T : Where during original assessment assessee furnished all details regarding royalty payment made to a foreign concern in lieu of taking technical assistance, mere audit objection, that royalty payment resulted in a capital benefit would not constitute tangible material on basis of which assessment could be reopened
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[2013] 29 taxmann.com 417 (Delhi)
HIGH COURT OF DELHI
Xerox Modicorp Ltd.
v.
Deputy Commissioner of Income-tax*
S. RAVINDRA BHAT AND R.V. EASWAR, JJ.
W.P. (C) NOS. 8483, 8485 & 8486 OF 2010
JANUARY 2, 2013
Section 37(1), read with section 147, of the Income-tax Act, 1961 - Business expenditure - Allowability of - Technical know how, fees for - Assessment years 2002-03, 2003-04 and 2004-05 - Assessee-company was engaged in export and manufacture of photocopiers - Assessing Officer completed assessment of assessee - Subsequently, Assessing Officer received information by way of revenue audit report that assessee had made royalty payment to a foreign company in lieu of rendering technical assistance and thus there arose an enduring benefit which ought to have been treated as capital expenditure - Subsequently, Assessing Officer also filed a counter affidavit for first time to take a stand that there was failure on part of assessee to furnish royalty agreements including supplementary agreements in course of assessment proceedings for years in question - Whether reassessment proceedings have to stand or fall on basis of what was stated in reasons recorded under section 148(2) and nothing more and since no failure to furnish full and true particulars relating to royalty payments, including failure to file relevant agreements, had been alleged in reasons recorded averment made in counter affidavit could not be accepted - Held, yes - Whether further audit objection was only an inference that royalty payment resulted in a capital benefit; such an opinion expressed by audit could not constitute tangible material on basis of which assessment could be reopened especially when there was no averment made by revenue audit that assessee had failed to furnish all factual aspect or material or primary fact relating to royalty payment - Held, yes [Paras 9 & 17] [In favour of assessee]
FACTS
Facts
• The Assessing Officer completed the assessment of the assessee which was engaged in the export of software, manufacture of photocopiers and trading in fax, paper and toner for the relevant assessment years 2002-03, 2003-04 and 2004-05.
• Subsequently, the Assessing Officer found that the assessee company had claimed and was allowed an expenditure of Rs. 438.59 lakh on account of royalty paid to a foreign company in foreign exchange in lieu of rendering technical assistance. Since this expenditure had provided the assessee a benefit of enduring nature, this expenditure ought to have been treated as capital expenditure in accordance with the judgment of Supreme Court in the case of Southern Switchgear Ltd. v. CIT [1998] 232 ITR 359. The omission resulted in under assessment of income of Rs. 438.59 lakh.
• He, accordingly, re-opened the assessment.
• For the assessment years 2002-03 and 2003-04 the notice was issued beyond period of four years. However for the assessment year 2004-05 the notice was issued within period of four years from end and of relevant assessment years.
Argument of the assessee
• The assessee contended that it had disclosed all material facts in the return relating to the royalty payment which was accompanied with audited accounts and the revenue did not raise any objection during course of original assessment proceedings relating to same.
Argument of the revenue
• The revenue however, filed a counter affidavit for the first time and took a stand that the relevant agreements under which the royalty was paid were not furnished by the assessee along with the return or during the original assessment proceedings, that the facts of the past years showed that no technology was ever developed by the assessee in India and it was dependent on the technical inputs supplied by the parent company and thus there arose an enduring benefit to the assessee, that the assessee omitted to state that it derived such enduring benefit.
• Further, the assessee failed to deduct tax from the royalty payments which attracted the provisions of section 40(a)(i) under which the royalty payments could have been disallowed, that since there was no query raised or any discussion made on the issue of allowability of the royalty in the original assessment proceedings no opinion was formed by the Assessing Officer and therefore the assessee cannot allege that the reopening was prompted by a mere change of opinion.
• It was also averred that the Assessing Officer received information by way of revenue audit report from the DG Audit, Central revenue accompanied by a statement of facts which was thoroughly examined by the Assessing Officer and only after he was fully satisfied and formed an opinion that income chargeable to tax had escaped assessment by way of royalty payment that reasons were recorded and notice under section 148 was issued.
Issue for consideration
• Whether re-opening was justified?
HELD
Assessing Officer should draw appropriate inference from primary facts furnished
• It is settled law that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what was stated in the reasons recorded under section 148(2) and nothing more. No failure to furnish full and true particulars relating to the royalty payments, including the failure to file the relevant agreements, had been alleged in the reasons recorded. If anything, the reasons are an admission that it was the Assessing Officer who did not draw the inference that the royalty payments were capital in nature. It was for him to draw the appropriate inference and not for the assessee to tell him what inference of fact or law should be drawn from the primary facts furnished. [Para 9]
• Accordingly, the reassessment notices for the assessment years 2002-03 and 2003-04 are quashed as also the consequent proceedings. [Para 10]
Issue relating to re-opening of assessment for assessment year 2004-05
• It is difficult to sustain the notice issued under section 148. The audit objection was only an inference that the royalty payment resulted in a capital benefit; such an opinion expressed by the audit could not constitute tangible material on the basis of which the assessment could be reopened. In the case of Indian Eastern & Newspaper Society v. CIT [1979] 119 ITR 996/2 Taxman 197 (SC), the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that revenue audit is not competent to pronounce on issues of law. There is no averment that the revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner. [Para 17]
• The alleged non-deduction of tax from the royalty which would authorize the disallowance under section 40(a)(i) is a fact that is mentioned for the first time in the counter-affidavit and it does not find place in the reasons recorded. As noted earlier, it is impermissible to look into any record other than the reasons recorded to judge the validity of the reopening of the assessment. Further, the statement in the counter-affidavit that the facts relating to the past years disclosed that the assessee was wholly dependent on the parent company for the technical inputs goes against the revenue, in the sense that it was always known to the revenue that the assessee did not develop any technology of its own but was dependent on the technology from the parent company. Moreover, it is not for the assessee to advise the Assessing Officer as to what inference he should draw as to nature of the expenditure. Whether it is revenue or capital in nature. [Para 18]
Conclusion
• In the light of the foregoing, the notice issued under section 148 for the assessment year 2004-05 is also without jurisdiction. The same is quashed as also the consequent proceedings. [Para 20]
CASES REFERRED TO
Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 9), CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 (Delhi) (FB) (para 13), CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 13), CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/25 taxmann.com 200 (Delhi) (FB) (para 14) and Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996/2 Taxman 197 (SC) (para 17).
Ajay Vohra, Ms. Kavita Jha and Somnath Shukla for the Appellant. Kamal Sawhney for the Respondent.
ORDER
R.V. Easwar, J. - These are three writ petitions filed by the petitioner which is a company engaged in the export of software, manufacture of photocopiers and trading in fax, paper and toner. They are directed against reassessment proceedings initiated by issue of notices under section 148 of the Income Tax Act, 1961.
2. W.P. (C) Nos.8483 & 8486/2010 relate to the proceedings for the assessment years 2002-03 and 2003-04 respectively. They can be dealt with together and separate from W.P. (C) Nos. 8485/2010 because for those years the reassessment proceedings were initiated after a period of four years from the end of the relevant assessment years, whereas for the assessment year 2004-05, which is the year involved in W.P.(C) No. 8485/2010, the reassessment proceedings were initiated within the period of four years from the end of the said assessment year, and therefore different considerations apply.
W.P.(C) Nos.8483 & 8486/2010:
The relevant dates are set out below:
| | Asst. year 2002-03 | Asst. year 2003-04 |
| Original assessment made u/s. | 143(3) | 143(3) |
| Date of the original assessment | 31.03.2005 | 23.03.2006 |
| Notice u/s.148 issued on | 30.03.2009 | 30.03.2010 |
3. Under the first proviso to section 147, notice to reopen an assessment completed under section 143(3) may be issued beyond the period of four years from the end of the relevant assessment year only if income chargeable to tax has escaped assessment on account of the failure of the assessee to file returns of income or to furnish fully and truly all material facts relating to his assessment at the time of the original assessment. This is a jurisdictional pre-condition.
4. For the assessment year 2002-03, the reasons recorded u/s. 148(2) for reopening the assessment are as follows:
"The assessment of M/s Xerox India Ltd. for the assessment year 2002-03 was completed under scrutiny in March 2005 determining an income of Rs. 7836.96 lakhs. The assessed income was however reduced under section 250/154 to Rs. 1136.81 lakhs.
2. The assessee company had claimed and was allowed an expenditure of Rs. 438.59 lakh on account of royalty paid to a foreign company in foreign exchange in lieu of rendering technical assistance. Since this expenditure has provided the assessee a benefit of enduring nature, this expenditure ought to have been treated as capital expenditure in accordance with the judgment of Supreme Court in the case of Southern Switchgear Ltd. v. CIT and another reported at 232 ITR 359. The omission resulted in underassessment of income of Rs. 438.59 lakh.
3. Further, the assessee claimed and was allowed a loss of Rs. 317.43 lacs on account of provision for securitisation. It being only a provision and the loss being of speculative nature was not allowable.
4. From the above facts, I have reason to believe that income of Rs. 756.02 lakhs, as above has escaped assessment by virtue of omission on the part of the assessee to disclose the above income. This is therefore a fit case for issuance of notice u/s.148 of the Income Tax Act, 1961".
The reasons recorded for the assessment year 2003-04 are:
"It is seen from records that the assessee company claimed expenses of Rs. 3,59,59,436 on royalty and Rs. 2,04,92,135 on a/c provision for securitisation. Whereas expenditure on royalty is liable to be capitalised and provisions for securitisation is contingent liability is inadmissible, both the expenditure(s) are liable to be added to income.
Therefore, I have reason to believe that income of Rs. 5.63 Crores has escaped Assessment.
Accordingly, re-Assessment proceedings are initiated under section 147 of Income Tax Act, 1961. Notice is issued under section 148 of Income Tax Act 1961".
5. It is common ground before us that the assessing officer (respondents herein) has dropped the ground relating to disallowance of the provision for securitisation for both the years; therefore, what survives is only the disallowance of the royalty paid as capital expenditure.
6. Let us examine the disclosure made by the petitioner. In respect of the assessment year 2002-03, the return of income was accompanied by the audited accounts along with the notes and schedules. In the profit and loss account for the year ended on 31.03.2002, "material and manufacturing expenses" of Rs. 31,341.04 lakhs was debited and the details thereof were given in Schedule N; in the schedule, royalty of Rs. 438.59 lakhs was shown as part of the expenses. It is not in dispute that the royalty was paid under a technical services agreement entered into on 22.03.1984 with Xerox Ltd. of England and was being allowed in all the assessments made from the assessment year 1984-85. It is stated in the counter-affidavit that no query was raised by the respondent in the course of the original assessment proceedings with regard to the royalty payment, that the petitioner did not submit the information or copies of the relevant documents showing the terms and nature of the benefit accruing from the royalty agreements in this assessment year, that each year is a separate year and the rule of res judicata is not applicable to income-tax proceedings, that the rule of consistency does not hold good on the facts of this case and that in these circumstances the reopening was valid. It is pointed out that the contents of the supplementary agreements 1 & 2 were not submitted by the petitioner during the original assessment proceedings.
7. In respect of the assessment year 2003-04 also, the royalty of Rs. 359.59 lakhs was separately shown in the Schedule-O which sets out the details of the "material and manufacturing expenses". A questionnaire was issued by the AO on 06.02.2006 in which 28 queries were raised by him, including query No.23 in which the petitioner was directed to furnish "evidence that royalty has been paid within the time prescribed u/s. 43B and file evidence of TDS from royalty". The petitioner submitted the details asked for under cover of letter dated 15.02.2006. On 23.03.2006 the petitioner again gave certain clarifications about the TDS from royalty payments in response to the queries raised by the respondent by letter dated 17.03.2006. The assessment was completed on 23.03.2006. The counter-affidavit filed by the respondents is substantially the same as in the writ petition for the assessment year 2002-03.
8. It is seen that it is in the counter-affidavit, for the first time, that the respondent has taken the stand that there was failure on the part of the petitioner to furnish the royalty agreements including the supplementary agreements in the course of the assessment proceedings for the years in question; no such reason was stated in the reasons recorded u/s. 148(2). All that was said in the reasons recorded was only that in the view of the assessing officer, the royalty payments ought to have been held to be capital in nature.
9. It is settled law that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what was stated in the reasons recorded u/s. 148(2) and nothing more. No failure to furnish full and true particulars relating to the royalty payments, including the failure to file the relevant agreements, has been alleged in the reasons recorded. If anything, the reasons are an admission that it was the assessing officer who did not draw the inference that the royalty payments were capital in nature. It was for him to draw the appropriate inference and not for the assessee to tell him what inference of fact or law should be drawn from the primary facts furnished. That is the ratio of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC).
10. Accordingly, the reassessment notices for the assessment years 2002-03 and 2003-04 are quashed as also the consequent proceedings.
W.P. (C) No.8485/2010:
11. The facts in this petition are slightly different. The original assessment was completed u/s. 143(3) on 27.12.2006. Notice u/s. 148 was issued on 30.03.2009 which is within the period of four years from the end of the relevant assessment year (2004-05). The reasons recorded are:
"The assessment of M/s. Xerox India Ltd. for the assessment year 2004-05 was completed under section 143(3) vide order dated 27.12.2006 determining an income of Rs. 27,39,40,490/-.
2. The assessee company had claimed and was allowed an expenditure of Rs. 3,79,50,791/- on account of royalty paid to a foreign company in foreign exchange in lieu of rendering technical assistance. Since this expenditure has provided the assessee a benefit of enduring nature, this expenditure ought to have been treated as capital expenditure."
12. The other reasons recorded relating to provision for securitisation, contingent liability, gratuity/superannuation etc. are not reproduced since the objections of the petitioner with respect to those issues were accepted by the respondent by order passed u/s.154 on 11.02.2010.
13. The contention of the petitioner is that the notice issued u/s. 148 is without jurisdiction on the basis of the Full Bench judgment of this court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 (Delhi) (FB), which stands affirmed by the Supreme Court inCIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312. The contention is that once an assessment is completed under sec. 143(3), the assessing officer is presumed to have applied his mind to all the issues and he cannot thereafter reopen the assessment on the ground that he did not form any opinion with respect to any particular issue; he must have tangible material before him on the basis of which he can entertain a reason to believe that income chargeable to tax has escaped assessment. It is contended that there is no reference to any tangible material in the reasons recorded and that all that is stated therein is that the expenditure by way of royalty conferred an enduring benefit to the assessee and ought to have therefore been disallowed as capital expenditure. That is, argues counsel for the petitioner, nothing but a change of opinion without any tangible material coming to the possession of the assessing officer subsequent to the completion of the original assessment.
14. The learned standing counsel for the revenue strongly relies on the following observations of the majority opinion in paragraph 23 of the judgment of the Full Bench of this court in CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/25 taxmann.com 200 (Delhi) (FB) and contends that having regard to those observations of the majority, the notice issued by the AO is valid: -
"23. The said observations do not mean that even if the Assessing Officer did not examine a particular subject matter, entry or claim/deduction and therefore had not formed any opinion, it must be presumed that he must have formed an opinion. This is not what was argued by the assessee or held and decided. There cannot be deemed formation of opinion even when the particular subject matter, entry or claim/deduction is not examined".
15. In the accounts the royalty of Rs. 379.51 lakhs was debited to the profit and loss account along with several other items of expenditure under the head "material and manufacturing expenses". Schedule-O to the accounts gives the break-up of the expenditure and shows royalty separately.
16. In the counter-affidavit, it has been stated that the relevant agreements under which the royalty was paid were not furnished by the petitioner along with the return or during the original assessment proceedings, that the facts of the past years showed that no technology was ever developed by the petitioner in India and it was dependent on the technical inputs supplied by the parent company and thus there arose an enduring benefit to the petitioner, that the petitioner omitted to state that it derived such enduring benefit, that the petitioner failed to deduct tax from the royalty payments which attracted the provisions of section 40(a)(i) of the Act under which the royalty payments could have been disallowed, that since there was no query raised or any discussion made on the issue of allowability of the royalty in the original assessment proceedings no opinion was formed by the assessing officer and therefore the petitioner cannot allege that the reopening was prompted by a mere change of opinion. It is also averred that the assessing officer received information by way of revenue audit report from the DG Audit, Central Revenue, IP Estate, New Delhi vide letter dated 03.09.2007 accompanied by a "statement of facts" which was "thoroughly examined by the AO and only after he was fully satisfied and formed an opinion that income chargeable to tax had escaped assessment by way of Royalty payment that reasons were recorded and notice u/s 148 was issued on 30.03.2010....", that thus the reopening was "based on information received from Revenue Audit" and that "an examination of records with reference to the Revenue Audit Objection also revealed that the petitioner had not disclosed full and true facts about the capital nature of Royalty payments". It is denied that the reopening is based on a mere change of opinion.
17. It is difficult to sustain the notice issued u/s. 148. The audit objection is only an inference that the royalty payment resulted in a capital benefit; such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened. In the case of Indian Eastern & Newspaper Society v. CIT [1979] 119 ITR 996/2 Taxman 197 the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that revenue audit is not competent to pronounce on issues of law. There is no averment that the revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner.
18. The alleged non-deduction of tax from the royalty which would authorise the disallowance under section 40(a)(i) is a fact that is mentioned for the first time in the counter-affidavit and it does not find place in the reasons recorded. As noted earlier, it is impermissible to look into any record other than the reasons recorded to judge the validity of the reopening of the assessment. Further, the statement in the counter-affidavit that the facts relating to the past years disclosed that the petitioner was wholly dependent on the parent company for the technical inputs goes against the revenue, in the sense that it was always known to the revenue that the petitioner did not develop any technology of its own but was dependent on the technology from the parent company. Moreover, it is not for the petitioner to advise the assessing officer as to what inference he should draw as to nature of the expenditure - whether it is revenue or capital in nature.
19. Since the reasons recorded have been prompted by the revenue audit's opinion as admitted in the counter-affidavit, it is not necessary to examine the contention of the revenue based on the observations of the majority in paragraph 23 of the judgment in Usha International Ltd.(supra).
20. In the light of the foregoing, we are of the view that the notice issued u/s. 148 for the assessment year 2004-05 is also without jurisdiction. The same is quashed as also the consequent proceedings.
21. In the result, all the writ petitions are allowed. The notices u/s.148 and the consequent proceedings are quashed. There shall be no order as to costs.
NITU[2011] 14 taxmann.com 165 (Mum.)
IN THE ITAT MUMBAI BENCH 'H'
Homi K. Bhabha
v.
Income-tax Officer (International Taxation), 3(1), Mumbai*
R.S. SYAL, ACCOUNTANT MEMBER AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NO. 3287 (MUM.) OF 2009
[ASSESSMENT YEAR 2006-07]
SEPTEMBER 28, 2011
Section 48 of the Income-tax Act, 1961 - Capital gains - Computation of - Assessment year 2006-07 - Assessee declared both long-term and short term capital gains from sale and purchase of shares and claimed deduction in respect of professional fees and profit sharing fees paid to an asset management company - Same issue had been predominantly decided in Devendra Motilal Kothari v. Dy. CIT [2011] 13 taxmann.com 15 (Mum.) and Pradeep Kumar Harlalka v. Asstt. CIT [IT Appeal No. 4501 (Mum.) of 2010] against assessee after making thorough analysis of issue and, dealing with all aspects now raised by assessee - Whether it was not proper to revisit all relevant facts and legal position in this case with a view to test correctness of above orders - Held, yes - Whether therefore, disallowance was to be sustained and resultantly impugned order was to be upheld - Held, yes [In favour of revenue]
FACTS
Assessee declared both long term and short term capital gains from sale purchase of shares. It claimed deduction while computing capital gains under each head in respect of professional fees and profit sharing fees paid to an asset management company for rendering portfolio management services. The Assessing Officer observed that the professional management fees and profit sharing fees paid to portfolio manager was unrelated to any profit or loss under the head 'capital gains'. There was no dispute on the fact that the assessee claimed long term capital gain as exempt, which was duly accepted. The Assessing Officer did not allow deduction for fees claimed by the assessee against the short term capital gains, as it was, in his opinion, not related to the transactions resulting into capital gain. Assessee filed appeal before the Commissioner (Appeals) contending that he was entitled to deduction on account of fees against the short term capital gain, as it was directly related to sale of shares and hence should be taken as expenditure incurred wholly and exclusively in connection with transfer of shares. An alternative argument for considering it as diversion of income by overriding title, was also raised. The Commissioner (Appeals) was unconvinced with the assessee's submissions. He echoed the assessment order on this point by holding that such charges could not be allowed as deduction under section 48.
On revenue's appeal:
HELD
It can be easily noticed that the facts and circumstances of the case in question and the two cases decided by Mumbai Benches Devendra Motilal Kothari v. Dy. CIT [2011] 13 taxmann.com 15 and Pradeep Kumar Harlalka v. Asstt. CIT [IT Appeal No. 4501 (Mum.) of 2010] are similar. It is axiomatic that the nature of services provided by any portfolio manager cannot be materially different. It is further manifest that all the contentions being the treatment of fees as cost of acquisition of shares; or expenses in connection with transfer of shares; or diversion of income by overriding title, have been elaborately discussed in these two cases. After considering all the aspects of the issue threadbare, the Tribunal has held in both these cases that the fees cannot form part of computation of capital gains under section 48 and has to be ignored. It is the only issue in the instant appeal and the facts are in pari materia with those considered and decided by the Mumbai Benches. [Para 10]
Judicial discipline requires that when a particular issue has been decided by a bench, then the subsequent co-ordinate benches should normally follow the same. At the same time, there are no fetters on the powers of the subsequent benches to doubt the correctness of the earlier order, if they are not convinced with it. Whereas following the earlier decision is a rule, calling into question its correctness is only an exception. Unless there are compelling reasons for not following the earlier view, such as, if it is inconsistent with judgment of the Supreme court or that of the jurisdictional High Court or earlier decisions of the same rank; or if it is sub silentio ; or if it is rendered per incuriamin the sense that it is patently inconsistent with the statutory or settled legal position, the same should be respected and adhered to by the subsequent benches so that consistency in the approach of the Tribunal is achieved. The above referred exception can be classified into two categories. First, when there is a direct contrary judgment of the Supreme Court or that of the jurisdictional High court on the point, rendered prior to or after the earlier Tribunal order, the later Bench would be fully justified in differing from the earlier contrary view and following the higher wisdom. Second, when the subsequent bench perceives earlier view to be rendered per incuriam or sub silentio etc., the right course for it is to make a reference to the President of the Tribunal for constitution of a special bench on the point so that the larger bench may consider whether the earlier view is correct or the perception of the latter bench is correct. [Para 11]
Ordinarily neither the assessee nor the revenue can be allowed to reargue the same issue over and over again, when it has already been decided by a co-ordinate bench of the Tribunal. If such a course is allowed, then every single repetitive issue would require reconsideration time and again because the aggrieved party would always try to convince the later bench over its point of view. Following the earlier order or making a reference to the special bench depends on the satisfaction of the Bench about the correctness or otherwise of the earlier order and not that on the viewpoint of the aggrieved party. It is only when a subsequent bench, on being seized of the matter, finds itself unable to endorse the earlier view, either suo motu or on the arguments of the parties, that it may make reference for the constitution of the Special Bench. The party dissatisfied with the earlier view cannot compel the later bench to either take a contrary view or make a reference for the constitution of the special bench. Thus it follows that once a particular view is taken, the subsequent benches of the Tribunal become functus officio on that issue, subject to the exception discussed supra . Needless to mention at this juncture that the party unconvinced with the Tribunal order is not without remedy as the Act enshrines the provisions enabling it to appeal to the High Court against the order and convince it about its stand. [Para 12]
The well known latin maxim 'stare decisis' expresses the underlying basis of the doctrine of precedent, which, in turn, means to abide by the former precedent when the same points arises again in litigation. It has got the seal of approval from the Supreme Court in several cases including Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 /(726, 727) the maxim stare decisis provides that when a point of law has been decided, it takes the form of a precedent which is to be followed subsequently and should not normally be departed from. A decision which is followed for a long time will generally be followed, even though the court before whom the matter arises afterwards, might be of different view. [Para 13]
Adverting to the facts of the instant case, it is found that the issue has been predominantly decided in the above referred two cases against the assessee after making thorough analysis of the issue, dealing with all the aspects now raised by the assessee. These cases do not fall into the exceptions, as discussed supra, justifying departure from the earlier view. Therefore, it is not proper to revisit all the relevant facts and the legal position on it with a view to test the correctness of these orders. The disallowance is thus sustained and resultantly the impugned order is upheld. [Para 14]
Devendra Motilal Kothari v. Dy. CIT [2011] 13 taxmann.com 15 (Mum.) (para 6), KRA Holding & Trading (P.) Ltd. v. Dy. CIT [2011] 46 SOT 19 /11 Taxman.com 250 (Pune) (para 6),CIT v. Smt. Shakuntala Kantilal [1991] 190 ITR 56 / 58 Taxman 106 (Bom.) (para 6),Pradeep Kumar Harlalka v. Asstt. CIT [IT Appeal No. 4501 (Mum.) of 2010] (para 6), CIT v.Roshanbabu Mohammed Hussein Merchant [2005] 275 ITR 231/ 144 Taxman 720 (Bom.) (para 6), CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) (para 8) and Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 / 132 Taxman 373 (SC) (para 13).
Nitesh Joshifor the Appellant. V.V. Shastri for the Respondent.
ORDER
R.S. Syal, Accountant Member. - This appeal by the assessee is directed against the order passed by the ld. CIT(A) on 31.03.2009 in relation to the assessment years 2006-2007.
2. Initially the assessee raised a solitary ground challenging the impugned order in not allowing deduction of expenses incurred in connection with the earning of short term capital gain. Subsequently revised grounds were filed reading as under:-
"The learned Comm. Of Income tax (Appeals) - 10, Mumbai has erred:-
1.in not allowing the appellant a deduction for expenses incurred in connection with earning of short term capital gains. He erred in not appreciating the nature of these expenses.
2.in not appreciating that the fees so incurred were a diversion of income by overriding title and hence ought to have been considered while computing income.
3.in not appreciating that the full value of consideration received had to be computed after deducting the fees which had been incurred and paid.
4.in not adjudicating that the fees paid were to be added to the cost of acquisition / improvement of assets."
3. The learned A.R. submitted that the ground taken in the original memo of appeal has been repeated as such as revised ground no.1 and the ground nos. 2 to 4 are additional grounds which arise out of an articulation of ground no.1. No serious objection was raised by the learned Departmental Representative against the admission of additional grounds. We, therefore, admit these grounds and take up the appeal for hearing.
4. Briefly stated the facts of the case are that the assessee declared gross long term capital gain of Rs. 67,32,921 and short term capital gain of Rs. 91,87,735. Thereafter a deduction was claimed in respect of professional fees / profit sharing fees paid to ENAM Asset Management Co. Ltd. for rendering portfolio management services and the net income from capital gains was determined as under:-
| Rs. 67,32,921 | ||
Long term capital gain | | |
Less: | | |
Professional | | |
Management fees | Rs. 3,05,688 | |
Profit sharing fees | Rs. 10,09,852 | Rs. 13,15,540 |
| Rs. 54,17,381 | ||
| Rs. 91,87,735 | ||
Short term capital gain | | |
Less : | | |
Professional Management fees | Rs. 4,17,141 | |
Profit sharing fees | Rs. 13,78,044 | Rs. 17,95,185 |
| Rs. 73,92,550 |
5. The Assessing Officer observed that the Professional Management fees and Profit sharing fees (hereinafter collectively called as 'fees') paid to portfolio manager was unrelated to any profit or loss under the head 'Capital gains'. There is no dispute on the fact that the assessee claimed long term capital gain as exempt, which was duly accepted. The A.O. did not allow deduction for fees of Rs. 17,95,185 claimed by the assessee against the short term capital gain, as it was, in his opinion, not related to the transactions resulting in to capital gain. It was argued before the learned CIT(A) that the assessee was entitled to deduction on account of fees against the short term capital gain, as it was directly related to sale of shares and hence should be taken as expenditure incurred wholly and exclusively in connection with transfer of shares. An alternative argument for considering it as diversion of income by overriding title, was also raised. The learned CIT(A) was unconvinced with the assessee's submissions. He echoed the assessment order on this point by holding that such charges could not be allowed as deduction u/s 48. Now the assessee has assailed the impugned order in above terms.
6. We have heard the rival submissions and perused the relevant material on record. Both the sides have placed on record copies of the orders passed by the Tribunal in support of their respective stands. The Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari v. Dy. CIT [2011] 13 Taxman.com 15] [to which one of us, namely, the ld. JM is party] decided the issue against the assessee by holding that the payment of fees by that assessee for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement and was consequently not eligible for deduction in computing capital gain. Thereafter, similar issue came up before the Pune Bench of the Tribunal in KRA Holding & Trading (P.) Ltd. v. Dy. CIT [2011] 46 SOT 19 /11 Taxman.com 250 in which the Revenue relied on the Mumbai Bench order in Devendra Motilal Kothari's case (supra). Vide its order dated May 2011 and after considering the case ofDevendra Motilal Kothari (supra), the Pune Bench recorded a contrary view in assessee's favour. In so deciding, the Pune Bench, inter alia, relied on the judgement of the Hon'ble Bombay High Court in CIT v. Smt. Shakuntala Kantilal [1991] 190 ITR 56/ 58 Taxman 106. Once again similar issue came up before the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka v. Asstt. CIT[IT Appeal No. 4501 (Mum.) of 2010. Vide its order dated 10.08.2011, the Mumbai Bench considered both the earlier decisions on the point, viz., Devendra Motilal Kothari's case (supra) and KRA Holding & Trading (P.) Ltd.'s case (supra ). Through an elaborate order, the Mumbai Bench in latter case followed the decision in the case of Devendra Motilal Kothari (supra) in priority over that of KRA Holding & Trading (P.) Ltd.'s case (supra). In deciding so, the latter Bench observed that the decision of the Pune Bench in KRA Holding & Trading (P.) Ltd.'s case (supra) is primarily based on the judgement of the Hon'ble Bombay High Court in the case of Shakuntala Kantilal(supra), which has been subsequently held to be not a good law by the Hon'ble Bombay High Court inCIT v. Roshanbabu Mohammed Hussein Merchant [2005] 275 ITR 231 / 144 Taxman 720 . As the later judgement overruling the earlier judgement was not brought to the notice of the Pune Bench, the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka's case (supra) chose to follow the decision in the case of Devendra Motilal Kothari (supra), thereby deciding the issue against the assessee. The position discussed above has been fairly admitted by both the sides.
7. From the above discussion it is seen that the first order on this issue was passed against the assessee in Devendra Motilal Kothari's case (supra). The second order, in the point of time by the Pune Bench in KRA Holding & Trading (P.) Ltd.'s case (supra), decided the issue in favour of the assessee after considering the first order. Third order, being the latest in the point of time in Pradeep Kumar Harlalka's case (supra), decided the issue against the assessee after considering both the earlier orders. Not only that, the third order also took note of the fact the basis of the Pune Bench order, being the judgment of the Hon'ble jurisdictional High Court in Shakuntala Kantilal's case (supra), already stood overruled by a subsequent judgment of the Hon'ble Bombay High Court in Roshanbabu Mohammed Hussein Merchant's case (supra), which fact was not brought to the notice of the Bench. No other order, in favour of the assessee, has been brought to our notice by the ld. AR. Accordingly it is vivid that the majority opinion (in terms of the number of orders) on the issue and also the latest order (in the point of time) together with the special circumstances of the Pune Bench case (in considering an overruled judgment), bring us to a stage where the current and the majority view taken by the tribunal so far on the point, is against the assessee.
8. The learned Counsel for the assessee vehemently argued that certain important aspects of the matter were not taken into consideration by the Mumbai Benches of the Tribunal in both the cases in deciding the issue against the assessee. It was argued that there was no basis for excluding fees paid by the assessee to his portfolio manager from the computation of income under the head 'Capital gains' as there was no other purpose for its incurring, except in connection with the purchase and sale of shares. Referring to agreement of the assessee with the portfolio manager, ENAM Asset Management Co. Ltd., the learned A.R. explained that the assessee agreed to place a sum of Rs. 2.25 crore at the discretion of his portfolio manager, which was to be used for purchase and sale of securities etc. Referring to various clauses about the consideration payable to the portfolio manager, he stated that it was at half percent of the net asset value (market value of assets inclusive of all Securities and cash balances) under management at the beginning of each quarter and further the portfolio managers were entitled to a return based fee calculated at the rate of 20% per annum of the profits in excess of 15% of the profits after deducting all the expenses. The sum and substance of his submissions was that such fees paid by the assessee has direct relation with the income arising from the transfer of shares and hence the same should be allowed as deduction, either by considering it as diversion of income by overriding title from the sale proceeds; or as part of the cost of acquisition of the shares; or alternatively as an expenditure incurred wholly and exclusively in connection with the transfer of shares. These aspects constitute three additional grounds stated to be articulation of the main ground on disallowance of the amount of fees. He relied on certain judgments to drive home his point of view on deductibility of the fees. In this process, he also took us through the judgment of the Hon'ble Supreme Court in CIT v.Sitaldas Tirathdas [1961] 41 ITR 367 (SC), which has been considered by the Mumbai bench inDevendra Motilal Kothari's case (supra), to argue that the ratio decidendi of this judgment was not properly understood by the Mumbai Bench in holding that there was no diversion of income.
9. Sounding a contra note, the ld. DR stated that there was no infirmity in the view taken by the authorities below as the fees had no direct relation with the purchase or sale of shares and hence was liable to be excluded from consideration. He vigorously accentuated on the orders passed by the Mumbai Benches and contended that all the aspects now raised on behalf of the assessee, have been already considered and decided against the assessee and there was nothing new to justify going away from the earlier view.
10. We are not inclined to accept the submissions tendered by the ld. AR that the Mumbai Benches of the tribunal have not properly appreciated the matter in right perspective in deciding the issue against the assessee. It can be easily noticed that the facts and circumstances of the case in question and the two cases decided by Mumbai Benches are similar. It is axiomatic that the nature of services provided by any portfolio manager cannot be materially different, as has been fairly conceded by the ld. AR during the course of hearing. It is further manifest that all the contentions raised before us, being the treatment of fees as cost of acquisition of shares; or expenses in connection with transfer of shares; or diversion of income by overriding title, have been elaborately discussed in these two cases. After considering all the aspects of the issue threadbare, the tribunal has held in both these cases that the fees cannot form part of computation of capital gains u/s 48 and has to be ignored. It is the only issue in the present appeal and the facts are in pari materia with those considered and decided by the Mumbai Benches.
11. The arguments advanced by the assessee on merits are an attempt to persuade us for not following the aforenoted view taken against the assessee. We are not impressed with this argument. Judicial discipline requires that when a particular issue has been decided by a bench, then the subsequent co-ordinate benches should normally follow the same. At the same time, we want to clarify that there are no fetters on the powers of the subsequent benches to doubt the correctness of the earlier order, if they are not convinced with it. Whereas following the earlier decision is a rule, calling into question its correctness is only an exception. Unless there are compelling reasons for not following the earlier view, such as, if it is inconsistent with judgment of the Hon'ble Supreme Court or that of the jurisdictional High Court or earlier decisions of the same rank; or if it is sub silentio; or if it is renderedper incuriam in the sense that it is patently inconsistent with the statutory or settled legal position, the same should be respected and adhered to by the subsequent benches so that consistency in the approach of the tribunal is achieved. The above referred exceptions can be classified into two categories. First, when there is a direct contrary judgment of the Hon'ble Supreme court or that of the Hon'ble jurisdictional High Court on the point, rendered prior to or after the earlier tribunal order, the later Bench would be fully justified in differing from the earlier contrary view and following the higher wisdom. Second, when the subsequent bench perceives earlier view to be rendered per incuriam or sub silentio etc., the right course for it is to make a reference to the President of the tribunal for constitution of a Special Bench on the point so that the larger bench may consider whether the earlier view is correct or the perception of the latter bench is correct.
12. Ordinarily neither the assessee nor the Revenue can be allowed to reargue the same issue over and over again, when it has already been decided by a coordinate bench of the tribunal. If such a course is allowed, then every single repetitive issue would require reconsideration time and again because the aggrieved party would always try to convince the later bench over its point of view. Following the earlier order or making a reference to the special bench depends on the satisfaction of the Bench about the correctness or otherwise of the earlier order and not that on the view point of the aggrieved party. It is only when a subsequent bench, on being seized of the matter, finds itself unable to endorse the earlier view, either suo motu or on the arguments of the parties, that it may make reference for the constitution of the special bench. The party dissatisfied with the earlier view cannot compel the later bench to either take a contrary view or make a reference for the constitution of the special bench. Thus it follows that once a particular view is taken, the subsequent benches of the tribunal become functus officio on that issue, subject to the exceptions discussed supra. Needless to mention at this juncture that the party unconvinced with the tribunal order is not without remedy as the Act enshrines the provisions enabling it to appeal to the Hon'ble High Court against the order and convince it about its stand.
13. We are reminded of the well known latin maxim 'stare decisis', which means to stand by the things decided. It expresses the underlying basis of the doctrine of precedent, which, in turn, means to abide by the former precedent when the same points arises again in litigation. It has got the seal of approval from the Hon'ble Supreme Court in several cases including Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (726,727)/ 132 Taxman 373 . The maxim stare decisisprovides that when a point of law has been decided, it takes the form of a precedent which is to be followed subsequently and should not normally be departed from. A decision which is followed for a long time will generally be followed, even though the court before whom the matter arises afterwards, might be of different view.
14. Adverting to the facts of the present case, we find that the issue raised before us has been predominantly decided in the above referred two cases against the assessee after making thorough analysis of the issue, dealing with all the aspects now raised by the ld. AR before us. These cases do not fall into the exceptions, as discussed supra, justifying departure from the earlier view. We are, therefore, not inclined to revisit all the relevant facts and the legal position on it with a view to test the correctness of these orders. Respectfully following the rule of precedent, we refuse to take a contrary view from that expressed by the Mumbai Benches in the afore-noted cases. The disallowance is thus sustained and resultantly the impugned order is upheld.
15. In the result, the appeal stands dismissed.
[2011] 15 taxmann.com 52 (Kol.)
IN THE ITAT KOLKATA BENCH 'A'
Sushil Kumar Das
v.
Income-tax Officer
MAHAVIR SINGH, JUDICIAL MEMBER AND AKBER BASHA, ACCOUNTANT MEMBER
IT APPEAL NO. 193 (KOL.) OF 2011
[ASSESSMENT YEAR 2005-06]
MAY 13, 2011
Section 4, read with sections 139 and 143, of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 2005-06 - Whether law impose on Assessing Officer a duty to assess income in accordance with law and in doing so, Assessing Officer cannot assess an amount which is not taxable as per law though shown by assessee in its return; and it is always open to assessee to take a plea before higher authorities that a sum though shown as income is not taxable under law - Held, yes - Assessee, on his retirement as a school teacher, had received a sum of Rs. 10.92 lakhs which included interest of Rs. 3.29 lakhs awarded by High Court - Assessee under impression that interest so received was taxable, showed it in its income-tax return - However, later on after realizing that interest so received, was not taxable in view of it being a non-statutory interest in nature of compensation preferred an appeal before Commissioner (Appeals) - Commissioner (Appeals) rejected appeal by holding that an income offered in return, could not be reduced at appellate stage - Whether interest in question received by assessee was a capital receipt and, thus, was not taxable - Held, yes - Whether, order of Commissioner (Appeals) was to be set aside - Held, yes
Circulars and Notifications : CBDT's Circular No. 14(XL-35), dated April 11, 1955
FACTS
The assessee, an individual, had retired as a school teacher. He received an amount of Rs. 10.92 lakhs inclusive of interest of Rs. 3.29 lakhs awarded by the High Court in a writ petition. The assessee, under the impression that the interest so received was taxable, offered the same for tax. The assessee, however, later on learnt from other sources that the interest received as a result of the order of the High Court is a non-statutory interest and is in the form of damages/compensation and, hence, the same was not liable to tax. Accordingly, the assessee filed an appeal before the Commissioner (Appeals). The Commissioner (Appeals) rejected the appeal by merely stating that the assessee had offered the income in his return and the same could not be reduced at the appellate stage.
Being aggrieved by the order of the Commissioner (Appeals), the assessee preferred instant appeal.
HELD
The moot question arising out is whether the income determined by the Assessing Officer on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee. It is well settled that the principle for determining the taxable income of the assessee under the Act should be within the purview of the law in force. If the taxable income determined by the Assessing Officer is not in accordance with such principle it is open to the assessee to contend the same before the higher authorities to follow the correct application of law to determine the actual taxable income of the assessee. It is held that the lower authorities, are not expected, to say that merely because the assessee has returned income which is higher than the income determined in accordance with legal principles such returned income can be treated as lawfully assessed. An assessee is liable to pay tax only upon the taxable income. The law imposed on the Assessing Officer liability to assess the income according to law and determine the tax payable thereon. In doing so, the Assessing Officer cannot assess the income of the assessee an amount which is not taxable as per law though shown by the assessee in the return. It is always open to the assessee to take a plea that the taxable income though shown as income is not taxable under law before the higher authorities. The Commissioner (Appeals) without going into the merits of the case held that the Commissioner (Appeals) is not having any power to reduce the taxable income of the assessee at the appellate stage, which is not correct. The case ofCIT v. Charanjit Jawa [2004] 270 ITR 173 /[2005] 142 Taxman 101 (Punj. & Har.) relied upon by the assessee supports the views that the interest received as a result of the order of the High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax. In view of the above, after considering the totality of the facts and circumstances of the case and also on perusal of the case law relied upon by both the parties it is held that the interest of Rs. 2,53,730 received by the assessee as per the order of the High Court was not taxable and the same is a capital receipt. The support can be taken from the circular issued by the CBDT vide Circular No. 14 (XL-35), dated 11-4-1995 which has directed the officers not to take advantage of the ignorance of the assessee. The appellate authorities have powers to admit points of law and admit claim for exemption based on materials on record. In view of the above, the Assessing Officer is directed to treat the aforesaid receipt of Rs. 2,53,730 as capital receipt which was received by him as per the order of the High Court. [Para 9]
In the result, the appeal of the assessee is allowed. [Para 10]
CASE REVIEW
CIT v. Charanjit Jawa [2004] 270 ITR 173 /[2005] 142 Taxman 101 (Punj. & Har.) (para 4), CIT v.Kanpur Coal Syndicate [1964] 53 ITR 225 (SC) (para 5), Jute Corpn. of India Ltd. v. CIT[1991] 187 ITR 688/[1990] 53 Taxman 85 (SC) (para 5), CIT v. Bhaskar Mitter [1994] 73 Taxman 437 (Cal.) (para 6), Maynak Poddar (HUF) v. WTO [2003] 262 ITR 633 (Cal.)/ 130 Taxman 500 (Cal.) (para 6), Sail DSP VR Employees Association 1998 v. Union of India[2003] 262 ITR 638 / 128 Taxman 704 (Cal.) (para 6) and National Thermal Power Co. Ltd. v.CIT [1998] 229 ITR 383 (SC) (para 9).
M.D. Shah for the Appellant. A.K. Pramanik for the Respondent.
ORDER
Akber Basha, Accountant Member. - This appeal by the assessee is against the order dated August 31, 2010 of the Commissioner of Income-tax (Appeals)-XIV, Kolkata pertaining to the assessment year 2005-06.
2. The grounds of appeal raised by the assessee are as under :
"1. For the learned Commissioner of Income-tax (Appeals) erred in law in holding that in your petitioner's case there was no need for furnishing reasons for reopening of the case in spite of the appellant's specific request to that effect.
2. For that the compensatory non-statutory interest received by the appellant in terms of the order of the hon'ble Calcutta High Court was a capital receipt in nature and the authorities below should have not imposed tax on such capital receipt.
3. For that the officers of the Department should not have taken advantage of the appellant's ignorance and the Central Board of Direct Tax's Circular No. 14(XL-35), dated April 11, 1955 is binding on the Assessing Officer.
4. For that without prejudice to ground No. 2 above, the appellant's claim of splitting up interest should have been allowed following the ratio of the Apex Court's decision in the case of CIT v. T. N. K. Govindarajulu Chetty [1987] 165 ITR 231 (SC).
5. For that in any event, as the reason for reopening of the case was never communicated, the proceedings were void and bad in law and therefore a nullity and the orders passed by the authorities below are liable to be set aside.
6. For that merely because the appellant has wrongly shown capital receipt as taxable income in his return, the capital receipt cannot be subjected to tax by the authorities taking advantage of ignorance of the appellant."
3. There is a delay of one day in filing of the appeal by the assessee for which the assessee has filed a condonation petition explaining the reasons for such delay. After considering the submissions by the assessee, the delay is condoned. Ground Nos. 1 and 5 raised by the assessee in this appeal are not pressed. The remaining grounds raised by the assessee are relating to whether the interest of Rs. 3,29,101 received by the assessee as per the order of the hon'ble Calcutta High Court is a capital receipt, treating it as compensatory in nature, which would not form a part of his income or not.
4. The brief facts of the case are that the assessee is an individual, retired as school teacher from Shanpur Netaji Subhas High School on July 31, 1998. The assessee received an amount of Rs. 10,92,796 inclusive of interest of Rs. 3,29,508 by virtue of the writ petition No. 2928 West Bengal. The assessee did not file any return under section 139(1) till March 31, 2006. Since the assessee received Rs. 10,092,796 which is inclusive of interest and TDS was made against this payment. The Assessing Officer noticed that the income has escaped assessment for the assessment year 2005-06. Under the circumstances the Assessing Officer issued notice under section 148 of the Act. The assessee filed the return showing income of Rs. 6,19,392 along with statement of taxable income of different years and the assessee also claimed for relief under section 89(1) of the Act. In the assessment proceedings after giving opportunity to the assessee to attend the hearing the Assessing Officer recomputed the taxable income at Rs. 8,86,500 restricting the relief under section 89(1) of the Act at Rs. 65,817. The assessee was under impression that the interest received as per the order of the High Court was taxable hence the assessee offered for tax a sum of Rs. 2,53,730. The assessee later learnt from other sources that the interest received as a result of the order of the hon'ble High Court is a non-statutory interest and in the form of damages/compensation and hence the same was not liable to tax. Accordingly the assessee filed appeal before the Commissioner of Income-tax (Appeals). In support of his contention, he relied on the orders of the hon'ble Punjab and Haryana High Court in the case of CIT v. Charanjit Jawa [2004] 270 ITR 173/[2005] 142 Taxman 101 (Punj. & Har.) and prayed that the Assessing Officer may be directed not to tax the interest of Rs. 2,53,730 which was not taxable but under wrong notion of law the same was offered to tax. The Commissioner of Income-tax (Appeals) however rejected the same by merely stating that the assessee had offered the income in his return and the same cannot be reduced at the appellate stage. Hence aggrieved by the order of the Commissioner of Income-tax (Appeals) the assessee is in appeal before us.
5. Learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) simply rejected the claim of the assessee on the ground that the income has been declared by the assessee in his return of income and hence the same cannot be reduced in the appellate proceedings. It is submitted that the powers of the Commissioner of Income-tax (Appeals) are coterminous with the powers of the Assessing Officer. For this proposition, he relied on the following judgments :
6. It is also submitted that it is a well settled law that no tax can be imposed without the authority of law if a tax cannot be imposed, the same cannot be collected merely because the assessee has paid the same. It is submitted that it is unconstitutional to collect tax without authority of law. He referred to article 265 which states that "No tax shall be levied or collected except by authority of law". Merely because the assessee under wrong understanding of law offers amount to tax, the same will not be a reason to tax the said amount unless it is lawful to tax the same. For this proposition he relied on the following case law :
(iii) Sail DSP VR Employees Association 1998 v. Union of India [2003] 262 ITR 638/[2003] 128 Taxman 704.
7. Hence it is therefore submitted that the receipt can be subjected to tax only if the same is chargeable to tax as per law not only because the assessee under wrong understanding. Hence the interest of Rs. 2,53,730 was non-statutory only and in the form of a damages/compensation and as such the interest is not liable to tax. In view of the above, he prayed that the Assessing Officer may be directed to exclude the sum of Rs. 2,53,730 as taxable to the assessee.
8. On the other hand, the learned Departmental representative submitted that an amount of interest of Rs. 2,53,730 was already included by the assessee himself and he filed the return in response to the notice under section 148 since this income is shown in the return by himself it cannot be reduced at the appellate stage. Hence, it is submitted the order of the Commissioner of Income-tax (Appeals) is to be confirmed.
9. We have heard the rival submissions and perused the materials available on record. The moot question arising out of this appeal is whether the income determined by the Assessing Officer on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee. It is a well settled that the principle for determining the taxable income of the assessee under the Income-tax Act should be within the purview of the law in force. If the taxable income determined by the Assessing Officer is not in accordance with such principle it is open to the assessee to contend the same before the higher authorities to follow the correct application of law to determine the actual taxable income of the assessee. In our considered view, the lower authorities, are not expected, to say that merely because the assessee has returned income which is higher than the income determined in accordance with legal principles such returned income can be treated as lawfully assessed. An assessee is liable to pay tax only upon the taxable income. The law imposed by the Assessing Officer to assess the income according to law and determined the tax payable thereon. In doing so, the Assessing Officer cannot assess the income of the assessee an amount which is not taxable as per law though shown by the assessee in the return: It is always open to the assessee to take a plea that the taxable income though shown as income is not taxable under law before the higher authorities. The Commissioner of Income-tax (Appeals) without going into the merits of the case held that the Commissioner of Income-tax (Appeals) is not having any power to reduce the taxable income of the assessee at the appellate stage, which is not correct. In the case of Charanjit Jawa (supra) relied upon by learned counsel for the assessee supports the views that the interest received as a result of the order of the hon'ble High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax. In view of the above, after considering the totality of the facts and circumstances of the case and also on perusal of the case law relied upon by both the parties we hold that the interest of Rs. 2,53,730 received by the assessee as per the order of the hon'ble High Court was not taxable and the same is a capital receipt. We also take support from the circular issued by the Central Board of Direct Taxes vide Circular No. 14 (XL-35), dated April 11, 1955 which has directed the officers not to take advantage of the ignorance of the assessee. The appellate authorities have powers to admit points of law and admit claim for exemption based on materials on record as per the judgment of the hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 . In view of the above, we direct the Assessing Officer to treat the aforesaid receipt of Rs. 2,53,730 as capital receipt which was received by him as per the order of the hon'ble High Court.
10. In the result, the appeal of the assessee is allowed.
----- Forwarded Message -----
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Saturday, 2 February 2013 1:51 AM
Subject: Report on Tax Audit
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Saturday, 2 February 2013 1:51 AM
Subject: Report on Tax Audit
Reporting CBDT on Membership Misuse
We had received the data on tax audit reports e-filed during 2011-12 to ascertain the misuse of membership numbers. Consequently, we recently submitted the details of fake and deceased memberships to the CBDT for appropriate action. We have reported that 652 membership numbers quoted by the assessees in e-returns do not subsist at all. Also, 2,503 tax audits have been conducted using the fake membership. 311 out of 652 membership numbers belong to the deceased who passed away before 31-3-2011. 759 out of 2,503 tax audits were conducted using the identity of the deceased members.
Source: President Message-CA Journal-Feb,2013
Best Wishes
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