Order passed without dealing with objections filed by the Assessee is not valid
The passing of an order dealing with theobjections filed by the assessee is not an empty formality. The assessing officer has to apply his mind to theobjections raised and has to deal with the objections in the order. This has not been done in the present case. Consequently, order dated 28.01.2013 is set-aside.
THE HIGH COURT OF DELHI AT NEW DELHI
Judgment delivered on: 08.02.2013
W.P.(C) 711/2013
M/S JAY BHARAT MARUTI LTD
versus
versus
ASSTT. COMMISSIONER OF INCOME TAX AND ORS
JUDGMENTBADAR DURREZ AHMED, J (ORAL)
This writ petition is directed against the notice dated 30.08.2011 issued by the respondent undersection 148 of the Income Tax Act, 1961 (hereinafter referred to as „the said Act‟) pertaining to theassessment year 2007-08. It is also directed against the order dated 28.01.2013 whereby the respondent has rejected the objections raised by the petitioner pursuant to the receipt of the purported reasons behind the proposed reopening of the assessment for the said assessment year 2007- 08.
2. On going through the order dated 28.01.2013 we find that the same has been passed without anyapplication of mind. To say the least, it is a cut-and-paste job. This is apparent from the fact that the paragraph 3 is merely a repetition of the provisions of section 147 and 148 of the said Act. Thereafter, paragraphs 4, 5 upto 5.6 comprise of quotations and extracts from Supreme Court andHigh Court decisions. Paragraph 5.7 is perhaps a reference to the case at hand. However, we find that the words mentioned therein could apply to any case. It appears to be a generic paragraph which is perhaps applied by the respondent to several such cases. In order to appreciate this fact we are reproducing the paragraph 5.7 hereinbelow: -
"5.7 In this case, the belief of the AO has been held in good faith and not on the basis of any rumour. In fact the reasons for issue of notice existed at the time of issue of notice and the reasons are genuine. They were in fact communicated to the assessee also. The reasons recorded are quite detailed. As is evident from the perusal of the reasons recorded, they in fact record the satisfaction of the AO that the income has escaped assessment on the basis of the reasons elucidated and the material on record as relied upon by the AO at the time while recording his satisfaction that the income had in fact escaped assessment."
3. Apart from the aforesaid paragraph there is no discussion of the points raised by the petitioner in its objections. In fact, portions of the objections furnished by the petitioner have been copied verbatim as would be apparent from paragraph 2 of the order which reads as under: -
"2. Notice u/s. 148 was issued after recording the reasons under section 147 of the Act on 30.08.2011 and duly served. In response to the same, assessee has submitted written submission dated 27.09.2011 wherein the assessee submitted that the notice is illegal and without jurisdiction. We object the reassessment proceedings. The return already filed by u/s 139 for A Y 2007-08 may please be treated as return filed in pursuance of the notice now received. Further, it was also requested to enable us to make objections both on facts and in law to the proposed reassessment, please give us reasons recorded for reopening the assessee and also the order of sanction obtained for the purpose and on receipt of the same we shall make detailed submission and objection, both on facts and in law after which we wish to be heard in person for which adequate opportunity be granted to determine the justifiability or otherwise of the action for reassessment in terms of the decision of GKN Driveshaft Ltd. Vs. CIT (2003) 259 ITR 19 (SC) and not issue on merits be taken up for any decision before the validity of action for reassessment is decided. The reasons recorded under section 147 were provided to the AR of the Assessee Company. The assessee filed an objection against the issuance of notice under section 148 vide written submission."
It is apparent on going through the above extract that the respondent has not even bothered to change the words such as "we", "us", etc. which the petitioner had used in its objections/ reply. This shows that the respondent had not even applied his mind and not even bothered to correct the contents of paragraph 2 so as to put it into second person or third person in the grammatic sense.
4. For the aforesaid reasons, after hearing the counsel for the parties at the stage of admission itself we feel that such an order cannot be permitted to stand as it smacks of non-application of mind. The passing of an order dealing with the objections filed by the assessee is not an empty formality. The assessing officer has to apply his mind to the objections raised and has to deal with theobjections in the order. This has not been done in the present case. Consequently, order dated 28.01.2013 is set-aside. The matter is remitted to the respondent to pass a fresh order after taking into account the objections filed by the petitioner as also after giving the petitioner an opportunity of hearing. The order be passed by the respondent within three weeks. We have not commented at all on the merits of this petition with regard to the validity of the notice dated 30.08.2011. That issue is kept open. The writ petition stands disposed of.
IT : The words "arising out of business" in section 28(iv) essentially imply that the benefit or perquisite referred to therein must be in the nature of business receipt or revenue receipt. As Capital reserve arising in amalgamated company's books as a result of amalgamation in the nature of merger is a capital receipt and not a revenue receipt, same cannot be brought to tax by AO by invoking section 28(iv)
• Unless it is a revenue receipt, it cannot be in the nature of income except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi), and unless it is in nature of income, it cannot be considered for taxation under section 28(iv).
• The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature.
• Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature.
• Whatever be the scope of expression 'business', an advantage has to be in the nature of income first, and when it is not in the nature of income it cannot be brought to tax under the head profits and gains from business or profession.
• The benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction". Learned CIT(A) was quite justified in deleting the impugned addition.
■■■
[2013] 31 taxmann.com 11 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'B'
Income-tax Officer, Ward 7(3), Kolkata
v.
Shreyans Investments (P.) Ltd.
Pramod Kumar, ACCOUNTANT MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
IT Appeal No. 1485 (Kol.) of 2011
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
MARCH 6, 2013
L.K.S. Dahiya for the Appellant. M.K. Patni for the Respondent.
ORDER
Pramod Kumar, Accountant Member - By way of this appeal, the appellant Assessing Officer has called into question correctness of learned Commissioner (Appeals)'s order dated 8th August 2011, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2008-09, on the following grounds:
| 1. | That, on the facts and in the circumstances of the case, the learned CIT(A) has erred in considering the issue of shares by amalgamated company to the shareholders of amalgamated company in lieu of transfer of undertaking of the amalgamating company are all transfers within the meaning of section 2(47(i) of the Income Tax Act, 1961. Therefore, the said order of the learned CIT(A)- VII, Kolkata is perverse and liable to be quashed. | |
| 2. | That, on the facts and in the circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in considering the provisions of Section 47(vii) of the Income Tax Act, 1961, when it has not been relied upon by the assessee during the course of assessment proceedings under section 143(3) of the Income Tax Act, 1961. Therefore, the said order of the learned CIT(A)- VII, Kolkata is perverse and liable to be quashed. | |
| 3. | That, on the facts and circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in not providing any opportunity to the undersigned while considering the provisions of Section 47(vii) of the Income Tax Act, 1961, in favour of the assessee, which makes the order bad in law and perverse. | |
| 4. | That, on the facts and circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in concluding that the amalgamation is not an adventure in the nature of trade, without negating the reasons to the contrary, mentioned in order under section 143(3) of the Income Tax Act, 1961 dated 28.12.2010. That, on the facts and circumstances of the case and in law, the learned CIT(A)-VII Kolkata has erred. | |
| 5. | The appellant craves the leave to add, alter or abrogate any grounds of appeal at the time of hearing. |
2. The relevant material facts are not in dispute. The assessee before us is a company registered under the Companies Act, 1956. The return of income filed by the assessee, which disclosed a loss of Rs 1,26,760, was selected for scrutiny assessment under the Computer Aided Scrutiny Selection (CASS) scheme. In the course of these scrutiny assessment proceedings, the Assessing Officer noticed that the company had increased its share capital, and that an amount of Rs 2,06,87,692, which was shown as 'Capital Reserve (other than profit and loss account)', was to shown in the current year's balance sheet, whereas no such amount was reflected in the immediately preceding year's balance sheet. In response to the Assessing Officer's requisition to explain these facts, it was submitted by the assessee that the assessee company was part to am amalgamation scheme, duly approved by Hon'ble Calcutta High Court, wherein one Vidya Vincon Private Limited (VVPL, in short), i.e. amalgamating company, amalgamated in the assessee company with effect from 1st April 2007. It was also explained that the capital reserve of Rs 2,06,87,692 came into existence in the books of the assessee, on account of amalgamation with VVPL. The Assessing Officer, on these facts, called upon the assessee to show cause as to why the amount of Rs 2,06,87,692, being the capital reserve credited by the company on amalgamation, not be treated as income of the assessee under section 28(iv) of the Income Tax Act, 1961. The assessee's explanation was that the said amount is neither a benefit, nor a perquisite, nor even advantage of any kind, but simply a result of merger of accounts of amalgamating and amalgamated company. This explanation did not satisfy the Assessing Officer. He rejected the submissions of the assessee, and, in a very scholarly discussion, observed as follows:
| (i) | It appears that the assessee is an investment company and had an accumulated profit of Rs. 6,36,196/- as on 31.03.2007 and Rs.3,14,944/- as on 31.03.2008. The earning per share of the company in Rupees is (12.85). Likewise M/s. Vidya Vincom Pvt. Ltd. is also an investment company and had an accumulated profit of Rs.2,529/- and Rs.4,552/- as on 31.03.2006 and 31.03.2007 respectively. The earning per share of the company (in Rupees) has been mentioned in the audited accounts for the year ended on 31.03.2007 as negligible. No dividend has been distributed by both the companies in any of the previous years. | |
| (ii) | It has been found that the assets and liabilities of the amalgamated company had been taken over by the amalgamating company which resulted in income of Rs. 2,06,87,692/- after deducting capital Suspense Account of Rs. 82,15,980/- from the net worth (assets - liabilities) of the amalgamated company. The amount of Rs. 2,06,87,692/- represents the difference owning to the swap ratio determined by the Hon'ble High Court at Calcutta. Therefore, it is clear that there is a surplus amount of the net worth after allocation of share capital to the share holders of the amalgamated company as per Court's order. | |
| (iii) | As already stated, that the performance of both the amalgamated and amalgamating companies is more or less similar. The said two companies are investment companies having no business activities. Therefore, the reason for amalgamation is unknown. | |
| (iv) | The word 'Business' was defined in the Act under section. 2(13). The definition is not exhaustive; it covers every facet of an occupation carried on by a person with a view to earning profits. The word 'business' under section 28 has a very broad meaning and may be used in different connotations. The section also refers to an adventure in the nature of trade. In this regard, reference is being drawn to the decisions in the case of Rajputana Textiles (Agencies) Ltd. v. CIT [1961] 42 ITR 743 (SC), where it was held that where from the very beginning, purchase of shares is made with the intention of selling them, at a profit, it is an adventure in the nature of trade. | |
| (v) | The purpose of existence of the assessee is to conduct business and as a result earn profit. It will not be far fetched to assume that all the activities of the assessee are driven towards its motive of conducting business and earn profit. Therefore, this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee. | |
| This is not a hypothesis, but can be postulated to actual situation also. The block of assets that the amalgamated assessee company receives is definitely tangible assets that the assessee will enjoy. The bolstered figure of capital reserve can boost its image and goodwill. It can also profit it with more leverage to access loans for expansion or other activities in business. So, in a nutshell, it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation. The assessee in its sane mind will not venture into this exercise of amalgamation, without going into the due diligence of evaluating the pros and cons of an amalgamation with another company. When it has done so, its only motive can be to derive maximum benefit out of it. Therefore, the net result of enhancement of 'Capital Reserve' to the tune of Rs.2,06,87,692/- can only be termed as a benefit accruing to the assessee under section 28(iv) of the Income Tax Act, 1961. | ||
| In the instant case, the intention of the amalgamating company, i.e. the assessee company was to earn profit as there was no reason to amalgamation particularly where the performance of both the company were alike and there was no actual business shown by it during the past year (other than investment in mostly in private limited companies). Therefore, the resultant of amalgamation is considered as a business transaction and the profit arising out of merging of accounts of the amalgamated company with the amalgamating company is business income which is in the nature of benefit or perquisite arising from business or the exercise of a profession, covered under section 28(iv) of the Income Tax Act, 1961. In view of this, Rs.2,06,87,692/- is added to the total income of the assessee under the head 'Business'. |
3. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Learned CIT(A) deleted the impugned addition, and observed as follows:
I have gone through the submissions of the A.R. and the order of the AO, I agree with the A/R that the amalgamation of the two companies are consequent transfer of assets of amalgamating company into amalgamated company and issue of shares by amalgamated company to the shareholders of amalgamating company in lieu of transfer of undertaking of amalgamating company are all transfers within the meaning of section 2(47)(i) of Income Tax Act and are to be charged as capital gains on two counts, one in the hands of amalgamating company and secondly in the hands of shareholders of amalgamating company. However, as per section 47(vi) and section 47(vii), these transfers are outside the purview of capital gains.
The legislature in its wisdom has treated certain transactions in course of amalgamation outside the purview of 'transfer' for taxation purposes.
Section 47(vi) specifically states 'any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian Company'/
Section 47(vii) states that 'any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if-
| (a) | the transfer is made in consideration of the allotment to him for any share or shares in the amalgamated company; and | |
| (b) | the amalgamated company is an Indian Company. |
The amalgamation is not an adventure in the nature of trade. This transaction is clearly a capital account transaction. I further find that ICAI AS-14 (Accounting for Amalgamation) read with Expert opinion published in C.A. Journal (April 2004) has also opined that the difference in the share capital issued by the transferee company on amalgamation and amount of share capital of the transferor companies is of capital nature. Accordingly, the difference should be treated as capital reserve, since it is akin to share premium.
The Kolkata ITAT in ML Dalmia and Company case (supra) has also observed that amalgamation reserve cannot be treated as income of the appellant. Thus, I conclude that amalgamation reserve of Rs.2,06,87,692/- cannot be treated as business income under section 28(iv) of the Income Tax Act. Thus Ground No. 1 is decided in the favour of the appellant.
4. The Assessing Officer is aggrieved, and is in appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
6. We find that there is no dispute about the fundamental factual position that it is a case of amalgamation of companies, and it is as a result of this scheme of amalgamation, duly approved by Hon'ble jurisdictional High Court - a copy of which is placed on our records as well, that the capital reserve of the amalgamating company, i.e. VVPL, was shown in the books of accounts of the assessee. The short question that we really need to answer is whether on these facts, the transfer of capital reserve to the assessee company can indeed be considered to be an income of the assessee under section 28 (iv) as a 'business income'. As we deal with this issue, we may also mention that given these facts, as far as learned CIT(A)'s reliance on this Tribunal's decision in the case of DCIT v. M L Dalmiya & Co Ltd (98 ITD 93) is concerned, it is really out of place inasmuch as the question before the Tribunal in the said case whether an addition, in respect of entries pertaining to inter alia share amalgamation reserve, can be made to the 'undisclosed income' under section 158 BB - particularly when all the relevant details were furnished at the time of regular assessment proceedings. Answering this question, the co-ordinate bench observed that, "Coming to the merits of the case, we find that the learned CIT(A) has deleted the addition observing that the addition made by the Assessing Officer on account of undisclosed income was not justified at all as all the transactions pertaining to the share amalgamation reserve and share application money were duly recorded in the books of accounts and were filed before the date of search in the form of account and were filed before the income tax department before the date of search and in the form of audited statement, and, therefore, the same cannot be taxed as undisclosed income of the assessee" [emphasis by underlining supplied by us now]. Be that as it may, let us come back to the question that we have posed for our ourselves and the question, which, in our humble understanding, is decisive factor in this appeal.
7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Limited v. CIT (261 ITR 501), Hon'ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that section 28 only refers to the "income" which can be charged to income tax under the head "profits and gains from business or profession", and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). Hon'ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT (195 ITR 877) observed that, "…we hold that the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income Tax Act." (Emphasis by underlining supplied by us). This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income Tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers "any capital gains chargeable under section 45", but right now we are confined to normal connotations of the expression 'income'. Howsoever liberal or narrow be the interpretation of expression 'income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. It is also important to bear in mind that, as held by Hon'ble Supreme Court in the case of Dr K George Thomas v. CIT (156 ITR 412), "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Brothers Pvt Ltd (222 ITR 818) wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature.
8. To find out whether or not the benefit, even if that be so, is on capital account or revenue account, it is necessary to understand the nature of transaction which has resulted in, what the Assessing Officer, perceives as 'benefit to the assessee'. This was a case of amalgamation in the nature of merger, and an amalgamation in the nature of merger, in corporate parlance, is the process of blending of two or more companies into one of these blending companies, the shareholders of each blending company becoming substantially the shareholder of the company which holds the blended undertaking. The expression 'amalgamating company' is used for the 'blending company' which loses its existence into the other company and the expression 'amalgamated company' is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger is an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. It is a process of corporate reconstruction and it is only with the approval of Hon'ble jurisdictional High Court that this exercise is carried out. In the present case also, as stated in paragraph 4 of Part I of Schedule A (i.e. scheme of amalgamation) to Hon'ble Calcutta High Court's order dated 9th April 2008, "for the purpose of better, efficient and economical management, control and running of the business and to withstand the recessionary trend in the economy of the business undertaking concerned and for administrative convenience and to obtain advantage of economies of large scale, the present scheme is proposed to amalgamate the transferor company (i.e. VVPL) with the transferee company (i.e. the assessee)". As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observes, "……this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee…", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Seshasayee Brothers (supra), also, we find that the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature.
9. We have noted that the Assessing Officer's observations to the effect that 'business' under section 28 has a very broad meaning and may be used in different connotations" and that it includes adventure in the nature of trade, as also his reliance on Hon'ble Supreme Court's judgment in the case of Rajputana Textiles (Agencies) Ltd. v. CIT 42 ITR 743 (SC), wherein it was held that where from the very beginning, purchase of shares is made with the intention of selling them, at a profit, it is an adventure in the nature of trade. However, we are unable to see any merits in these arguments either. Whatever be the scope of expression 'business', an advantage has to be of income nature first, and when it is not of income nature, it cannot be brought to tax under the head profits and gains from business or profession. As regards the transactions in the nature of 'adventure in the nature of trade' in a situation in which shares are purchased with an intention of selling the same, right now we are dealing with a case of amalgamation by way of merger and not by way of purchase of shares, and, therefore, there cannot be any question of selling of the shares, nor does this judicial precedent deal with the issue before us in any other manner. There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee's business dealings or of trading nature. In view of these discussions, we are of the considered view that the benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction". Learned CIT(A) was quite justified in deleting the impugned addition, we uphold his conclusions, and we decline to interfere in the matter.
10. As we have decided the appeal on the fundamental issue that the benefit, even if any, was not in the revenue field, and could not have been brought to tax under section 28(iv) for this short reason, we see no need to deal with other peripheral legal issues raised by the parties, as also assessee's contention to the effect that there was no benefit at all to the assessee. These issues are rendered academic and call for no adjudication.
11. In the result, the appeal is dismissed.
IT : Deduction allowed under section 80-IA(8) should be on actual profit earned by power generation plant and has nothing to do with fixing of tariff rate for supply of power to consumer
■■■
[2013] 31 taxmann.com 63 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax-10
v.
Reliance Energy Ltd.*
J.P. DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL NO. 6792 OF 2010†
NOVEMBER 26, 2012
Section 80-IA, read with section 147, of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - [Electricity generation and distribution] - Assessment year 2003-04 - Assessee-electricity generation and distribution company was eligible for deduction under section 80-IA - In regular assessment deduction was computed under section 80-IA(8) based on market value of goods and services from electricity generating business to its distribution business - Assessing Officer, later on found that there was a circular of State Electricity Regulatory Committee dealing with fixing power tariff for consumer which took as one ingredient 16 per cent return on investment - He sought to reopen assessment on ground that profits for purposes of deduction under section 80-IA of power generation business has to be computed on basis of reasonable profits in terms of section 80-IA(10) incorporating ingredient mentioned in said circular - Whether fixing of power tariff for consumer had nothing to do with arriving at profits for purposes of deduction under section 80-IA - Held, yes - Whether deduction allowed under section 80-IA (8) should be on actual profit earned by power generation plant and has nothing to do with fixing of tariff rate for supply of power to consumer and, therefore, issue of application of section 80-IA (10) instead of section 80-IA (8) to arrive at profit for claiming deduction under section 80-IA, was a mere change of opinion which would not warrant reopening of assessment - Held, yes [Para 10] [In favour of assessee]
FACTS
| • | The assessee was engaged in generation and distribution of electricity and, thus, entitled to deduction under section 80-IA. In the regular assessment, computation was done under section 80-IA(8) taking into account the market value of goods and services (electricity supplied) from respondents electricity generating business to its distribution business. | |
| • | Later on, the Assessing Officer found that there was a Circular of State Electricity Regulatory Committee (MERC) dated 1-7-2004 dealing with fixing power tariff for consumer which as one ingredient 16 per cent return on investment. | |
| • | The assessment was reopened on the ground that— |
| (a) | A belief was formed on the basis of the order of the MERC for financial year 2004-05 determining the tariff for the sale of power by an order dated 1-7-2004 in which the profits attributable to its business of generation of electricity was pegged at 16 per cent return on investment; | |
| (b) | A deduction higher than 16 per cent rate of return on investment was claimed as profits for deduction under section 80-IA in respect of its electric generation business; | |
| (c) | The profits for purposes of deduction under section 80-IA of the power generation business has to be computed on the basis of reasonable profits in terms of section 80-IA(10) and not under section 80-IA(8) as done in regular assessment. |
HELD
| • | Both the Commissioner (Appeals) as well as the Tribunal have arrived at a finding of fact that Assessing Officer did not have any reasonable belief to come to the conclusion that there has been any escapement for the assessment year 2003-04. | |
| • | The order of MERC dated 1-7-2004 specifically deals with regard to fixing of the tariff rate at which power has to be supplied to the consumer. It is in the process of fixing of tariff rate for the consumer that 16 per cent return on capital investments is to be taken into account as one of the ingredients to arrive at the tariff rate and has nothing to do with the actual profits which are earned by an activity of the power generation plant. As against that the deduction allowed under section 80-IA is on the actual profit earned by the power generation plant and has nothing to do with the fixing of the tariff rate for the supply of power to the consumer. | |
| • | Moreover, the Tribunal has also correctly held that the jurisdiction to issue a reopening notice for the assessment year 2003-04 is absent in view of the fact that the profits earned as determined under section 80-IA with regard to its generation plant was the subject matter of appeal before the Commissioner (Appeals) and the Tribunal. Consequently, the original order of assessment dated 24-5-2005 had merged into the order of Appellate Authority inter alia with regard to the profits earned from the power generation plant at Dahanu for the purposes of deduction claimed under section 80-IA. | |
| • | The jurisdiction to exercise powers of reopening an assessment is specifically barred in respect of any matter which has been a subject matter of the appeal by the 3rd proviso to section 147. | |
| • | Further, the issue of application of section 80-IA(10) instead of section 80-IA(8) to arrive at the profit for claiming deduction under section 80-IA, is a mere change of opinion which would not warrant reopening of assessment. The material to reopen the assessment being relied on by the revenue seems to be the order of MERC dated 1-7-2004 which has nothing to do with arriving at profits for purposes of deduction under section 80-IA but deals with fixing of the power tariff for the consumer and for that purpose takes as one of the ingredients 16 per cent return on investments. Therefore, no fault can be found with the order of the Tribunal dated 14-5-2010. [Para 10] |
CASE REVIEW
Reliance Energy Ltd. v. Dy. CIT [2010] 40 SOT 314 (Mum. - Trib.) (para 10) affirmed.
Arvind Pinto for the Appellant. P.J. Pardiwala and B.G. Yewale for the Respondent.
JUDGMENT
M.S. Sanklecha, J. - This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 14.05.2010 of the Income Tax Appellate Tribunal (the Tribunal) relating to the Assessment Year 2003-2004.
2. The order dated 14.05.2010 of the Tribunal disposes of two appeals of the revenue for assessment years 2001-02 and 2003-04. The issue arising in both the assessment years is with regard to reopening of assessment under Sections 147 and 148 of the Act. However the two appeals with regard to assessment year 2001-02 (being appeal No.6791of 2010) and the present appeal are being disposed of by separate orders as appeal No.6791 of 2010 with regard to assessment year 2001-02 deals with reopening of assessment beyond a period of 4 years from the end of the relevant assessment year. While this appeal is with regard to reopening of assessment within a period of 4 years from the end of the relevant assessment year.
3. The Revenue has formulated the following questions of law for the consideration of this Court.
| (a) | Whether on the facts and circumstance of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) in cancelling the notice u/s. 148 and the assessment u/s. 147 holding that the re-assessment proceedings initiated based merely of change of opinion without taking into consideration that Explanation 1 to Section 147 of the Act squarely applied to this case? | |
| (b) | Whether on the facts and circumstances of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) when the assessee did not bring to the notice of the AO, the Maharashtra Electricity Regulatory Committee (MERC) circular which prescribed the 'reasonable rate of return' earned by the assessee on the basis of which tariffs of electricity was to be calculated and on the basis of which the Assessing Officer has now reworked out the eligible profit for deduction ? | |
| (c) | Whether on the facts and circumstance of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) in deciding that the assessment was reopened on change of mind as the issues decided in the original assessment and re-opened assessment viz. Pricing of power and quantum of profits eligible for deduction, were different and thus it cannot be said that a change of opinion had taken place in the case? |
4. The respondent-assessee is engaged in the business of generation and distribution of electricity. Originally the respondent was engaged only in the distribution of electricity in Mumbai. However, with effect from assessment year 1996-97 it commenced generation of electricity from its plant at Dahanu. As a consequence of establishing of plant for generation of electricity the respondent became entitled to deduction under Section 80IA of the Act.
5. For the assessment year 2003-2004, the respondent had filed its return of income, which was assessed on 24.05.2005 under Section 143(3) of the Act. The Assessing officer by order dated 24.05.2005 determined the respondent's income under the normal provision at Rs. 34.91 crores and under Section 115JB of the Act at Rs. 215 crores. The aforesaid income was determined after allowing a deduction of Rs. 282 crores in respect of the activity of power generation at Dahanu.
6. On 31.03.2008, a notice was issued by the appellant under Section 148 of the Act to the respondent seeking to reopen the assessment for the assessment year 2003-04. The reasons for the reopening the assessment are recorded as under :
"In this case, the assessee has filed the return of income for A.Y. 2003-04 on 28.11.2003 declaring total income at Nil and taxable income u/s 115JB at Rs. 14,24,89,782/-. The assessment order u/s 143(3) of the Act has been passed on 24.05.2005 assessing the total income under normal provisions of the Act at Rs. 34,91,44,430/- and u/s 115JB of the Act at Rs. 2,15,78,29,379/. In the same assessment order, the assessee has been allowed the deduction u/s. 80IA of the Act at Rs. 38,67,924/- (in respect of profit from Elastimold business) and also at Rs. 2,82,75,81,809/- in respect of profit from generation activity.
Section 80IA (10) of the I.T. Act, 1961 provides that 'where it appears to the AO that owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason the course of business between them is so arranged that the business transacted between them produced to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived there from.
Tariff for purchase of sale of power is determined on the basis of the normative parameters determined by the Govt of India under its Notification No. SO 251(E) dated 30.03.1992 issued under the provisions of Electricity Act, 1948. Tariff situates, both for the Central Sector and Independent Power producers (IPPS) were determined on COST PLUS PROFIT BASIS. Profit was determined on the 'return on equity' basis which was to be computed on the paid up and subscribed capital relatable to the generating unit at the rate of 16% of such capital. In this case, the assessee has claimed the deduction u/s 80IA of the Act in respect of generation of power from its power unit located at Dahanu. While filing the return of income for AY 2001-02, the assessee was aware that the profit should not exceed the 16% of its capital during the PY in view of the principles which are the basis for the fixation of tariff. However, the assessee has claimed the deduction u/s 80IA of the Act on the profits of Dahanu Unit which exceeded 16% of its capital. Though the MERC order in case No. 18 of 2003 was not passed till the date of passing of the order u/s 143(3) of the Act in the assessee's case, however, since the assessee was aware of the tariff regulation of restricting its profits to 16% in view of the act (Supra) the claim of deduction u/s 80IA should have been accordingly restricted in the return of income filed by the assessee and this fact should also have brought to the notice of the AO during the course of assessment proceedings. Thus, I am of the view that the claim of excess deduction u/s 80IA of the Act is because of failure on the part of the assessee, by not disclosing these facts truly and fully.
Maharashtra Electricity Regulatory Commission (MERC) in its order in the case no. 18 of 2003 calculated "Clear Profit or Reasonable Rate of return" on the assessee's capital for both generation and distribution of power. On perusal of assessee's records for AY 2001-02, it is observed that incorrect computation of profits without taking into consideration the tariff regulation which provides for clear profit and reasonable rate of return on capital base method has resulted in escapement of income to the extent of Rs. 177.08 crores, which is worked out as under :
| | Rs. In Crores | |
| Reasonable Profit allowed by MERC while calculating tariff | 249.00 | |
| Net power transferred from generated unit | 3546 | |
| Total sales in license area | 5880.00 | |
| Pro rata Reasonable profit | 150.16 | |
| 80IA deduction computed | 581.51 | |
| 80IA availed after restricting to available total income | 261.96 | |
| Excess 80IA deduction availed | 110.80 |
Therefore, I have reason to believe that in the case of the assessee, the income of the assessee chargeable to tax to the extent of Rs. 111.80 crores has escaped the assessment for AY 2001-02. This escapement of income is by reason for the failure on the part of the assessee to disclose fully and truly all material fact necessary for the assessment for the assessment year 2001-02.
Issue notice u/s. 148 of the Act."
7. The respondent resisted the reopening of the assessment. However, the Assessing Officer by an order dated 31.12.2008 besides holding that an amount of Rs.111.80crores had escaped assessment in view of excess deduction claimed under Section 80IA of the Act in the regular proceeding also held that the reopening of assessment was justified as:
| (a) | the reopening was for a period of less then 4 years from the end of the relevant assessment year the only requirement was that the assessing officer must have a reasonable belief that income has escaped assessment. This belief was formed on the basis of the the order of the Maharashtra Electricity Regulatory Commission (MERC) for financial year 2004-05 determining the tariff for the sale of power by an order dated 01.07.2004 in which the profits attributable to its business of generation of electricity was pegged at 16% return on investment; | |
| (b) | Consequently, it was held that a deduction higher than 16% rate of return on investment was claimed as profits for deduction under Section 80IA of the Act in respect of its electric generation business; and | |
| (c) | the profits for purposes of deduction under Section 80IA of the Act of the power generation business has to be computed on the basis of reasonable profits in terms of Section 80IA(10) of the Act and not under Section 80IA(8) of the Act as done in the regular assessment i.e., the market value of goods and services(electricity supplied) from respondents electricity generating business to its distribution business; |
8. In first appeal, the Commissioner of Income Tax (Appeals) by an order dated 02.06.2009 allowed the respondents appeal for assessment year 2003-04 by following his order in respondent's appeal for Assessment year 2001-02. So far as reopening of assessment for the assessment year 2003-04 was concerned the Commissioner of Income Tax (appeals) held that the same was not sustainable as the Assessing officer had no reason to believe that income had escaped assessment. This was on account of the fact that the revenue had opened the assessment only for the purposes of application of Section 80IA(10) of the Act when the same was available during the regular proceedings. Therefore, the issue of the claim for deduction under Section 80IA (8) or (10) of the Act was an issue of interpretation and therefore it was a mere change of opinion not warranting reopening of the assessment. On other issues it follows his order dated 02.06.2009 of the Commissioner of Income Tax (Appeals) for the assessment year 2001-02. In view of the above, the Commissioner of Income Tax (Appeals) held that the order dated 31.12.2008 of the Assessing officer cannot be sustained
9. Being aggrieved, the appellant herein preferred an appeal to the Tribunal. The Tribunal by its order dated 14.05.2010 upheld the order of the Commissioner of Income-tax (Appeals) dated 02.06.2009 and held that the order dated 31.12.2008 of the Assessing officer is not justified on account of the following:
| (a) | Section 80IA(10) of the Act can have no application to the present facts as that sub-section postulates that there has to be a close connection between assessee and some other persons. In this case, there is no other person involved. The respondent is engaged in both power generating business as well as power distribution business and there is no transaction with any other person in respect thereto. Therefore, the original order of the assessment dated 23.03.2004 correctly applied Section 80IA(8) of the Act which applies to transaction carried out by an assessee between its eligible business and its non-eligible business so as to determine the market value of goods and services in arriving at its profit. In any event this was also a mere change of opinion not warranting reopening of assessment under Section 147 and 148 of the Act. | |
| (b) | the MERC order dated 01.07.2004 was in respect of fixing the tariff at which power has to be supplied and the same would be no relevance in arriving at the profit at the generating plant of the respondent at Dahanu for the purposes of Section 80IA of the Act; | |
| (c) | the assessment order dated 24.05.2005 passed in regular assessment dealt with the quantification of deduction under Section 80IA in respect of Dahanu plant had merged into the order of Appellate Authorities namely, the Commissioner of Income Tax (Appeals) and the Tribunal. This is so as the appellate authorities had dealt with the determination of profit for the purpose of deduction under Section 80IA of Dahanu generation plant. Consequently, the Assessing Officer now has no jurisdiction to reopen the assessment under Sections 147 and 148 of the Act as provided in view of the 3rd proviso to Section 147 of the Act. |
10. We have heard Mr. Pinto Advocate for the revenue and Mr. Pardiwalla Senior Advocate for the respondent. We find that both the Commissioner of Income Tax (Appeals) as well as the Tribunal have arrived at a finding of fact that Assessing officer did not have any reasonable belief to come to the conclusion that that there has been any escapement for the assessment year 2003-04. The order of MERC dated 01.07.2004 specifically deals with regard to fixing of the tariff rate at which power has to be supplied to the consumer. It is in the process of fixing of tariff rate for the consumer that 16% return on capital investments is to be taken into account as one of the ingredients to arrive at the tariff rate and has nothing to do with the actual profits which are earned by an activity of the power generation plant. As against that the deduction allowed under Section 80IA of the Act is on the actual profit earned by the power generation plant and has nothing to do with the fixing of the tariff rate for the supply of power to the consumer. Moreover the Tribunal has also correctly held that the jurisdiction to issue a reopening notice for the assessment year 2003-04 is absent in view of the fact that the profits earned as determined under Section 80IA of the Act with regard to its Dahanu generation plant was the subject matter of appeal before the Commissioner of Income Tax (Appeals) and the Tribunal. Consequently, the original order of assessment dated 24.05.2005 had merged into the order of Appellate Authority inter alia with regard to the profits earned from the power generation plant at Dahanu for the purposes of deduction claimed under Section 80IA of the Act. The jurisdiction to exercise powers of reopening an assessment is specifically barred in respect of any matter which has been a subject matter of the appeal by the 3rd proviso to Section 147 of the Act. Further the issue of application of Section 80IA (10) of the Act instead of Section 80IA (8) of the Act to arrive at the profit for claiming deduction under Section 80IA of the Act is a mere change of opinion which would not warrant reopening of assessment. The material to reopen the assessment being relied on by the revenue seems to be the order of MERC dated 01.07.2004 which has nothing to with arriving at profits for purposes of deduction under Section 80IA of the Act but deals with fixing of the power tariff for the consumer and for that purpose takes as one of the ingredients 16% return on investments. Therefore, no fault can be found with the order of the Tribunal dated 14.05.2010.
11. In view of the above, the questions of law as formulated does not raise any substantial question of law. Therefore, the appeal is dismissed with no order as to costs.
The elite criminal investigation wing of the Income Tax department, which conducted a number of high-profile actions including raids on liquor baron Ponty Chadha, has been disallowed to carry out any search or seizure operations by the Finance Ministry henceforth.
The just over-an-year old wing called theDirectorate of Criminal Investigation (DCI), created in May 2011 to combat the menace of blackmoney and develop cases of illegal funds of "criminal nature", will now only work to develop a robust database of financial information and aid the regular investigation wings of the I-T to undertake "specific and result-oriented" search and survey operations. "The DCI, henceforth, will not undertake operations which they did under section 132 of the I-T Act (search and seizure). It will now be an intelligence gathering, analysis and dissemination wing of the I-T department," top sources privy to the development said.
The wing, however, can carry out some on-spot verification if the need arises, they said.
Sources said the Central Board of Direct Taxes (CBDT) has recently ordered the wing, based in the national capital, to study mounds of electronic data generated by economic intelligence agencies like the Financial Intelligence Unit (FIU), Central Economic Intelligence Bureau (CEIB) and those sent by the Intelligence Bureau and Enforcement Directorate (ED), and supply it to the regular probe units of the I-T spread across the country who will undertake action like raids and seizure of cash and other valuables.
The DCI had undertaken action on 128 search warrants during 2011-12. It executed eight search warrants in 2012-13 (Upto September, 2012) which included the high-profile search on liquor baron Ponty Chadha, killed recently in a shootout at his farmhouse, in February this year.
The searches were mired in controversy and according to sources, the Finance Ministry was mulling changing the operational procedures of this wing since then.
DCI had also conducted survey operations on various IPL franchises earlier this year.
"Finance Minister P Chidambaram had a few meetings with the top brass of the CBDT and the I-T department and instructed that the DCI should supplement to the I-T department's enforcement wings by way of giving them good cases to work upon and not rather duplicate the work by being on field themselves," sources said.
The CBDT has also formulated a new plan for the DCI which envisages to induct only those officials in this elite wing who have a bent of mind in not only technical analysis but also in creating a pool of human intelligence operatives.
"The DCI will also study and prepare trends of economic crimes in the country which would include detection and analysis of any terror funds in country's economic channels," they said.
The I-T department has 14 regular directorates of investigation in the country which undertake search and seizure operations to check and curb tax evasion.
The DCI, according to the official notification of the Finance Ministry of May 30,2011 was created to "seek and collect information about persons and transactions suspected to be involved in criminal activities having cross-border, inter-state or international ramifications, that pose a threat to national security and are punishable under the direct tax laws and to investigate the source and use of funds involved in such criminal activities."
Apart from the headquarters and a field office in Delhi the DCI has seven other offices in cities likeChandigarh, Jaipur, Ahmedabad, Mumbai, Chennai, Kolkata and Lucknow. Creation of the DCI was one amongst the five-pronged strategies that the government initiated to tackle blackmoney last year.
The other initiatives included joining global crusade against blackmoney (by way of signing treaties), creating an appropriate legislative framework, developing systems for implementation (of these laws), imparting skills to the manpower for effective action.
IT : Documents recovered during search under sec. 132 on buyer's premises are deemed to belong to the seller of properties within the meaning of sec. 153C, if documents recovered include sale deeds and agreements entered into for vacation of property between sellers and tenant before conclusion of such sale. Such documents give jurisdiction to AO under sec. 153C to initiate an action against "such other person" (i.e., person other than the person whose premises are searched)
FACTS
• Petitioners(individuals being family members ) sold their properties to company engaged in construction business(buyer).
• Buyer-company wanted vacant possession of properties sold
• Sellers paid moneys to tenants, entered into formal agreements with them to vacate properties and got them vacated
• During a search under section 132 on buyer-company, the sale deeds executed by seller in favour of buyer company and agreements with erstwhile tenants of properties were recovered.
• Based on such documents, ACIT initiated assessment proceedings by issuing notice under section 153C against petitioners-sellers.
• Petitioners challenged the notices issued under section 153C in instant writ petitions before the Gujarat High Court.
Petitioner's contention
• Under section 153C of the Act action can be taken only if any money, bullion, jewelry or other valuable articles or things or books of account or documents seized or requisitioned belong to a person other than the person searched.
• When the lands in question were already sold, these documents in question cannot be stated to belong to the petitioners.
• Once the title in the land passed on to the purchaser, none of the documents could be stated to belong to the petitioners.
HELD
• The petitioners required vacant possession of the land to be able to pass on the title.
• To be able to do so, the petitioners entered into agreements with the tenants.
• Such documents thus are documents which definitely belong to the petitioners.
• Simply because on subsequent date, the land was sold, which may have a bearing on the title of such land, the same would not in any manner alter the nature of the document concerned.
• Such documents belong to the petitioners and continue to so belong, irrespective of the transfer of the title of the land.
• One cannot see how the petitioners can contend that simply because at a subsequent point of time they disposed of the property and transferred the title to the purchasers, the documents cease to belong to them.
• The term "belong to" has not been defined in the Act.
• In the Webster's Third New Intl. Dictionary, the word, "belong" is described as, "to have relation or reference to a person or thing".
• In Advanced Law Lexicon by P. Ramanatha Aiyar [3rd Edition], the term, "belong" in context of section 400 IPC means, "implied something more than the idea of casual association; it involves a notion of continuity and indicates a more or less intimate connection with a body of persons extending over a period of time sufficiently long to warrant the inference that the person affected was identified himself with a band, the common purpose of which is the habitual commission of dacoity."
• The document executed between the erstwhile tenants of the petitioners regarding eviction of the tenants upon acceptance of sizeable payment by the petitioners definitely thus belong to the petitioners.
• It may be that as an evidence of passing on vacant and peaceful possession of the property, the petitioners handed over such documents to the purchasers to protect the interest of the purchasers against any action that may be initiated by the erstwhile tenants.
• The nature of the document or the fact that it belongs to the petitioners would not in any manner change.
• Likewise, the documents of sale also can be stated to belong to the petitioners.
• It is not in dispute that the petitioners were the sellers of the lands.
• They do not either doubt or dispute the documents of sale, or their respective signatures thereon.
• Term "belong" is not defined and does not have legally technical connotation and therefore, we once again fall back on the dictionary meaning of the same.
• We need to ascertain if such document can be stated to "have relation or reference to" to the petitioners.
• As noted, the petitioners were as sellers of the land, parties to the documents. They had admittedly executed such sale deeds.
• It can not be stated that the sale deeds do not belong to them.
• Likewise, the receipts of payments are also documents belonging to the petitioners.
• They are alleged to have received various payments in cash from the purchasers.
• If there are documents evidencing such particulars and if such documents are also signed by the petitioners, it can certainly be stated that such documents do belong to the petitioners.
• Under the circumstances, the action initiated under section 153C of the Act cannot be quashed. Petitions are therefore dismissed.
■■■
[2013] 31 taxmann.com 50 (Gujarat)
HIGH COURT OF GUJARAT
Kamleshbhai Dharamshibhai Patel
v.
Commissioner of Income-tax
AKIL KURESHI AND Ms. SONIA GOKANI, JJ.
Special Civil Application Nos.13635, 13636 & 13643 of 2012
DECEMBER 24, 2012
R.K. Patel for the Petitioner. Manish R. Bhatt, Mrs. Mauna M. Bhatt and Ms. Paurami B Sheth for the Respondent.
ORDER
Akil Kureshi, J. - These petitions arise out of common factual background. They are therefore, heard together and are being disposed of by this common judgment.
We may notice the facts as arising in Special Civil Application No. 13643 of 2012.
The petitioner is an individual and is assessed to tax under the Income-tax Act, 1961 ["Act" for short]. The petitioner has challenged the order dated 2nd February 2012 passed by the Commissioner of Income-tax, Ahmedabad under Section 127 [2] of the Act by which he clubbed and consolidated the assessment proceedings of the petitioner and other family members with ACIT, Central Circle-2(1), Ahmedabad. The petitioner has also challenged the notice dated 25th September 2012 issued under Section 153C of the Act.
The petitioner and other family members sold three parcels of land situated in the City of Ahmedabad to a Sanghvi Group operating in the name of Sanghvi Infracon Pvt. Ltd., who were engaged in the construction business. Search and seizure operations were carried out on the business premises of the said Sanghvi Infracon Pvt. Ltd. and other related persons on 9th March 2011. On the premise that certain documents belonging to the petitioner and other family members were found from the business premises of the said searched person, summons under Section 131(1A) of the Act was issued against the petitioner on 24th June 2011. A notice under Section 153C of the Act came to be issued by the Assistant Commissioner of Income Tax, Central Circle, 2(4) Ahmedabad against the petitioner and others on 25th September 2012, in which it was stated as under :
"A search U/s. 132 of the Income-tax Act was conducted in Group cases of Sanghvi Group (Shri Dhirajlal Vaghjibhai Sanghvi and others), on 09.03.2011. The income-tax of six assessment years immediately preceding the from A.Y. 2005-06 to 2010-11 is required to be assessed/re-assessed in your 153C r.w.s. 153(A) of the Income-tax Act, 1961 for A.Y. 2005-2006 being one out of the above six assessment years in respect of which you are assessable under the Income-tax Act, 1961. The return should be filed in the appropriate form as prescribed in Rule 12 of the Income-tax Rules, 1962. It should be duly verified and signed in accordance with the provisions of section 140 of the said Act and delivered at any office as mentioned above within fifteen days from the service of the notice."
The respondents along with the reply have produced reasons for issuance of notice under Section 153C of the Act, which were recorded on 24th September 2011 by the Assistant Commissioner of Income Tax, which reads as under :
"A search U/s. 132 of the Income-tax Act was conducted in Group cases of Sanghvi Group (Shri Dhirajlal Vaghjibhai Sanghvi and others), on 09.03.2011. Search was also carried out at residential premises of Shir Dhirajlal Vaghjibhai Sanghvi At A-14, Tirthbhumi Appartments, Opp. Law Garden, Ellisbridge, Ahmedabad. During the course of search one loose paper file consisting of 102 pages was found which was seized and inventorized as per annexure A-1. The documents seized are as under :-
| (a) | Pages 65 to 92 are sale deed of land (Survey No. 3) of Nava Vadaj, Ahmedabad which was sold by Shri Kamlesh Dharmsibhai Patel & Others. | |
| (b) | Pages 46 to 64 are sale deed of land (Survey No. 13) of Nava Vadaj, Ahmedabad which was sold by Shri Sanjay D. Patel & Kamlesh D. Patel. Both the documents are duly signed by Shir Kamlesh Dharamsibhai Patel. | |
| (c) | Further, Agreement relating to return of possession |
| i. | between Bansilal Babubhai Chaudhary and Shri Kamlesh Dharmsibhai Patel/Sanjay Dharmasibhai Patel was also seized at Pages 40 to 45. | |
| ii. | between Lilaben Bhadriprasad Bhulji and Shri Kamlesh Dharamsibhai Patel/Sanjay Dharamsibhai Patel was also seized at Pages 36 to 39. | |
| iii. | between Bhimjibhai Amarsinh Chauhan and Shri Kamlesh Dharmsibhai Patel/Sanjay Dharmsibhai Patel was also sized at Pages 32 to 35. |
All the above documents are duly signed by Shir Kamlesh Dharamsibhai Patel. Thus, documents belonging to Shri Kamlesh Dharmsibhai Patel were seized from the residential premises of Shri Dhirajlal Vaghjibhai Sanghvi.
In view of above facts, I am satisfied that all the prerequisite conditions of section 153C of the Act are fulfilled and therefore, it is a fit case for issuing of notice u/s. 153C r.w.s. 153A of the Act. Therefore, Notice u/s. 153C of the Act is issued to the assessee."
As noted, the petitioners filed these petitions, challenging the order passed by the Commissioner of Income Tax under Section 127(2) of the Act as also the notices issued under Section 153C of the Act on various grounds. However, while making oral submissions before us learned Counsel gave up challenge to the impugned order dated 2nd February 2012 passed under Section 127(2) of the Act but maintained the challenge of the petitioners to the notices issued under Section 153C of the Act.
Before recording and dealing with the rival contentions, we may recall that as per the reasons recorded by the Assistant Commissioner of Income Tax for initiating action under Section 153C of the Act against the petitioners, he had relied upon certain documents found from the possession of Sanghvi Infracon Pvt. Ltd. during the search operation at their business premises. Such documents were (1) Sale deeds of the land in question and (2) agreement entered into by and between the tenant of the said property and petitioners on various dates. In some cases, the authority has relied on receipts of payments along with the sale deeds; whereas in other cases, reliance is placed only on sale deeds. We shall therefore judge the validity of the notices on the basis of all such grounds.
Learned Counsel Shri R. K. Patel appearing for the petitioners vehemently contended that none of the documents found from the persons searched could be stated to belong to the petitioners. He submitted that under Section 153C of the Act action can be taken only if any money, bullion, jewellery or other valuable articles or things or books of account or documents seized or requisitioned belong to a person other than the person searched. He submitted that when the lands in question were already sold in favour of Sanghvi Infracon Pvt. Ltd. under the sale dated 18th September 2010, these documents in question cannot be stated to belong to the petitioners. As per his contention, once the title in the land vested in the purchases, none of the documents could be stated to belong to the petitioners.
Heavy reliance was placed on the decision of Devision Bench of this Court in case of Vijaybhai N. Chandrani v. Assistant Commissioner of Income-tax [2011] 333 ITR 436, wherein the Court had an occasioned to interpret the term "belongs to" used in Section 153C of the Act. We will refer to the said decision at a later stage.
For our perusal, Counsel produced on record photo copies of some of the documents which were entered into between the petitioners and the tenants.
On the other hand, learned Counsel Shri Manish Bhatt appearing for the Revenue submitted that the satisfaction note recorded by the authority leaves no room for doubt. Documents belonging to the petitioners were seized during the search and seizure operation carried out at the business premises of Sanghvi Infracon Pvt. Ltd. He submitted that simply because property was later on transferred by the owners would not change the nature of ownership of the documents in question.
Counsel relied upon decision of Division Bench of Delhi High Court in case of SSP Aviation Ltd. v. Deputy Commissioner of Income Tax [2012] 346 ITR 177, wherein in the context of Section 153C of the Act the Court observed as under :-
"14. Now, there can be a situation when during the search conducted on one person under section 132, some documents or valuable assets or books of account belonging to some other person, in whose case the search is not conducted, may be found. In such case, the Assessing Officer has to first be satisfied under Section 153C, which provides for the assessment of income of any other person, i.e., any other person who is not covered by the search, that the books of account or other valuable article or documents belongs to the other person (person other than the one searched). He shall hand over the valuable article or books of account or document to the Assessing Officer having jurisdiction over the other person. Thereafter, the Assessing Officer having jurisdiction over the other person has to proceed against him and issue notice to that person in order to assess or reassess the income of such other person in the manner contemplated by the provisions of section 153A.
15. It needs to be appreciated that the satisfaction that is required to be reached by the Assessing Officer having jurisdiction over the searched person is that the valuable articles or books of account or documents seized during the search belong to a person other than the searched person. There is no requirement in section 153C(1) that the Assessing Officer should also be satisfied that such valuable articles or books of account or documents belonging to the other person must be shown to show to conclusively reflect or disclose any undisclosed income."
Learned counsel Ms. Paurami Sheth also appeared for the Revenue and submitted that since the petitioners had given up their challenge to the order passed under Section 127(2) of the Act, she has no further submissions to make.
Having thus heard learned counsel for the parties and upon perusal of the documents on record, a pointed question that arises for our consideration is whether the action of the respondents under Section 153C of the Act can be stated to be invalid in the facts of the case. To recapitulate the facts - the petitioners held certain parcels of land in the city of Ahmedabad. Such lands were sold to Sanghvi Infracon Pvt. Limited by executing Sale Deeds dated 18th September 2010. Subsequently, Sanghvi Group was subjected to search and seizure operations during which time, certain documents were seized. It is the case of the Revenue that huge cash amounts were paid for purchase of the land which were received by the petitioners. We are not concerned with these allegations at this stage. What is relevant for us is to determine whether the sale-documents executed in favour of the petitioners and the agreements executed by the tenants of the lands in favour of the petitioners and other documents relied upon by revenue are the documents belonging to the petitioners and that therefore, action under Section 153C of the Act is valid.
Section 153C of the Act pertains to Assessment of income of any person other than the person searched and relevant portion thereof reads as under :-
"153C :- Assessment of income of any other person.
Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153 where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other that the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.
Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to [sub-section (1) of] section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person."
From the above, it can be seen that sub-section (1) of Section 153C of the Act starts with non obstante clause and provides that, notwithstanding anything contained in Sections 139, 147, 148, 149, 151 or Section 153 of the Act, if the requirements of the said sub-section are satisfied, the Assessing Officer having jurisdiction over the person other than the person searched shall proceed against such other person and issue notice and assess or re-assess income of such a person in accordance with the provisions contained in Section 153A of the Act. Requirements for assuming jurisdiction under sub-section (1) of Section 153C therefore are that the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in Section 153A of the Act. In such a case, he shall hand over to the Assessing Officer having jurisdiction over such other person, the books of account or documents or documents or assets seized or requisitioned. Importantly therefore, to initiate any action under Section 153C of the Act, it is essential that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A of the Act.
It was in this background that the Division Bench of this Court in case of Vijaybhai N. Chandrani [Supra] quashed the action of the Revenue authorities when it was found that copies of loose sheets of papers which were found during the search cannot be stated to belong to the person other than the searched person. It was the case wherein, on the basis of such documents seized during search operations on a builder, action under Section 153C of the Act was initiated against the purchasers of the properties constructed by the searched person. It was on this point that the Court held and observed as under :-
"13. Thus a condition precedent for issuing notice under section 153C and assessing or reassessing income of such other person, is that the money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned should belong to such person. It the said requirement is not satisfied, recourse cannot be had to the provisions of section 153C of the Act.
14. Examining the facts of the present case in the light of the aforesaid statutory scheme, it is an admitted position as emerging from the record of the case, that the documents in question, namely the three loose papers recovered during the search proceedings do not belong to the petitioner. It may be that there is a reference to the petitioner inasmuch as his name is reflected in the list under the heading Samutkarsh Members Details and certain details are given under different columns against the name of the petitioner along with other members, however, it is nobody's case that the said documents belong to the petitioner. It is not even the case of the Revenue that the said three documents are in the handwriting of the petitioner. In the circumstances, when the condition precedent for issuance of notice is not fulfilled any action taken under section 153C of the Act stands vitiated."
Facts being vitally different, the ratio laid down in the said decision would not apply in the present case. In the present case, the set of documents relied upon by the Revenue pertain to sale deeds executed by the petitioners in favour of the purchases viz., M/s. Sanghvi Infracon Private Limited and agreements entered into between the erstwhile tenants of the said lands and the petitioners. As noted earlier, in some cases reliance is placed on the sale deeds alone and in some additionally on the receipts of payments. In the present case, we find that the documents viz., agreements between the tenants of the petitioners would certainly satisfy the requirement of Section 153C of the Act. We may, to support such conclusions, have a slightly closure look at such documents. These documents are worded similarly. We may, therefore, record narration found in one such document executed on 23rd August 2010 between Bansibhai Babubhai Chaudhary - the party on the first part and Kamleshbhai Dharamshibhai Patel and Sanjaykumar Dharamshibhai Patel - petitioners herein [as party of the second part]. In such document, it is stated that the parties of the second part had purchased land on 3rd December 2007 by a registered sale deed. The party of the first part occupied three rooms constructed on such land as a tenant. The party of the second part required the land with vacant possession. The party of the first part did not require tenanted property any longer. The party of the second part therefore paid a total consideration of Rs. 24,00,000/= calculating Rs. 8,00,000/= per room to the party of the first part, upon which he had handed over vacant and peaceful possession of the said tenanted property to the party of the second part. In paragraph 5 of the said agreement, it was specifically provided that the party of the first part had not entered into any other transaction with respect to the tenanted properties. In paragraph 6 thereof, it was stated that the party of the first part would present himself for executing any document in favour of the party of the second part before any authorities; whenever required.
From the above, it emerges that the portion of land in question were occupied by tenants. In order to not only give a clear marketable title to the purchaser but also give the vacant possession of the entire land, the petitioners before executing the Sale Deeds entered into agreements with the tenants under which, the tenants vacated the premises and handed over possession to the petitioners in consideration of seizable amount paid to them. This was done through several agreements executed between the tenants and the petitioners. Later on, the lands were sold to M/s. Sanghvi Infracon Private Limited by a registered sale deed dated 16th September 2010.
What ever be the position of title of the lands post 16th September 2010, it can hardly be disputed that the documents in question belong to the petitioners. The petitioners required vacant possession of the land to be able to pass on the title and vacant possession. To be able to do so, the petitioners entered into agreements with the tenants. Such documents thus are documents which definitely belong to the petitioners. Simply because on subsequent date, the land was sold, may have a bearing on the title of such land, the same would not in any manner alter the nature of the document concerned. Such documents belong to the petitioners and continue to so belong, irrespective of the transfer of the title of the land. We do not see how the petitioners can contend that simply because at a subsequent point of time they disposed of the property and transferred the title to the purchasers, the documents since to belong to them. The term "belong to" has not been defined in the Act. In the Webster's Third New Intl. Dictionary, the word, "belong" is described as, "to have relation or reference to a person or thing".In Advanced Law Lexicon by P. Ramanatha Aiyar [3rd Edition], the term, "belong"in context of Section 400 IPC means, "implied something more than the idea of casual association; it involves a notion of continuity and indicates a more or less intimate connection with a body of persons extending over a period of time sufficiently long to warrant the inference that the person affected was identified himself with a band, the common purpose of which is the habitual commission of dacoity."
The document executed between the erstwhile tenants of the petitioners regarding eviction of the tenants upon acceptance of sizeable payment by the petitioners definitely thus belong to the petitioners. It may be that as an evidence of passing on vacant and peaceful possession of the property, the petitioners handed over such documents to the purchasers to protect the interest of the purchasers against any action that may be initiated by the erstwhile tenants. The nature of the document or the fact that it belongs to the petitioners would not in any manner change.
Likewise, the documents of sale also can be stated to belong to the petitioners. It is not in dispute that the petitioners were the sellers of the lands. They do not either doubt or dispute the documents of sale, or their respective signatures thereon. Term "belong"is not defined and does not have legally technical connotation and therefore, we once again fall back on the dictionary meaning of the same. We need to ascertain if such document can be stated to "have relation or reference to" to the petitioners. As noted, the petitioners were as sellers of the land, parties to the documents. They had admittedly executed such sale deeds. It cannot be stated that the sale deeds do not belong to them. Likewise, the receipts of payments also are documents belonging to the petitioners. They are alleged to have received various payments in cash from the purchasers. If there are documents evidencing such particulars and if such documents are also signed by the petitioners, it can certainly be stated that such documents do belong to the petitioners.
Under the circumstances, we are of the opinion that the action initiated under Section 153C of the Act cannot be quashed on the ground on which writ petitions are presented before us. Petitions are therefore dismissed.--
IT : Where there was a difference between stock as per statement filed before bank and in books of account of assessee and assessee despite being given more than sufficient opportunity had not been able to explain discrepancy, addition made by Assessing Officer was justified
■■■
[2013] 31 taxmann.com 70 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'SMC'
Estee Exports (P.) Ltd.
v.
Income-tax Officer *
SMT. DIVA SINGH, JUDICIAL MEMBER
IT Appeal No. 424 (Kol.) of 2012
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
AUGUST 9, 2012
Section 143 of the Income-tax Act, 1961 - Assessment - Additions to income [Stock discrepancies] - Assessment year 2002-03 - Assessee-company availed of a cash credit facility with a bank - Assessing Officer found that there was a difference between stock as per statement filed before bank and in books of account of assessee - Claim of assessee was that stock statement given to bank included goods which were being imported from USA being defective/secondary T.F.S. mixed sheets lacquered - Explanation of assessee was found to be false as such stock of defective/secondary T.F.S. mixed lacquered sheet as per books and stock statement given to bank matched exactly - Assessing Officer treated difference of stock as suppression and added to total income of assessee - Whether assessee despite being given more than sufficient opportunity had not been able to explain discrepancy in stock - Held, yes - Whether practice on which reliance was being placed by assessee that higher stock was shown to bank for purpose of getting higher loan or overdraft, could not be given judicial notice - Held, yes - Whether, therefore, additions made by Assessing Officer were to be upheld - Held, yes [Para 11] [In favour of revenue]
FACTS
Facts
| • | The assessee-company availed of a cash credit facility with a bank. The stock belonging to the company and in the name of the company was hypothecated/charged to the bank. | |
| • | As per the stock statement filed before the bank, the assessee was in possession of 213.138 mt. of goods. However, the assessee in its books of account had shown a quantity of 180.927 mt. The assessee claimed that in the stock statement given to the bank, it had included goods which were being imported from the USA being defective/secondary T.F.S. mixed sheets lacquered. | |
| • | The Assessing Officer observed that the stock of defective/secondary T.F.S. mixed lacquered sheet as per the books of the assessee and the stock statement given to the bank matched exactly. Further, the import invoice clearly mentioned that the goods being imported by assessee were defective secondary T.F.S. mixed lacquered sheets. It means that the claim of the assessee that it had included defective/secondary T.F.S. mixed lacquered sheet in the stock statement given to the bank which was yet to be reviewed in transit was an incorrect statement. In the absence of the stock book the Assessing Officer treated the difference of stock as suppression and, thus, same was added to the total income of the assessee. | |
| • | The Commissioner (Appeals) upheld the action of the Assessing Officer. | |
| • | Considering the submissions of the assessee that given on opportunity it would reconcile the difference in the stock as well as produce the stock register, the Tribunal restored the matter to the Assessing Officer for fresh adjudication. | |
| • | The Assessing Officer as well as the CIT(A) held that the assessee failed to give proper explanation for the difference, therefore, the addition is to be upheld. |
Assessee's submissions
| • | The assessee placed reliance on the fact that goods were in transit and had been accounted for by the assessee in its books of account on its arrival. | |
| • | It was further submitted that the assessee had included the goods in order to obtain a higher loan and it was the case of hypothecation. |
HELD
| • | In the peculiar facts and circumstances of the case, in the facts as it stand, the ground raised by the assessee deserves to be rejected. Even when the arguments of the assessee are accepted for the moment, it is seen that the figures do not reconcile even then. Thus the assessee despite being given more than sufficient opportunity has not been able to explain the discrepancy in stock. No new document or evidence has been brought to the notice of the Bench, nor has the assessee been able to show how the document has been wrongly considered. As such neither on facts nor on law the assessee's explanation is acceptable, as the alleged practice on which reliance is being placed that larger stock shown to the bank for the purpose of getting higher loan or overdraft. The said practice cannot be given judicial notice. [Para 11] | |
| • | Therefore, the addition made by the Assessing Officer is to be confirmed. |
CASES REFERRED TO
CIT v. Sidhu Rice and General Mills [2006] 281 ITR 428 (Punj. & Har.) (para 7), Coimbatore Spinning & Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.) (para 11), Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368/[1983] 12 Taxman 130 (Bom.) (para 7), Dhansiram Agarwalla v. CIT [1993] 201 ITR 192 (Gau.) (para 11), Dy. CIT v. Bush Tea & (P.) Ltd. [I.T. Appeal No. 994 (Kol.) of 2010] (para 12) and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Mum.) (para 12).
S.P. Choudhury and Soumitra Choudhury for the Appellant. A.K. Pramanick for the Respondent.
ORDER
Smt. Diva Singh, Judicial Member - This is an appeal filed by the assessee against the order dated September 30, 2011 of the Commissioner of Income-tax (Appeals)-VI, Kolkata, pertaining to the assessment year 2002-03 on the following grounds :
| "1. | That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the addition made by the Assessing Officer of Rs. 2,60,020 on the ground of difference in stock as per books of account and stock statement submitted to bank, though the reasons for such difference was duly explained and that in fact the stock shown as per books of account was correct. | |
| 2. | That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) ought to have held that the appellant is maintaining regular books of account including stock ledger which contains the quantity of each purchase and sale and as such no addition could be sustained on the ground of higher stock shown to bank as the stock was hypothecated and not pledged and the stock as per books of account was accepted by the Department as opening stock in the subsequent year. | |
| 3. | That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of Rs. 94,244 out of interest incurred for the appellant's business. | |
| 4. | That your appellant reserves the right to adduce any further ground or grounds, if necessary, at or before the hearing of the appeal." |
2. The relevant facts of the case are that the assessee, who is engaged in the business of trading in iron and steel, returned an income of Rs. 42,866 by way of filing a return on October 30, 2002. After having been processed under section 143(1), the same was subjected to scrutiny and the total income was computed at Rs. 3,54,260 by the Assessing Officer. Being aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals).
3. A perusal of the impugned order shows that the facts qua the addition made by the Assessing Officer in the first round are discussed in paragraph 1 of the same, which is reproduced for ready reference.
| "1. | Suppression of stock-Addition thereof | |
| During the course of hearing, it has been observed that the assessee-company availed itself of cash credit facility with the Punjab National Bank, Brabourne Rd. Br., Kol. A reference was made to the Manager, Punjab National bank to furnish details regarding the securities pledged for availing the cash credit facility, it was informed by the Punjab National Bank that no security was pledged. However, the stocks belonging to the company and in the name of the company are hypothecated/charged to the bank. Copies of stock statement for the financial year 2001-02 are also furnished. A perusal of the stock statement submitted to the bank, by the assessee-company as on March 31, 2002, reveals that total stock on that date was 213.138 mt, value of which was Rs. 46,27,535 as against Rs. 43,67,515 reflected in the profit and loss account. Therefore, there was a difference of stock of Rs. 2,60,020. Accordingly, the authorised representative was asked to explain the difference between the stock statement filed before the bank and to that of the Income-tax Department. He was also asked to explain as to why the same should not be added to the total income. He was further asked to produce the stock book. The assessee-company, vide their letter dated March 31, 2005, explained the difference due to the fact that consignment No. 80224 made in the USA weighing 39.60 MT was in transit and delivered to the company on April 12, 2002. Since the letter of credit and all other documents were received by the bank, they have shown the same in the stock. They further contended that there was also cash sale of 7.5 mt at Rs. 35,000 per mt amounting to Rs. 2,62,500 in the month of March, 2002, which was taken in the total sales for the month of March, 2002. In this context, it is to be mentioned that the authorised representative was categorically asked to produce the stock book, which he failed to produce. The explanations furnished by the assessee-company cannot be accepted in the absence of stock book. In the absence of the stock book, the difference of stock is treated as suppression and the same is added to the total income of the assessee-company." |
4. The said action was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal, vide its order dated January 24, 2007 in I.T.A. No. 238/Kol/06, restored the issue vide paragraph 5.1 observing as under :
"We find that the addition of Rs. 2,60,020 was made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) in absence of production of books of account as well as stock register and availability of physical stock. Considering the submissions of learned counsel for the assessee that given an opportunity he will reconcile the difference in the stock as well as produce the stock register, we, therefore, in the interest of justice, are of the considered opinion that the matter should go back to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall give adequate opportunity of being heard to the assessee as per law."
5. The proceedings before the Assessing Officer under section 143(3) read with section 254, which has given rise to the present proceedings, have been extracted in paragraph 4 of the impugned order. Aggrieved by which the assessee went in appeal before the Commissioner of Income-tax (Appeals), who, vide his detailed findings in paragraphs 7 to 13, confirmed the action of the Assessing Officer, considering the arguments of the assessee that as per the details given to the bank, the assessee had included the possession of the stock, which was in transit at the high seas and as per what has been given along with the return, the value of the said goods were not included, which has resulted in the discrepancy in the figures. A perusal of the impugned order shows that the Assessing Officer, vide his report No. ITO Wd-5(3)/Kol/R.R./11-12/109, dated June 23, 2011 made the following detailed submission :
"The assessee-company has/had filed stock statement before Punjab National Bank, Brabourne Road branch as on March 31, 2002. The copy of the stock statement is enclosed herewith for your records and perusal. As per this statement filed by the assessee, the assessee was in possession of 213.138 mt. of goods having a value of Rs. 46,27,535. It is relevant to bring to your notice that as per the statement the entire stock of 213.138 mt. of goods were lying at 87, M.D. Road, Kolkata-6. This has been stated by the assessee before the bank in the said report. The assessee in its books of account has shown a quantity of 180.927 mt. valued at Rs. 43,67,515. Thus, there is a difference of 32.211 mt. of goods and a value difference of Rs. 2,60,020. The assessee has claimed that in the stock statement given to the bank, they had included 39.60 mt. of goods which were being imported from the U.S.A. being defective/secondary T.F.S. mixed sheets lacquered. In the course of various proceedings the assessee has all throughout given the break-up of 180.927 mt. stock as per the balance-sheet as follows :
| Product Name | Unit | Closing | |
| Def./sec. E.T.P. stirps, below—295 MM. | M.T. | 26.186 | |
| Def/sec. C.R. Colis | M.T. | 31.616 | |
| Def./sec tinfree misprint | M.T. | 58.726 | |
| Def,/sec. T.F.S. mixed lacquercut from cols | M.T. | 40.189 | |
| Defective/secondary ETP W/W/ | M.T. | 24.210 | |
| 180.927 |
From the above, it is seen that as per the assessee its stock of defective/secondary T.F.S. mixed lacquered was 40.189 mt.
Now coming to the stock statement filed before the bank it is seen that the stock of defective/secondary T.F.S. mixed lacquered sheet was 40.189 m.t. This shows that the stock of defective/secondary T.F.S. mixed lacquered sheet as per books of the assessee and the stock statement given to the bank matches exactly. This also mean that the claim of the assessee that it had included 39.6 mt. of defective/secondary T.F.S. mixed lacquered sheet in the stock statement given to the bank which was yet to be reviewed in transit is an incorrect statement. The import invoice dated February 26, 2002 clearly mentions that 39.6 m.t. was defective/secondary T.F.S. mixed lacquered sheets being imported by the assessee, This invoice is not in dispute rather depending on this invoice the assessee tried to reconcile its stock difference. As stated above that there is no difference between the stock as per books and stock as per bank in import of defective//secondary T.F.S. mixed lacquered sheets. The submission of the assessee and its attempt to reconcile the stock difference is a false submission, mainly to escape the imposition of tax.
From the above, it is evident that the explanation of the assessee with respect to 39.6 mt is found to be false and the said import invoice does not support the case of the assessee, as being the excess stock is arriving out of different items not being secondary/defective T.F.S. mixed lacquered sheets.
With respect to the cash sale of 7.5 mt of defective/secondary T.F.S. mixed lacquered sheets, it is submitted that the closing stock as per books of account, of the assessee is 180.927 m.t., which is arrived after considering the sale of 7.5 m.t. on March 14, 2002 the sale being a cash sale would have been duly incorporated in the assessee's books of account on the date of sale and as a result of sale entry the stock had already stood reduced. This being so there is no reason as to reduce 7.5 m.t. This is also an afterthought to make a weak attempt to reconcile the difference between the stock quality finished before the bank and stock quality as per books. The statement given before the bank was on or after March 31, 2002 while the sale had taken place on March 14, 2002. The assessee had not given any explanation to justify the fact of not considering the sale of 7.5 m.t. at the time of preparation of stock statement which was filed before the bank.
From the above submission and the sequence of events it is evident that the assessee has failed to reconcile or give proper explanation. The explanation given by the assessee has been proved to be a false explanation in view of the facts narrated herein above. It is, therefore, hereby submitted that the sale addition of Rs. 2,60,020 should be upheld."
6. A perusal of the impugned order further shows that the assessee was required to reconcile the chart and stock valuation. The assessee relied upon a computer generated stock statement stating that it is automatically generated. The Commissioner of Income-tax (Appeals) reproduced the order sheet of the Assessing Officer dated November 19, 2007 narrating the following facts :
"Mr. D.P. Saraf F.C.A., authorised representative for the assessee appeared and furnished a copy of ledger about stock in quantity, a copy in respect to payment of customs duty, a invoice dated (copy) February 26, 2002 reg. purchase from ledger balance-a copy of stock-dated March 31, 2002, quantitative copy, a copy of high sea sale bill in respect to transfer/sale mode to Jugal Kishore, site-which are placed in file after verification with books of account.
It is shown to the authorised representative that the assessee has taken plea before the hon'ble Income-tax Appellate Tribunal that the bank has taken the stock on the letter of credit received by the bank. The hon'ble Income-tax Appellate Tribunal also asked the authorised representative to produce stock register but as per form No. 3CD there was no stock register. The authorised representative stated that the stock register is self-generated. Then it is shown to the authorised representative that the assessee under his signature has given the stock statement before the bank as stock as on March 31, 2002. The authorised representative also filed a copy of bill entry regarding sale of goods as endorsed by the Customs Department, which is placed on file after examination.
The assessee is being asked to file explanation in this regard by November 26, 2007.
In respect to sale of share and disallowance of interest under section 36(1)(iii) about rate of interest the assessee's books of account are verified and found o.k."
7. The assessee filed further written submissions on August 4, 2011 which are reproduced in paragraph 9 of the impugned order of the Commissioner of Income-tax (Appeals). For ready reference, the same is also reproduced :
"With reference to the above, we duly made our submission earlier and also submitted our letter of June 28, 2011 in reply to your various queries. Besides, we received a letter No. ITO Wd. 5(3)/Kol/10-11/61 dated May 31, 2011 fixing the date on June 7, 2011 along with necessary documents in connection with remand report. In compliance whereof the undersigned duly appeared and explained the reasons of difference between the stock as per books of account and stock statement given to the bank and the Assessing Officer was satisfied with the said explanation and did not raise any query. The stock ledger was also in the file of the Assessing Officer for which in the assessment order he mentioned that "no stock ledger was produced". The said stock ledger/stock register was regularly maintained showing all the items of purchases and sales day to day showing quantity of each purchases and sales. Besides all the books of account including purchase bills and sales bills were produced before the then Assessing Officer at the time of assessment proceedings and no false purchases and/or sales were found at that time nor any other anomaly was detected in such books of account. It is also to be narrated here that your appellant is a company whose books of account, bills, vouchers and other relevant documents are being subject matter of audit and tax audit and as such the closing stock reflected in the said accounts is true and correct and the said closing stock was shown as opening stock in the next year which was duly accepted by the then Assessing Officer. It is understood that the Assessing Officer has submitted a remand report before your honour in which he has stated. It is seen that as per the assessee its stock of defective/secondary T.F.S. mixed lacquered was 40.189 m.t. Now coming to the stock statement filed before the bank it is seen that the stock of defective/secondary T.F.S. mixed lacquered sheet was 40.189 m.t. This shows that the stock of defective/secondary T.F.S. mixed lacquered sheet as per books of the assessee and the stock statement given to the bank matches exactly. This also mean that the claim of the assessee that it had included 39.6 m.t. of defective/secondary T.F.S. mixed lacquered sheet in the stock statement given to the bank which was yet to be reviewed by the company as the same was in transit is an incorrect statement. The Assessing Officer failed to appreciate that the goods which was in transit was a different item known as defective/secondary. T.F.S. sheets whereas the items 40.189 m.t. as per books of account is defective/secondary TFS mixed lacquer cut from coils". The Assessing Officer without there being any basis and evidence thereof was quite unjustified in holding "that the submission of the assessee and its attempt to reconcile the stock difference is a false submission mainly to escape the imposition of tax". Due to his failure to understand the real impact he has wrongly stated that the submission of the assessee and its attempt to reconcile the stock difference is a false submission, mainly to escape the imposition of tax. In case the Assessing Officer could not understand our submission regarding reconciliation of stock he should have asked us again by making a query which he did not, as a result we presumed that he has understood the stock reconciliation. It is submitted before your honour that the goods was hypothecated to the bank and not pledged. Moreover, the explanation given by your appellant is true and correct. We have also to draw your kind attention to the following observation of the hon'ble High Court of Punjab and Haryana in the case of CIT v. Sidhu Rice and General Mills [2006] 281 ITR 428 (P&H) "that the Commissioner of Income-tax (Appeals) and the Tribunal have recorded concurrent findings of fact that the credit facility was against hypothecation of stock and not against pledge. It was also observed that except for the photocopy of the stock statement allegedly furnished to the bank, the Assessing Officer has not brought any material on record to show that the assessee, in fact, possessed stocks as reflected in the said statement as against the stock depicted in the balance-sheet. It was also found that the books of account were regularly maintained by the assessee and had been accepted by the Department . . . The Tribunal and the Commissioner of Income-tax (Appeals) on the basis of the material on record have taken a possible view which has not been shown to be perverse. Thus, in the absence of any substantial question of law no case has been made out for interference in the concurrent findings of fact recorded by the two authorities. Accordingly, the appeal is dismissed in limine. Recently the hon'ble High Court of Gujarat has also held by his judgment dated January 11, 2010 in the case of CIT v. Arrow Exim P. Ltd. as under :
Held : "that the much emphasis given by the counsel for the Revenue that the Tribunal has erred in making this observation that it was for the Assessing Officer to establish that the sale is not genuine and the observation that the Assessing Officer has failed to establish any unaccounted purchases outside the books of account to establish that the stock as per books is incorrect, is contrary to the material on record when admittedly the statement before the bank is different than the books of account. However, this submission referring to this observation has to be considered in the light of the entire discussion wherein the Tribunal has, referring to the order of the Commissioner of Income-tax (Appeals) in detail has accepted the explanation given by the assessee and in that context has stated that when the books of account or the accounting system has been found to be genuine supported by vouchers, etc., the addition was not justified. It is required to be mentioned that the stocks are hypothecated and not pledged, which was explained by the assessee and therefore in order to avail higher credit facilities the statement was given, but the stock was with the assessee, and therefore the submissions are misconceived. In view of the discussion made hereinabove, the findings arrived at by the Commissioner of Income-tax (Appeals) as well as the Tribunal cannot be interfered with".
8. Taking note of the fact that the assessee files a computer generated stock register whereas as per the order sheet on March 31, 2005 of the Assessing Officer, the learned authorised representative for the assessee failed to produce the stock register. In these facts, the Commissioner of Income-tax (Appeals), vide paragraphs 11 to 13, upheld the action of the Assessing Officer observing as under :
"11. I have perused the earlier assessment records and did not find the copy of stock register (now being produced by the assessee) so it was not produced during the original assessment. The assessment records have a purchase register, general ledger but not the copy of the stock register. The stock register produced by the assessee is a computer generated stock ledger. The said stock ledger was never produced by the assessee in the earlier assessment proceedings or appellate proceedings before the Commissioner of Income-tax (Appeals) before the matter was set aside by the hon'ble Income-tax Appellate Tribunal. The assessee produced this computer generated print out of two pages only during the reassessment proceedings before the Assessing Officer being carried out in response to the directions of the hon'ble Income-tax Appellate Tribunal setting aside the original assessment order. The register produced does not inspire confidence that it was a part of the original software programme since if it was being generated on every entry then there was no chance for the assessee to calculate the closing stock wrongly by any chance and further fact of non-production of the same and non-submissions any explanation regarding the difference between the closing stock reflected in the books of account and submitted to the bank. Even after categorical direction given by the Assessing Officer, the assessee did not produce any type of closing stock. The explanation of the assessee regarding taking into consideration of the purchases in advance receipt of the material and subtracting twice the quantity of cash sales are not reliable as genuine mistake of the assessee for furnishing the wrong statement. The assessee has tried to match the quantities which are not apparently believable. The Assessing Officer has given elaborate reasons for the addition and the difference in quantity and quality of the stocks in the assessment order and in the remand report. Therefore, the explanation of the assessee regarding the difference in the closing stock is rejected.
12. The hon'ble Bombay High Court in the case of Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368 (Bom) has upheld the addition made on the basis of information received from the bank regarding stock placed with it which was more in quantity then what was reflected in the income-tax return.
13. Therefore, it is held that the assessee has failed to give proper explanation for the difference between the stock reflected in the books of account and submitted to the bank authorities. Therefore, the addition Rs. 2,60,020 is upheld."
9. Aggrieved by this, the assessee is in appeal before the Tribunal. The learned authorised representative placed heavy reliance on the fact that these were goods in transit and this fact is borne out from page 39 of the paper book, the invoice number of which is 957370 dated February 26, 2002 of Lafer Blanc Inc. which has been accounted for by the assessee in its books of account at the value of Rs. 5 lakhs or for the next year on its arrival and the said document was before the Assessing Officer and the Commissioner of Income-tax (Appeals) who have not given due credence to the said document. It was his submission that the assessee had included in the stock position given to the bank the goods which were at high seas in order to obtain a higher loan and it was the case of hypothecation.
10. The learned Departmental representative, on the other hand, heavily relying upon the impugned order, submitted that all along the case of the assessee has been that stock register was not called for by the Assessing Officer and when opportunity was given to the assessee, he is relying upon the computer generated stock register and the impugned order sufficiently demonstrates that opportunity to produce the stock register was given by the Assessing Officer in the first round. It was his argument that he relies on the orders for the finding that the same is not reliable. Inviting attention to paper book page 29, it was his submission that if the closing stock figure is taken along with the submission of the assessee stating that the goods of 40.80 m.t. were in transit then the total closing stock would be 220 mt Inviting attention to page 5 of the Commissioner of Income-tax (Appeals), it was his submission that this document has been taken into consideration by the Commissioner of Income-tax (Appeals). As per the assessee, the amount of closing stock available with the assessee including the goods in transit have been given to the bank, even in such a case, the figures do not reconcile. Inviting attention to the same, it was submitted that first the assessee states that the entire stock of 213.138 m.t. of goods were lying at 87, M.D. Road, Kolkata-700 006. As per the statement given before the bank and as per the books of account of the assessee, it is 180.927 m.t. Then the assessee states that the goods weighing 39.60 m.t. were imported from the U.S.A. Thus, attempting to reconcile the difference considering the fact that the document referred to February 26, 2002 which is placed at paper book page 39 talks about 40.173 m.t., stock of defective/secondary T.F.S. mixed lacquered sheets, it was his argument that the figures are not reconcilable. Attention was further invited to paper book page 23 on the basis of which, it was his submission that though in the year under consideration, the sales increased from Rs. 29.59 lakhs odd to Rs. 2 crores 42 lakhs odd, the gross profit has reduced from 70 per cent. to 20 per cent. At each stage and from every angle, the case of the assessee rings hollow and the assessee has not attempted to justify any of these irreconcilable facts.
11. Having heard the rival submissions and perused the materials available on record and having gone through the various documents and the findings arrived at in the impugned order, I am of the view that in the peculiar facts and circumstances of the case, in the facts as it stand, the ground raised by the assessee deserves to be rejected. Even when the arguments advanced on behalf of the assessee are accepted for the moment, it is seen that the figures do not reconcile even then. Thus the assessee despite being given more than sufficient opportunity has not been able to explain the discrepancy in stock. No new document or evidence has been brought to the notice of the Bench, nor has the assessee been able to show how the document has been wrongly considered. As such neither on facts nor on law the assessee's explanation is acceptable, as the alleged practice on which reliance is being placed that larger stock shown to the bank for the purpose of getting higher loan or overdraft. The said practice cannot be given judicial notice. Reliance is placed upon Coimbatore Spinning & Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad); Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368/[1983] 12 Taxman 130 (Bom) and Dhansiram Agarwalla v. CIT [1993] 201 ITR 192 (Gau.). The assessee's ground is rejected.
12. Qua the second issue agitated by the assessee wherein an addition of Rs.94,244 made as attributable to investments resulting in earning exempt income, which action was confirmed by the Commissioner of Income-tax (Appeals) holding that the money was invested out of own kitty and the assessee's common fund of share capital and reserve in surplus were not sufficient to make it as investment out of own capital. The learned authorised representative placed reliance on the decision of the co-ordinate Bench of the Tribunal in the case of Dy. CIT v. Bush Tea & (P.) Ltd. in I.T. A. No. 994/Kol/2010 stating that disallowance at one per cent. may be made relying upon the accepted practice of the Kolkata Benches, which is consistently being followed. The learned Departmental representative did not oppose the said prayer, stating that the accepted legal precedence at the Kolkata Benches may be applied. Accordingly, in the light of the arguments advanced by the parties taking note of the judgment of the Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Mum.), which states that rule 8D would not be applicable retrospectively and would be applicable with effect from 2008-09 assessment year. Respectfully following the order of the Tribunal, the 14A disallowance is restricted to one per cent. of total exempt income. The ground No. 2 is allowed.
13. In the result, the appeal of the assessee is partly allowed. IT- I : Where expenses for charitable and religious purposes have been incurred in earlier year and said expenses are adjusted against income of subsequent year, income of that year can be said to have been applied for charitable and religious purposes in year in which expenses incurred for charitable and religious purposes had been adjusted
IT- II : Depreciation be allowed as necessary deduction in computing income of charitable trust
■■■
[2013] 31 taxmann.com 68 (Madhya Pradesh)
HIGH COURT OF MADHYA PRADESH
Commissioner of Income-tax
v.
Gujrati Samaj (Regd.)*
Shantanu Kemkar AND S.C. Sharma, JJ.
IT Appeal Nos. 21, 22 & 23 of 2011†
JULY 8, 2011
I. Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Application of income] - Assessment years 2004-05 to 2006-07 - Whether where expenses for charitable and religious purposes have been incurred in earlier year and said expenses are adjusted against income of subsequent year, income of that year can be said to have been applied for charitable and religious purposes in year in which expenses incurred for charitable and religious purposes had been adjusted - Held, yes [Para 8] [In favour of assessee]
II. Section 32, read with section 11, of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Charitable trust] - Assessment years 2004-05 to 2006-07 - Assessee, a charitable trust, claimed depreciation on its fixed assets - Said claim was disallowed by Assessing Officer - High Court in CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (MP), held that it if depreciation is not allowed as necessary deduction in computing income of a charitable trust, then there would be no way to preserve corpus of trust - Whether, in view of said decision, depreciation be allowed to assessee - Held, yes [Para 6] [In favour of assessee]
FACTS-I
Facts
| • | Assessee, a charitable trust, was created with object to impart education for benefit of public. | |
| • | It claimed carry forward and set off of excess of expenditure incurred during earlier year over its current year's income. | |
| • | However, the Assessing Officer had disallowed the same. | |
| • | The Commissioner (Appeals) confirmed decision of Assessing Officer. | |
| • | The Tribunal allowed assessee's claim. |
Issue involved
| • | Whether carry forward and set off of deficit of earlier year in application of funds of current year was allowable? |
HELD
| • | In view of section 11(1)(a), it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes. Having regard to section 11(1)(a) of the Act, when the income of the trust is used or put to use to meet the charitable or religious purposes, it is applied for charitable purpose and the said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Thus, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of the subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which expenses incurred for charitable and religious purposes had been adjusted. There are no words of limitation in section 11(1)(a) of the Act explaining that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. [Para 8] |
CASE REVIEW
CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.) (para 8) and CIT v. Raipur Pallottine Society [1989] 180 ITR 579/[1990] 50 Taxman 233 (MP)(para 6) followed.
CASES REFERRED TO
CIT v. Raipur Pallottine Society [1989] 180 ITR 579/[1990] 50 Taxman 233 (MP) (para 6), CIT v. Society of the Sisters of St.Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.) (para 6) and CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.) (para 8).
Ku. Veena Mandlik for the Appellant.
JUDGMENT
Shantanu Kemkar, J. - This order shall govern disposal of I. T. A. Nos. 22 and 23 of 2011 as common questions of law are involved in all these appeals and they arise out of the common order.
2. All these appeals under section 260A of the Income-tax Act, 1961 (for short, "the Act"), are against the order dated January 31, 2011 passed by the Income-tax Appellate Tribunal, Indore Bench (for short, "the Tribunal"), by which the Tribunal has decided I. T. A. No. 171/Ind/2010 for the assessment year 2004-05, I.T.A. No. 172/Ind/2010 for the assessment year 2005-06 and I.T.A. No. 173/Ind/2010 for the assessment year 2006-07.
3. Briefly stated, the respondent-assessee is a charitable trust formed with the main object to run educational institutions for the benefit of public. In the course of assessment under section 143(3) of the Act the Assessing Officer, vide order dated December 8, 2006, disallowed the assessee's claim for depreciation on the fixed assets. The Assessing Officer also denied the claim of the assessee to carry forward deficit in the application of funds. The said order of the Assessing Officer was challenged before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), vide order dated January 4, 2010, partly allowed the assessee's appeal to the extent he held that the assessee shall be entitled for claim of depreciation on the assets owned by it. About the claim to carry forward deficit, the Commissioner of Income-tax (Appeals) affirmed the decision of the Assessing Officer of not allowing the carry forward of loss. Aggrieved by the said order of the Commissioner of Income-tax (Appeals) the Revenue and the assessee had approached the Tribunal by filing their respective appeals.
4. The Tribunal, vide the impugned order dated January 31, 2011, allowed the assessee's appeal and dismissed the appeals of the Revenue. Aggrieved the Revenue has filed the present appeal.
5. Having heard learned counsel for the appellant, we find no ground to interfere into the impugned order passed by the Tribunal.
6. We find that the question, whether a charitable trust is entitled to depreciation under section 32 of the Act in respect of assets owned by it, was dealt with by a Division Bench of this court in CIT v. Raipur Pallottine Society [1989] 180 ITR 579/[1990] 50 Taxman 233 (MP) by placing reliance on a Division Bench judgment of the Karnataka High Court in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28/16 Taxman 400 and has held that depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. It is the exhaustion of the effective life of a fixed asset owing to "use" or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime ; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period. If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of the trust. A charitable trust is, therefore, entitled to depreciation in respect of the assets owned by it. (Also see Spicer and Pegler's Book Keeping and Accounts, 17th edition, pages 44, 45 and 46).
7. Having regard to the aforesaid settled legal position in our considered view, the Tribunal has rightly decided the issue about disallowance of claim of depreciation while computing the income of charitable trust and has rightly held that the assessee being a charitable trust is entitled for claim of depreciation on the assets owned by it. We, accordingly, affirm the view taken by the Tribunal in that regard.
8. Coming to the next question as to whether the order of the Tribunal holding that the assessee is entitled for carry forward and set off excess of expenditure incurred during the year over its income. We find that in view of section 11(1)(a) of the Act, it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes. Having regard to section 11(1)(a) of the Act, in our view, when the income of the trust is used or put to use to meet the charitable or religious purposes, it is applied for charitable purpose and the said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Thus, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which expenses incurred for charitable and religious purposes had been adjusted. There are no words of limitation in section 11(1)(a) of the Act explaining that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen (see CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.). In our considered view, the Tribunal has rightly applied the ratio of the judgment and order passed by the Division Bench of the Rajasthan High Court in Maharana of Mewar Charitable Foundation (supra) and committed no error in holding this issue in favour of the assessee.
9. In the circumstances, in our considered view, no case is made out to interfere into the order passed by the Tribunal. Accordingly, the appeal fails and is hereby dismissed.
IT: Deduction under section 80HHC cannot be allowed on eligible profits of business without reducing profits of business on which deduction under section 80-IA has been allowed
■■■
[2013] 31 taxmann.com 77 (Punjab & Haryana)
HIGH COURT OF PUNJAB & HARYANA
Commissioner of Income-tax-I, Ludhiana
v.
Abhishek Industries Ltd.*
SURYA KANT AND R.P. Nagrath, JJ.
IT Appeal No. 312 of 2011†
DECEMBER 20, 2012
Section 80HHC, read with sections 80-IA and 263, of the Income-tax Act, 1961 - Deduction - Exporters [Computation of] - Deduction under section 80HHC was allowed on eligible profits of business without reducing profits of business on which deduction under section 80-IA had been allowed - Whether there was contravention of section 80-IA(9) and, therefore, revision of assessment order would be proper - Held, yes [Para 16] [In favour of assessee]
FACTS
Facts
| • | | The Assessing Officer passed the assessment order dated 28-12-2006 under section 143(3). |
| • | | The Commissioner exercising his revisional powers under section 263, found the assessment order to be prima facie erroneous and prejudicial to the interest of revenue as the relief granted under section 80-IA, was not deducted from the profits and gains of the business before computing relief under section 80HHC. |
| • | | The Commissioner held that where any amount of profits and gains in the case of an assessee is claimed and allowed under section 80-IA deduction to the extent of such profits and gains shall not be allowed under this Chapter, i.e., Chapter VI-A. Section 80HHC also falls in Chapter VI-A, therefore, deduction under section 80HHC is not to be computed on profits and gains of an industrial undertaking on which deduction under section 80-IA has been allowed. |
| • | | The Commissioner found that due to non-application of correct law, deduction under section 80HHC had been allowed in excess, which had resulted into lesser taxable income and, thus, the order was prejudicial to the interest of revenue. |
| • | | The order of the Assessing Officer was set aside and it was directed to compute the deduction under section 80HHC. |
| • | | However, the Tribunal allowed appeal of assessee merely by holding that the Assessing Officer adopted one of the two possible views and therefore, there was nothing wrong. |
Arguments of assessee
| • | | There was a consistent contrary view of different Benches of the Tribunals and also the High Courts and since the view taken by Assessing Officer was one of the possible views, the revisional powers could not be invoked by Commissioner. |
Issues involved
| • | | Whether, relief under section 80-IA should be deducted from the profits and gains of the business before computing relief under section 80HHC? |
| • | | Whether, therefore, initiation of revision was proper? |
HELD
| • | | In the case in hand, there was no specific discussion in the order passed by Assessing Officer as to whether for granting relief under section 80HHC, the profits and gains of the business for which relief was granted under section 80-IA, was required to be reduced or not, but separate deductions have been allowed under both these provisions in the assessment order. [Para 11] |
| • | | For exercising revisional powers by the Commissioner under section 263, the position of law on the subject as prevalent on the date when the order is passed has to be applied. |
| • | | The Special Bench Chennai in the case of Asstt. CIT v. Rogini Garments [2007] 108 ITD 49 has held that section 80HHC is part of Chapter VI-A. Section 80HHC is not a self contained provision. The deduction cannot be allowed ignoring the restrictive clause contained in section 80-IA(9). The restrictive clause in section 80-IA makes it abundantly clear that wherever deduction under any other section of Chapter VI-A(C) is claimed, the computation will be subject to the restrictions laid down in section 80-IA(9). It precludes 'pro tanto', all the deductions of such profits and gains claimed under Chapter VI-A(C). Section 80HHC is part of Chapter VI-A(C). It is not a self-contained provision. There is absolutely no ambiguity on this aspect. Therefore, relief under section 80-IA should be deducted from the profits and gains of the business before computing relief under section 80HHC. [Para 12] |
| • | | The respondent-assessee, had in its return of income-tax, claimed deduction under section 80-IA at Rs. 12.01 crores and under section 80HHC at Rs. 5.75 crores and declared the total income of Rs. 82.47 lakhs. The Assessing Officer allowed the deduction under section 80-IA to the tune of Rs. 14.04 crores and deduction under section 80HHC to the tune of Rs. 2.42 crores. The Commissioner on perusal of the assessment order had rightly held that the deduction under section 80HHC was allowed on eligible profits of business without reducing the profits of business on which deduction under section 80-IA had been allowed. There was, thus, contravention of section 80-IA(9), which clearly indicates the extent of restriction to which the deduction under other provision of Chapter VI-A can be allowed in cases where relief has been given on the profits and gains under section 80-IA. [Para 16] |
CASE REVIEW
CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 14) and CIT v. Deepak Mittal [2010] 324 ITR 411 (Punj. & Har.) (para 18) distinguished.
CASES REFERRED TO
Friends Casting (P.) Ltd. v. CIT [2012] 20 taxmann.com 708 (Punj. & Har.) (para 8), Asstt. CIT v. Hindustan Mint. & Agro Products (P.) Ltd. [2009] 119 ITD 107 (Delhi) (para 8), Asian Exim International v. CIT [I.T. Appeal No. 469 of 2010, dated 18-4-2011] (para 8), CIT v. Davinder Exports, Guru Nanak Dev Nagar [I.T. Appeal No. 371 of 2007, dated 21-4-2011] (para 8), CIT v. Honda Siel Power Products Ltd. [2011] 333 ITR 547/[2010] 194 Taxman 175 (Delhi) (para 9), Asstt. CIT v. Rogini Garments [2007] 108 ITD 49 (Chennai) (SB) (para 12), CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 14), Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 17) and CIT v. Deepak Mittal [2010] 324 ITR 411 (Punj. & Har.) (para 18).
Rajesh Katoch for the Appellant. Akshay Bhan for the Respondent.
JUDGMENT
R.P. Nagrath, J. - This appeal filed by Commissioner of Income Tax-I, Ludhiana under Section 260A of the Income Tax Act, 1961 (for brevity 'IT Act') challenges the order dated 29.04.2011 passed by the Income Tax Appellate Tribunal, Bench 'A', Chandigarh (ITAT).
2. The facts of the case in brief are that Joint Commissioner, Income Tax, Range-I, Ludhiana, the Assessing officer (AO) passed the assessment order dated 28.12.2006 under Section 143(3) of the IT Act in respect of the respondent-assessee for the assessment year 2004-05. The Commissioner of Income Tax (CIT) exercising his revisional powers under Section 263 of IT Act, found the assessment order to be prima-facie erroneous and prejudicial to the interest of revenue as the relief granted under Section 80 IA, was not deducted from the profits and gains of the business before computing relief under Section 80 HHC of the IT Act. The respondent-assessee was, thus, served with a show cause notice dated 18/20.02.2009 under Section 263 of IT Act.
3. After hearing the respondent-assessee by the Revisional Authority in its order dated 18.03.2009 (Annexure A-2) observed as under:-
"3.1.1 For the sake of coherence second arguments put forth by the assessee company is discussed at first place. Sub Section 9 of Section 80IA is reproduced as under:-
"(9) Where any amount of profits and gains of an (undertaking) or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C. - Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of (undertaking) or enterprise, as the case may be.
3.1.2 Very plain reading of sub Section makes it amply clear that where any amount of profits and gains in the case of an assessee is claimed and allowed u/s 80IA deduction to the extent of such profits and gains shall not be allowed under this Chapter i.e. Chapter VI-A. Section 80HHC also falls in Chapter VI-A, therefore, deduction u/s 80HHC is not to be computed on profits & gains of an industrial undertaking on which deduction u/s 80IA has been allowed.
4. It was also found that due to non-application of correct law, deduction under Section 80HHC has been allowed in excess, which has resulted into lesser taxable income and thus the order is prejudicial to the interest of revenue. To this extent the order of AO was set aside and it was directed to compute the deduction under Section 80HHC after giving due opportunity of being heard to the assessee.
5. The ITAT allowed appeal of the assessee-respondent thus concluding that:-
"17. The issue raised in the present appeal is identical to the issue raised before the Hon'ble Delhi High Court in CIT v. Honda Siel Power Products Ltd. in ITA Nos. 1376/09 & 1382/09, judgment dated 5th July, 2010. In the facts of the present case before us and elaborated by us in the paras hereinabove, the Assessing Officer had allowed the deduction u/s 80IA & 80HHC of the Act without resorting to the provisions of Section 80IA(9) of the Act. Merely because the issue does not find mention in the assessment order, there is no presumption that no enquiry was made by Assessing Officer, especially in view of the various aspects of deductions allowable under Section 80IA & 80HHC of the Act were elaborately considered and decided by Assessing Officer, as referred to by us in paras hereinabove. Further, the issue was covered in favour of the assessee by the orders of Tribunal at the relevant time and the Assessing Officer having taken such a view, cannot be said to be incorrect application of law. In the totality of facts and circumstances and following the ratio laid by the Hon'ble Delhi High Court in the case of CIT, Delhi v. Honda Siel Power Products Ltd. (supra), we find no merit in the order of CIT as the view taken by the Assessing Officer was one of the view and accordingly the same could not be held to be erroneous and prejudicial to the interest of justice. Accordingly, we cancel the order passed by the CIT(A) u/s 263 of the Act. The ground of appeal raised by the assessee is thus allowed.
6. In this appeal filed by CIT against the above order of the ITAT, following substantial question of law has been proposed:-
"Whether, on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in cancelling the order dated 18.03.2009 of CIT-I, Ludhiana passed u/s 263 by holding that it does not contain any firm decision that the order of the Assessing Officer passed under Section 143(3) of the Act was erroneous in the eyes of law when the CIT in his order u/s 263 has clearly brought out that plain reading of the sub- section 9 of Section 80IA of the I.T. Act makes it amply clear that where any amount of profits and gains in the case of an assessee is claimed and allowed u/s 80IA deduction to the extent of such profits and gains shall not be allowed under this Chapter i.e. Chapter VI-A. Section 80HHC also falls in Chapter VI-A, therefore, deduction u/s 80HHC is not be computed on profits and gains of an industrial undertaking on which deduction u/s 80IA has been allowed?
It is stated that the tax effect involved in this case is Rs. 96,92,017/-.
7. We have heard learned counsel for the parties and have given our thoughtful consideration to the proposition involved.
8. The counsel for appellant submits that this Court has settled the position of law while interpreting Section 80 IA(9) of the IT Act in three recent judgments. The first judgment is Friends Castings (P.) Ltd. v. CIT [2012] 20 taxmann.com 708 (Punj. & Har.). The Tribunal in that case had held that the issue was squarely covered by the decision of ITAT Special Bench 'C', New Delhi in favour of the revenue and against the assessee in the case of Asstt. CIT v. Hindustan Mint. & Agro Products (P.) Ltd. [2009] 119 ITD 107 (Delhi) for the assessment years 2001-02, 2003-04, 2004-05 dated 23.06.2009. This Court agreed with the view of the Tribunal and dismissed the appeal of assessee. The aforesaid view was followed by this Court in Asian Exim International v. CIT [IT Appeal No. 469 of 2010, decided on 18.04.2011 and CIT v. Davinder Exports, Guru Nanak Dev Nagar ITA No. 371 of 2007, decided on 21.04.2011.
9. The respondent's counsel on the other hand vehemently contended that there was a consistent contrary view of different Benches of the Income Tax Tribunals and also the High Courts and since the view taken by AO was one of the possible views, the revisional powers could not be invoked by CIT. To support his contention, reliance is placed upon the judgment of Hon'ble Delhi High Court in CIT v. Honda Siel Power Products Ltd. [2011] 333 ITR 547/[2010] 194 Taxman 175 (Delhi) which is directly relating to the issue in hand. In that case also the Commissioner took up the case in exercise of his powers under Section 263 of IT Act on the application of the provisions of Sections 80HHC, 80-IB(13) read with Section 80-IA(9) of IT Act. The Delhi High Court held as under:-
"18. From the aforesaid discussion, it is apparent that the expression prejudicial to the interest of revenue appearing in Section 263 has to be read in conjunction with the expression "erroneous" and that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the revenue. In cases where the AO adopts one of the courses permissible in law or where two views are possible and the ITO has taken one view, the CIT cannot exercise his powers under Section 263 to differ with the view of the AO even if there has been a loss of revenue. Of course, if the AO takes a view which is patently unsustainable in law, the CIT can exercise his powers under Section 263 where a loss of revenue results as a consequence of the view adopted by the AO. It is also clear that while passing an order under Section 263, the CIT has to examine not only the assessment order, but the entire record of the profits. Since the assessee has no control over the way an assessment order is drafted and since, generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only those points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made, the mere absence of the discussion of the provisions of Section 80IB(13) read with Section 80IA (9) would not mean that the AO had not applied his mind to the said provisions. As pointed out in Kelvinator of India's case (supra) [CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 (Del) (FB)], when a regular assessment is made under Section 143(3), a presumption can be raised that the order has been passed upon an application of mind. No doubt, this presumption is rebuttable, but there must be some material to indicate that the AO had not applied his mind.
23 …. Consequently, we are of the view that the decisions cited by the learned counsel for the Revenue, wherein assessment orders were found to be erroneous for want of an enquiry or proper enquiry, would have no application to the present appeals. It is also true that the validity of an order under s. 263 has to be tested with regard to the position of law as it exists on the date on which such an order is made by the CIT. From the narration of facts in the Tribunal's order, it is clear that on the date when the CIT passed his orders under s. 263, the view taken by the AO was in consonance with the views taken by several Benches of the Tribunals. Therefore, the conclusion of the Tribunal that the CIT could not have invoked his jurisdiction under s. 263 of the said Act was correct. As a result, we answer the question against the Revenue and in favour of the assessee by holding that the Tribunal was correct in law in cancelling the order passed by the CIT under s. 263 and in restoring the order of the AO by holding that the AO had taken a possible view at the relevant point of time. The appeals are accordingly dismissed ……."
10. The Department filed Special Leave to Appeal against the above judgment of Delhi High Court, which was dismissed by the Hon'ble Supreme Court.
11. In the case in hand also there was no specific discussion in the order passed by AO as to whether for granting relief under Section 80 HHC, the profits and gains of the business for which relief was granted under Section 80IA, was required to be reduced or not, but separate deductions have been allowed under both these provisions in the assessment order. It is, thus, submitted that the present case is fully covered by the decision of the Delhi High Court and thus, the instant appeal deserves to be dismissed.
12. It, thus, emerges that for exercising revisional powers by the Commissioner under Section 263 of the IT Act, the position of law on the subject as prevalent on the date when the order is passed has to be applied. In Honda Siel Power Products Ltd.'s case (supra), the assessment under Section 143 (3) of the IT Act was completed by AO on 18.03.2004. CIT passed order in that case under Section 263 of IT Act on 20.02.2006. There might be a conflict of view on the interpretation of relevant provisions by various Benches of Tribunal at the relevant time but the present is a case in which the assessment order is dated 28.12.2006 and CIT passed the order on 18.03.2009, when the proposition of law had been well settled by the Special Bench (Chennai) of the Tribunal on 27.04.2007 in the case of Asstt. CIT v. Rogini Garments [2007] 108 ITD 49 (Chennai) (SB), as also noticed by the Delhi High Court in Honda Siel Power Products Ltd.'s (supra). The Special Bench (Chennai) in Rogini Garments' case (supra) held as under:-
"42…. Section 80HHC is part of Chapter VI-A. Hon'ble jurisdictional High Court in the case of CIT v. Sharon Vancers P. Ltd. T.C. (A) No. 62 of 2004 dt. 26.02.207, has made it clear that it is not correct to say that Section 80HHC of the Act is a self contained provision. The deduction cannot be allowed ignoring the restrictive clause contained in Section 80-IA(9). The restrictive clause in Section 80-IA makes it abundantly clear that wherever deduction under any other section of Chapter VI-A(C) is claimed, the computation will be subject to the restrictions laid down in Section 80-IA (9). It precludes 'pro tanto', all the deductions of such profits and gains claimed under Chapter VI-A(C). Section 80HHC is part of Chapter VI-A(C). It is not a self-contained provision. There is absolutely no ambiguity on this aspect. We are therefore of the opinion that relief under Section 80-IA should be deducted from the profits and gains of the business before computing relief under Section 80HHC of the Act."
13. We are, further, of the firm view that nothing should be left at the whims and fancies of the AO while making assessment of income tax on the questions purely of law. Otherwise, it will bring ridicule to the system of assessment and end up with dangerous results. If for example one AO takes a particular view point, out of the two possible views while interpreting the provisions and the AO of another area takes the other possible view, that would lead to anomalous situations. The Tribunal has held in this case that the AO adopted one of the two possible views and therefore, there was nothing wrong. What restrained the Tribunal to discuss and determine the scope of plain meaning of the provisions of Section 80IA(9) ? The decision of ITAT was always subject to challenge either by the department or the assessee before the higher forums.
14. In CIT v. Max India Ltd., [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC), it was observed that on the date when CIT passed the revisional order under Section 263 of the I.T. Act on 05.03.1997, there were two views on the word 'profits' in Section 80HHC(3). The Hon'ble Supreme Court held that problem with Section 80HHC of the IT Act is that it has been amended 11 times. Different views existed on the day when CIT passed the above order. Moreover, the mechanics of the Section having become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 inserting the word 'loss' in the new proviso even though retrospective, will not attract the provision of Section 263 particularly when the Commissioner passed the order dated 05.03.1997, in purported exercise of his powers under Section 263 of the IT Act. Therefore, the above case will not provide any help to the respondent-assessee as the amendment in the provision was clearly made to remove an ambiguity which had arisen on account of interpretation of the said provision. That case, however, did not involve the interpretation of sub Section (9) of Section 80IA of the Act.
15. Should we not adopt a uniform interpretation to the plain meaning of the section instead of leaving it to the absolute and arbitrary discretion of AO to accept one of the two possible views in preference to the other?
16. The respondent-assessee, in the present case, had in its return of income tax, claimed deduction under Section 80IA at Rs. 12.01 crores and Section 80HHC of the IT Act at Rs. 5.75 crores and declared the total income of Rs. 82.47 lacs. The AO allowed the deduction under Section 80IA to the tune of Rs. 14.04 crores and deduction under Section 80HHC to the tune of Rs. 2.42 crores. The CIT on perusal of the assessment order found the assessment order to be both erroneous and prejudicial to the interest of Revenue and rightly so as deduction under Section 80HHC was allowed on eligible profits of business without reducing the profits of business on which deduction under Section 80IA had been allowed. There was, thus, contravention of Section 80IA(9), which clearly indicates the extent of restriction to which the deduction under other provision of Chapter VI-A of IT Act can be allowed in cases where relief has been given on the profits and gains under Section 80IA of IT Act.
17. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC), it was held as under:-
"An incorrect assumption of facts or an application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind ………….
The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue ……………
The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer.
On the facts of that case, the matter was decided by Hon'ble Supreme Court in favour of the revenue observing as under:-
"The Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts, the conclusion that the order of the ITO was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.
18. The respondent also relied upon the judgment reported as CIT v. Deepak Mittal [2010] 324 ITR 411 (Punj. & Har.). That judgment did not deal with any conflict on the interpretation of Sections 80IA and 80IB on the one hand and Section 80HHC of the IT Act on the other. This Court in that case found that exercise of revisional jurisdiction on the ground of change in opinion by reappraisal of evidence was wholly without any justification, being not within the parameters of revisional jurisdiction of the Commissioner. That case would, thus, not help the respondent.
19. In view of the above discussion, we allow this appeal, set aside the order dated 29.04.2011 of Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh and restore that of Commissioner of Income Tax-I, Ludhiana dated 18.03.2009 (Annexure A-2).
IT : Where assessee did not produce any evidence as to nature and source of amount received as share capital, creditworthiness of applicants and genuineness of transactions and simply surrendered amount in question allegedly to buy peace, penalty was leviable under section 271(1)(c)
■■■
[2013] 31 taxmann.com 35 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income tax
v.
Mak Data Ltd.*
BADAR DURREZ AHMED AND R.V. EASWAR, JJ.
IT Appeal NO. 415 OF 2012
JANUARY 22, 2013
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income - Surrender of income, effect of - Assessment year 2004-05- During survey some documents pertaining to assessee were found and impounded - Documents belonged to certain entities who had applied for shares in assessee-company - When Assessing Officer required assessee to produce evidence as to nature and source of amount received as share capital, creditworthiness of applicants and genuineness of transactions, assessee simply surrendered certain amount - Assessing Officer made addition of said amount and also levied penalty under section 271(1)(c) - Whether in absence of any explanation in respect of surrendered income, first part of clause (A) of Explanation 1 to section 271(1)(c) was attracted and, therefore, levy of penalty was justified - Held, yes [Para 7] [In favour of revenue]
FACTS
Facts
| • | | During a survey, some documents pertaining to the assessee were found and impounded. The documents belonged to certain entities who had applied for shares in the assessee-company. |
| • | | The Assessing Officer required the assessee to prove the nature and source of the monies received as share capital, the creditworthiness of the applicants and the genuineness of the transactions. |
| • | | The assessee stated that it had received share application money from different entities during the past three years. However, it, with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income-tax department, surrendered certain amount as income from other sources. |
| • | | The Assessing Officer completed assessment by adding aforesaid amount and also levied penalty under section 271(1)(c). |
| • | | On appeal, the Commissioner (Appeals) confirmed the penalty. On second appeal, the Tribunal deleted the penalty holding that the offer was made in a spirit of settlement of the dispute with the revenue and no investigation was carried out by the Assessing Officer to prove concealment. |
Assessee's arguments
| • | | Surrender of income was made suo motu before any investigation; that there was no other evidence in the possession of the income-tax authorities except the surrender; and that the levy of penalty without recording any finding on the merits of the assessee's plea was untenable. |
Revenue's arguments
| • | | There was no explanation from assessee in respect of amount in question and, therefore, levy of penalty was justified. |
Issue involved
| • | | Whether Tribunal was justified in cancelling the penalty. |
HELD
| • | | There was absolutely no explanation from the assessee in respect of the amount surrendered. When the Assessing Officer called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions, the assessee simply folded up and surrendered a sum. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income tax department, it surrendered the income under the head 'income from other sources'. |
| • | | In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation to section 271(1)(c) is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to the computation of the total income of the assessee. The revenue is entitled to know the same and if the nature and source of the amount is not explained, it is entitled to draw the inference that the amount represents the assessee's taxable income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. |
| • | | It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore, it should be in a position to offer an explanation and disclose the material facts regarding the same. |
| • | | The absence of any explanation is statutorily considered as amounting to concealment of income. In the absence of any explanation regarding the receipt of the money, which is in the exclusive knowledge of the assessee, an adverse inference is to be drawn against the assessee under the first part of clause (A) of the said Explanation. This appears to be somewhat in the lines of section 106 of the Evidence Act, the principle behind which has been extended to the provisions of sction 271(1)(c). [Para 7] |
| • | | The Tribunal fell into error in setting aside the penalty imposed by the Assessing Officer and upheld by the Commissioner (Appeals). |
Sanjeev Sabharwal for the Petitioner.
JUDGMENT
R.V. Easwar, J. - The following substantial question of law was framed by this Court on 11th October, 2012:-
"Whether the Tribunal fell into error in setting aside the order of penalty imposed by the AO and upheld by the CIT (A)?"
2. This is an appeal by the Revenue under Section 260A of the Income Tax Act, 1961 ('Act' for short) and it pertains to the assessment year 2004-05. An assessment was completed upon the assessee under Section 143(3) of the Act in which an addition of Rs. 40,74,700/- was made in the following circumstances. There was a survey under Section 133A on 16th December, 2003 in the course of which some documents pertaining to the assessee were found and were impounded. These documents consisted of blank transfer deeds for shares duly signed, affidavits, share application forms, copies of bank accounts, income tax returns and assessment orders of certain other companies. Those documents were forwarded to the AO assessing the present assessee who called upon the assessee to explain the contents of the documents and the genuineness of the transactions represented by them. It appears that the documents belonged to certain entities who had applied for shares in the assessee company. What the AO wanted the assessee to do was to prove the nature and source of the monies received as share capital, the creditworthiness of the applicants and the genuineness of the transactions.
3. In response to the above notice which was issued on 26th October, 2006, the assessee stated as under:-
"It has been stated that the company had received share application money from different entities aggregating to a sum of Rs. 239 lacs during the past 3 years as:
| Assessment Year | Amount | |
| 2002 - 2003 | 12,00,000 | |
| 2003 - 2004 | 1,06,50,000 | |
| 2004 - 2005 | 1,20,50,000 | |
| 2,39,00,000 |
The company with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department offers to surrender a sum of Rs. 56.49 lacs as income from other sources.
In this context we also wish to bring on record the fact that Sh. V. K. Aggarwal, Promoter Director of the company had offered a sum of Rs. 1,82,51,000/- for taxation as "income from other sources" in the hands of the partnership firm M/s. Marketing Services. Sh. V.K. Aggarwal is the partner of M/s. Marketing Services and the firm is being assessed with the CIT XI, New Delhi, this income of Rs. 1,82,51,000/- was duly subjected to tax by CIT XI in the following manner:
| Assessment Year | Amount | |
| 2001 - 2002 | Rs. 48,97,000/- | |
| 2002 - 2003 | Rs.40,68,000/- | |
| 2003 - 2004 | Rs.92,86,000/- | |
| Rs.1,82,51,000/- |
It has also been stated that Sh. V.K. Aggarwal, Promoter- Director of the assessee company has utilized this offered sum of Rs. 1,82.51 lacs for inducting funds into the books of the assessee company as share application money. It has been stated further that the additional fund flow to the extent of Rs.56.49 lacs (239 lacs - 182.51 lacs) which remain unexplained is now being offered for taxation by the company as its income from other sources. Subject to the condition that the offer of the surrender is by way of voluntary disclosure without admitting any concealment whatsoever or any intention to conceal and subject to non initiation of penalty proceedings and prosecution."
It appears that thereafter the assessee filed an application before the Addl. Commissioner of Income Tax under Section 144A soliciting directions for expediting the assessment proceedings and therein it indicated its willingness to be assessed on an amount of Rs. 56.49 lacs as its income under the head "income from other sources". It may be noticed that this figure represents the difference between the amount of Rs. 239 lacs and Rs. 1,82,51,000/-. After certain correspondence between the AO and the Addl. CIT, a letter was issued on 27th December, 2006 containing the directions of the Addl. CIT. The entire directions are reproduced in the assessment order and is, therefore, not reproduced here for the sake of brevity. It suffices to note that before the Add. CIT the assessee would appear to have scaled down the offer from Rs. 56.49 lacs to Rs. 40.74 lacs on the ground that the peak investment should be taken at Rs. 2,19,50,000/- instead of Rs. 239 lacs as calculated earlier. The AO, on the basis of the directions of the Addl. CIT called upon the assessee to furnish the relevant documents and information regarding the fresh offer of Rs. 40,74,000/-. The purpose appears to be merely to verify the reconciliation between the earlier offer of Rs. 56.49 lacs and the revised offer of Rs. 40.74 lacs. After having carried out the verification the amount of Rs. 40.74 lacs was added as "income from other sources" with the following narration "As per direction of the Addl. CIT Range-6 and further discussion with the assessee's A.R. a sum of Rs. 40,74,000/- is treated as income from other sources"
4. There was no appeal against the aforesaid addition by the assessee. The addition of Rs. 40,74,000/- thus became final.
5. Subsequently the AO initiated penalty proceedings for furnishing inaccurate particulars of its income under Section 271(1)(c) of the Act. The gist of the assessee's reply was that the amount was offered as income only to buy peace and avoid protracted litigation and with the condition that no penalty or prosecution proceedings would be launched. It was further stated that the offer was made before any investigation was carried out into the matter and, therefore, was voluntary. Several authorities were relied upon in support of the submission. However, the submissions were rejected by the AO who, by the order dated 23.4.2007, imposed the minimum penalty of Rs.14,16,600/- for furnishing inaccurate particulars of income to the extent of Rs. 40,74,000/-. The ultimate findings of the AO on the basis of which the penalty was imposed were as follows:-
"23. The reply furnished by the assessee has been considered & found to be unsatisfactory because of the following: -
| (a) | | In the return filed by the assessee the assessee has not offered the amount of Rs. 40.74 lacs for taxation voluntarily. |
| (b) | | The assessee has surrendered the above amount of Rs. 40.74 lacs during course of assessment proceeding when the impounded material was confronted to the assessee which was impounded during course of survey u/s 133A of the IT Act, 1961 on 16.12.2003 at the business premise of Marketing Services. |
| (c) | | The assessee has furnished inaccurate particulars of its income in the return of income filed on 27.10.2004 for the year under consideration. |
| (d) | | The satisfaction was recorded at the time completing assessment proceedings u/s 143(3) of the I.T. Act, 1961. |
| (e) | | The assessee has itself surrendered for tax, the addition sum of Rs. 40,74,000/- which it was asked to explain the source of share application money. Moreover, admitted facts need not to be proved by the Assessing Officer, as in this case, the assessee itself admitted the concealment of income to the extent of Rs. 40,74,000/- by offering the amount for tax. |
In view of the above facts and circumstances of the case, I am satisfied that it is a fit case for imposition of penalty u/s 271(1)(c) read with section 274 of the IT Act, 1961."
6. The assessee preferred an appeal to the CIT(Appeals) who rejected the submissions of the assessee and confirmed the penalty. A further appeal was preferred by the assessee to the Income Tax Appellate Tribunal ('Tribunal' for short) in ITA No.1896/Del/2010. The levy of the penalty was opposed on the ground that the surrender of income was made suo moto before any investigation, that there was no other evidence in the possession of the income tax authorities except the surrender, and that the levy of penalty without recording any finding on the merits of the assessee's plea was untenable. The Tribunal on examination of the facts and the rival contentions cancelled the penalty recording the following findings:-
| (a) | | It was only after the directions of the Addl.CIT issued under Section 144A that the assessee's offer was accepted and the assessment was finalized; |
| (b) | | There was no material against the assessee to show any concealment and this fact has been admitted by the AO himself; there is not even any indication in the penalty order as to the particular credit in respect of which the penalty was being imposed; |
| (c) | | The fact that the assessee surrendered the income only when it was confronted with the documents found in the survey does not adversely affect its case. |
| (d) | | The assessee did not admit that it had concealed the income to the extent of Rs. 40,74,000/-; it had made it clear in the letter dated 22.11.2006 that the surrender was made without any admission of concealment or intention to conceal. |
| (e) | | The offer was made in a spirit of settlement of the dispute with the revenue and no investigation was carried out by the AO to prove concealment. |
In support of the aforesaid findings the Tribunal referred to several authorities.
7. The contention of the revenue before us is that the Tribunal failed to appreciate the provisions of Explanation-1 to Section 271(1)(c) of the Act. We think that there is force in the contention. Section 271(1)(c) provides for levy of penalty for concealing the particulars of income or furnishing inaccurate particulars of the income. Explanation-1 is as below:-
"Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--
| (A) | | Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or |
| (B) | | Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him], then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed." |
In the case before us the revenue is right in contending that there was absolutely no explanation from the assessee in respect of the amount of Rs. 40,74,000/-; when the AO called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions the assessee simply folded up and surrendered a sum of Rs. 56.49 lacs in its hands initially, which was later scaled down to Rs. 40,74,000/-. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department, it surrendered the income under the head "income from other sources". In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to the computation of the total income of the assessee. The Revenue is entitled to know the same and if the nature and source of the amount are not explained, it is entitled to draw the inference that the amount represents the assessee's taxable income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore, it should be in a position to offer an explanation and disclose the material facts regarding the same. The absence of any explanation is statutorily considered as amounting to concealment of income. In the absence of any explanation regarding the receipt of the money, which is in the exclusive knowledge of the assessee, an adverse inference is sought to be drawn against the assessee under the first part of clause (A) of the said Explanation. This appears to be somewhat in the lines of Section 106 of the Evidence Act, the principle behind which has been extended to the provisions of Section 271(1)(c) of the Act.
8. We are satisfied that the Tribunal fell into error in setting aside the penalty imposed by the AO and upheld by the CIT(Appeals). We accordingly answer the substantial question of law in the affirmative, against the assessee and in favour of the revenue. The appeal of the revenue is allowed with no order as to costs.
IT : Mere circumstance that amount in excess of Rs. 10,000 had been remitted to account of payee would not absolve assessee from rigour of section 40A(3)
■■■
[2013] 31 taxmann.com 71 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax, Madurai
v.
Venkatadhri Constructions*
AND , JJ.
TC (A) NOS. 122 OF 2003
AND 1430 & 1431 OF 2005†
AND 1430 & 1431 OF 2005†
JUNE 29, 2012
Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limits [Cash payment, connotation of] - Assessment years 1993-94 and 1995-96 - Whether where assessee deposited amount in excess of Rs. 10,000 to supplier's bank account it would be treated as cash payment and provisions of section 40A(3) would be applied in such case - Held, yes [Para 9] [In favour of revenue]
FACTS
| • | | The assessee made cash payment exceeding Rs. 10,000 in respect of certain business expenditure incurred by him. |
| • | | On the proposal to apply section 40A(3), the assessee furnished the details which were extracted in the assessment order itself. |
| • | | The assessee contended that the payee was having regular accounts with the assessee as regards the supply of cement and that in some of the cases, cash payments were deposited by the assessee directly into the account of the supplier. |
| • | | Apart from this, the assessee also pointed out to the payment to labour. |
| • | | Thus, on a consideration of the facts, the Assessing Officer granted the relief in respect of those cases where payment in cash was made. |
| • | | However, as regards the payment made by way of advance for purchase of cement and credited to the account of vendor, the Assessing Authority rejected the assessee's plea. |
| • | | Thus, out of cash payment of Rs. 4,44,803 the Assessing Officer held that a sum of Rs. 64,720 alone would not fall for consideration under section 40A(3) and balance sum of Rs. 3,80,083 was liable to be disallowed under section 40A(3). |
| • | | On appeal, the Commissioner (Appeals) accepted the assessee's plea that since the amount of Rs. 3,26,813 was directly paid into the account, the same was not liable to be considered as covered by section 40A(3) for disallowance. |
| • | | The Commissioner (Appeals) also granted further relief on payment of Rs. 25,000 and odd. |
| • | | On further appeal, the Tribunal confirmed the order of the Commissioner (Appeals). |
| • | | On revenue' appeals : |
HELD
Applicability of section 40A(3)
| • | | A reading of section 40A(3) would point out that whenever the assessee incurred expenditure in respect of which payment is made in cash in excess of Rs. 10,000, the expenditure should not be allowed as a deduction. The proviso to sub-section (3) of section 40A carries out the exception that before rejecting such claim for deduction, the officer shall take into account the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors. [Para 5] |
Applicability of rule 6DD
| • | | Rule 6DD of the Income-tax Rules specify circumstances under which the payment for a sum exceeding Rs. 10,000 may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. Thus, except on those circumstances, narrated under rule 6DD and as given under section 40A(3), unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs. 10,000 by cash would not escape the rigour of section 40A(3). [Paras 6 and 7] |
Factual aspect of case
| • | | As far as the instant case was concerned, none of the circumstances were narrated by the assessee either before the Assessing Officer or before the appellate authority concerned in support of the contention that the claim for allowance should not be disallowed. The mere circumstance, that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that section 40A(3) will not be applied to the case. [Para 8] |
| • | | In the light of the provisions as it stood, there being no exceptional circumstances for remitting the amount to the credit of payee's amount, there is no good ground to upheld the order of the Tribunal. |
| • | | It may be pointed out that the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee. Consequently, Tribunal was not justified in holding that payment of cash amounting to Rs. 3,14,600/- by the assessee to the supplier's bank account is not a violation of the provisions of section 40A(3)?. [Para 9] |
T.R. Senthil Kumar for the Appellant. V.S. Jayakumar for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The Revenue has filed the above appeals as against the order of the Income Tax Appellate Tribunal for the assessment years 1993-94 and 1995-96. The T.C.(A). No. 122 of 2003 was admitted on the following substantial question of law:-
"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs. 3,80,083/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"
The T.C.(A). Nos. 1430 and 1431 of 2005 were admitted on the following substantial question of law:-
"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs. 3,14,600/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"
2. The assessee herein admittedly made cash payment exceeding Rs. 10,000/- in respect of certain business expenditure incurred by him. On the proposal to apply Section 40A(3) of the Income Tax Act, the assessee furnished the details which are extracted in the assessment order itself. The assessee contended that the payee was having regular accounts with the assessee as regards the supply of cement and that in some of the cases, cash payments were deposited by the assessee directly into the account of the supplier. Apart from this, the assessee also pointed out to the payment to labour. Thus, on a consideration of the facts, the Assessing Authority granted the relief in respect of those cases where payment in cash was made. However, as regards the payment made by way of advance for purchase of cement and credited to the account of the vendor, the Assessing Authority rejected the assessee's plea. Thus, out of cash payment of Rs. 4,44,803/-, the Assessing Authority held that a sum of Rs. 64,720/- alone would not fall for consideration under Section 40A(3) of the Act and balance sum of Rs. 3,80,083/- was liable to be disallowed under Section 40A(3) of the Act. The facts thus stated above related to assessment year 1993-94. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who accepted the assessee's plea that since the amount of Rs. 3,26,813/- was directly paid into the account, the same was not liable to be considered as covered by Section 40A(3) for disallowance. The Commissioner of Income Tax (Appeals) also granted further relief on payment of Rs. 25,000/- and odd. Thus, partly allowed the appeal.
3. Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal, who confirmed the assessee's case in a single line that after hearing the parties and on going through the order of the Commissioner of Income Tax (Appeals)'s, the order could not found fault with. We may record herein that absolutely there is no recording of the reasons independently by the Tribunal as a finding fact body by considering the provisions under Section 40A(3) of the Act to the facts of the case. Aggrieved by the view of the Tribunal, the Revenue has come on appeal before this Court.
4. Section 40A(3) as it existed relevant to the assessment year under consideration reads thus, Section 40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969), as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:
Provided that .........................................................
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
5. A reading of the above said section would point out that whenever the assessee incurred expenditure in respect of which payment is made in cash in excess of Rs. 10,000/-, the expenditure should not be allowed as a deduction. The proviso to sub section (3) of Section 10A carries out the exception that before rejecting such claim for deduction, the officer shall take into account the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors.
6. Rule 6DD of the Income Tax Rules specify circumstances under which the payment for a sum exceeding Rs. 10,000/- may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. In fact on a representation made by a Trade, the Central Board of Direct Taxes has also issued circular No. 1 dated 11.1.1979, wherein in considering difficulties in clearance of cheques issued on banks, the Central Board of Direct Taxes stated that,
"............... Accordingly, any payment for business expenditure made during the period when the cheque clearing operations are suspended or other similar circumstance as aforesaid exists, will not be covered by the provisions of Section 40A(3) of the Income Tax Act provided the assessee furnishes evidence to the satisfaction of the Income Tax Officer as to the genuineness of the payment and the identity of the payee."
7. Thus, except on those circumstances, narrated under Rule 6DD of the Income Tax Rules and as given under 40A(3) of the Income Tax Act, unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs. 10,000/- by cash would not escape the rigour of Section 40A(3) of the Income Tax Act.
8. As far as the present case is concerned, none of the circumstances were narrated by the assessee either before the Assessing Officer or before the Appellate Authority concerned in support of the contention that the claim for allowance should not be disallowed. The mere circumstance, that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that Section 40A(3) of the Act will not applied to the case.
9. In the light of the provisions as it stood, there being no exceptional circumstances for remitting the amount to the credit of payee's amount, we do not find any good ground to uphold the order of the Tribunal. It may be pointed out that the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee. Consequently, the order of the Tribunal is set aside and the Tax Case (Appeal) No. 122 of 2003 is allowed. No costs.
10. The facts in respect of other cases are not different from what had been noted above since the questions of law raised on other Tax Case (Appeals) are identical. Accordingly, the orders of the Tribunal passed in other two Tax Case (Appeals) are set aside and we allow Tax Case (Appeal) Nos. 1430 and 1431 of 2005. No costs.
IT : At the stage of section 245D(1) of the Act, the Commission would have ample powers to examine whether an application for settlement of cases made under section 245C(1) of the Act fulfills the legal requirements particularly, those provided in section 245C(1) of the Act. Secondly, that such inquiry however, shall have to be summary in nature. If the Commission on a summary inquiry comes to the conclusion that an application filed by the assessee under section 245C(1) of the Act does not fulfill the legal requirements, it would be within the jurisdiction of the Commission to reject the same
• At the stage of section 245D(1) of the Act, the Commission would have ample powers to examine whether an application for settlement of cases made under section 245C(1) of the Act fulfills the legal requirements particularly, those provided in section 245C(1) of the Act.
• Secondly, that such inquiry however, shall have to be summary in nature.
• If the Commission on a summary inquiry comes to the conclusion that an application filed by the assessee under section 245C(1) of the Act does not fulfill the legal requirements, it would be within the jurisdiction of the Commission to reject the same.
• However, if it is allowed to be proceeded with, such decision would be tentative in nature.
• Settlement Commission is a special body created and constituted for a special purpose.
• The order that the Settlement Commission may pass though is binding between the parties, does not lay down a ratio or a precedent.
• If on the basis of material on record, the Commission could have come to the conclusion that application was not valid, it had every authority to reject the same even at the stage of first screening under section 245D(1) of the Act.
• It is not possible to accept the petitioners' contention that if such application was allowed to be proceeded, the petitioners would have produced additional materials in support of the requirement that the petitioner made true and full disclosure of undisclosed income and the manner of deriving the same.
• The petitioners were required to make an application and make such declarations as required under section 245C(1) of the Act.
• They could not have hoped for or insisted upon a second innings to do so beyond the stage of section 245D(1) of the Act.
• If other-wise such requirements of the Act were not fulfilled, the Commission was well within the powers to terminate such application without any further ado.
• In the result, the petitions fail and are dismissed. Notice discharged.
■■■
[2013] 31 taxmann.com 99 (Gujarat)
HIGH COURT OF GUJARAT
Vishnubhai Mafatlal Patel
v.
Assistant Commissioner of Income-tax
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
Special Civil Application Nos. 12060, 12061 & 12063 of 2012
DECEMBER 4, 2012
S.N. Soparkar and R.K. Patel for the Petitioner. Manish Bhatt and Ms. Mauna M. Bhatt for the Respondent.
JUDGMENT
Akil Kureshi, J. - These petitions arise out of common background. They have been heard together and are being disposed of by this common judgment.
2. For the purpose of this order, we may notice the facts as arising in Special Civil Application No.12060/2012.
2.1 The petitioner is an individual and is assessed to tax as such. The petitioner claims to be engaged in the business of infrastructure development activities. On 5.10.2010, search operations were carried out at the residential and business premises of the petitioner under section 132 of the Income Tax Act, 1961 ("the Act" for short) . The petitioner made disclosure of income of Rs.48 crores in his statements which were recorded under section 132(4) of the Act. The proceedings under section 153A of the Act for assessment year 2008-2009 to 2010-2011 and under section 143(2) of the Act for the assessment year 2011-2012 were pending. On 28.5.2012, the petitioner filed an application under section 245C of the Act before Settlement Commission for the assessment years 2008-2009 to 2011-2012. The petitioner disclosed additional income of Rs.49,24,14,630/- for different years in the following manner :
| Assessment Year | Additional Income of Rs. 49,24,14,630/- Disclosed in Return/Application filed | ||||
| Return u/s 139 (1) | Return u/s 139(5) Revised After Search within the permitted time | Return u/s 153A | Before Settlement Commission | Total Income Disclosed due to Search | |
| 2008-09 | Nil | Nil | Nil | 6,22,92,000 | 6,22,92,000 |
| 2009-10 | Nil | 12,32,07,000 | 31,32,500 | 17,45,000 | 12,80,84,500 |
| 2010-11 | Nil | Nil | 18,30,000 | 1,00,000 | 19,30,000 |
| 2011-12 | 30,00,00,000 | Nil | Nil | 1,08,130 | 30,01,08,130 |
| Total | 30,00,00,000 | 12,32,07,000 | 49,32,500 | 6,42,45,130 | 49,24,14,630 |
2.2 We may recall that in the disclosures under section 132(4) of the Act the petitioner had disclosed a total income of Rs. 48 crores. The petitioner had therefore, paid additional tax and interest on the additional disclosures made before the Settlement Commission.
2.3 The application of the petitioner was taken for hearing on 6.6.2012 by the Settlement Commission. The Commission vide its impugned order dated 8.6.2012 rejected the application of the petitioner on the ground that requirements of section 245D(1) of the Act were not fulfilled. It is this order of the Settlement Commission which the petitioner has challenged in this petition.
2.4 Before passing the impugned order the Settlement Commission heard the representative of the petitioner on the question of fulfillment of requirements of section 245C of the Act. The Commission noted that the petitioner was required to make true and full disclosures of the income as also the manner in which such income was derived. The Commission formed an opinion that the petitioner had not made true and full disclosures. Subsequent question of the manner in which such income having been derived therefore, cannot be examined. On its belief that the petitioner did not fulfill the requirements of section 245C of the Act, the Commission rejected the application at the very threshold which has prompted the petitioners to approach this Court.
3. Material facts are common in all the petitions.
4. Learned senior counsel Shri S.N.Soparkar appearing for Shri R.K.Patel for the petitioners taking us through the statutory provisions and case laws on the point submitted that the Commission committed grave error in rejecting the application at the very threshold. Counsel would contend that at the stage of section 245D(1) of the Act, it was not open to the Commission to carry out any detailed inquiry. The Commission therefore, committed grave error in examining the various aspects of the matter in order to come to the conclusion that the application was not maintainable.
4.1 Counsel further submitted that the petitioners had made full and true disclosures and also produced supporting materials. Commission without examining such aspects came to an erroneous conclusion.
4.2 Counsel further submitted that if the petitioners were granted sufficient opportunity to produce additional documents and evidence, if so required by the Commission during the course of hearing of the settlement proceedings, the petitioners would have done so. The Commission committed a grave error in shutting out any such further inquiry or an opportunity to the petitioners to produce additional material.
4.3 Counsel also took us through the impugned decision of the Commission to contend that the Commission's findings were dehors the material on record and the petitioners having made true and full disclosures, the application for settlement could not have been dismissed.
4.4 Counsel relied on the decision of Division Bench of this Court in case of Commissioner of Income-tax v. Mahendra C. Shah reported in [2008] 299 ITR 305 (Guj), wherein in the context of immunity from penalty under section 271(1) (c) of the Act, in terms of explanation (5) thereof, which requires besides other conditions that the assessee should have in his statement under section 132(4) of the Act disclosed the manner in which income was earned, this Court held and observed that even if such statement does not specify the manner in which the income is derived, if the income is declared and the tax thereon is paid, there would be substantial compliance not warranting any further denial of the benefit of immunity.
5. On the other hand, learned senior counsel Shri Manish Bhatt for the Revenue opposed the petitions contending that the scope of judicial review against a decision of Settlement Commission is extremely narrow. This Court would not act as an appellate authority. When the Settlement Commission has come to certain factual findings, scope of interference by this Court would be narrow. Counsel further submitted that Commission had every authority to examine the validity of the statements made by the assessee. If at the very threshold it was found that such application did not satisfy the legal requirements, it was open for the Commission to reject the same without any further consideration. In the present case the Commission came to the conclusion that the petitioners had not made true and full disclosures about their income. Counsel relied on the following decisions:
| (1) | | In case of Jyotendrasinhji v. S.I. Tripathi and others reported in [1993] 201 ITR 611 (SC), in which the Apex Court held that though the order of Settlement Commission has been given finality, such finality would not bar a writ petition before the High Court or jurisdiction of the Supreme Court, nevertheless, the scope of judicial review would be restricted to considering whether order is contrary to any provisions of the Income Tax Act. |
| (2) | | In case of Ajmera Housing Corporation and another v. Commissioner of Income-tax reported in [2010] 326 ITR 642 (SC), wherein the Apex Court put considerable stress on the requirement of an assessee approaching the Settlement Commission to make full and true disclosure of the income which had not been previously disclosed by the assessee. It was held that such requirement is a pre-condition for valid application under section 245C(1) of the Act. It was held that an assessee has no right to revise his disclosure. |
6. Having thus heard learned counsel for the parties and having perused the documents on record, we may at the outset take note of statutory provisions applicable.
| ♦ | | Chapter XIXA which was introduced in the Act in the year 1976, pertains to settlement of cases. |
| ♦ | | Settlement Commission is constituted under Section 245B of the Act. Section 245BA lays down the jurisdiction and powers of Settlement Commission. |
| ♦ | | Section 245C pertains to application for settlement of cases. Sub-section(1) thereof permits an assessee, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, and containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income-tax payable on such income and such other particulars as may be prescribed, to the Settlement Commission to have his case settled. It is further provided that application shall be disposed of in the manner hereinafter provided. |
| ♦ | | Section 245D of the Act pertains to procedure on receipt of an application under section 245C. Relevant portion of section 245D reads as under : |
"245D. (1) On receipt of an application under section 245C, the Settlement Commission shall, within seven days from the date of receipt of the application, issue a notice to the applicant requiring him to explain as to why the application made by him be allowed to be proceeded with and on hearing the applicant, the Settlement Commission shall, within a period of fourteen days from the date of the application, by an order in writing, reject the application or allow the application to be proceeded with :
Provided that where no order has been passed, within the aforesaid period by the Settlement Commission, the application shall be deemed to have been allowed to be proceeded with.
(2B) The Settlement Commission shall, -
| (i) | | in respect of an application which is allowed to be proceeded with under sub-section (1), within 30 days from the date on which the application was under; or |
| (ii) | | in respect of an application referred to in sub-section (2A) which is deemed to have been allowed to be proceeded with under that subsection, on or before the 7th day of August, 2007, call for a report from the Commissioner, and the Commissioner shall furnish the report within a period of thirty days of the receipt of communication from the Settlement Commission. |
(2C) Where a report of the commissioner called for under sub-section (2B) has been furnished within the period specified there in, the Settlement Commission may, on the basis of the report and within the period of fifteen days of the receipt of the report, by an order in writing, declare the application in question as invalid, and shall send the copy of such order to applicant and commissioner :
Provided that an application shall not be declared invalid unless an opportunity has been given to the applicant of being heard:
Provided further that where the commissioner has not furnished the report within the aforesaid period, the Settlement Commission shall proceed further in the matter without the report of the Commissioner.
(3) The Settlement Commission, in respect of-
| (i) | | an application which has not been declared invalid under sub-section (2C) ; or |
| (ii) | | an application referred to in sub-section (2D) which has been allowed to be further proceeded with under that sub-section, |
may call for the records from the Commissioner and after examination of such records, if the settlement commission is of the opinion that any further enquiry or investigation in the matter is necessary, it may direct the Commissioner to make or cause to be made such further enquiry or investigation and furnish a report on the matters covered by the application and any other matter relating to the case, and the commissioner shall furnish the report within a period of ninety days on the receipt of communication from the Settlement Commission :
Provided that where the commissioner does not furnish the report within the aforesaid period, the Settlement Commission may proceed to pas an order under sub-section (4) without such report.
(4) After examination of the records and the report of the Commissioner, if any, received under-
| (i) | | sub-section (2B) or sub-section (3), or |
| (ii) | | the provision of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007, |
and after giving an opportunity to the applicant and to the commissioner to be heard, either in person or through a representative duly authorized in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the commissioner."
7. From the perusal of the statutory provisions noted above, it can be gathered that an assessee may at any stage of the case relating to him, make an application for settlement to the Commission under sub-section(1) of section 245C. Such application has to be made in a prescribed manner and is required to contain a full and true disclosure of the income of the assessee which had not been disclosed before the Assessing Officer and the manner in which such income had been derived besides such other particulars as may be prescribed. When such application is filed, it is to be treated in the manner provided in section 245D. Sub-section(1) of section 245D provides that, on receipt of an application, the Settlement Commission shall, within seven days of receipt, issue a notice to the applicant requiring him to explain why such an application made by him be allowed to be proceeded with. On hearing the applicant, the Settlement Commission shall, within fourteen days from the date of the application, by an order in writing either reject the application or allow the application to be proceeded with. Proviso to sub-section(1) of section 245D provides that where no order has been passed by the Settlement Commission as aforesaid, the application shall be deemed to have been allowed to be proceeded with.
8. Under sub-section (1) of section 245D thus, the first stage of scrutinising the application of settlement made by an assessee is envisaged. The statute does not provide for grounds on which Settlement Commission may reject such an application or allow the application to be proceeded with. There are however, sufficient indications in the statute itself what would be the purpose and nature of scrutiny of Commission at that stage. As already noted, sub-section(1) of section 245C an assessee may make an application for settlement in the prescribed manner containing true and full disclosure of income not previously disclosed before the Assessing Officer and the manner in which such income had been derived as also the additional amount of income-tax payable on such income and such other particulars as may be prescribed. At the stage of sub-section (1) of section 245D of the Act, therefore, prime scrutiny of the Commission would be whether application of the assessee is in order and in conformity with the requirements of sub-section (1) of section 245C which would include filing of an application in the prescribed manner and also making necessary disclosures as required therein. There are also additional requirements of sub-section (1) of section 245C such as payment of requisite tax and interest thereon which would have been payable under the provisions of the Act, had the income disclosed in the application been declared by the assessee in the return of income before the Assessing Officer. It would thus be well within the jurisdiction of the Settlement Commission to examine whether the application for settlement fulfills such requirements or not. Such scrutiny of-course would be summary in nature. We may recall that the Settlement Commission upon receipt of such an application within seven days thereof, has to issue notice to the assessee and pass a final order either rejecting the application or allowing the application to be proceeded within fourteen days of the date of application. Proviso to sub-section (1) of section 245D makes it further clear that when no such order is passed rejecting the application within the period prescribed, the application shall be deemed to have been allowed to be proceeded with.
9. Two things therefore, emerge. Firstly, that at the stage of section 245D(1) of the Act, the Commission would have ample powers to examine whether an application of an assessee made under section 245C(1) of the Act fulfills the legal requirements particularly, those provided in section 245C(1) of the Act. Secondly, that such inquiry however, shall have to be summary in nature. The later provisions of sections 245D would also demonstrate that any decision of the Commission to allow the application to be proceeded with would only be prima facie in nature. We would elaborate this aspect a little later. At this stage, therefore, we find that under section 245D(1) of the Act, if the Commission on a summary inquiry comes to the conclusion that an application filed by the assessee under section 245C(1) of the Act does not fulfill the legal requirements, it would be within the jurisdiction of the Commission to reject the same. However, if it is allowed to be proceeded with, such decision would be tentative in nature.
10. Section 245D(2B) provides that the Settlement Commission in respect of an application, which is allowed to be proceeded with under sub-section (1), within thirty days from the date on which the application was made, call for a report from the Commissioner, and the Commissioner shall furnish the report within a period of thirty days of the receipt of communication from the Settlement Commission. Sub-section(2C) further provides that where a report of the Commissioner under sub-section (2B) has been furnished within the prescribed period, the Settlement Commission may on the basis of the report within fifteen days of the receipt of the report by an order in writing, declare the application as invalid. Proviso to sub-section(2C) provides that no such declaration shall be made unless an opportunity is provided to the assessee of being heard. From such provisions, it thus emerges that an application which has been allowed to be proceeded or deemed to have been allowed to be proceeded under section 245D(1) of the Act, it is still open to scrutiny by the Commission at the stage of sub-section(2B) and (2C) of section 245D, this time with the assistance of the report of the Commission if so made within the prescribed time. On the basis of materials contained in such report and after giving an opportunity to the applicant of being heard, if the Commission is so satisfied, can declare the application to be invalid. This is the second stage where the Commission can scrutinise the validity of application for settlement made by the assessee under section 245C (1) of the Act. Thus even if the Commission had previously passed an order under section 245D(1) of the Act, allowing the application to be proceeded with, it would still be open for the Commission if grounds are so available, to declare such an application invalid after obtaining report from the Commissioner and giving an opportunity of being heard to the applicant.
11. If however, no such order is passed declaring an application as invalid, the Commission would in terms of provisions of section 245D of the Act, proceed to decide the same on merits. Sub-section (3) thereof envisages calling for the records from the Commissioner and examining such records and carrying out such inquiry or investigation as the Commission thinks it necessary. Sub-section (4) empowers the Commission after giving an opportunity to the applicant and to the Commissioner to be heard, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner.
12. The twin requirements for an assessee making an application for settlement under section 245C(1) of the Act, of containing full and true disclosure of income which has not been disclosed before the Assessing Officer and the manner in which such income has been derived, are thus of considerable importance and would be open for the Settlement Commission to examine the fulfillment thereof at several stages of the settlement proceedings. If therefore, while at the threshold, considering the question whether such application should be allowed to be proceeded with or be rejected, the Commission examined such questions on the basis of disclosure made by the applicants and the supporting material produced along with the applications, we do not see that the Commission committed any legal error. As already noted, it was well within the jurisdiction of the Commission at the stage of sub-section (1) of section 245D of the Act to examine whether application for settlement fulfills the statutory requirements contained in sub-section (1) of section 245C of the Act. At this stage we may refer to the decision of the Supreme Court in case of Ajmera Housing Corporation and another (supra). It was a case in which the assessee had made certain disclosures in the initial application under section 245C(1) of the Act. Such disclosures were however, revised and additional income was disclosed in the revised annexures. The Apex Court held that the assessee had no right to revise an application under section 245C(1) of the Act and further that such revised annexure making further disclosure of undisclosed income alone was sufficient to establish that the initial application made by the assessee could not be entertained as it did not contain true and full disclosure of the undisclosed income and the manner in which such income had been derived.
13. It is true that the order that the Settlement Commission has to pass under section 245D(1) of the Act comes with a rigid time frame. The scrutiny or the inquiry at that stage, therefore, necessarily shall have to be summary in nature. This however, does not take away the powers of the Settlement Commission to reject the application for settlement which in its opinion does not satisfy the legal requirements and more particularly, those contained in sub-section (1) of section 245C of the Act.
14. With this background in mind, we may peruse the order of the Settlement Commission which is in challenge before us. In such order, the Settlement Commission noted that the petitioners had made disclosures of larger amount of income. Commission desired to gather from the applicants the manner in which such income was derived. The Commission recorded that the representative of the applicants admitted that there was no evidence found during the search or other-wise with the applicants in this regard. It was further submitted that the applicants are old and reputed business leaders in their domain and the income earned has been mostly applied in the share capital of group companies. It was submitted before the Commission that the applicants used to participate in bidding process for securing the development work from the government, government agencies, public sector undertakings. Over a period of several decades, the applicants had achieved complete knowledge of the procedure, tactics and other technicalities of securing the contract from the Government and Government agencies, for which the applicants would receive remuneration in cash. Such contentions were turned down by the Commission observing that :
"10.1 The above submission in the statement of facts was only read out by Learned AR and he admitted that there is not an iota of 'material' to relate to the so called 'manner' of earning income.
10.2 We have considered the facts of the case and also the submissions made by Learned AR. In our view the explanation offered by Learned AR is only a make believe story which is neither credible nor worthy of any credence. We would like to stress that it is not the question of 'sufficiency' of material which could be correlated to the manner in which additional income has been derived but the total absence of any material with which we are confronted in this case.
10.3 The provision under section 245C(1) of the Income-tax Act 1961 is quoted hereunder :
"245C[(1) An assessee may, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, and containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income-tax payable on such income and such other particulars as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposes of in the manner hereinafter provided. . . . . ."
It was further observed that :
There is not even a whisper to suggest that at the stage of admission of an application, the issue of the "manner in which such income has been derived" could be left open or ignored. This is, in fact, basic eligibility criterion.
It was concluded that :
"20. Thus we hold that the admissibility of an application under section 245C(1) of the Income-tax Act, 1961 and 22C(1) of the Wealth tax Act, 1957 is dependent upon fulfilling the twin requirements of true and full disclosure of income and the manner in which such income has been derived. In fact, unless and until the manner in which the income has been derived I properly disclosed, it would not be just and appropriate to arrive at the conclusion as to whether the disclosure of additional income is true and full or all the primary facts have been brought before the Commission. In view of this settled position of law and facts and circumstances of the case we here by hold that the requirements mentioned in section 245D(1) of the Income-tax Acts, 1961/ Wealth tax Act, 1957 have not been fulfilled in the case of both the applicants. For this reason we do not allow the applications to be proceeded with under section 245D(1) of the Income-tax Act, 1961/ Wealth tax Act, 1957 in the case of both the applicants."
15. From the above observations and findings of the Commission, it can be seen that the petitioners' contentions were examined but the Commission was not convinced about the manner in which the income previously undisclosed was derived. In that view of the matter, Commission kept the question of true and full disclosure open unable to judge the same.
16. Question is should such conclusion of the Commission be interfered in exercise of writ jurisdiction? The scope of judicial review in exercise of writ jurisdiction under Articles 226 and 227 of the Constitution of India while examining the validity of an order of the Settlement Commission has come up for consideration before various Courts in the past. In case of Jyotendrasinhji (supra), the Apex Court held and observed that the sole overall limitation upon the Commission appears to be that it should act in accordance with the provisions of the Act. The scope of inquiry whether by the High Court under Article 226 or by the Supreme Court under Article 136 is also the same namely, whether the order of the Commission is contrary to any of the provisions of the Act and if so, has it prejudiced the petitioner apart from the ground of bias, fraud and malice, which, of course, constitute a separate and independent category.
17. This view has been reiterated in various later decisions by the Apex Court. It is true that such decisions pertain to the final adjudication of an application for settlement by the Commission. However, limitations recognized by the Courts in exercising powers of judicial review against the orders of the Settlement Commission, in our opinion, would not be of much difference even where an order of the Settlement Commission passed at the interim stage is called in question. Settlement Commission is a special body created and constituted for a special purpose. The order that the Settlement Commission may pass though is binding between the parties, does not lay down a ratio or a precedent.
18. In case of Saurashtra Cement Ltd. And ors. v. Commissioner of Customs and anr. reported in 2012(3) G.L.H. 235, scope of judicial review by the Supreme Court against the order of Settlement Commission was examined in light of various decisions of the Apex Court and following observations were made :
"15. It is well settled that no finality clause in a statute would oust the jurisdiction of the High Court under Article 226 of the Constitution or that of the Supreme court under Article 32 or 136 of the Constitution. Nevertheless, the parameters of judicial intervention in a decision rendered by an administrative tribunal are well recognised and well laid down. Ordinarily, the court would interfere if the Tribunal has acted without jurisdiction or failed to exercise jurisdiction vested in it or the decision of the Tribunal is wholly arbitrary or perverse or malafide or is against the principles of natural justice or when such decision is ultra vires the Act or the same is based on irrelevant considerations.
16. When examining the scope of judicial review in relation to a decision of Settlement Commission, we must further bear in mind that the Settlement Commission is set up under the statute for settlement of revenue claims. Its decision is given finality and it also has power to grant immunity from prosecution, of course, subject to satisfaction of certain conditions. The scope of court's inquiry against the decision of the Settlement Commission, therefore, is necessarily very narrow. The Apex Court in the case of State of U.P. And Another v. Johri Mal reported in [2004] 4 SCC 714 observed that the scope and extent of power of judicial review of the High Court under Article 226 of the Constitution of India would vary from case to case, the nature of the order, the relevant statute as also other relevant factors including the nature of power exercised by the public authorities, namely, whether the power is statutory, quasi-judicial or administrative. It was observed that the power of judicial review is not intended to assume a supervisory role. The power is not intended either to review governance under the rule of law nor for the courts to step into the areas exclusively reserved by the suprema lex to the other organs of the State. The court observed that the limited scope of judicial review is
| (i) | | Courts, while exercising the power of judicial review, do not sit in appeal over the decisions of administrative bodies; |
| (ii) | | A petition for a judicial review would lie only on certain well-defined grounds |
| (iii) | | An order passed by an administrative authority exercising discretion vested in it, cannot be interfered in judicial review unless it is shown that exercise of discretion itself is perverse or illegal. |
| (iv) | | A mere wrong decision without anything more is not enough to attract the power of judicial review; the supervisory jurisdiction conferred on a Court is limited to seeing that the Tribunal functions within the limits of its authority and that its decisions do not occasion miscarriage of justice. |
| (v) | | The courts cannot be called upon to undertake the government duties and functions. The court shall not ordinarily interfere with a policy decision of the State. Social and economic belief of a judge should not be invoked as a substitute for the judgment of the legislative bodies. (See Ira Munn v. State of Illinois.) |
17. Despite such narrow confines of judicial review of the decision of the Settlement Commission, it is undeniable that the jurisdiction under Article 226 of the Constitution is not totally ousted. In a given situation if the Settlement Commission has taken into consideration irrelevant facts and such consideration has gone into its decision-making process resulting into grave injustice and prejudice to the party then within the narrow confines of the judicial review, interference would still be open."
19. When the Settlement Commission examines an application in terms of statutory powers and finds that such application does not satisfy the legal requirements, as contained in section 245C(1) of the Act, in our view, unless such decision of the Commission is contrary to the statutory provisions contained in the Act, interference in exercise of writ jurisdiction under Article 226 of the Constitution of India would not be warranted. The counsel for the petitioners, as recorded earlier, made strenuous efforts to convince us that the Commission ought not to have summarily dismissed the application. We are afraid this cannot be the ground on which we would reverse the Commission's order. If on the basis of material on record, the Commission could have come to the conclusion that application was not valid, it had every authority to reject the same even at the stage of first screening under section 245D(1) of the Act. We are not convinced with the petitioners' contention that if such application was allowed to be proceeded, the petitioners would have produced additional materials in support of the requirement that the petitioner made true and full disclosure of undisclosed income and the manner of deriving the same. The petitioners were required to make an application and make such declarations as required under section 245C(1) of the Act. They could not have hoped for or insisted upon a second innings to do so beyond the stage of section 245D(1) of the Act. If other-wise such requirements of the Act were not fulfilled, the Commission was well within the powers to terminate such application without any further addo.
20. In the result, the petitions fail and are dismissed. Notice discharged.
INCOME TAX REPORTS (ITR) HIGHLIGHTS
F Assessee not entitled to deduction for exporting granites prior to amendment in 1991 : CIT v. Vijay Granites P. Ltd. (Mad) p. 247
F Long-term capital gains : Tribunal deleting addition on ground assessee not given opportunity to cross-examining managing director : Not justified when no such req uest by assessee : CIT v. Vinod Kumar Gupta (Delhi) p. 253
F Transfer of cases : Necessity of centralisation of assessment in view of assessee's nexus with group companies : Arrow Alloys P. Ltd. v. Union of India (Gauhati) p. 259
F Whether income from sale of stock option assessable as short-term capital gains or as long-term capital gains : Debatable issue when assessee filing return : No penalty leviable : CIT v. Jaswinder Singh Ahuja (Delhi) p. 262
F Amount received in cash by assessee from her father-in-law for purchasing property is a gift and not a loan : Penalty could not be imposed : CIT v. Smt. M. Yesodha (Mad) p. 265
F Provision for income-tax : No addition could be made : Oriental Insurance Co. Ltd. v. CIT (Delhi) p. 270
F Expenditure on lease rent, taxes and repairs and maintenance of guest house not allowable : Oriental Insurance Co. Ltd. v. CIT (Delhi) p. 270
F Bad and doubtful debts reserve not to be added to balance of profits disclosed in accounts : Oriental Insurance Co. Ltd. v. CIT (Delhi) p. 270
F Reassessment subject in remand proceedings : CIT (A) ought to have adjudicated issue of validity of reassessment : Smt. Prabha Rani Agrawal v. ITO (All) p. 275
F Form 10 can be filed during reassessment proceedings : Association of Corporation and Apex Societies of Handlooms v. Asst. Direct of I. T. (Delhi) p. 287
F Not possible for AO in regular charge to undertake detailed and co-ordinated investigations : Order of transfer of cases to central charge in New Delhi valid : Continental Milkose (India) Ltd. v. CIT (Gauhati) p. 292
F Finding that seconded personnel not employees of assessee but continuing to be employees of oil companies : Amount paid as foreign allowances to seconded personnel not liable for deduction of tax at source : Payment not to be disallowed : CIT v. Petroleum Indfia International (Bom) p. 295
F No allegation in notice of failure on part of assessee to disclose any material facts : No mention in order rejecting objections what fact assessee had failed to disclose : Notice and order rejecting objections not valid : E. I. Dupont India P. Ltd. v. Deputy CIT (Delhi) p. 299
F Enforcement of recovery of demand without disposing of application for stay not justified : Society of the Franciscan (Hospitaller) Sisters v. Deputy Directors of Income-tax (Exemptions) (Bom) p. 302
F Entertainment subsidy is a capital receipt : CIT v. Chaphalkar Brothers (Bom) p. 309 and Deputy CIT v. Inox Leisure Ltd. (Guj) p. 314
F Notice under section 142(1) to co-operative societies within jurisdiction : Mangalam Service Co-operative Bank Ltd. v. ITO (Ker) p. 312
F Consideration received by assessee in respect of sale of securities is capital gains and exempt in of DTAA with Cyprus : Director of I. T. (International Taxation) v. Credit Suisse First Boston (Cyprus) Ltd. (Bom) p. 323
F Reassessment : Notice : Objections : Application of mind to objections essential : Jay Bharat Maruti Ltd. v. Asst. CIT (Delhi) p. 342
F Recovery of tax : TRO bound to pass appropriate order based on order passed in appeal : Sri Lakshmi Brick Industries v. TRO (Mad) p. 345
F Receipt less than amount specified in second proviso to section 2(15) : Trust entitled to exemption : CIT v. Rajasthan Jain Charitable Trust (Karn) p. 354
F Cancellation of renewal without notice not justfied : CIT v. Rajasthan Charitable Trust (Karn) p. 354
F Whether or not expenses were incurred for earning exempt income is a question of fact : CIT v. Glenmark Pharmaceutical Ltd. (Bom) p. 359
F Marketing know-how resulting in higher sales as well as leading to higher profit : Revenue expenditure : CIT v. Glenmark Pharmaceutical Ltd. (Bom) p. 359
F Part of consideration paid for acquiring brand : Depreciation allowable : CIT v. Glenmark Pharmaceutical Ltd. (Bom) p. 359
F Book profit : Interest can be chargeable : CIT v. Glenmark Pharmaceutical Ltd. (Bom) p. 359
F Salaries paid by non-resident employer and not borne by permanent establishment not taxable in India : Director of I. T. (International Taxation) v. Maersk Co. Ltd. (Uttarakhand) p. 366
F Sale of scrap includible in business profits : R. N. Gupta and Co. Ltd. v. CIT (A) (P&H) p. 369
F Fresh assessment consequent to notice under section 263 : Assessee cannot contend opportunity to hearing not given and assessment invalid : NTUC Income Insurance Co-operative Ltd. v. Deputy Director of I. T. (International Taxation) (Bom) p. 372
F Provision for excise duty written back deductible : CIT v. Tata Yodogawa Ltd. (Jharkahnd) p. 379
F Penalty on undisclosed income found during search-section 271AAB analysed-K. Kumar, Advocate p. 56
F Power of Commissioners (Appeals) to stay demand applications filed before them-T. N. Pandey, Retd. Chairman, CBDT p. 49
| COMPANY LAW INSTITUTE OF INDIA PVT. LTD. No. 2, Vaithyaram Street, T.Nagar, Chennai - 600017. Phone: (044) 24350752 - 55 Fax: (044) 24322015 info@cliofindia.com |
COMPANY CASES (CC) HIGHLIGHTS
F Unsecured creditor, petitioner in pending petition for winding up, not entitled to be heard on application for directions to convene meeting to consider scheme : Agnite Education Ltd., In re (Mad) p. 60
F Where application for stay of proceedings pending consideration of scheme, notice to petitioning creditor in pending winding up petition mandatory : Agnite Education Ltd., In re (Mad) p. 60
F Regional Director cannot raise objections where shareholders accepting share exchange ratio in scheme of arrangement : Transferee company entitled to use new name without complying with any other formality : V. R. Textiles P. Ltd., In re (Mad) p. 83
F Where shareholders having less than one per cent. shares seeking to circulate resolution for removal of managing director of company, mandatory provision u/s. 188(2) not fulfilled : Kotak Mahindra Bank Ltd. v. Sureshchandra V. Parekh p. 53
Rules :
F Limited Liability Partnership (Winding up and Dissolution) Rules, 2012-(Contd.)
F An aid for defaulting companies : Company Law Settlement Scheme--Anushree Agrawal p.34
F Jurisdiction of Company Law Board : Intent expressed in articles of association--Sahil Arora, Ivan and Aanchal Basur p. 27
F "Special rights in private equity deals : Evolution of 'control' from Rhodia S. A. to Subhkam Ventures"--Abhyuday Bhotika and Aeishwarya Jha p. 21
| COMPANY LAW INSTITUTE OF INDIA PVT. LTD. No. 2, Vaithyaram Street, T.Nagar, Chennai - 600017. Phone: (044) 24350752 - 55 Fax: (044) 24322015 info@cliofindia.com |
IT : Where assessee did not produce any evidence as to nature and source of amount received as share capital, creditworthiness of applicants and genuineness of transactions and simply surrendered amount in question allegedly to buy peace, penalty was leviable under section 271(1)(c)
■■■
[2013] 31 taxmann.com 35 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income tax
v.
Mak Data Ltd.*
BADAR DURREZ AHMED AND R.V. EASWAR, JJ.
IT Appeal NO. 415 OF 2012
JANUARY 22, 2013
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income - Surrender of income, effect of - Assessment year 2004-05- During survey some documents pertaining to assessee were found and impounded - Documents belonged to certain entities who had applied for shares in assessee-company - When Assessing Officer required assessee to produce evidence as to nature and source of amount received as share capital, creditworthiness of applicants and genuineness of transactions, assessee simply surrendered certain amount - Assessing Officer made addition of said amount and also levied penalty under section 271(1)(c) - Whether in absence of any explanation in respect of surrendered income, first part of clause (A) of Explanation 1 to section 271(1)(c) was attracted and, therefore, levy of penalty was justified - Held, yes [Para 7] [In favour of revenue]
FACTS
Facts
| • | | During a survey, some documents pertaining to the assessee were found and impounded. The documents belonged to certain entities who had applied for shares in the assessee-company. |
| • | | The Assessing Officer required the assessee to prove the nature and source of the monies received as share capital, the creditworthiness of the applicants and the genuineness of the transactions. |
| • | | The assessee stated that it had received share application money from different entities during the past three years. However, it, with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income-tax department, surrendered certain amount as income from other sources. |
| • | | The Assessing Officer completed assessment by adding aforesaid amount and also levied penalty under section 271(1)(c). |
| • | | On appeal, the Commissioner (Appeals) confirmed the penalty. On second appeal, the Tribunal deleted the penalty holding that the offer was made in a spirit of settlement of the dispute with the revenue and no investigation was carried out by the Assessing Officer to prove concealment. |
Assessee's arguments
| • | | Surrender of income was made suo motu before any investigation; that there was no other evidence in the possession of the income-tax authorities except the surrender; and that the levy of penalty without recording any finding on the merits of the assessee's plea was untenable. |
Revenue's arguments
| • | | There was no explanation from assessee in respect of amount in question and, therefore, levy of penalty was justified. |
Issue involved
| • | | Whether Tribunal was justified in cancelling the penalty. |
HELD
| • | | There was absolutely no explanation from the assessee in respect of the amount surrendered. When the Assessing Officer called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions, the assessee simply folded up and surrendered a sum. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income tax department, it surrendered the income under the head 'income from other sources'. |
| • | | In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation to section 271(1)(c) is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to the computation of the total income of the assessee. The revenue is entitled to know the same and if the nature and source of the amount is not explained, it is entitled to draw the inference that the amount represents the assessee's taxable income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. |
| • | | It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore, it should be in a position to offer an explanation and disclose the material facts regarding the same. |
| • | | The absence of any explanation is statutorily considered as amounting to concealment of income. In the absence of any explanation regarding the receipt of the money, which is in the exclusive knowledge of the assessee, an adverse inference is to be drawn against the assessee under the first part of clause (A) of the said Explanation. This appears to be somewhat in the lines of section 106 of the Evidence Act, the principle behind which has been extended to the provisions of sction 271(1)(c). [Para 7] |
| • | | The Tribunal fell into error in setting aside the penalty imposed by the Assessing Officer and upheld by the Commissioner (Appeals). |
Sanjeev Sabharwal for the Petitioner.
JUDGMENT
R.V. Easwar, J. - The following substantial question of law was framed by this Court on 11th October, 2012:-
"Whether the Tribunal fell into error in setting aside the order of penalty imposed by the AO and upheld by the CIT (A)?"
2. This is an appeal by the Revenue under Section 260A of the Income Tax Act, 1961 ('Act' for short) and it pertains to the assessment year 2004-05. An assessment was completed upon the assessee under Section 143(3) of the Act in which an addition of Rs. 40,74,700/- was made in the following circumstances. There was a survey under Section 133A on 16th December, 2003 in the course of which some documents pertaining to the assessee were found and were impounded. These documents consisted of blank transfer deeds for shares duly signed, affidavits, share application forms, copies of bank accounts, income tax returns and assessment orders of certain other companies. Those documents were forwarded to the AO assessing the present assessee who called upon the assessee to explain the contents of the documents and the genuineness of the transactions represented by them. It appears that the documents belonged to certain entities who had applied for shares in the assessee company. What the AO wanted the assessee to do was to prove the nature and source of the monies received as share capital, the creditworthiness of the applicants and the genuineness of the transactions.
3. In response to the above notice which was issued on 26th October, 2006, the assessee stated as under:-
"It has been stated that the company had received share application money from different entities aggregating to a sum of Rs. 239 lacs during the past 3 years as:
| Assessment Year | Amount | |
| 2002 - 2003 | 12,00,000 | |
| 2003 - 2004 | 1,06,50,000 | |
| 2004 - 2005 | 1,20,50,000 | |
| 2,39,00,000 |
The company with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department offers to surrender a sum of Rs. 56.49 lacs as income from other sources.
In this context we also wish to bring on record the fact that Sh. V. K. Aggarwal, Promoter Director of the company had offered a sum of Rs. 1,82,51,000/- for taxation as "income from other sources" in the hands of the partnership firm M/s. Marketing Services. Sh. V.K. Aggarwal is the partner of M/s. Marketing Services and the firm is being assessed with the CIT XI, New Delhi, this income of Rs. 1,82,51,000/- was duly subjected to tax by CIT XI in the following manner:
| Assessment Year | Amount | |
| 2001 - 2002 | Rs. 48,97,000/- | |
| 2002 - 2003 | Rs.40,68,000/- | |
| 2003 - 2004 | Rs.92,86,000/- | |
| Rs.1,82,51,000/- |
It has also been stated that Sh. V.K. Aggarwal, Promoter- Director of the assessee company has utilized this offered sum of Rs. 1,82.51 lacs for inducting funds into the books of the assessee company as share application money. It has been stated further that the additional fund flow to the extent of Rs.56.49 lacs (239 lacs - 182.51 lacs) which remain unexplained is now being offered for taxation by the company as its income from other sources. Subject to the condition that the offer of the surrender is by way of voluntary disclosure without admitting any concealment whatsoever or any intention to conceal and subject to non initiation of penalty proceedings and prosecution."
It appears that thereafter the assessee filed an application before the Addl. Commissioner of Income Tax under Section 144A soliciting directions for expediting the assessment proceedings and therein it indicated its willingness to be assessed on an amount of Rs. 56.49 lacs as its income under the head "income from other sources". It may be noticed that this figure represents the difference between the amount of Rs. 239 lacs and Rs. 1,82,51,000/-. After certain correspondence between the AO and the Addl. CIT, a letter was issued on 27th December, 2006 containing the directions of the Addl. CIT. The entire directions are reproduced in the assessment order and is, therefore, not reproduced here for the sake of brevity. It suffices to note that before the Add. CIT the assessee would appear to have scaled down the offer from Rs. 56.49 lacs to Rs. 40.74 lacs on the ground that the peak investment should be taken at Rs. 2,19,50,000/- instead of Rs. 239 lacs as calculated earlier. The AO, on the basis of the directions of the Addl. CIT called upon the assessee to furnish the relevant documents and information regarding the fresh offer of Rs. 40,74,000/-. The purpose appears to be merely to verify the reconciliation between the earlier offer of Rs. 56.49 lacs and the revised offer of Rs. 40.74 lacs. After having carried out the verification the amount of Rs. 40.74 lacs was added as "income from other sources" with the following narration "As per direction of the Addl. CIT Range-6 and further discussion with the assessee's A.R. a sum of Rs. 40,74,000/- is treated as income from other sources"
4. There was no appeal against the aforesaid addition by the assessee. The addition of Rs. 40,74,000/- thus became final.
5. Subsequently the AO initiated penalty proceedings for furnishing inaccurate particulars of its income under Section 271(1)(c) of the Act. The gist of the assessee's reply was that the amount was offered as income only to buy peace and avoid protracted litigation and with the condition that no penalty or prosecution proceedings would be launched. It was further stated that the offer was made before any investigation was carried out into the matter and, therefore, was voluntary. Several authorities were relied upon in support of the submission. However, the submissions were rejected by the AO who, by the order dated 23.4.2007, imposed the minimum penalty of Rs.14,16,600/- for furnishing inaccurate particulars of income to the extent of Rs. 40,74,000/-. The ultimate findings of the AO on the basis of which the penalty was imposed were as follows:-
"23. The reply furnished by the assessee has been considered & found to be unsatisfactory because of the following: -
| (a) | | In the return filed by the assessee the assessee has not offered the amount of Rs. 40.74 lacs for taxation voluntarily. |
| (b) | | The assessee has surrendered the above amount of Rs. 40.74 lacs during course of assessment proceeding when the impounded material was confronted to the assessee which was impounded during course of survey u/s 133A of the IT Act, 1961 on 16.12.2003 at the business premise of Marketing Services. |
| (c) | | The assessee has furnished inaccurate particulars of its income in the return of income filed on 27.10.2004 for the year under consideration. |
| (d) | | The satisfaction was recorded at the time completing assessment proceedings u/s 143(3) of the I.T. Act, 1961. |
| (e) | | The assessee has itself surrendered for tax, the addition sum of Rs. 40,74,000/- which it was asked to explain the source of share application money. Moreover, admitted facts need not to be proved by the Assessing Officer, as in this case, the assessee itself admitted the concealment of income to the extent of Rs. 40,74,000/- by offering the amount for tax. |
In view of the above facts and circumstances of the case, I am satisfied that it is a fit case for imposition of penalty u/s 271(1)(c) read with section 274 of the IT Act, 1961."
6. The assessee preferred an appeal to the CIT(Appeals) who rejected the submissions of the assessee and confirmed the penalty. A further appeal was preferred by the assessee to the Income Tax Appellate Tribunal ('Tribunal' for short) in ITA No.1896/Del/2010. The levy of the penalty was opposed on the ground that the surrender of income was made suo moto before any investigation, that there was no other evidence in the possession of the income tax authorities except the surrender, and that the levy of penalty without recording any finding on the merits of the assessee's plea was untenable. The Tribunal on examination of the facts and the rival contentions cancelled the penalty recording the following findings:-
| (a) | | It was only after the directions of the Addl.CIT issued under Section 144A that the assessee's offer was accepted and the assessment was finalized; |
| (b) | | There was no material against the assessee to show any concealment and this fact has been admitted by the AO himself; there is not even any indication in the penalty order as to the particular credit in respect of which the penalty was being imposed; |
| (c) | | The fact that the assessee surrendered the income only when it was confronted with the documents found in the survey does not adversely affect its case. |
| (d) | | The assessee did not admit that it had concealed the income to the extent of Rs. 40,74,000/-; it had made it clear in the letter dated 22.11.2006 that the surrender was made without any admission of concealment or intention to conceal. |
| (e) | | The offer was made in a spirit of settlement of the dispute with the revenue and no investigation was carried out by the AO to prove concealment. |
In support of the aforesaid findings the Tribunal referred to several authorities.
7. The contention of the revenue before us is that the Tribunal failed to appreciate the provisions of Explanation-1 to Section 271(1)(c) of the Act. We think that there is force in the contention. Section 271(1)(c) provides for levy of penalty for concealing the particulars of income or furnishing inaccurate particulars of the income. Explanation-1 is as below:-
"Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--
| (A) | | Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or |
| (B) | | Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him], then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed." |
In the case before us the revenue is right in contending that there was absolutely no explanation from the assessee in respect of the amount of Rs. 40,74,000/-; when the AO called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions the assessee simply folded up and surrendered a sum of Rs. 56.49 lacs in its hands initially, which was later scaled down to Rs. 40,74,000/-. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department, it surrendered the income under the head "income from other sources". In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to the computation of the total income of the assessee. The Revenue is entitled to know the same and if the nature and source of the amount are not explained, it is entitled to draw the inference that the amount represents the assessee's taxable income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore, it should be in a position to offer an explanation and disclose the material facts regarding the same. The absence of any explanation is statutorily considered as amounting to concealment of income. In the absence of any explanation regarding the receipt of the money, which is in the exclusive knowledge of the assessee, an adverse inference is sought to be drawn against the assessee under the first part of clause (A) of the said Explanation. This appears to be somewhat in the lines of Section 106 of the Evidence Act, the principle behind which has been extended to the provisions of Section 271(1)(c) of the Act.
8. We are satisfied that the Tribunal fell into error in setting aside the penalty imposed by the AO and upheld by the CIT(Appeals). We accordingly answer the substantial question of law in the affirmative, against the assessee and in favour of the revenue. The appeal of the revenue is allowed with no order as to costs.
IT : The words "arising out of business" in section 28(iv) essentially imply that the benefit or perquisite referred to therein must be in the nature of business receipt or revenue receipt. As Capital reserve arising in amalgamated company's books as a result of amalgamation in the nature of merger is a capital receipt and not a revenue receipt, same cannot be brought to tax by AO by invoking section 28(iv)
• Unless it is a revenue receipt, it cannot be in the nature of income except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi), and unless it is in nature of income, it cannot be considered for taxation under section 28(iv).
• The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature.
• Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature.
• Whatever be the scope of expression 'business', an advantage has to be in the nature of income first, and when it is not in the nature of income it cannot be brought to tax under the head profits and gains from business or profession.
• The benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction". Learned CIT(A) was quite justified in deleting the impugned addition.
■■■
[2013] 31 taxmann.com 11 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'B'
Income-tax Officer, Ward 7(3), Kolkata
v.
Shreyans Investments (P.) Ltd.
Pramod Kumar, ACCOUNTANT MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
IT Appeal No. 1485 (Kol.) of 2011
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
MARCH 6, 2013
L.K.S. Dahiya for the Appellant. M.K. Patni for the Respondent.
ORDER
Pramod Kumar, Accountant Member - By way of this appeal, the appellant Assessing Officer has called into question correctness of learned Commissioner (Appeals)'s order dated 8th August 2011, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2008-09, on the following grounds:
| 1. | That, on the facts and in the circumstances of the case, the learned CIT(A) has erred in considering the issue of shares by amalgamated company to the shareholders of amalgamated company in lieu of transfer of undertaking of the amalgamating company are all transfers within the meaning of section 2(47(i) of the Income Tax Act, 1961. Therefore, the said order of the learned CIT(A)- VII, Kolkata is perverse and liable to be quashed. | |
| 2. | That, on the facts and in the circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in considering the provisions of Section 47(vii) of the Income Tax Act, 1961, when it has not been relied upon by the assessee during the course of assessment proceedings under section 143(3) of the Income Tax Act, 1961. Therefore, the said order of the learned CIT(A)- VII, Kolkata is perverse and liable to be quashed. | |
| 3. | That, on the facts and circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in not providing any opportunity to the undersigned while considering the provisions of Section 47(vii) of the Income Tax Act, 1961, in favour of the assessee, which makes the order bad in law and perverse. | |
| 4. | That, on the facts and circumstances of the case and in law, the learned CIT(A)- VII Kolkata has erred in concluding that the amalgamation is not an adventure in the nature of trade, without negating the reasons to the contrary, mentioned in order under section 143(3) of the Income Tax Act, 1961 dated 28.12.2010. That, on the facts and circumstances of the case and in law, the learned CIT(A)-VII Kolkata has erred. | |
| 5. | The appellant craves the leave to add, alter or abrogate any grounds of appeal at the time of hearing. |
2. The relevant material facts are not in dispute. The assessee before us is a company registered under the Companies Act, 1956. The return of income filed by the assessee, which disclosed a loss of Rs 1,26,760, was selected for scrutiny assessment under the Computer Aided Scrutiny Selection (CASS) scheme. In the course of these scrutiny assessment proceedings, the Assessing Officer noticed that the company had increased its share capital, and that an amount of Rs 2,06,87,692, which was shown as 'Capital Reserve (other than profit and loss account)', was to shown in the current year's balance sheet, whereas no such amount was reflected in the immediately preceding year's balance sheet. In response to the Assessing Officer's requisition to explain these facts, it was submitted by the assessee that the assessee company was part to am amalgamation scheme, duly approved by Hon'ble Calcutta High Court, wherein one Vidya Vincon Private Limited (VVPL, in short), i.e. amalgamating company, amalgamated in the assessee company with effect from 1st April 2007. It was also explained that the capital reserve of Rs 2,06,87,692 came into existence in the books of the assessee, on account of amalgamation with VVPL. The Assessing Officer, on these facts, called upon the assessee to show cause as to why the amount of Rs 2,06,87,692, being the capital reserve credited by the company on amalgamation, not be treated as income of the assessee under section 28(iv) of the Income Tax Act, 1961. The assessee's explanation was that the said amount is neither a benefit, nor a perquisite, nor even advantage of any kind, but simply a result of merger of accounts of amalgamating and amalgamated company. This explanation did not satisfy the Assessing Officer. He rejected the submissions of the assessee, and, in a very scholarly discussion, observed as follows:
| (i) | It appears that the assessee is an investment company and had an accumulated profit of Rs. 6,36,196/- as on 31.03.2007 and Rs.3,14,944/- as on 31.03.2008. The earning per share of the company in Rupees is (12.85). Likewise M/s. Vidya Vincom Pvt. Ltd. is also an investment company and had an accumulated profit of Rs.2,529/- and Rs.4,552/- as on 31.03.2006 and 31.03.2007 respectively. The earning per share of the company (in Rupees) has been mentioned in the audited accounts for the year ended on 31.03.2007 as negligible. No dividend has been distributed by both the companies in any of the previous years. | |
| (ii) | It has been found that the assets and liabilities of the amalgamated company had been taken over by the amalgamating company which resulted in income of Rs. 2,06,87,692/- after deducting capital Suspense Account of Rs. 82,15,980/- from the net worth (assets - liabilities) of the amalgamated company. The amount of Rs. 2,06,87,692/- represents the difference owning to the swap ratio determined by the Hon'ble High Court at Calcutta. Therefore, it is clear that there is a surplus amount of the net worth after allocation of share capital to the share holders of the amalgamated company as per Court's order. | |
| (iii) | As already stated, that the performance of both the amalgamated and amalgamating companies is more or less similar. The said two companies are investment companies having no business activities. Therefore, the reason for amalgamation is unknown. | |
| (iv) | The word 'Business' was defined in the Act under section. 2(13). The definition is not exhaustive; it covers every facet of an occupation carried on by a person with a view to earning profits. The word 'business' under section 28 has a very broad meaning and may be used in different connotations. The section also refers to an adventure in the nature of trade. In this regard, reference is being drawn to the decisions in the case of Rajputana Textiles (Agencies) Ltd. v. CIT [1961] 42 ITR 743 (SC), where it was held that where from the very beginning, purchase of shares is made with the intention of selling them, at a profit, it is an adventure in the nature of trade. | |
| (v) | The purpose of existence of the assessee is to conduct business and as a result earn profit. It will not be far fetched to assume that all the activities of the assessee are driven towards its motive of conducting business and earn profit. Therefore, this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee. | |
| This is not a hypothesis, but can be postulated to actual situation also. The block of assets that the amalgamated assessee company receives is definitely tangible assets that the assessee will enjoy. The bolstered figure of capital reserve can boost its image and goodwill. It can also profit it with more leverage to access loans for expansion or other activities in business. So, in a nutshell, it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation. The assessee in its sane mind will not venture into this exercise of amalgamation, without going into the due diligence of evaluating the pros and cons of an amalgamation with another company. When it has done so, its only motive can be to derive maximum benefit out of it. Therefore, the net result of enhancement of 'Capital Reserve' to the tune of Rs.2,06,87,692/- can only be termed as a benefit accruing to the assessee under section 28(iv) of the Income Tax Act, 1961. | ||
| In the instant case, the intention of the amalgamating company, i.e. the assessee company was to earn profit as there was no reason to amalgamation particularly where the performance of both the company were alike and there was no actual business shown by it during the past year (other than investment in mostly in private limited companies). Therefore, the resultant of amalgamation is considered as a business transaction and the profit arising out of merging of accounts of the amalgamated company with the amalgamating company is business income which is in the nature of benefit or perquisite arising from business or the exercise of a profession, covered under section 28(iv) of the Income Tax Act, 1961. In view of this, Rs.2,06,87,692/- is added to the total income of the assessee under the head 'Business'. |
3. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Learned CIT(A) deleted the impugned addition, and observed as follows:
I have gone through the submissions of the A.R. and the order of the AO, I agree with the A/R that the amalgamation of the two companies are consequent transfer of assets of amalgamating company into amalgamated company and issue of shares by amalgamated company to the shareholders of amalgamating company in lieu of transfer of undertaking of amalgamating company are all transfers within the meaning of section 2(47)(i) of Income Tax Act and are to be charged as capital gains on two counts, one in the hands of amalgamating company and secondly in the hands of shareholders of amalgamating company. However, as per section 47(vi) and section 47(vii), these transfers are outside the purview of capital gains.
The legislature in its wisdom has treated certain transactions in course of amalgamation outside the purview of 'transfer' for taxation purposes.
Section 47(vi) specifically states 'any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian Company'/
Section 47(vii) states that 'any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if-
| (a) | the transfer is made in consideration of the allotment to him for any share or shares in the amalgamated company; and | |
| (b) | the amalgamated company is an Indian Company. |
The amalgamation is not an adventure in the nature of trade. This transaction is clearly a capital account transaction. I further find that ICAI AS-14 (Accounting for Amalgamation) read with Expert opinion published in C.A. Journal (April 2004) has also opined that the difference in the share capital issued by the transferee company on amalgamation and amount of share capital of the transferor companies is of capital nature. Accordingly, the difference should be treated as capital reserve, since it is akin to share premium.
The Kolkata ITAT in ML Dalmia and Company case (supra) has also observed that amalgamation reserve cannot be treated as income of the appellant. Thus, I conclude that amalgamation reserve of Rs.2,06,87,692/- cannot be treated as business income under section 28(iv) of the Income Tax Act. Thus Ground No. 1 is decided in the favour of the appellant.
4. The Assessing Officer is aggrieved, and is in appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
6. We find that there is no dispute about the fundamental factual position that it is a case of amalgamation of companies, and it is as a result of this scheme of amalgamation, duly approved by Hon'ble jurisdictional High Court - a copy of which is placed on our records as well, that the capital reserve of the amalgamating company, i.e. VVPL, was shown in the books of accounts of the assessee. The short question that we really need to answer is whether on these facts, the transfer of capital reserve to the assessee company can indeed be considered to be an income of the assessee under section 28 (iv) as a 'business income'. As we deal with this issue, we may also mention that given these facts, as far as learned CIT(A)'s reliance on this Tribunal's decision in the case of DCIT v. M L Dalmiya & Co Ltd (98 ITD 93) is concerned, it is really out of place inasmuch as the question before the Tribunal in the said case whether an addition, in respect of entries pertaining to inter alia share amalgamation reserve, can be made to the 'undisclosed income' under section 158 BB - particularly when all the relevant details were furnished at the time of regular assessment proceedings. Answering this question, the co-ordinate bench observed that, "Coming to the merits of the case, we find that the learned CIT(A) has deleted the addition observing that the addition made by the Assessing Officer on account of undisclosed income was not justified at all as all the transactions pertaining to the share amalgamation reserve and share application money were duly recorded in the books of accounts and were filed before the date of search in the form of account and were filed before the income tax department before the date of search and in the form of audited statement, and, therefore, the same cannot be taxed as undisclosed income of the assessee" [emphasis by underlining supplied by us now]. Be that as it may, let us come back to the question that we have posed for our ourselves and the question, which, in our humble understanding, is decisive factor in this appeal.
7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Limited v. CIT (261 ITR 501), Hon'ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that section 28 only refers to the "income" which can be charged to income tax under the head "profits and gains from business or profession", and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). Hon'ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT (195 ITR 877) observed that, "…we hold that the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income Tax Act." (Emphasis by underlining supplied by us). This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income Tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers "any capital gains chargeable under section 45", but right now we are confined to normal connotations of the expression 'income'. Howsoever liberal or narrow be the interpretation of expression 'income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. It is also important to bear in mind that, as held by Hon'ble Supreme Court in the case of Dr K George Thomas v. CIT (156 ITR 412), "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Brothers Pvt Ltd (222 ITR 818) wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature.
8. To find out whether or not the benefit, even if that be so, is on capital account or revenue account, it is necessary to understand the nature of transaction which has resulted in, what the Assessing Officer, perceives as 'benefit to the assessee'. This was a case of amalgamation in the nature of merger, and an amalgamation in the nature of merger, in corporate parlance, is the process of blending of two or more companies into one of these blending companies, the shareholders of each blending company becoming substantially the shareholder of the company which holds the blended undertaking. The expression 'amalgamating company' is used for the 'blending company' which loses its existence into the other company and the expression 'amalgamated company' is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger is an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. It is a process of corporate reconstruction and it is only with the approval of Hon'ble jurisdictional High Court that this exercise is carried out. In the present case also, as stated in paragraph 4 of Part I of Schedule A (i.e. scheme of amalgamation) to Hon'ble Calcutta High Court's order dated 9th April 2008, "for the purpose of better, efficient and economical management, control and running of the business and to withstand the recessionary trend in the economy of the business undertaking concerned and for administrative convenience and to obtain advantage of economies of large scale, the present scheme is proposed to amalgamate the transferor company (i.e. VVPL) with the transferee company (i.e. the assessee)". As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observes, "……this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee…", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Seshasayee Brothers (supra), also, we find that the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature.
9. We have noted that the Assessing Officer's observations to the effect that 'business' under section 28 has a very broad meaning and may be used in different connotations" and that it includes adventure in the nature of trade, as also his reliance on Hon'ble Supreme Court's judgment in the case of Rajputana Textiles (Agencies) Ltd. v. CIT 42 ITR 743 (SC), wherein it was held that where from the very beginning, purchase of shares is made with the intention of selling them, at a profit, it is an adventure in the nature of trade. However, we are unable to see any merits in these arguments either. Whatever be the scope of expression 'business', an advantage has to be of income nature first, and when it is not of income nature, it cannot be brought to tax under the head profits and gains from business or profession. As regards the transactions in the nature of 'adventure in the nature of trade' in a situation in which shares are purchased with an intention of selling the same, right now we are dealing with a case of amalgamation by way of merger and not by way of purchase of shares, and, therefore, there cannot be any question of selling of the shares, nor does this judicial precedent deal with the issue before us in any other manner. There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee's business dealings or of trading nature. In view of these discussions, we are of the considered view that the benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction". Learned CIT(A) was quite justified in deleting the impugned addition, we uphold his conclusions, and we decline to interfere in the matter.
10. As we have decided the appeal on the fundamental issue that the benefit, even if any, was not in the revenue field, and could not have been brought to tax under section 28(iv) for this short reason, we see no need to deal with other peripheral legal issues raised by the parties, as also assessee's contention to the effect that there was no benefit at all to the assessee. These issues are rendered academic and call for no adjudication.
11. In the result, the appeal is dismissed.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
No comments:
Post a Comment