. The AO, however, did not accept the contention of the assessee because the assessee remained owner of the gold for the period gold was deposited in gold deposit scheme and the certificates were transferable at the option of the owner and further the assessee enjoyed tax free interest. However, the judgment relied upon by the assessee pertains to National Defence Bond Scheme. The AO further noted that the gold certificates can be liquidated before its maturity. The rate of gold to be received at the time of maturity was not determined, but the prevailing market rate of gold would be received whenever the certificate is encashed. The scheme relates to custody of the gold and premium is paid to the subscriber to compensate them for the changes. The AO, therefore, did not accept the contention of the assessee and treated the date of acquisition of gold as on 27.11.1999 and computed the long-term capital gains. On appeal, the assessee reiterated the submissions made before the AO and also relied upon the Board's circular No. 415 dated 14.03.1985 and the same decision. However, the ld. CIT(A) dismissed the appeal of the assessee.
4. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the cost and date of acquisition of the gold for the purpose of computing the capital gains is to be taken, i.e., date on which gold has been received by the assessee on redemption of the gold bonds, which is also clarified by the Board in Circular No. 415 dated 14.03.1985. He has relied upon following decisions :
(i) Decision of Calcutta High Court in the case of Debmalya Sur (supra),
(ii) Order of ITAT, Mumbai Benches in the case of Smt. L.M. Parikh v. Sixth ITO [1990] 36 TTJ 29 (Bom.).
(iii) Decision of ITAT Ahmedabad Bench in the case of Vyavasaya v. ITO [1989] 30 ITD 205 (Ahd.).
On the other hand, the ld. DR relied upon the orders of the authorities below.
5. We have considered the rival submissions and the material on record. The facts noted above have not been disputed by the parties. The assessee deposited gold on 22.11.1999 in gold deposit scheme, 1999. The redemption certificate of gold was issued on 22.11.2006 and the assessee sold the gold on 07.11.2007. Thus, the gold bond remained in possession of the assessee till redemption of certificates was issued. The transfer can take place only if the transferor is in a position to do so. Therefore, it was necessary that the transferor should have a full title over the property, which he transfers and he must be in full possession of the property. When the assessee has deposited the gold in gold deposit scheme, 1999, there created an agreement between him and the Government and gold bonds were issued in favour of the assessee subject to interest. The assessee was entitled to get back the gold on the date of maturity. Therefore, on the maturity date, the character of the gold bond certificate would change. On the maturity date, it was merely a document of title of the gold and on redemption of the certificate, the assessee would be entitled for possession of the gold as per the Scheme. Thus, the nature of the capital asset which was in possession of the assessee in the shape of gold became changed, i.e., from gold to gold bonds and at the time of redemption of the capital asset, which was in the shape of gold bond certificate in possession of the assessee, was further changed into the gold and thus, the gold which was received by the assessee on redemption was a new capital asset came in possession of the assessee on redemption of gold bond certificate.
5.1 Circular No. 415, though pertained to National Defense Gold Bonds, but explain the similar issue and reads as under :
"National Defence Gold Bonds, 1980-Transfer of gold after redemption-Date of acquisition of gold for the purpose of capital gains-Instruction regarding
14/03/1995 (sic - 1985)
CAPITAL GAINS
SECTIONS 2(42A)
The Government of India had issued in the year 1965, National Defence Gold Bonds, 1980. These Bonds were redeemable after 15 years, i.e., on or after 27th October, 1980. It was clarified in the Press Communique bearing No. MMS/MMM/ANT/361/3 dated 22nd September, 1980, issued by the Department of Economic Affairs, Ministry of Finance, that:
"No capital gains will arise when the Bonds are exchanged for gold on redemption. However, any subsequent sale, exchange or transfer of such gold within the meaning of s. 2(47) of the IT Act, would attract capital gains tax in respect of capital gains arising from such sale, exchange or transfer. For the purpose of computation of capital gains, the cost of acquisition of gold be the market value of the Bonds on the date of redemption."
2. A question has arisen as to whether such capital gains should be treated as long-term or short-term capital gains. The question has been examined by the Board. The exchange of gold bonds at the time of redemption is an altogether fresh transaction when an assessee acquires a different asset. It has also been decided above that for the purposes of the computation of capital gains, cost of acquisition of gold would be the market value of the bonds on the date of redemption. The material date in this case would, therefore, be the date of redemption of gold bonds which would be treated as the date of acquisition of the gold. As per s. 2(42A), "Short-term capital asset" means a capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer. The question as to whether the gains arising in such cases would be short or long-term would, therefore, depend upon the time that has passed between the date of redemption of gold bonds and the subsequent sale of gold.
3. The above instructions may please be brought to the notice of all officers."
5.2 Hon'ble Calcutta High Court in the case of Debmalya Sur (supra) held as under :
"Gold is a distinct asset within the definition of capital asset as contained in s. 2(14). Gold bond is another kind of capital asset which is excluded by legislative deliberation from the said definition of capital asset. "Capital asset" is defined in the said provision, in the first instance, in an exhaustive manner and then showing specific exclusions. Therefore, it is very clear that when a person exchanges gold for the gold bond, he acquires an altogether new species of capital asset which is left out of the scope of capital gains taxation. Again, when a person exchanges the bond for gold, he acquires a new species of capital asset which comes within the net of capital gains tax. What has been urged on behalf of the assessee is based on complete equation between gold and gold bonds. The entire line of submission pressed on behalf of the assessee wants one to assume that, even after conversion of the gold bonds into primary gold, there is no acquisition of a new capital asset and the bonds and the gold remain one and the same asset. The contention is fallacious. In that event, as a logical extension of the theory so advanced, the assessee should be totally free of any liability to pay tax on the gains arising on sale of the gold received on redemption of the bond because the bonds are exempt from capital gains. When the gold is received on redemption of the bond, we have to take it that there is acquisition of gold as a fresh asset by conversion of another asset, viz., the gold bond. So, the ITO's inference that the date of acquisition of the gold sold should be reckoned from the date of maturity of the bond is correct. In fact, the date of acquisition could have been taken as the actual date of redemption. If the asset gifted is converted into another asset the former loses its identity and the conversion of the same as an asset becomes an independent asset. The conversion snaps its nexus with the gift and the converted new asset cannot retain its character as the gifted asset. In such a Situation, s. 49(1)(11) has no application. The provision which is directly on the point is not only s. 49, but s. 2(42A) r/w. s. 49. Since the redemption by itself is a transaction of acquisition of a new capital asset, viz., primary gold, there could be no question of relating back the date of acquisition of such primary gold on redemption either to the date of investment in the gold bonds by the donor or the date of receipt of such bonds as gifts by the donee, the assessee herein. The quantity of gold received on redemption is a new asset unrelated to the mode of acquisition of the gold bond. The Tribunal was not Justified In law in holding that the capital gain arising out of the sale of primary gold by the assessee was a long- term capital gain."
5.3 ITAT Mumbai Bench in the case of Smt. L.M. Parikh (supra) held -
"The circular No. 415, dated 14th March, 1985, issued by the CBOT lays down that capital gains will not arise when the bonds are exchanged for gold on redemption but would arise on subsequent sale of the gold and for this purpose the computation shall be on the premise that the cost of acquisition of gold is market value of the bonds on the date of redemption. The press communique issued by the Finance Ministry on 22nd Sept., 1980, incorporating the guidelines also states that for the purposes of computation of capital gains, the cost of acquisition of gold is the market value of the bonds on the date of redemption. On the date when the press communique was issued, only one date of redemption was conceivable and that was the date when the bonds were going to mature. Obviously, therefore, what is implied in the press communique is the date of maturity of the bonds, and could not be the actual date of redemption. It may also be stated that the bonds were also in the nature of debt or liability and their date of discharge would be the date when the same were due to be discharged which, in this case, was 27th Oct., 1980. When the gold bond is issued to a person, there is an agreement between him and the Government that the bond will be returned on a certain future date, called the maturity date and during that time, he has the right to interest and he can also assign the bond. Under the terms of the agreement, the holder has a right to get back the gold on the maturity date whereupon the interest would cease and it would no longer be assigned. Therefore, on the maturity date, the character of this document which was the bond, would change. It would not bear interest and it would lose assignability. On the maturity date, it is merely a document of title to the gold and its presentation to the Reserve Bank would entitle the holder of that document to the delivery of the gold. Thus, the gold bond had its existence only upto the date of maturity, i.e., 27th Oct., 1980. In the circumstances, the cost of acquisition of the gold in the hands of the assessee has to be determined with reference to that maturity date and not with reference to the actual date on which the assessee obtained gold by surrendering the gold bonds."
5.4 The ITAT Ahmedabad Bench in the case of Vyavasaya (supra) held as under:
"Relevant date regarding price of gold obtained in respect of National Defence Gold Bonds is the date on which not only the title to the gold vested in the assessee but also the date on which he acquired the possession thereof."
5.5 In the Board's circular No. 415 (supra), it was decided that for the purpose of computation of capital gains, the cost of acquisition of the gold would be the market value of the bonds on the date of redemption. The same point has been decided in favour of the assessee by Hon'ble Calcutta High Court and Mumbai and Ahmedabad Bench of ITAT (supra), in which it was held that gold bonds are different capital assets from gold redeemed and the question whether capital gains are short-term or long-term on the sale of gold have to be determined qua the date of redemption. May be the above circular pertains to National Defence Gold bonds, but no other/different circular on the gold scheme 1999 has been brought on record by the Revenue Authorities. Therefore, the same would also apply to the matter in issue in the present appeals. Since it is not in dispute that on the date of maturity, i.e., 22.11.2006, the certificates of gold were redeemed, therefore, 22.11.2006 should be considered as the date of acquisition of the gold for the purpose of computation of capital gains. The authorities below were, therefore, not justified in rejecting the claim of assessee for short term capital gains on redemption of bonds. The cost of acquisition of the gold is to be taken, i.e., value of gold on the date of redemption of certificates when a new capital asset has come into existence in possession of the assessee. Earlier, the gold in possession of the assessee had lost its identity when the same was converted into bonds. The Bonds cannot be treated as gold nor the gold can be treated as bonds. Since no specific circular has been brought to our notice dealing with the Gold Deposit Scheme, 1999 and there is no serious challenge to the above decision cited by the ld. Counsel for the assessee, we are of the view that the authorities below were not justified in taking the date of acquisition as 22.11.1999 instead of 22.11.2006. We, therefore, set aside the orders of the authorities below and direct that the cost and the date of acquisition of the gold for the purpose of computing the capital gains be taken as the date on which the gold has been received by assessee on redemption of the gold bonds, i.e., 22.11.2006. In the result, the appeal of the assessee is allowed.
ITA No. 140, 141 & 142/Agra/2012 :
6. The issue is same in these appeals as has been considered in ITA No. 139/Agra/2012. Accordingly, by following the reasons for decision in ITA No. 139/Agra/2012, the orders of the authorities below are set aside and the appeals of the assessees are allowed in terms decided above.
7. In the result, all the appeals of the assessees are allowed.
IT : Deductee-payee having no tax liability, interest and penalty under section 201 cannot be levied on deductor of tax at source
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[2012] 28 taxmann.com 25 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Thomas Muthoot
v.
Deputy Commissioner of Income-tax, TDS, Kottayam*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NOS. 383, 384, 386, 387-389, 390 & 392 TO 394 (COCH.) OF 2011
[ASSESSMENT YEARS 2005-06 TO 2008-09]
OCTOBER 12, 2012
Section 201, read with section 194, of the Income-tax Act, 1961 - Deduction of tax at source - Consequence of failure to deduct or pay - Where deductee has no tax liability - Assessment years 2005-06 to 2008-09 - Assessee-partners borrowed money from their firm - They paid interest thereon without deduction of tax at source - Whether since, after including interest income, firm would suffer loss, it would have no tax liability, assessee-deductor would not be liable to penalty under section 201(1) or interest under section 201(1A) - Held, yes [Paras 15 and 24] [Matter remanded]
Circulars and Notifications : Instruction No. 275/201/95-IT(B), dated 29-1-1997
FACTS
Facts
• The assessee-partner borrowed money from the partnership firms in which they are partners and also paid interest to the said firms.
• The assessees did not deduct tax at source, as per the provisions of section 194A.
• The Deputy Commissioner (TDS) levied penalty under section 201(1) and interest under section 201(1A) for all the years.
• The Commissioner (Appeals) confirmed the interest levied under section 201(1A).
Arguments of assessee
• The partners and the firm were one and same 'person' under the partnership Act and, hence, the transaction between the partnership firm and the partners should be considered as transaction with self.
• Under the current provisions of the Act, the partnership firm is not liable to deduct tax at source under section 194A on such interest payment, in view of the exemption provided in clause (iv) of sub-section (3) of section 194A. It was, on the other hand, quite logical to hold that the provisions of section 194A should not be attracted to the interest paid by a partner to his partnership firm also.
• The position of legal relationship between the partners and the partnership firms as prevailing under the Partnership Act should be applied for the purposes of section 194A also.
• All the partnership firms, which received interest from the assessee herein, had included those interest receipts in their respective income statement. However, since they had declared losses and, accordingly, filed the returns of income, there was no liability to pay taxes.
• Since the deductee partnership-firms had declared losses, there was no tax liability, in which case it could not be held that the assessees have withheld the tax due to the Government. Since interest is a compensatory payment for withholding the tax due to the Government, there was no necessity to compensate the Government in the cases where no tax was payable.
• Since the date of deduction/payments of TDS was not known, the computation provision would fail and, hence, interest could not be charged.
Arguments of revenue
• The income-tax Act, being taxing statute, should be subject to strict interpretation.
• Legal relationship as prevailing under the partnership Act should not be applied in abstract, only to the provisions of section 194A.
• There cannot be any dispute that the Income-tax Act recognizes a partner and a partnership-firm as different 'person', despite the legal position of relationship between them as prevailing under the Partnership Act.
Issue Involved
• Whether the assessee partner was liable to penal consequences?
HELD
Legal relationship as prevailing under the Partnership Act should not be applied in abstract only to the provisions of section 194A
• There cannot be any dispute that the Income-tax Act recognizes a partner and a partnership firm as different 'person', despite the legal position of relationship between them as prevailing under the Partnership Act. Further, section 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm. In the absence of any provision to provide for such exemption and further by considering the fact that the Act treats a partner and a firm as different 'person', the position of legal relationship between a partner and his firm looses its importance/significance under the Income-tax Act. Accordingly, the said position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of section 194A. [Para 12]
Firm having loss, had no liability to tax and, hence, payer partners had no TDS liability
• There cannot be any dispute that an assessee who is having losses cannot be compelled to pay the income-tax, as the Income-tax Act does not provide for such a situation, exception being the MAT provisions in the case of companies. What is required to be seen as per the circular issued by CBDT and which was approved by Supreme Court in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355, is that 'Taxes due' have been paid by the deductee-assessee. Therefore, the question of payment of tax does not arise, if there is no tax liability at all. Accordingly, in the instant cases, the question of liability for tax or 'tax due' in the hands of partnership firms does not arise, if they had declared losses in the returns of income. Subject to verification of the fact of filing return of income by the partnership firms by duly including the interest paid by the assessees, the penalty levied under section 201(1) in their hands is liable to be deleted i.e., if the assessed income in the hands of the concerned partnership firms is 'loss', then the date of filing of return is to be considered as the date of deemed payment of tax due. [Para 15]
Levy of Interest - Whether computation provision fail
• The date of filing return of income is to be taken as the date of payment of tax in the facts and circumstances of the instant case. Hence, the date of payment is also known. Hence, it cannot be said that the computation provision fails, since both the beginning date and ending date for the purpose of computation of interest under section 201(1A) is ascertainable. [Para 16]
• Since the date of filing of return of income is considered as the date of deemed payment in the instant cases, if assessed income has resulted in loss, the Deputy Commissioner (TDS) should have calculated interest liability under section 201(1A) from the end of the relevant financial year to the date of filing of return of income of that year, instead of charging interest up to 31-5-2009, if the interest under that section is otherwise liable to be charged. [Para 17]
Nature of interest charged under Income-tax Act, is not penal but compensatory
• It is well established principle now that if any interest is liable to be charged under the Act, the same can be charged only if the Government is deprived of its funds or any loss is caused to the Government, since interest is compensatory in nature. [Para 20]
• The TDS amount to be deducted and remitted belongs to the revenue/Government. Hence, interest under section 201(1A) is charged; since the assessee is considered to be enjoying the TDS amount, which belongs to the Government, till the time he deducts and remits the same to the account of the Government. It is pertinent to note that the tax so deducted at source is given credit in the account of deductee-assessee. If the assessment of the deductee assessee results in refund of TDS amount, the Government shall refund the amount along with interest under section 244A. The reason for paying interest under section 244A is that the Government is considered to have enjoyed the amount, which it is not entitled to. Thus, the interest is charged/paid as compensation for withholding/enjoying funds not belonging to the assessee/revenue. [Para 21]
Conclusion
• In the instant cases, the recipient of interest viz., the partnership firms have declared losses even after accounting for the interest paid by the assessee herein. Even if the assessees herein deduct and remit the TDS amount on the interest paid to the partnership firms, the same is liable to be refunded to the said partnership firms, as there is no tax liability in their respective hands. Under this situation, cannot it be said that the Government is deprived of the funds due to it or any loss is caused to the Government. [Para 22]
• The assessees are not liable to pay interest under section 201(1A), if the recipient of interest, viz., the partnership firms are not liable to pay tax on the impugned interest income. [Para 24]
CASE REVIEW
Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC) (para 15) followed.
CASES REFERRED TO
CIT v. Ramesh Enterprises [2001] 250 ITR 464/[1999] 105 Taxman 711 (Mad.) (para 3), Hindustan Coca Cola Beverage (P.) Ltd. v.CIT [2007] 293 ITR 226/163 Taxman 355 (SC) (para 4), CIT v. Dhanalakshmy Weaving Works [2000] 245 ITR 13/109 Taxman 395 (Ker.) (para 4), CIT v. Prem Nath Motors (P.) Ltd. [2002] 253 ITR 705/120 Taxman 584 (Delhi) (para 4), Pentagon Engg. (P.) Ltd. v.CIT [1995] 212 ITR 92 (Bom.) (para 14), Jubilee Investments & Industries Ltd. v. Asstt. CIT [1999] 238 ITR 648/106 Taxman 210 (Cal.) (para 4), Munak Investment (P.) Ltd. v. ITO [1995] 55 ITD 429 (Chd.) (para 10), K.V.S. Caters [IT Appeal Nos. 7514 & 7515 (Mum.) of 2004] (para 10), Central Provinces Manganese Ore. Co. Ltd. v. CIT [1986] 160 ITR 961/27 Taxman 275 (SC) (para 18),Ganesh Das Sreeram v. ITO [1988] 169 ITR 221/[1987] 35 Taxman 36A (SC) (para 18), CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225/178 Taxman 505 (SC) (para 18), CIT v. Anand Prakash [2009] 316 ITR 141/179 Taxman 44 (Delhi) (para 19), Dr. Prannoy Roy v. CIT [2002] 121 Taxman 314 (Delhi) (para 20), CIT v. Pranoy Roy [2009] 309 ITR 321/179 Taxman 53 (SC) (para 20),Mrs. Sheela Jaisingh v. Asstt. CIT [2007] 13 SOT 617 (Mum.) (para 20), and Sudha Agro Oil & Chemical Industries Ltd. v. ACIT [IT Appeal No. 288 (Vizag.) of 2007, dated 29-3-2010] (para 20).
R. Sreenivasan for the Appellant. Sreenivasu Kollipaka for the Respondent.
ORDER
B.R. Baskaran, Accountant Member - In all these appeals filed by the respective assessees, identical issues are urged, viz., whether the ld CIT(A) is justified in upholding the penalty and interest levied u/s 201(1) and 201(1A) of the Act respectively. Hence these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
2. The facts surrounding the said issues are also identical in nature in all the appeals. These assessees are assessed to tax in the status of 'Individual'. They are also partners in various partnership firms. The gross receipts in the hands of each of the assessees have exceeded the monetary limits prescribed u/s 44AB of the Act and hence their account books have been subjected to tax audit as per that provision. Hence the provisions of sec. 194A relating to tax deduction at source on the interest payments are applicable to them, i.e., they are liable to deduct tax at source on interest payments made by them as per the provisions of sec. 194A of the Act during the years under consideration. There is no dispute with regard to this factual position.
3. These assessees borrowed money from the partnership firms in which they are partners and also paid interest to the said firms. The Deputy Commissioner of Income tax (TDS) noticed that the assessee did not deduct tax at source, as per the provisions of sec. 194A of the Act, on the interest so paid to the partnership firms. After hearing the assessees, the DCIT (TDS) levied penalty u/s 201(1) of the Act equivalent to the amount of TDS liability and also levied interest u/s 201(1A) of the Act for the period from the closing of the relevant financial year to 31.5.2009 for all the years. In support of his decision to levy penalty u/s 201(1) of the Act, the DCIT(TDS) placed reliance on the decision of Hon'ble Madras High Court in the case of CIT v. Ramesh Enterprises [2001] 250 ITR 464/[1999] 105 Taxman 711.
4. All these assessees challenged the said orders passed by the DCIT(TDS) in all the years by filing appeals before Ld CIT(A), who confirmed the penalties levied in all the cases by placing reliance on the decision of Hon'ble Madras High Court, referred supra. The observations made by Ld CIT(A) in the case of Shri Thomas Muthoot is extracted below:-
"I, therefore, hold the view that the obligation to deduct tax is imposed with a view to ensure that on an interest payment made in respect of which tax is required to be deducted at source, the State promptly receives the amount so required to be deducted and therefore the appellant's contention that the firm has shown income and paid tax on such income does not absolve the appellant from the responsibility of deducting and depositing the tax immediately to the Government Account. In this case the appellant failed to discharge the obligation cast upon him by the Income tax Act."
The Ld CIT(A) confirmed the interest levied u/s 201(1A) of the Act by placing reliance on the following case law:-
(a) Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC)
(b) CIT v. Dhanalakshmy Weaving Works [2000] 245 ITR 13/109 Taxman 395 (Ker.)
(c) CIT v. Prem Nath Motors (P.) Ltd. [2002] 253 ITR 705/120 Taxman 584 (Delhi)
(d) Pentagon Engg. (P.) Ltd. v. CIT [1995] 212 ITR 92 (Bom.)
(e) Jubilee Investments & Industries Ltd. v. Asstt. CIT [1999] 238 ITR 648/106 Taxman 210 (Cal.)
Aggrieved by the orders passed by Ld CIT(A), all these assessees are in appeal before us for the years mentioned in the caption, supra.
5. The Ld. Counsel for the assessee Shri R. Sreenivasan, Chartered Accountant submitted that these assessees have borrowed only from the partnership firms in which they are partners, by way of making over drawings from their respective capital accounts. Hence, these assessees have paid interest on the debit balance of their respective capital. He further submitted that the partners and the firm are one and same 'person' under the Partnership Act, i.e., under the said Act, the firm is described as compendium of partners. They are individually known as 'Partner' and collectively known as "Firm". Hence the transaction between the partnership firm and the partners should be considered as transaction with self. Under the Income tax Act, a partnership firm is considered as a separate entity for the limited purposes of collection of tax. The provisions of Income tax Act cannot alter the legal relationship between the partners and firm as prescribed in the Partnership Act.
6. The Ld A.R further submitted that the Income tax Act was amended by the Finance Act, 1992 by bringing drastic change in the method of taxation of partnership firms, which enabled a firm to claim the interest paid to its partners as expenditure. Prior to the said amendment, the interest payable by a partnership firm to the partners is not an allowable expenditure in the hands of the firm. Though, under the current provisions of the Act, the interest payable by a firm to its partners is allowable as expenditure; yet the partnership firm is not liable to deduct tax at source u/s 194A of the Act on such interest payment, in view of the exemption provided in clause (iv) of sub section (3) of section 194A of the Act. The legislature has provided the said exemption by considering the legal relationship between the partnership firm and the partners, i.e., they are one and the same. The Ld A.R contended that the said legal relationship does not undergo any change if a partner pays interest to his partnership firm. Hence, by considering the legal relationship between a partner and partnership firm, it is quite logical to hold that the provisions of sec. 194A shall not be attracted to the interest paid by a partner to his partnership firm also. Accordingly he contended that the assessees are not liable to deduct tax at source u/s 194A of the Act on the interest paid by them to the partnership firms in which they are partners.
7. The Ld A.R further submitted that all the partnership firms to whom the interest were paid by these assessees have duly accounted for the interest receipts in their income statement and all the partnership firms have also filed their respective returns of income for the years under consideration. The Ld A.R submitted that the penalty u/s 201(1) is not levieble, if the payee has accounted for interest receipts and paid tax thereon. In this regard, he placed reliance on the instruction No. 275/201/95-IT(B) dated 29-01-1997 issued by CBDT, where in it is stated that no demand visualized under section 201(1) of the Income tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes due have been paid by the deductee-assessee. The Ld A.R further submitted that the partnership firms have incurred losses in some of the years even after including the interest paid by the partners and hence there was no tax liability on account of losses. However, by considering the fact that the interest paid by the partners has already been included in their income, it should be deemed that the taxes due on the said interest receipts have been paid. The Ld A.R further submitted that the above said circular issued by the CBDT was considered by the Hon'ble Supreme Court in the case of Hindustan Cocacola Beverage (P.) Ltd. (supra) and the Hon'ble Apex Court has approved the said circular. Accordingly the Ld A.R submitted that the penalties levied by the AO u/s 201(1) of the Act in all these cases are liable to be deleted.
8. With regard to the interest levied u/s 201(1A) of the Act, the Ld A.R submitted that the same is not chargeable if the relationship between the partners and the partnership firms under the Partnership Act is taken into account. He further submitted that the DCIT (TDS) has charged interest for a period beginning from the closure of the relevant financial year to 31.5.2009 in all the cases, which goes against the ratio of the decision rendered by the Hon'ble Supreme Court in the case of Hindustan Cocacola Beverage (P.) Ltd. (supra). In that case, the Hon'ble Supreme Court has held that the interest u/s 201(1A) of the Act is chargeable till the date of payment of taxes by the deductee-assessee. Without prejudice to his subsequent contentions, he submitted that the interest u/s 201(1A), if at all chargeable, should be charged only up to the date of filing return of income for respective years by the respective partnership firms.
9. The Ld A.R contended that the assessees herein are not liable to pay interest u/s 201(1A) of the Act in the cases where the concerned partnership firms have incurred losses and in support of the said contention, the Ld A.R advanced following arguments.
"Interest chargeable u/s 201(1A) is compensatory in nature, i.e., the Government is entitled to interest for the period during which the tax, which is the money belonging to the Government, was withheld by the assessee. This logic/ratio is true if the deductee-assessee is liable to pay income tax. However, in the instant cases, the partnership firms have incurred losses and hence there is no liability to pay tax to the Government, in which case, it cannot be said that the taxes due to the Government was withheld by these assessees. Even if tax had been deducted from the impugned interest payments, the Government has to refund the entire amount of TDS along with interest to the partnership firms, since they have incurred losses. Hence, in this kind of situations, the question of compensation shall not arise and in that case, the question of payment of interest u/s 201(1A) shall also not arise".
10. In the alternative, the Ld A.R submitted that it is a settled principle that tax cannot be levied if the computation provision fails. In the case of Munak Investment (P.) Ltd. v. ITO [1995] 55 ITD 429 (Chd.) it was held that the interest u/s 201(1A) is not leviable, since it is incapable of computation in the absence of the date of payment of TDS. The said decision was followed in the case of K.V.S Caterers (ITA No.7514 & 7515/M/2004) by the Mumbai bench of ITAT. The interest u/s 201(1A) is chargeable for the period from the date on which such tax was deductible to the date on which such tax is actually paid. The Ld A.R submitted that the date of deduction/payment of TDS is not known in the instant cases, as the assessees have failed to deduct TDS assessees and hence the computation provision fails.
11. On the other hand, the Ld Jr. D.R Shri Sreenivasu Kollipaka strongly defended the orders passed by Ld CIT(A). He submitted the deduction of tax at source is one of the modes of recoveries under the Income tax Act and hence the TDS provisions cannot be considered as leading to double taxation. He submitted that the Income tax Act provides exemption from TDS provisions only in respect of interest paid or credited by firm to its partners. However, such an exemption is not given to the interest paid/credited by a partner to his firm. He submitted that the Income tax Act, being a taxing statute, should be subjected to strict interpretation and hence one cannot assume or supply some thing which was not provided in the Act. He further submitted that the Income tax Act recognizes a partnership firm as a separate entity and further, the Act considers a partner and a firm as a different 'Person', by disregarding the nature of relationship between them under the Partnership Act. Since the nature of relationship has been disregarded under the Income tax Act, it would not be correct to apply it in part that too only for TDS provisions, to suit the convenience of tax payer and to disregard the same for other provisions of the Act. He further submitted that the assessees herein have failed to deduct tax at source on the interest paid by them to the partnership firms and hence they are liable to pay penalty u/s 201(1) of the Act as well as the interest u/s 201(1A) of the Act. He further submitted that the decision of Hon'ble Madras High Court aptly applies to the facts of the instant cases, since the partnership firms have not paid taxes. With regard to the period for which the interest is to be charged, the Ld D.R submitted the tax authorities are correct in computing interest up to 31.5.2009 as the default was noticed only by that date and the assessees have also not deducted tax at source by that time.
12. We have heard the rival contentions and carefully perused the record. The Ld A.R has contended that the position of legal relationship between the partners and the partnership firms as prevailing under the Partnership Act should be applied for the purposes of sec. 194A of the Act also. However, we are convinced with the contentions put forth by Ld D.R. that the Income tax Act, being taxing statute, should be subjected to strict interpretation. There cannot be any dispute that the Income tax Act recognizes a partner and a partnership firm as different 'Person', despite the legal position of relationship between them as prevailing under the Partnership Act. Further sec. 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm. In the absence of any provision to provide for such exemption and further by considering the fact that the Act treats a partner and a firm as different 'Person', we are of the view that the position of legal relationship between a partner and his firm looses its importance/significance under the Income tax Act. Accordingly, we are of the view that the said position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of sec. 194A of the Act. Accordingly, we reject all the contentions raised by the assessee in this regard.
13. Now we shall take up the issue relating to the levy of penalty u/s 201(1) of the Act. The tax authorities have placed reliance on the decision of Hon'ble Madras High Court in the case of Ramesh Enterprises (supra), in imposing penalty u/s 201(1) of the Act. In the instant cases, the partnership firms have filed loss return in some of the years. The tax authorities have taken support of the above said decision for the reason that the Hon'ble High Court held that even if recipient filed loss return, the same cannot be taken as a reasonable consideration for non-deduction of TDS as per applicable section.
14. However, the question of levying penalty u/s 201(1) of the Act was considered by Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra), wherein the Hon'ble Apex Court has observed as under:-
"Be that as it may, Circular No.275/201/95 IT(B) dated January 29, 1997 issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares "no demand visualized u/s 201(1) of the Income tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS, that the taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest u/s 201(1A) of the Act till the date of payment of taxes by the deductee assessee or the liability for penalty under section 271C of the Income tax Act".
15. In the instant cases, it is submitted by Ld A.R that all the partnership firms, which received interest from the assessees herein, have included those interest receipts in their respective income statement. However, since they have declared losses and accordingly filed the returns of income, there was no liability to pay taxes. There cannot be any dispute that an assessee who is having losses cannot be compelled to pay the income-tax, as the Income tax Act does not provide for such a situation, exception being the MAT provisions in the case of companies. What is required to be seen as per the circular issued by CBDT and which was approved by Hon'ble Supreme Court is that "Taxes due" have been paid by the deductee-assessee. Therefore, the question of payment of tax does not arise, if there is no tax liability at all. Accordingly, in the instant cases, the question of liability for tax or "tax due" in the hands of partnership firms does not arise, if they had declared losses in the returns of income. Under these peculiar circumstances, in our view, it would be sufficient compliance with the ratio laid down by the Hon'ble Supreme Court in the case of Hindustan Coca cola Beverage (P.) Ltd. (supra), if the impugned interest receipts by the firms are duly included in their respective return of income. Accordingly, in our view, the ratio of decision in the case of Hindustan Coca-cola Beverage (P.) Ltd. (supra), can be applied to the facts of the instant cases also. However, subject to verification of the fact of filing return of income by the partnership firms by duly including the interest paid by the assesses herein, in our view, the penalty levied u/s 201(1) of the Act in their hands is liable to be deleted. Since the above said facts require verification, we set aside the orders of Ld CIT(A) on this issue and restore the same in all the cases to the file of DCIT(TDS) with the direction to verify the claim of the assessee and delete the penalty levied u/s 201(1) of the Act in all the cases after satisfying himself that the concerned partnership firms have filed their respective returns of income by duly including the impugned interest payments and the tax due, if any, has been paid. If the assessed income in the hands of the concerned partnership firms is "loss", then the date of filing of return is to be considered as the date of deemed payment of tax due.
16. With regard to the interest charged u/s 201(1A) of the Act, the assessee has argued against that levy on two different points viz.,
(a) Since the date of deduction/payment of TDS is not known, the computation provision fails and hence interest could not be charged.
(b) Since the deductee-assessees (Partnership firms) have declared losses, there is no tax liability, in which case it cannot be held that the assessees have with held the tax due to the Government. Since interest is a compensatory payment for withholding the tax due to the Government, there is no necessity to compensate the Government in the cases where no tax is payable.
With regard to the first point, we find it to be contradictory to the stand taken on the issue relating to levy of penalty u/s 201(1) of the Act. As per the provisions of sec. 201(1A) of the Act, an assessee is liable to pay simple interest at the prescribed rate on the amount of such tax (TDS amount) from the date on which such tax was deductible to the date on which such tax is actually paid. The date on which such tax is "deductible" is known in every case in every year. The Hon'ble Supreme Court has held in the case of Hindustan Coca Cola Beverage (P.) Ltd. (supra), that the interest u/s 201(1A) is payable till the date of payment of taxes by the deductee-assessee. We have already held that the date of filing return of income is to be taken as the date of payment of tax in the facts and circumstances of the instant case. Hence the date of payment is also known. Hence, in our view, it cannot be said that the computation provision fails, since both the beginning date and ending date for the purpose of computation of interest u/s 201(1A) is ascertainable.
17. Since the date of filing of return of income is considered as the date of deemed payment in the instant cases, if assessed income has resulted in loss, the DCIT(TDS) should have calculated interest liability u/s. 201(1A) from the end of the relevant financial year to the date of filing of return of income of that year, instead of charging interest up to 31/05/2009, if the interest under that section is otherwise liable to be charged.
18. However, we find force in the second point. The question that requires consideration is about the nature of interest charged under the Income tax Act, i.e., whether interest is penal or compensatory in nature?. This question came to the consideration of Hon'ble Supreme Court in the context of interest chargeable under sec. 215/139(8) that were in force at the relevant point of time in the Act, which are akin to interest chargeable u/s 234B/234A under the present provisions. The Hon'ble Supreme Court considered the nature of levy of interest u/s 215/139(8) in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961/27 Taxman 275 (SC) and observed as under:-
"it is not correct to refer to the levy of such interest as a penalty. The expression "penal interest" has acquired usage, but is, in fact, an inaccurate description of the levy. Having regard to the reason for the levy and the circumstances in which it is imposed, it is clear that interest is levied by way of compensation and not by way of penalty. The income-tax Act makes a clear distinction between the levy of a penalty and other levies under that statute. Interest is levied under Sub Section (8) of Section 139 and under Section 215 because, by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the tax for the period during which it has remained unpaid."
Similar view was expressed by Hon'ble Supreme Court in the case of Ganesh Das Sreeram v. ITO [1988] 169 ITR 221/[1987] 35 Taxman 36A. The said view was again reiterated by the Hon'ble Supreme Court in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225/178 Taxman 505 at Page 251 in the context of interest chargeable u/s 201(1A) of the Act. The Hon'ble Supreme Court further clarified that interest u/s 201(1A) is mandatory even if there is no tax liability u/s 201(1) of the Act, i.e., the view expressed in the case ofHindustan Cocacola Beverage (P.) Ltd. (supra), by the Apex court is again reiterated here.
19. The Hon'ble High Court of Delhi also considered an identical question in the case of CIT v. Anand Prakash [2009] 316 ITR 141/179 Taxman 44 and the relevant observations made by the Hon'ble Delhi High Court are extracted below:-
"11. We have examined the decisions cited by the counsel on both sides and after considering the submissions made by them, we agree with the learned counsel for the Revenue that the levy under Section 234B of the said Act is compensatory in nature and is not in the nature of penalty. We may also note the decision of the Bombay High Court in the case of CIT v. Kotak Mahendra Finance Ltd. 265 ITR 119 (Bom.), wherein the Bombay High Court observed that it was well settled that interest under Section 234B was compensatory in character and that it was not penal in nature. Another decision which would be relevant is of a Division Bench of this Court in the case of Dr Prannov Roy v. Commissioner of Income-tax and Another : 254 ITR 755 (Del.). In that case, the provisions of Section 234A were in issue. The question before the court was whether interest could be charged under Section 234A when, though the return had not been filed in time, the tax had been paid. The argument raised on behalf of the Revenue that such payment of tax did not strictly comply with the meaning of advance tax and would therefore, have to be disregarded for the purposes of charging interest under Section 234A, was rejected. The Court also held that interest under section 234A was compensatory in nature and unless any loss was caused to the Revenue, the same could not be charged from the assessee. It may be relevant to point out that the matter was taken up in appeal before the Supreme Court and by its decision dated 17.09.2008 in CIT v. Prannov Roy /Civil 'Appeal No. 448/2003L the Supreme Court noted that**:
"the High Court, while accepting the writ petition and setting aside the interest charged under section 234A of the Act, has come to the conclusion that interest is not a penalty and that the interest is levied by way of compensation to compensate the revenue in order to avoid it from being deprived of the payment of tax on the due date. Having heard counsel on both the sides we entirely agree with the finding recorded by the High Court as also the interpretation of Section 234A of the Act as it stood at the relevant time."
(** reported in 309 ITR 231)
"12. Coming back to the present appeals, we are of the view that Section 234A, Section 234B and Section 234C are of the same class. On going through these provisions, it is clear that interest' is sought to be charged on account of the fact that the Government is deprived of its revenue. Under Section 234A, interest is charged if tax whichever to be paid at the time of filing of the return is not paid at that point of time, Section 234B provides for levy of interest for default in payment of advance tax and Section 234C stipulates the charging of interest for default in the payments of advance tax on the appointed dates of payment. It is clear that under the said Act tax is payable at different dates and, through different modes. Where specific dates of payment of tax are not adhered to, it can be said that the Government is deprived of tax on those dates. Interest is chargeable under the provisions of the Act such a Sections 234A, 234B and 234C in order to compensate the Government for such deprivation. It is clear from the scheme of the Act and the nature of these provisions that they are compensatory and not penal. We, therefore, conclude that the levy of interest under Section 234B of the Income Tax Act is compensatory in nature. The Tribunal, having taken a contrary view has clearly erred.
20. In the case of Dr. Pronnoy Roy v. CIT [2002] 121 Taxman 314, referred to by Hon'ble Delhi High Court, the assessee therein paid the tax due on his income for the assessment year 1995-96 before the due date for filing return of income, i.e., before 31-10-1995, but after 31.3.1995. However, he filed his return of income belatedly, i.e., there was a delay of 11 months. The question that arose before the Hon'ble Delhi Court was whether interest u/s 234A is leviable or not in the said facts. Under section 234A, interest is chargeable if the return is not filed within the prescribed due date. The Hon'ble Delhi High Court held that interest is not leviable in the facts and circumstances of that case, mainly on the reason that interest is compensatory in nature and unless any loss is caused to revenue, the same could not be charged from the assessee. The said view was also accepted by the Hon'ble Supreme Court CIT v. Pranoy Roy [2009] 309 ITR 231/179 Taxman 53, which was referred to by the Hon'ble Delhi High Court in the case of Anand Prakash (supra). Hence, it is well established principle now that the if any interest is liable to be charged under the Act, the same can be charged only if the Government is deprived of its funds or any loss is caused to the Government, since interest is compensatory in nature. It is pertinent to note that the ratio of the decision rendered in the case ofDr. Prannoy Roy (supra) was followed by the Mumbai J bench of the Tribunal in the case of Mrs. Sheela Jaisingh v. Asstt. CIT [2007] 13 SOT 617 and the Visakhapatnam bench of the Tribunal in the case of Sudha Agro Oil & Chemical Industries Ltd v. ACIT [ITA No.288/Vizag/2007, dated 29-3-2010].
21. Now we shall turn to the facts of the instant cases before us, wherein interest u/s 201(1A) was levied upon the assessees. It may be noted that interest u/s 201(1A) is levied if there is any failure on the part of any assessee to deduct tax at source (TDS)/remit the same at the right point of time on the income paid by him. The TDS amount to be so deducted/remitted belongs to the revenue/Government. Hence, interest u/s 201(1A) is charged; since the assessee is considered to be enjoying the TDS amount, which belongs to the Government, till the time he deducts and remits the same to the account of the Government. It is pertinent to note that the Tax so deducted at source is given credit in the account of deductee- assessee. If the assessment of the deductee assessee results in refund of TDS amount, the Government shall refund the amount along with interest u/s 244A of the Act. The reason for paying interest u/s 244A is that the Government is considered to have enjoyed the amount, which it is not entitled to. Thus the interest is charged/paid as compensation for withholding/enjoying funds not belonging to the assessee/revenue.
22. Let us consider about exigibility of interest u/s 201(1A) of the Act under the peculiar conditions prevailing in the instant cases, wherein the recipient of interest viz., the partnership firms have declared losses even after accounting for the interest paid by the assessees herein. Even if the assessees herein deduct and remit the TDS amount on the interest paid to the partnership firms, the same is liable to be refunded to the said partnership firms, as there is no tax liability in their respective hands. Under this situation, can it be said that the Government is deprived of the funds due to it or any loss is caused to the Government.
23. We shall now examine the said question with an example. Let us assume that 'Mr. A' pays an interest of Rs.1.00 lakh to 'Mr. B' on 31.3.2007. Mr. A is liable to deduct tax at source on the said payment u/s 194A of the Act. Mr. B includes the said interest receipt in his income statement, but his total income turns into loss. Hence Mr. B is not liable to pay income tax, as he has declared loss in his return of income. Let us analyse the above said facts under two situations, viz., (a) if TDS was deducted by Mr. A and (b) if TDS was not deducted.
(A) If TDS was deducted:-
(a) In this situation, if Mr. A has deducted and remitted the TDS within the prescribed time, the provisions of sec. 201 of the Act shall not apply to him. However, if there is belated deduction/payment, Mr. A would be charged with interest u/s 201(1A) of the Act, since he is considered to have withheld/enjoyed the tax amount, which otherwise belongs to the Government.
(b) In the hands of Mr. B, the revenue is liable to refund the TDS amount of Rs. 10,000/- to him, as he is not liable to pay any tax, in view of the loss return. Since the Government has withheld/enjoyed the funds belonging to Mr. B, which it is not entitled to, the revenue is liable to pay interest u/s 244A of the Act to Mr. B.
(B) If TDS was not deducted:-
If TDS was not deducted by Mr. A on the interest payment made to Mr. B, then Mr. B would not claim any refund from the revenue. In that case, the question of payment of interest u/s 244A by the revenue to Mr. B does not arise. Since Mr. B has declared loss in his return of income, he is also not liable to pay any tax. In this situation, can it be said that Mr. A has withheld/enjoyed the tax amount belonging to the Government? The answer would be yes, only if Mr. B is liable to pay tax. In this example, Mr. B is not liable to pay any tax and hence question of 'withholding any tax money' belonging to revenue does not arise. Accordingly, it cannot be said that Mr. A has withheld/enjoyed the tax amount belonging to the Government. Even if he is compelled to deduct TDS, ultimately, the same is liable to refunded to Mr. B. Hence, under this kind of situation, it cannot be said that the Government is deprived of its fund or any loss was caused to the Government.
24. The facts analysed in Situation B is applicable to the facts prevailing in the instant cases. On the basis of analysis made in situation B, we are of the view that the assessees herein are not liable to pay interest u/s 201(1A) of the Act, if the recipient of interest, viz., the partnership firms, are not liable to pay tax on the impugned interest income. However, in the paper book filed before us, only copies of the returns of income filed by the partnership firms have been furnished. It is not known whether the said returns of income were accepted as it is by the revenue or not, since copies of the assessment orders for relevant years, if any, were not filed before us. Hence, we are unable to examine, whether the said partnership firms were liable to pay tax on the impugned interest income or not, in the absence of the assessment orders. Hence these facts require verification at the end of the DCIT (TDS). If they are not liable to pay tax on the impugned interest income, then as per the discussions made in the foregoing paragraphs, these assessees are not liable to pay interest u/s 201(1A) of the Act.
25. It may be noted that the prevailing rate of interest chargeable/payable u/s 201(1A)/244A are different, i.e., the rate of interest payable u/s 244A is lesser than the interest chargeable u/s 201(1A) of the Act. Due to this disparity, a question may arise as to the correctness of the view taken by us in the preceding paragraphs. In our view, the rate of interest is prescribed by the Government on the basis of various factors. The main principle considered by us is that pronounced by the Hon'ble Courts, viz., that, interest is compensatory in nature for depriving funds belonging to the revenue/assessee. Hence the disparity in the rate of interest shall not have any effect on the said principle.
26. In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) on the issue of levy of interest u/s 201(1A) in all cases before us and restore the same to the file of the DCIT (TDS) with the direction to verify whether or not the recipients of the interest income, viz., the partnership firms were liable to pay tax on that income and then take appropriate decision about the chargeability of interest u/s 201(1A) of the Act in the hands of the assessees herein in accordance with the principles discussed by us in the preceding paragraphs.
27. In the result, all the appeals of the assessees are treated as allowed for statistical purposes.
IT : Reopening of assessment in relation to a matter which is subject matter of block assessment, is without jurisdiction
■■■
[2012] 28 taxmann.com 8 (Gujarat)
HIGH COURT OF GUJARAT
Prakash Jewellers
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI
AND MS. HARSHA DEVANI, JJ.
SPECIAL CIVIL APPLICATION NO. 12394 OF 2002
SEPTEMBER 3, 2012
Section 147, read with section 158BC, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - In case of Block assessment under section 158BC - Assessment year 1999-2000 - A search was conducted in the case of assessee, a partnership firm, in course of which certain gold ornaments were seized - Assessee claimed that said ornaments belonged to its customers - Assessing Officer rejected assessee's contention and included value of seized ornaments in assessee's taxable income while making block assessment - Commissioner (Appeals) as well as Tribunal deleted addition made by Assessing Officer - Assessing Officer thereupon initiated reassessment proceedings taking a view that value of ornaments seized belonging to assessee escaped assessment - Whether when value of gold ornaments which assessee claimed to be belonging to its customers was subject-matter of block assessment, same could not be made subject-matter of regular assessment under Chapter XIV of Act - Held, yes - Whether, therefore, reopening of assessment in relation to a matter which was subject-matter of block assessment was evidently without jurisdiction - Held, yes - Whether even otherwise, once issue had already been decided by appellate authority, it was not open for Assessing Officer to seek to reopen assessment on same grounds as this would tantamount to Assessing Officer sitting in appeal over order of Commissioner (Appeals) - Held, yes - Whether in view of above, impugned reassessment proceedings deserved to be quashed - Held, yes [Paras 12, 15 & 16] [In favour of assessee]
FACTS
• A search was conducted in the case of assessee, a partnership firm, in course of which certain gold ornaments were seized. The assessee claimed that said ornaments belonged to its customers.
• The AO rejected the assessee's contention and included the value of seized ornaments in the assessee's taxable income while making block assessment.
• The Commissioner (Appeals) as well as Tribunal deleted addition made by AO.
• The AO thereupon initiated reassessment proceedings taking a view that value of ornaments seized belonging to assessee escaped assessment.
• On writ :
HELD
Undisclosed income which is subject matter of block assessment cannot be made basis for reopening of assessment
• When the undisclosed income determined by the Assessing Officer included Rs. 29,77,726 being the value of gold ornaments which the assessee claimed to be belonging to its customers was subject-matter of block assessment, the same could not be made the subject-matter of regular assessment under Chapter XIV of the Act. Under the circumstances, the reopening of assessment in relation to a matter which was subject-matter of block assessment was evidently without jurisdiction. [Para 12]
Reopening of assessment when addition made in block assessment was deleted by appellate authorities
• Another notable aspect of the matter is that in the block assessment the issue regarding gold ornaments had been considered by the Assessing Officer, in the assessee's appeal, the Commissioner (Appeals) had examined the issue on merits and had recorded that in the facts of the present case, the assessee had discharged the onus in respect of the deposits of gold received by it. It was recorded that the assessee had not only filed confirmations of parties but also filed affidavits of the depositors. The genuineness of the affidavits has been verified by the Assessing Officer through examination of the depositors in person over a few days. The depositors were produced by the assessee for such examination at the instance of the Assessing Officer. It was further recorded that the Assessing Officer also sent the Ward Inspector to the area the depositors came from and the Inspector duly submitted a report on these enquiries.
• Nothing amiss was found in all these enquiries conducted by the Assessing Officer himself and through Ward Inspector. In not a single case did the Assessing Officer record any finding that the facts narrated in any affidavit were false. The Commissioner (Appeals), accordingly, was of the view that the onus that lay on the assessee had been amply discharged and if the Assessing Officer still wanted to make an addition, the onus was on the Assessing Officer to establish that the claim was not genuine and that the facts stated in the affidavits were false etc. Such onus had not been discharged by the Assessing Officer to the slightest. Finding that there was no justification in making the addition, the Commissioner (Appeals) had directed deletion of such addition. [Para 13]
• In appeal by the Department, the Tribunal after re-appreciating the evidence on record has found as a matter of fact that the assessee had successfully proved to the hilt the genuineness of the transactions encompassing all its aspects. The Tribunal found that the assessee had duly discharged its onus, and, therefore, did not find any justification for reversing the order passed by the Commissioner (Appeals) and upheld the deletion of addition. [Para 14]
• Thus, it is apparent that the Assessing Officer seeks to reopen the assessment in relation to an item, viz., gold ornaments which was already subject-matter of block assessment wherein such addition was made in the order under section 158BC and was subject-matter of appeal before the Commissioner (Appeals) (and subsequently before the Tribunal). The said issue has been treated as being subject-matter of block assessment and examined on merits by the Commissioner (Appeals) and has been deleted. Once such issue has already been decided by the appellate authority, it is not open for the Assessing Officer to seek to reopen the assessment on the same grounds as this would tantamount to the Assessing Officer sitting in appeal over the order of the Commissioner (Appeals). [Para 15]
• For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice issued under section 148 of the Act is hereby quashed and set aside. [Para 16]
CASES REFERRED TO
N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733/101 Taxman 525 (Guj.) (para 10) and Cargo Clearing Agency (Gujarat) v.Jt. CIT [2008] 307 ITR 1 (Guj.) (para 11).
J.P. Shah for the Petitioner. Manav A. Mehta for the Respondent.
JUDGMENT
Ms. Harsha Devani, J. - The petitioner, a partnership firm, has challenged the notice dated 22nd January, 2002 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') seeking to reopen its assessment for assessment year 1999-2000.
2. The facts of the case as stated in the petition are that on 27th January, 1999, search proceedings were conducted under section 132 of the Act in the case of the petitioner. The authorised officers seized certain ornaments as also registers which were showing the names of parties who had given these ornaments by way of loan or for remaking. Such registers also showed the weight of the ornaments given by the parties. During the course of block assessment proceedings under Chapter XIV-B, the petitioner filed its return on 30th August, 1999 disclosing 'nil' income. The petitioner produced affidavits of various parties who had given these ornaments and also produced such parties before the Assessing Officer who confirmed the fact of lending or giving of ornaments and also replied the questions put by the Assessing Officer about the source, ownership, capacity, identity etc. Pursuant to inquiry made by him, the Assessing Officer did not propose any addition in respect of jewellery. However, when the order was presented for the approval of the Joint Commissioner of Income Tax, he directed such addition. Accordingly, assessment was framed under section 158BC of the Act on 27th March, 2001 computing the undisclosed income at Rs. 48,49,902/- which was the value of the ornaments taken as undisclosed investments of the petitioner. The petitioner carried the matter in appeal before the Commissioner (Appeals), who, by his order dated 9th May, 2001 allowed the appeal on almost all points except the point of application of section 40A(3) of the Act. Against the order of the Commissioner (Appeals), the Department went in appeal to the Tribunal. In the said appeal, the petitioner preferred cross-objections against the upholding of the addition under section 40A(3) of the Act. By an order dated 19th September, 2002, the Tribunal disposed of the appeal as well as the cross-objections, wherein it upheld the deletion of addition of Rs. 29,77,726/-.
3. After the Commissioner (Appeals) had decided the appeals, the Assessing Officer issued the impugned notice dated 22nd January, 2002, (that is, before the Tribunal had decided the appeal preferred by the Department) proposing to reopen the petitioner's assessment for assessment year 1999-2000. The petitioner's Chartered Accountants by a letter dated 28th January, 2002 drew the attention of the Assessing Officer to the fact that all the aspects had been examined by the Assessing Officer in the assessment under section 158BC and requested the respondent to furnish copies of the reasons recorded. However, by a communication dated 28th August, 2002, the petitioner was informed that all the records were with the Departmental Representative appearing before the Tribunal and that copy of the reasons would be supplied only after he receives back the record. It is at this stage that the petitioner has filed the present petition.
4. In the aforesaid factual background, Mr. J.P. Shah, learned counsel for the petitioner assailed the impugned notice by submitting that the Assessing Officer seeks to reopen the assessment on issues which have already been decided by the Commissioner (Appeals) in favour of the petitioner as confirmed by the Tribunal. Inviting attention to the reasons recorded, it was pointed out that the assessment was sought to be reopened in relation to the deletion of addition of Rs. 29,77,726/- made by the Commissioner (Appeals) during the course of block assessment. Referring to the order of Commissioner (Appeals), it was pointed out that such issue has been dealt with on merits by the Commissioner (Appeals) who on the basis of the evidence on record found that there is no justification for making such addition and had deleted the same. From the order passed by the Tribunal in the appeal preferred by the Department, it was pointed out that the Tribunal has recorded that the assessee was successful in proving to the hilt the genuineness of the transactions encompassing all its aspects. The assessee had duly discharged its onus. Therefore, there was no justification at all for reversing the order of the Commissioner (Appeals) on this issue. The learned counsel submitted that the Commissioner (Appeals) as well as the Tribunal have examined the issue on merits and have held in favour of the petitioner and as such the reopening of assessment in relation to such issue is without authority of law inasmuch when the very same issue has been scrutinised by the Commissioner (Appeals) as well as by the Tribunal, the Assessing Officer can have no reason to believe that income chargeable to tax has escaped assessment. It was argued that the reopening of assessment is contrary to the scheme of the Act, inasmuch as matters detected during the course of search, would be subject matter of block assessment and not regular assessment. Therefore, for this reason also the reopening of assessment is bad in law. Under the circumstances, the impugned notice being without jurisdiction is required to be quashed and set aside.
5. Opposing the petition, Mr. Manav Mehta, learned standing counsel for the respondent reiterated the averments made in the affidavit-in-reply filed by the respondent as well as the reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act.
6. The undisputed facts of the case are that the Assessing Officer pursuant to an action under section 132 of the Act framed block assessment under section 158BC of the Act wherein he held that the so called customers' gold weighing 7396.94 gms belongs to the assessee and taking the rate of gold at Rs. 402.5 per gram made addition of Rs. 29,77,726/- in the hands of the assessee. In the assessee's appeal such addition came to be deleted by the Commissioner (Appeals). Such deletion came to be confirmed by the Tribunal in revenue's appeal against such deletion. Thereafter, in respect of the very same item the assessment is sought to be reopened under section 147 of the Act.
7. Before adverting to the merits of the case, it may be necessary to refer to the reasons recorded by the Assessing Officer for reopening of assessment which read thus:-
REASONS FOR REOPENING THE CASE
M/S. PRAKASH JEWELLERS - A.Y. 1999-2000.
In this case survey u/s. 133A was carried out at the business premises of the assessee on 28.1.1999. This was converted into search u/s. 132 of the Act. During the course of search action, gold ornaments and silver articles weighing of 16156.7 grams of old ornaments and 72.649 Kg. of silver articles aggregating total value of Rs. 68,89,252/- were found. Out of which 7092.3 grams of gold ornaments were sized and 18.648 Kg of silver and silver ornaments were put under deemed seizure u/s. 132(1) - second proviso. The assessee firm is engaged in job work of gold and silver ornaments and also trading thereof. It filed the return of income for the block period declaring total income of Rs. NIL on 30.8.1999 at Mumbai. Subsequently due to order u/s. 127(2) of the Act passed by the CIT, Mumbai City-XII dtd.22.12.1999, the case is assigned to the erstwhile Investigation Circle-3(1).
The block assessment for the period of A.Y. 1988-89 to A.Y. 1997-98 and partial period from 1.4.98 to 28.1.98 was made u/s.158BC(c) of the Act determining total undisclosed income of Rs.48,49,902/- comprising mainly of gold ornaments claimed to belonging to customers of Rs.29,77,726/- on 27.3.2001.
Being aggrieved by the said order the assessee preferred an appeal to the CIT(A)-III, Surat. The Ld. CIT(A) vide order No.CAS/III/51/2000-01 dtd.9.5.2001 while deciding assessee's appeal deleted the majority of the additions including the aforesaid addition of Rs. 29,77,726/- made by the Assessing Officer. He directed the A.O. to exclude all recorded materials for the consideration for the purpose of block assessment in view of specific provisions of law because such additions can be made only in the block assessment.
During the course of search, physical stock of gold found was 16153.7 gms. while the stock as per books was 1473.28 grms. and the excess stock as per books comes to 7396.94 gms. which claimed to be pertaining to customers given for conversion into new ornaments on job work basis.
During the course of search, as well as assessment proceedings u/s.158BC of the I.T. Act assessee had failed to prove the creditworthiness and identity of the persons to whom the so called jewellery was claimed to be belonging. Following glaring mistake were observed which proves that jewellery found does not belonging to outsiders but belongs assessee himself. It is therefore required to be taxed in the A.Y. 1999-2000.
I. In the register maintained in Form No.11, address of customers is not written and it was claimed by the assessee that as customers are known. There is no need of any address to when the assessee was asked during the course of search and thereafter to provide address by merely seeing register, assessee failed to do so and said that they will contact certain person and then address of these persons.
II. The incoming receipt books kept by the assessee in which the first copy which should have been handed over to the customer is lying with the assessee thereto the column of the signature is blank, whereas in genuine case it should be with the customer or at least should bear the signature of the customer.
III. During the course of search in the case of assessee a bunch of Majuri bills have been found all torn of from bounded book and containing serial numbers hand written. These majuri bills pertain to period 1.4.97 to 31.3.98 (Seized as per Annexure B-S-1/26). Comparison of the same with register No.11 of the same period indicate that on every third day i.e. within three days of receipt of old ornament, newly made ornaments are given back to the customer and majuri bill is drawn on exact weight as received from customer and weight of old and new ornament is exactly the same. In fact, majuri bill drawn on 31.3.98 has been drawn in respect of old ornaments received on 28.3.98. Thus, last year's detail clearly bring out the fact that within 3 days ornaments have been returned. Same is the case with the incoming receipt book. Last year's incoming receipt book does not contain first copy i.e. customers copy. If customers do not claim copy what is the need of tearing it. It is nothing but preparing paper work to cover up real transaction. This year due to search action u/s.132, the assessee did not had the time to meticulously plan and complete the paper work and physically checking of stock altered all calculations.
IV. It is known that if any customer gives old ornaments for conversion into new ornaments he would definitely provide details of items, i.e. whether bangles, necklace etc. to prepared, the designs etc. and jewellers would note the same in the order book but no such order details have been found and order book which have been seized contains details of such persons whose name are not written in register No. 11 etc. Thus, there is no order detail in respect of these huge stock brought in to perform the job work.
V Once the customer takes back his gold ornament, at the time of delivery the jeweller would ask in normal course, copy of receipt or at least take signature of the person indicating fact of return of jewellery. But in the assessee's case, there is none, neither copy of receipt (which in any way is not issued to customer) not there is any signature or fact of return mentioned in register. Nor outgoing receipt book contains any such entry.
VI Loose majuri bills found and seized indicate that within three days of receipt of gold customers took back their gold. Then how in current year, gold is with the assessee for such long period and that too exhibited in show room over the counter and ready for sale.
VII. Certain order books have been seized and inventoried, during the course of search. These order books contain name and address/telephone number of customers and also details of weight of old ornament received. But none of these are mentioned in Register No.11. Why it is not so is clear because Register No.11 does not represent record of persons who have given gold for job work, rather, it represents partly introduction of assessee's own unaccounted gold and partly name of persons who have exchanged their old ornaments for new one of same value or have paid difference of greater value.
VIII. In quality wise stock register, nowhere there is indication in regard to incoming items as to whether they belong to customers or whole stock belong to assessee.
IX. During the search proceedings, no record or register was found which contain details of remolding the ornaments including nature of items like bangles, chain design, etc. and when he was asked to explain, it was explained no such records are maintained.
From the foregoing discussion, it is clear that jewellery claim to be belong to customers actually belong to assessee himself. Besides, since the Ld. CIT(A)-III, Surat has deleted the additions of Rs. 29,77,726/- from the block assessment with the remarks that such additions can be made only in regular assessment u/s. 143(3) or 144 of the I.T. Act. Therefore, I have reason to believe that the income chargeable to tax in this case amounting to Rs. 29,77,726/- has escaped assessment which is required to be taxed by reopening the assessment u/s.147 of the Act, 1961. Thus, it is fit case for issuing notice u/s.148 of the I.T. Act, 1961.
8. A perusal of the reasons recorded shows that in the block assessment made under section 158BC(c) of the Act total undisclosed income of the petitioner had been determined at Rs. 48,49,902/- comprising mainly of gold ornaments valued at Rs. 29,77,726/- claimed to be belonging to customers. It is also amply clear that the Assessing Officer was well aware of the fact that the Commissioner (Appeals) had, on merits, deleted majority of the additions including the addition of Rs. 29,77,726/- made in the block assessment under section 158BC of the Act. Moreover, it may be significant to note that on a conjoint reading of the assessment order under section 158BC of the Act and the reasons recorded it is found that from the third unnumbered paragraph to paragraph VII of the reasons, the respondent has, word by word, reproduced either wholly or major portions of the contents of paragraphs 14-2, 14-15, 14-6, 14-7 and 14-9 of the assessment order. In paragraphs VIII and IX of the reasons, the respondent has observed that in quality wise stock register it is nowhere indicated as to whether the incoming items belong to the customers or the whole stock belongs to the assessee and in paragraph IX he has recorded that during the course of search proceeding no record was found containing details of remolding of ornaments and that the assessee upon being called upon to explain the same had stated that no such records are maintained. After the above discussion, the respondent has observed that it is clear that the jewellery claimed to be belonging to the customers actually belong to the assessee. He has also emphasized that the Commissioner (Appeals) has deleted the addition of Rs. 29,77,726/- with the remarks that such additions can be made only in regular assessment under section 143(3) or 144 of the Act. Based on the above the respondent has stated that he has reason to believe that income chargeable to tax has escaped assessment.
9. Thus two things are apparent. Firstly, that the issue in respect of which the assessment is sought to be reopened was subject matter of the block assessment. Secondly, that the addition of Rs. 29,77,726/- made by the Assessing Officer during the course of block assessment under section 158BC of the Act had been deleted by the Commissioner (Appeals).
10. At this juncture, it may be germane to refer to leading two decisions of this court on the question of reopening of assessment in the context of block assessment. In N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733/101 Taxman 525 (Guj.) a Division Bench of this court held that the assessment of undisclosed income is altogether a different matter from the regular assessments. Under section 158BB of the Act, for computing the undisclosed income of the block period, the Assessing Officer has to compute the total income of the relevant previous years on the basis of the evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. The evidence found as a result of search or requisition would be the evidence that has been gathered by the authorised officer under sections 132 and 132A of the Act, which would include the statements recorded by the authorised officer during the course of search and seizure under section 132(4) of the Act. The evidence found and material available is to be the basis for computing the aggregate of the total income of the previous years falling in the block period. The court held that under section 158BB(1), read with section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year required to be assessed in the normal regular assessment under section 143(3), where the Assessing Officer makes an inquiry to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner and on the basis of the evidence produced by the assessee, the evidence obtained on the specific points and all relevant material which he has gathered assesses the total income or loss and determines the sum payable thereon as per that assessment. This exercise under section 143(2) and (3) for regular assessment stands in contrast to the exercise of the Assessing Officer under section 158BB read with section 158BC (b), where he has to assess only the undisclosed income of the block period on the basis of the evidence found and material available as a result of the search conducted by the authorised officer under section 132 of the Act. These provisions operate entirely for different purposes, one for assessing undisclosed income of the block period while the other for assessing the total income or loss of the previous year in a regular assessment.
11. In Cargo Clearing Agency (Gujarat) v. Jt. CIT [2008] 307 ITR 1 (Guj), a Division Bench of this court after an in-depth study of the scheme of Chapters XIV and XIVB of the Act held that the Legislature does not intend to reopen assessments completed under Chapter XIV-B of the Act assessing the undisclosed income by adopting the special procedure provided in the said Chapter. Observing that the entire Chapter XIV-B of the Act relates to assessment of search cases, viz., undisclosed income found as a result of search, the court expressed the view that one cannot envisage escapement of undisclosed income once a search has taken place and material recovered, on processing of which undisclosed income is brought to tax. Section 147 of the Act itself indicates that the same is in relation to income escaping assessment and applies in a case where either income chargeable to tax has escaped assessment by virtue of non-disclosure by way of non-filing of return, or non-disclosure by way of omission to disclose fully and truly all material facts for the purpose of assessment, or processing of material already available on record, if the same is within the stipulated period of limitation. Therefore, to contend that undisclosed income has escaped assessment despite an assessment having been framed under Chapter XIV-B of the Act by adopting the special procedure by the said Chapter is to contend what is inherently not possible. The court held that once assessment has been framed under section 158BA of the Act in relation to undisclosed income for the block period as a result of search there is no question of the Assessing Officer issuing notice under section 148 of the Act for reopening such assessment as the said concept is abhorrent to the special scheme of assessment of undisclosed income for block period.
12. Examining the facts of the present case in the light of the principles enunciated in the above decisions, admittedly as is apparent on a plain reading of the reasons recorded, the stock of gold ornaments valued at Rs. 29,77,726/- was subject matter of block assessment under section 158BC of the Act. The Assessing Officer after considering the material on record in fact made an addition of Rs. 29,77,726/- as undisclosed income of the petitioner. Such addition was set aside by the Commissioner (Appeals). The order of Commissioner (Appeals) deleting such addition was upheld by the Tribunal. Thus, when the undisclosed income determined by the Assessing Officer included Rs. 29,77,726/- being the value of gold ornaments which the assessee claimed to be belonging to its customers was subject matter of block assessment, the same cannot be made the subject matter of regular assessment under Chapter XIV of the Act. Under the circumstances, the reopening of assessment in relation to a matter which was subject matter of block assessment is evidently without jurisdiction.
13. Another notable aspect of the matter is that in the block assessment the issue regarding gold ornaments valued at Rs.29,77,726/- had been considered by the Assessing Officer. In the assessee's appeal, the Commissioner (Appeals) had examined the issue on merits and had recorded that in the facts of the present case, the assessee had discharged the onus in respect of the deposits of gold received by it. It was recorded that the assessee had not only filed confirmations of parties but had filed affidavits of the depositors. The genuineness of the affidavits has been verified by the Assessing Officer through examination of the depositors in person over a few days. The depositors were produced by the assessee for such examination at the instance of the Assessing Officer. It was further recorded that the Assessing Officer also sent the Ward Inspector to the area the depositors came from and the Inspector duly submitted a report on these enquiries. Nothing amiss was found in all these enquiries conducted by the Assessing Officer himself and through Ward Inspector. In not a single case did the Assessing Officer record any finding that the facts narrated in any affidavit were false. The Commissioner (Appeals), accordingly, was of the view that the onus that lay on the assessee had been amply discharged and if the Assessing Officer still wanted to make an addition, the onus was on the Assessing Officer to establish that the claim was not genuine and that the facts stated in the affidavits were false etc. Such onus had not been discharged by the Assessing Officer to the slightest. Finding that there was no justification in making the addition, the Commissioner (Appeals) had directed deletion of such addition.
14. In appeal by the Department, the Tribunal after re-appreciating the evidence on record has found as a matter of fact that the assessee had successfully proved to the hilt the genuineness of the transactions encompassing all its aspects. The Tribunal found that the assessee had duly discharged its onus, and, therefore, did not find any justification for reversing the order passed by the Commissioner (Appeals) and upheld the deletion of addition of Rs. 29,77,726/-. Now, the Assessing Officer seeks to reopen such concluded issue by issuance of the impugned notice. The sole ground appears to be a passing remark made by the Commissioner (Appeals) in his order wherein the Commissioner (Appeals), while dealing with the contention raised on behalf of the petitioner that what is found recorded at the time of search cannot be treated as undisclosed income for the purpose of Chapter XIV-B and that section 158BA (3) clarifies this position, has agreed with the said contention that what is found recorded is to be excluded for the purpose of block assessment. He has further recorded that it is not that addition cannot be made in respect of recorded material, but such addition can be made only in the regular assessment under section 143(3)/144 and not in the block assessment under section 158BC. Thus, such remark of the Commissioner (Appeals) relating to what was found recorded at the time of the search namely, items which were excluded for the purpose of block assessment has been misconstrued by the Assessing Officer as a licence to reopen the assessment in respect of the very same items which were subject matter of the block assessment.
15. Thus, it is apparent that the Assessing Officer seeks to reopen the assessment in relation to an item, viz., gold ornaments valued at Rs.29,77,726/- which was already subject matter of block assessment wherein such addition was made in the order under section 158BC of the Act and was subject matter of appeal before the Commissioner (Appeals) (and subsequently before the Tribunal). The said issue has been treated as being subject matter of block assessment and examined on merits by the Commissioner (Appeals) and has been deleted. Such addition was not deleted on the ground that the same was subject matter of regular assessment. Under the circumstances, once such issue has already been decided by the appellate authority, it is not open for the Assessing Officer to seek to reopen the assessment on the same grounds as this would tantamount to the Assessing Officer sitting in appeal over the order of the Commissioner (Appeals). Moreover, as has rightly been contended by the learned counsel for the petitioner, when the Commissioner (Appeals) as well as the Tribunal have examined the issue on merits and have held in favour of the petitioner, the Assessing Officer can have no reason to believe that income chargeable to tax has escaped assessment. For this reason also, the reopening of assessment under section 147 of the Act is without jurisdiction. Consequently, the notice under section 148 of the Act is rendered unsustainable.
16. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 22nd January, 2002 issued under section 148 of the Act is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.
IT : Depletion claimed by assessee on account of reduction in value of capital expenditure incurred on account of exploration and development of oil and gas is to be treated as depreciation for purpose of computation of book profits under section 115JB
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[2011] 13 taxmann.com 129 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'A'
Hardy Exploration & Production (India) Inc.
v.
Assistant Director of Income-tax, International Taxation, Chennai*
DR. O. K. NARAYANAN, VICE-PRESIDENT
AND GEORGE MATHAN, JUDICIAL MEMBER
IT APPEAL NOS. 802 AND 803,1077,2154 & 2155 (MAD.) OF 2010
[ASSESSMENT YEARS 2002-03,2003-04,2005-06 AND 2006-07]
JUNE 9, 2011
Section 115JB, read with section 42, of the Income-tax Act, 1961 - Minimum alternate tax - Assessment years 2002-03, 2003-04, 2005-06 & 2006-07 - Assessee was a company incorporated in USA and it had established a project office in India - Assessee entered into a Production Sharing Contract ('PSC') with Government of India along with ONGC and others for exploration, development and production of oil and gas in east coast of India - It returned nil income under normal provisions of act after setting of brought forward losses and unabsorbed depreciation - As book profit under section 115JB was more than normal provisions of Act, assessee returned total income under section 115JB - Assessing Officer passed assessment order and excluded depletion while computing total depreciation loss under section 115JB - Assessee contended that expenditure incurred by it in connection with exploration and development of oil well was treated by it as fixed asset and that expenditure was written off on estimated life of oil basin; that this write off of expenditure had been claimed by assessee as depletion; that depletion having taken place on fixed asset it actually represented depreciation and, consequently, for purpose of computation of book profits under section 115JB depreciation was liable to include depletion - Whether a deduction to capital expenditure which is recorded as a fixed asset would clearly be a depreciation to fixed asset - Held, yes - Whether, therefore, depletion claimed by assessee was, in fact, depreciation and was liable to be treated as such - Held, yes - Whether, however, since decision of Supreme Court in case of CIT v. Enron Oil & Gas India Ltd. [2008] 305 ITR 75/173 Taxman 346 had not been considered by lower authorities and it had also not been verified by lower authorities that claim of depletion by assessee was in fact depreciation to fixed asset representing exploration and development expenditure, this issue was liable to be restored to file of Assessing Officer for re-adjudication - Held, yes [Partly in favour of assessee]
Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment years 2002-03, 2003-04, 2005-06 and 2006-07 - Whether site restoration expenditure is an allowable expenditure while computing book profit under section 115JB - Held, yes [In favour of assessee]
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