[aaykarbhavan] Judgments received from Amreshji,

IT-Loss incurred by partner in a transaction entered into on behalf of firm isn't deductible in hands of partners

IT : Loss in foreign currency transaction entered by partner on behalf of firm from its account, cannot be claimed by individual partner as deduction

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[2013] 33 taxmann.com 230 (Gujarat)

HIGH COURT OF GUJARAT

Pravinbhai Mohanbhai Kheni

v.

Assistant Commissioner of Income-tax, Central Circle-2*

AKIL KURESHI AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 181 OF 2012†

JANUARY  8, 2013 

Section 28(i) of the Income-tax Act, 1961, read with section 13 of the Partnership Act, 1932 - Business loss/deduction - Allowable as [Income of firm] - Assessment year 2007-08 - Appellant assessee was a partner in a partnership firm engaged in business of diamond exports - Appellant entered into foreign currency transactions on behalf of firm from its account - These transactions resulted in loss - Whether such loss could not be allowed as deduction in individual capacity of assessee-partner - Held, yes [Para 5] [In favour of revenue]

FACTS

 

■		The appellant assessee was a partner in firm 'M' which was engaged in business of diamond exports. He entered into foreign currency transaction on behalf of firm which resulted into a loss of Rs. 9.91 lakhs. Both the assessee-partner and firm claimed such loss as deduction from their respective income. The Tribunal disallowed the claim of the both.
■		By a separate order passed, the instant High Court had admitted appeal of the partnership firm.
■		In appeal before the High Court in respect of the assessee as an individual partner, the contentions of the appellant were that the transactions were entered into without the knowledge and consent of other partners and, therefore, should be treated as his personal loss.
■		On appeal:

HELD

 

■		It is undisputed that the investment was made in the name of the firm. The amount invested was also from the account of the firm. The partner, therefore, cannot individually claim any deduction of such loss in the individual capacity. Section 13 of the Partnership Act provides, inter alia, that subject to the contract between, partnership firm shall indemnify the partner in respect of the payment made and liabilities incurred by firm in the ordinary and proper conduct of the business and in doing such act, in an emergency for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances. [Para 5]
■		In the result, it is not justifiable to entertain this appeal of partner, particularly, when same claim is made by firm under examination. Hence, appeal is dismissed. [Paras 6 & 7]

R.K. Patel for the Appellant.

ORDER

 

Akil Kureshi, J. - The assessee is in appeal against the judgment of the Income-tax Appellate Tribunal dated 21.10.201 raising following questions for our consideration:-

"(1) Whether on facts and in the circumstances of the case, the Tribunal is right in law in interpretation of Section 28 read with Section 37 in confirming the disallowance of Rs. 9,99,41,056/- on account of Forex Trading Loss in Foreign Currency Transactions against export business in case of the appellant as well as the partner of the appellant firm?

(2) Whether in the facts and in law, the Tribunal is right in appreciating/ disregarding evidence on record in arriving at findings and conclusions in confirming the Forex Trading Loss in Foreign Currency Transactions of Rs. 9,99,41,056/-?

(3) Whether on facts and in law, the Tribunal is right in confirming the disallowance of Forex Trading Loss in Foreign Currency Transactions incurred in the course of business and resulting into "Embezzlement Loss" to the appellant firm having nexus with the conscious action taken by the partner of the firm on behalf of the firm?"

2. Broadly stating facts are that the appellant assessee was a partner in one M/s. M. Kantilal Exports. Partnership firm was engaged in the business of diamond exports. During the previous year relevant to the assessment year 2007-08, the appellant, for and on behalf of the partnership firm, entered into several foreign currency transactions, which resulted into a total loss of Rs. 9,99,41,056/- on account of foreign exchange trading loss. The assessee claimed such loss from his business income. It was contended that such transactions were entered into without the knowledge and consent of other partners and, therefore, the same should be treated as the personal loss of the partner.

3. We may notice that alternatively the firm also claimed deduction of the loss from its business profits. The Tribunal, by the impugned common judgment, disallowed the loss so claimed in case of both the individual partner as well as the firm.

4. By separate order passed today, we have admitted appeal of the partnership firm. In so far as the present appeal of the individual partner is concerned, the Tribunal rejected the claim making following observations:-

"8. We have considered the rival submissions, perused the material on records and have gone through the orders of authorities below and the judgments cited by the Ld. A.R. First we decide as to whether the claim of the assessee in the hands of Shri P.M. Kheni, a partner of the firm M/s. M. Kantilal Exports is allowable or not. We find that in para 4.4 of the assessment order, it is held by the A.O. that there is no provision in the Act to allocate the loss of a firm only to a partner but the same is required to be adjusted against other income of the firm. The A.O. has noted that even the contract note/ certificate issued by the banks in respect of the loss on forex trading is in the name of the firm and the amount invested for such treading is from the funds of the firm only and therefore, individual assessee being a partner of the said firm, cannot claim such loss in his case merely by passing internal entry and debiting his account with the firm. There is no dispute regarding the facts and under these facts, we are of the considered opinion that no interference is called for in the orders of authorities below in the case of the individual Shri P M Kheni because when the loss has been incurred by investing the funds of the firm and the contract notes are also in the name of the firm, such loss cannot be claimed by individual being a partner of the firm. Hence, ground No.1 of the appeal in the case of individual P M Kheni is rejected."

5. We are broadly in agreement with the view of the Tribunal. It is undisputed that the investment was made in the name of the firm. The amount invested was also from the account of the firm. The partner, therefore, cannot individually claim any deduction of such loan in the individual capacity. Section 13 of the Partnership Act provides, inter alia, that subject to the contract between the partners, partnership firm shall indemnify the partner in respect of the payments made and liabilities incurred by him in the ordinary and proper conduct of the business and in doing such act, in an emergency for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

6. In the result, we do not find any justification for entertaining this appeal of the partner, particularly, when we are examining the same claim made by the firm.

7. In the result, tax Appeal is dismissed.

SB

---

*In favour of revenue.

† Arising out of order of Tribunal, dated 21-10-2011.

IT-Sec. 54 relief can't be declined merely because investment has not sprouted from the original sales consideration

IT : Exemption claimed by assessee under section 54 cannot be denied on ground that assessee has not utilized sale consideration received from sale of flats itself, in purchasing a new residential house

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[2013] 33 taxmann.com 305 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'B'

Smt. Pushpa Devi Tirbrewala

v.

Income-tax Officer, Ward - 8, Hyderabad*

CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER

IT Appeal No. 1763 (Hyd.) of 2011
[ASSESSMENT YEAR 2007-08]

MARCH  22, 2013 

Section 54, read with section 54F, of the Income-tax Act, 1961 - Capital gains - Profit on sale of property used for residential house [Utilisation of sale consideration] - Whether investment in purchase of a plot for construction of house would entitle an assessee to claim exemption under section 54 or section 54F - Held, yes - Whether, further, exemption claimed by assessee under section 54 cannot be denied on ground that assessee has not utilized sale consideration received from sale of flats itself, in purchasing a new residential house - Held, yes [Para 12][In favour of assessee]

FACTS

 

■		The assessee owned a property. She entered into a development agreement with 'T' Builders for construction of flats over the said property on 50:50 sharing basis. In terms of said agreement, five flats fell to the share of the assessee, which were claimed to have been sold by her during the year under consideration for a total consideration of Rs. 1.79 crores.
■		In the return of income, the assessee while computing long-term capital gains, claimed exemption under section 54 towards purchase of plot and construction of house besides deposit in capital gains account scheme.
■		The Assessing Officer held that as the assessee purchased only an open plot for construction of a house over it and not a residential house, she was not entitled to claim exemption under section 54.
■		The Commissioner (Appeals) took a view that since the assessee had made payment for purchase of the plot from a different source and had not actually utilised the sale consideration received from transfer of the original asset, no deduction under section 54 could be allowed to the assessee.

On second appeal:

HELD

 

■		Exemption claimed by the assessee under section 54 cannot be denied on the ground that the assessee has not utilized the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of plot for construction of house would entitle an assessee to claim exemption under section 54 or 54F. [Para 12]
■		So far as the issue of whether the assessee has constructed the residential house within a period of three years as stipulated in section 54 is concerned, neither the Assessing Officer nor the Commissioner (Appeals) has dealt with this fact. While the Commissioner (Appeals) has disallowed the claim of the assessee on the ground that the sale consideration received on transfer of assets has not been utilized in purchasing the plot, the Assessing Officer has disallowed it by observing that the assessee has not purchased a residential house within one year.
■		Be that as it may, it is categorical submission of the assessee that she has constructed the residential house within the stipulated period of three years as per section 54, and necessary information and evidences were also produced before the Assessing Officer.
■		In this regard, copy of the bank account and letters submitted before the Assessing Officer have been produced on record. In the absence of any material to the contrary brought on record by the revenue, the assessee's claim that the construction was completed within the stipulated period of three years as per section 54 has to be accepted. As such, the assessee is entitled to the relief under section 54, as claimed by her. [Para 13]
■		Even assuming that the construction was not completed within the period of three years, which, of course, is not the case in the present appeal, if at all any disallowance has to be made, then, it has to be made in the year in which the period of three years expires and not in the impugned assessment year, in which the department is obliged in the first place to grant deduction under section 54.
■		Considering the totality of facts and circumstances of the case, it is held that the assessee is eligible to claim exemption of the amount invested in purchase of land under section 54. Accordingly, the Assessing Officer is directed to allow the same to the assessee. [Para 14]

CASE REVIEW

 

J.V. Krishna Rao v. Dy. CIT [2012] 54 SOT 44/24 taxmann.com 104 (Hyd.) (para 12) followed.

CASES REFERRED TO

 

Smt. Sashikala Rajkumar Kabra v. ITO [1999] 64 TTJ 754 (Nag.) (para 5), K.A. Abdul Salam v. ITO [2005] 2 SOT 375 (Cochin) (para 5), Muneer Khan v. ITO [2010] 41 SOT 504(Hyd.) (para 7) and J.V. Krishna Rao v. Dy. CIT [2012] 54 SOT 44/24 taxmann.com 104 (Hyd.) (para 7).

K.C. Devadas for the Appellant. Ms. Amisha S. Gupt for the Respondent.

ORDER

 

Saktijit Dey, Judicial Member - This appeal of the assessee is directed against the order of the Commissioner of Income-tax(Appeals), Hyderabad dated 24.08.2011 for the assessment year 2007-08.

2. Grounds No.1 and 9 are general in nature. Hence they are not required to be adjudicated upon.

3. Grounds No.2 and 3 relate to disallowance of exemption claimed under S.54 of the Act, amounting to Rs.69,61,500, being invested in purchase of land for constructing a house.

4. Briefly, the facts relating to the issue in dispute are- The assessee is an individual. On 17.2.1981, the assessee alongwith another person, namely, Smt. Sashikala Tibrewala, jointly acquired certain property for a consideration of Rs.1,95,430.00. Later, Smt. Sashikala Tibrewala relinquished her rights over the said property on 23.3.1985. Thereafter the assessee entered into a development agreement with M/s Tibrewala Builders for construction of flats over the said property on 50:50 sharing basis. Accordingly, five flats fell to the share of the assessee, which were claimed to have been sold by her during the year under consideration for a total consideration of Rs.1,79,00,000. For the assessment year under appeal, the assessee filed her return of income declaring total income of Rs.58,839. In the return of income, the assessee while computing long term capital gains claimed exemption under S.54 of the Act towards purchase of plot and construction of house besides deposit in capital gains account scheme. In the course of assessment proceedings, the Assessing Officer, while examining the assessee's claim of exemption u/s. 54 of the Act noted that the assessee has purchased a house bearing No.6-3-1111/14 at Somajiguda, Hyderabad on 8.1.2007 for a cost of Rs.69,61,500 inclusive of registration charges. In response to the query raised by the Assessing Officer, the assessee stated that the property purchased is an open land with old structure, which the assessee intended to dismantle and construct a new house. The Assessing Officer noted that exemption u/s. 54 is available only where the assessee purchases a residential house within a period of one year, after the date of transfer or sale of original asset. The Assessing Officer held that as the assessee purchased only an open plot for construction of a house over it and not a residential house, she is not entitled to claim exemption of the amount of Rs.69,61,500/- under S.54 of the Act. The Assessing Officer, however, allowed exemption u/s. 54, on an amount of Rs.64,05,000 deposited in capital gains account scheme.

5. The part disallowance of exemption claimed u/s. 54 of the Act was challenged by the assessee in appeal filed before the CIT(A). In the course of hearing before the CIT(A), it was contended by the assessee that investment in purchase of land for construction of residential house is also in compliance to the provisions contained u/s. 54 of the Act and hence, the assessee is entitled to claim exemption u/s.54 of the Act. In support of such contention, the assessee relied upon Board's circular No.667 dated 18.10.1993. On examining the information and details submitted by the assessee, the CIT(A) noted that the amount of Rs.63,00,000 paid by the assessee towards purchase of the plot was actually paid on her behalf by M/s. Jagadamba Builders vide cheque No.837507 dated 3.1.2007 drawn on Agrasen Co-op. Urban Bank Ltd., out of her balance with them. On he basis of the above facts, the CIT(A) came to a conclusion that since the assessee has made payment for purchase of the plot from a different source and has no actually utilised the sale consideration received from transfer of the original asset, no deduction u/s. 54 can be allowed to the assessee. In this context, the CIT(A) relied upon the decision of ITAT, Nagpur Bench in the case of Smt. Sashikala Rajkumar Kabra v. ITO [1999] 64 TTJ 754 and the decision of the Cochin Bench of the Tribunal in the case of K.A. Abdul Salam v. ITO [2005] 2 SOT 375.

6. Aggrieved by the above order of the CIT(A), assessee is in second appeal before us.

7. The learned Authorised Representative submitted that the CIT(A) has totally misconceived and misconstrued the provisions contained us/. 54 of the Act, while coming to the conclusion that the assessee is not entitled to exemption, as it has not utilsied the consideration received on transfer of the flats in the purchase of the plot. He submitted that S.54 of the Act cannot be interpreted in a manner to suggest that the investment in the new asset should only be out of the sale consideration received from transfer of the old original assets. In support of such contention, the learned Authorised Representative relied upon the following decisions of the coordinate Bench of the Tribunal-

(a)		Muneer Khan v. ITO [2010] 41 SOT 504 (Hyd.)
(b)		J.V. Krishna Rao v. Dy. CIT [2012] 54 SOT 44/24 taxmann.com 104 (Hyd.)

The learned Authorised Representative continuing his arguments submitted that the only requirement u/s. 54 is the assessee must purchase a residential house within two years or construct a residential house within three years of the transfer of the original asset. It was submitted that the assessee has invested an amount of Rs.69,61,500 in purchasing a plot for constructing a residential house and has deposited an amount of Rs.64,05,000, in a capital gains account scheme. It was submitted that investment in purchase of plot for constructing a residential house is sufficient compliance for the provision contained u/s. 54 of the Act and in case construction of the residential house is not made within three years, then such income can be charged to capital gains tax only in the assessment year, in which the period of three years expires. In support of such contention, the learned Authorised Representative drew support from the Board Circular No.667 dated 18.10.1983.

8. The learned Departmental Representative submitted that for claiming exemption under S.54 of the Act, the consideration received from sale of original asset has to be utilsied in purchase or construction of the new residential house; and otherwise, the intent and purpose of the provision will be defeated. It was further submitted that the assessee has only purchased the plot and has not constructed the house within three years. Hence, no exemption can be given under S.54 of the Act.

9. The learned Authorised Representative in rejoinder submitted that the assessee in fact has constructed the residential house within the period of three years and complied with the statutory provision by completing the construction of the house in the year 2008. It was submitted that the entire deposits made in capital gains account scheme was withdrawn and utilised in construction of the house. It was further submitted that all these details were also submitted before the Assessing Officer. The learned Authorised Representative also submitted the bank account statement and the letters submitted before the Assessing Officer.

10. We have heard rival submissions and perused the materials on record. We have also carefully applied our mind to the decisions cited before us. On a perusal of the orders of the Revenue authorities and other materials on record, the undisputed facts which emerge are the assessee received an amount of Rs.1,79,00,000 from sale of five flats. The assessee, though admitted long term capital gains, however, claimed exemption in respect of the same under S.54 of the Act, in respect of an amount of Rs.69,57,5000 towards purchases of plot for construction of residential house and an amount of Rs.64,05,000 being deposited in capital gains account scheme. So far as the amount of Rs.64,05,000 deposited in capital gains account scheme is concerned, the Assessing Officer allowed the claim of exemption. However, in respect of the amount of Rs.69,51,500 utilised for purchase of plot, while the Assessing Officer disallowed it on the ground that the assessee has not purchased a residential house within one year, the CIT(A) has disallowed the claim of exemption by holding that the assessee has purchased the plot by utilising fund from a different source and not out of the sale consideration received from the sale of flats. According to the CIT(A), for claiming exemption us. 54 of the Act, the assessee should have utilsied the sale consideration received from sale of flats towards purchase of the plot. On going through the provisions contained in S.54 of the Act, we could not locate any such precondition/restriction. The only condition imposed under sub-section (1) and (2) of S.54 are- (a) the assessee should within a period of two years from the date of transfer, purchase a residential house or within a period of three years from the date of transfer, construct a residential house, and (b) the amount of capital gains not so utilized shall be kept in a scheme of the Central Government made in that behalf.

11. It is not in dispute that the assessee has purchased a plot of land for Rs.69,51,500 and deposited an amount of Rs.64,05,000 in capital gains account scheme. The coordinate bench of this Tribunal, while dealing with an identical issue of utilisation of money from a source other than the sale consideration received from capital asset in the case of J.V. Krishana Rao (supra), following an earlier decision of the same bench in the case of Muneer Khan (supra) held in the following manner-

"9. We heard both the parties and perused the orders of the lower authorities. We have also perused the case-law relied upon by the learned counsel for the assessee. The point in dispute before us is when the assessee undisputedly earned capital gains and when the deposited equivalent amount in the bank under Capital Gains Accounts Schemes, whether the assessing officer is justified in denying benefit of S.54F on the ground that part of such deposit has source in borrowal of funds and part of such gains is diverted elsewhere for other purposes. On this, we find that this issue is covered by the decision of the Hyderabad Bench of Shri Muneer Khan (supra), wherein it has been held that money has no colour and all that is required to be eligible for relief under S.54F of the Act is compliance with the condition of investment within the specified time. We also find support for this view from the decision of the Delhi Bench of the Tribunal in the case of Sita Jain & Others v. ACIT, wherein it was held that one to one correlation between the sale proceeds of agricultural lands and utilisation of such proceeds for purchase of land is not necessary. In the case of Bombay Housing Corporation (supra), the Mumbai Bench of the Tribunal held that even if an assessee borrows required funds and satisfied conditions relating to investment in specified assets, he is entitled to exemption. The later decision of the Mumbai Bench of the Tribunal in the case of Mrs. Prema P. Shah (supra) is also to the same effect, and it in fact followed the earlier decision of the Mumbai bench in the case of Bombay Housing Corporation (supra). We have perused the decision of the Hon'ble Kerala High Court in the case of V.R. Desai (197 Taxman 52), relied upon by the learned CIT(A), and find that it is distinguishable on facts in as much as in that case the assessee has failed to make investment in eligible asset within the specified period, and therefore, in our opinion, the CIT(A) erred in following that decision in the impugned order.

10. In the light of the above discussion, following the Hyderabad Bench of the Tribunal in the case of Muneer Khan (supra) and also the other decisions of the Tribunal relied upon by the learned counsel for the assessees before us, we hold that the capital gains earned by the assessee can be utilised for other purposes, and as long as the assessee fulfils the condition of investment of the equivalent amount in the scheme specified or in the asset qualifying for relief under S.54F, by securing the money spent out of the capital gains or from other sources available to it either by borrowal or otherwise, and the assessees are eligible for relief under S.54F of the Act in respect of the entire amount of capital gains so deposited. In the circumstances, we find merit in the contentions of the assessees that inasmuch as they have made deposits of the amounts equivalent to the capital gains realized in the Capital Gains Investments Accounts, even though part of those capital gains have been utilized for other purposes, borrowing amounts equivalent to such utilised funds from Shri J.V. Laxman Rao. The assessees are entitled to relief under S.54F of the Act, as ultimately the assessees deposited the requisite amounts in the Capital Gains Accounts Schemes for exemption under S.54F of the Act within the time stipulated by the statute. We accordingly, set aside the orders of the lower authorities on this issue, and direct the assessing officer to delete the disallowance made by the assessing officer in this regard. Grounds of the assessees in these appeals are consequently allowed."

12. The ratio laid down by the coordinate bench as above squarely applies to the facts of the present case as provision contained u/s. 54 of the Act is pari materia with S.54F of the Act. Therefore, following the aforesaid ratio laid down by the coordinate bench, we hold that exemption claimed by the assessee under S.54 of the Act cannot be denied on the ground that the assessee has not utilised the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of pot for construction of house would entitle an assessee to claim exemption u/s.54 or 54F of the Act. Board's circular No.667 dated 18.10.1993 also says so.

13. So far as the issue of whether the assessee has constructed the residential house within a period of three years as stipulated in S.54 is concerned, neither the Assessing Officer nor the CIT(A) has dealt this fact. While the CIT(A) has disallowed the claim of the assessee on the ground that the sale consideration received on transfer of assets has not been utilized in purchasing the plot, the Assessing Officer has disallowed it by observing that the assessee has not purchased a residential house within one year. Be that as it may, it is categorical submission of the learned Authorised Representative that the assessee has constructed the residential house within the stipulated period of three years as per S.54 of the Act, and necessary information and evidences were also produced before the Assessing Officer. In this regard, copy of the bank account and letters submitted before the Assessing Officer have been produced before us. In the absence of any material to the contrary brought on record by the Revenue, we are inclined to accept the assessee's claim that the construction was completed within the stipulated period of three years as per Section 54 of the Act and necessary information and evidence were also produced before the Assessing Officer, as seen from the copies thereof furnished before us as well. As such, the assessee is entitled to the relief under S.54 of the Act, as claimed by her.

14. Even assuming that the construction was not completed within the period of three years, which, of course, is not the case in the present appeal, if at all any disallowance has to be made, then, it has to be made in the year in which the period of three years expires and not in the impugned assessment year, in which the department is obliged in the first place to grant deduction under S.54 of the Act. Considering the totality of facts and circumstances of the case, we are of the view that the assessee is eligible to claim exemption of the amount of Rs.69,61,500 invested in purchase of land under S.54 of the Act. Accordingly, we direct the Assessing Officer to allow the same to the assessee. The grounds raised by the assessee on this aspect, viz. grounds No.2 and 3, are allowed.

15. In ground Nos 4, 5 and 6, the assessee has challenged the method of computation of long term capital gains adopted by the Assessing Officer, and specifically disputed the restriction of the cost of construction and cost of improvement to Rs.3 lakhs as against Rs. 6 lakhs claimed by the assessee.

16. We have heard submissions of the parties on the issue and perused the orders of the Revenue authorities. It is evident from the orders of the revenue authorities that the assessee has not produced enough supporting evidence to prove that she has in fact incurred expenditure of Rs.6 lakhs towards cost of construction and cost of improvement. In such a view of the matter, the allowance of 50% of cost of construction at Rs.3 lakhs is reasonable, and no interference is called for. We accordingly reject the grounds raised by the assessee on this aspect.

17. In ground No.7, the assessee has challenged the disallowance of expenditure incurred towards digging of borewell while computing the cost of acquisition. Considering the fact that the assessee has failed to produce any evidence in this regard, her claim was not accepted by the Revenue authorities. In the absence of any evidence in support of her claim in this behalf even before us, we find no infirmity in the action of the revenue authorities in rejecting the claim of the assessee. This ground of the assessee is accordingly rejected.

18. In ground No.8, the assessee has disputed the action of the revenue authorities, in not allowing the amount of Rs.3,00,000 being the cost of boundary wall as part of construction cost of the new property.

19. The Assessing Officer while examining the assessee's claim for exemption under S.54 of the Act noted that assessee claimed an amount of Rs.3,00,000 towards construction of boundary wall over the plot purchased by her. The Assessing Officer rejected the claim by holding that the exemption under S.54 is available where assessee purchases a residential house within a period of one year after the date of transfer of original asset. The CIT(A) confirmed the disallowance of the amount of Rs.3 lakhs by observing that the expenditure incurred on construction of boundary wall on the plot was not out of the actual sale proceeds received by the assessee from sale of the flats.

20. We heard both sides. On a careful consideration of the matter in the light of the orders of the CIT(A) and the Assessing Officer, it is quite evident that they have not disputed the fact that the assessee has incurred the expenditure of Rs.3-lakhs in the construction of the boundary wall. The CIT(A) has rejected the assessee's claim only on the ground that the construction made was not out of sale proceeds of the flats. In paras 10 to 12 of our order hereinabove, we have held that for claiming exemption under S.54 of the Act, it is not necessary that the investment in new asset should be out of the sale consideration received from transfer of the original asset only. In the aforesaid view of the matter, we hold that the assessee is entitled for deduction of Rs.3 lakhs, being expenditure incurred on construction of compound wall. This ground raised by the assessee is allowed.

21. In the result, appeal of the assessee is partly allowed.

Sunil

---

*In favour of assessee.

IT/LT-Economic circumstances and functional similarity to be seen among comparables for TP analysis

IT/ILT : For carrying out comparability analysis, it is to be seen as to whether comparable company is comparable having regard to characteristic of property and service, functions performed, assets used and risk assumed

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[2013] 33 taxmann.com 259 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'K'

Lloyds TSB Global Services (P.) Ltd.

v.

Deputy Commissioner of Income-tax, Circle - 3(2)*

B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND Amit Shukla, JUDICIAL MEMBER

IT Appeal No. 5928 (Mum.) of 2012
[ASSESSMENT YEAR 2008-09]

NOVEMBER  21, 2012 

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price [Comparables and adjustment] - Assessment year 2008-09 - Whether for carrying out comparability analysis, comparison of controlled transactions with an uncontrolled transaction has to be done to see whether they are comparable having regard to characteristics of property and service transferred, functions performed taking into assets used and risk assumed and other economic circumstances - Held, yes - Whether, thus, while carrying out comparability analysis economically significant activities and responsibility taken by unrelated parties in relation to tested party has to be seen - Held, yes - Whether once a company is found to be functionally similar in just preceding year, it cannot be rejected on functional analysis in current year - Held, yes [Paras 20 & 22] [In favour of assessee]

FACTS

 

■		The assessee was a subsidiary company of LTSB and was engaged in providing support services relating to overall management of LTSB's business in India. A reference was made to the TPO to ascertain the ALP. The assessee shortlisted nine comparable companies using data of Financial year 2007-08 as directed by the TPO for benchmarking its international transactions.
■		Out of nine comparables the TPO accepted four comparable companies having high PLI and rejected the other five on the grounds that they were functionally different and made the upward adjustment of ALP at Rs. 2.68 crore.
■		The assessee filed objection before DRP for the inclusion of five comparable companies which had been rejected by the TPO. The DRP upheld the findings of the TPO.
■		On appeal:

HELD

 

■		For carrying out comparability analysis, comparison of controlled transactions with an uncontrolled transaction has to be seen whether they are comparable having regard to the characteristics of the property and service transferred, functions performed taking into assets used and risk assumed and other economic circumstances. While carrying out the comparability analysis economically significant activities and the responsibility taken by the unrelated parties in relation to the tested party have to be seen. In the instant case, after detail search process and using various filtrations, nine comparable companies were short listed by the assessee as per the direction of the Transfer Pricing Officer out of such nine companies, four of them have been accepted by the Transfer Pricing Officer, prima facie, which were having high PLI (Profit Level Indicator). He has rejected the other five companies mainly on the ground that they were functionally different without giving any reasons as to how the other four companies which has been accepted by him are functionally similar to that of the assessee's business activities. It is to be seen whether five comparables those are rejected, could be included in the comparability analysis or not.
■		The business activities carried out by the assessee are mostly in the nature of business support services and liaisoning. [Para 20]

ITDC Ltd.

■

ITDC Ltd. is mainly engaged in the business of running of hotel and restaurants at various tourist places besides providing transport facilities. Its main business activities revolve around promotion of tourism in India. Even going by the segmental data of reservation, marketing service and event management as adopted by the assessee for comparison, it is seen that these functions are entirely different from that of the activities of the assessee company. Under the ARMS division i.e., reservation and marketing services, this company is mainly handling event and conferences, promotion and marketing of ITDC hotels and reservations. The SEL i.e., sound and light activities carried on by this company are also different. The segmental details and also income from such service goes to show that income from services rendered have been classified into several categories which are entirely different from each other. The contentions raised by the revenue that the functional profile of the company is entirely different from the activities carried on by the assessee appears to be acceptable. Therefore, in our opinion, going by the functional profile as available on record before us, this company has rightly been rejected by the Transfer Pricing Officer and cannot be included as a comparable entity even at a segmental level for conducting any comparability analysis. Accordingly, the assessee's contention for including the said company is rejected. [Para 21]

EDCIL and ICRA

■

These companies were accepted as a comparable by the Transfer Pricing Officer in the immediately preceding assessment year 2007-08 and there was no dispute among the parties in that year for taking them as a comparable company. Moreover, going by the functions profile specifically that of ICRA Management Consultant Services, prima facie, it is seen that it is also engaged in the business support services like strategy risk management, process consulting, transaction advisory policy and regulation and development consulting. These functions are, by and large, similar to the assessee's activities also. Therefore, this company on merits also is includable in the set of companies. In the case of EDCIL, though main activities are functionally different, however, its technical assistance segment can be broadly considered to be functionally similar to the assessee. Since this company has been accepted as a comparable by the Department as well as by the assessee, therefore, following the rule of consistency. It is to be held that this company should also be included as comparable. In the earlier year once these two companies have been found to be functionally similar, then in this year they cannot be rejected on functional analysis. Thus, both the aforesaid companies i.e. ICRA Management and EDCIL are directed to be included as comparable for the purpose of comparability analysis for determining the Arm's Length Price of the international transactions of the assessee company. [Para 22]

Overseas Manpower Corp. Ltd.

■

It is purely recruitment and placement company and its main revenue is from recruitment services only. Thus, not only the functional profile, the other test of comparability analysis also fails in this case. Therefore, this company has rightly been rejected by the TPO for the purpose of comparability analysis and is to be excluded. [Para 23]

Inhouse Productions Ltd.

■		This company is mainly engaged in the business of knowledge Process Outsourcing (KPO) in the field of healthcare and is also engaged in media. The functions and the business activities of this company as seen from the records is not comparable to that of the business activities carried on by the assessee and the functional profile is also different. Therefore, this company has rightly been rejected by the TPO. [Para 24]
■		Thus, besides four companies, accepted both by the Transfer Pricing Officer as well as by the assessee, two more companies should also be included namely EDCIL and ICRA Management Services for the purpose of comparability analysis for determining the Arm's Length Price. The balance three companies are to be excluded. The TPO is directed to work out the arithmetic mean for the finally selected six companies and determine the Arm's Length Price. [Para 25]

CASES REFERRED TO

 

Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC) (para 16), Vishay Components India (P.) Ltd. v Dy. CIT [IT Appeal No.133(Pune) of 2011] (para 19) and Actis Advisors (P.) Ltd. v. Dy. CIT [IT Appeal No.5277(Delhi) of 2011] (para 19).

M.P. Lohia for the Appellant. Ajeet Kumar Jain for the Respondent.

ORDER

 

1. The present appeal preferred by the assessee, is directed against the final impugned assessment order dated 27th August 2012, which was passed in pursuance of the directions given by the Dispute Resolution Panel-I (for short "DRP"), Mumbai, for the quantum of assessment passed under section 144C(v) of the Income Tax Act, 1961 (for short "the Act") for the assessment year 2008-09. Following grounds have been raised by the assessee:-

"1.		The learned AO erred in passing an order under section 143(3) r.w.s. 92CA and r.w.s 144C(5).
2.		The learned Assessing Officer / Transfer Pricing Officer (TPO) erred in making an addition of Rs. 26,750,954 to the value of international transaction of rendering support services by the appellant. The AO / TPO erred in determining the average Profit Level Indicator (PLI) of the comparables at 30.84%.
3.		The learned AO/ TPO erred in rejecting the documentation to the extent of the search process adopted by the appellant without providing any cogent reasons and requesting the appellant to conduct a fresh search for comparable companies:
4.		Without prejudice, in the fresh search conducted by the appellant the learned A.O / TPO erred in rejecting five low margin earning comparable companies and accepting four high margin earning companies as comparable to the appellant without considering the fact that the low margin companies were engaged in the same activities as that of high margin companies.
5.		The learned AO / TPO erred in identifying comparable companies based on the data available in the public domain at the time of conducting the assessment i.e using noncontemporaneous data for calculating arm's length price of the international transaction entered by the appellant.
6.		The learned AO / TPO erred in using single year data for undertaking a comparability analysis that will not produce accurate results.
7.		The learned AO / TPO erred in not considering the provisions of Section 92C(2) of the Act while determining the ALP."

2. The learned Counsel, Mr. M.P. Lohia, representing the assessee, during the course of hearing, submitted before us that he did not wish to press grounds no.3, 5, 6 & 7. Learned Departmental Representative did not object to the submissions of the assessee. Consequently, these grounds are dismissed as "not pressed".

3. Ground no.1, is general in nature, hence, no separate adjudication is required.

4. Grounds no.2 and 4, the assessee has mainly challenged the addition of Rs. 2,67,50,954, on account of adjustment made in arm's length price (for short "ALP") on the value of international transactions.

5. Brief facts of the case are that Lloyds TSB Global Services Pvt. Ltd. (for short "GSL"), incorporated in India in October 2003 and is subsidiary of Lloyds TSB Bank Plc. (for short "LTSB"). It is engaged in providing support services relating to over all management of LTSB's business in India and to overseas off-shore business operation risk and compliance and all necessary relationship in India. The scope of services rendered by the assessee GSL to LTSB has been enumerated in a letter dated 19th August 2005, written by the C.E.O. of the assessee company to the director of LTSB in the following manner:-

"Scope of Services:

3. As per GSLs arrangement with LTSB the overarching function of GsL is to provide support on issues which affect the conduct of business between LTSB and its Indian Outsource Partners. This includes support towards protecting LTSB from any brand risk and providing support to LTSB employees present in India from time to time in relation to the outsourced activities.

4. Specifically, under its arrangement with LTSB, GSL has been requested to provide the following support services to LTSB in relation to the outsourced activities.

UK Seconded Staff Welfare Support

Supporting LTSP, employees sent to India in Connection with the outsourced activities on short or long term stays. This includes working with LTSB offshore units to develop templates for tracking staff movements mainly at weekends, and a documented set of local procedures covering staff medical welfare, administration of insurance and immigration matters, and LTSB issued guidelines on staff conduct and repatriation support.

Being the point of contact for the LTSB employees visiting India in connection with the Outsourced activities if in need of assistance, including in a medical emergency.

Risk and Compliance Management

Overseeing the implementation of LTSB'S risk management strategy and encouraging LTSB best practices in risk and compliance management in relation to the outsourced activities at the outsource partners offices / sites in India.

Conduct regular checks / audits, in conjunction with the LTSB International Security Consultant and LTSB business unit risk teams, on the Outsource Partners' business practices In the context of the performance of the outsourced activities and the welfare, health and safety of LTSB employees, if arty, visiting the Outsource Partners work site.

Incident end Crisis Management coordination

In the event of a country specific or isolated risk to LTSB employees visiting India the CEO, GSL is responsible for convening and managing the Crisis Management Team, and implementation of the Crisis Management Plan, if deemed appropriate, and and in the manner agreed with LTSB. It is clarified that GSL's responsibilities are restricted to employees of LTSB visiting India and that the Outsource Partners are responsible for Crisis Management within their own businesses.

Corporate Social Responsibility (CSR)

GSL is responsible for overseeing the Implementation of LTSB's CSR programme in each of the cities which the Outsource Partners operate. CSR implementation will include identifying suitable projects for LTSB's consideration, and advising LTSB of any potential risks that may arise to the LTSB brand on implementation of the same.

Industry representation

In accordance with the directions of and under the express instructions of LTSB, represent LTSB in developing relationships with appropriate industry and government bodies (e.g. NASSCOM, British High Commission) and law enforcement agencies in relation to the outsourced activities In India and to assist the Lloyds 156 Group in its efforts to enhance end protect its reputation in India. Provide support to business units on industry regulation and trends

Providing time to time updates regarding developments in the Indian SPO market and with regard to any regulatory or legislative changes in India which could impact the performance of LTSB's contracts with the Outsource Partners.

Liaising with LTSB's lawyers Fox Mandal in India for obtaining the above legal and regulatory updates and assist LTSB at their request and under their instructions, in the co-ordination with Fox Mandal of any legal matters in relation to the outsourced activities.

Supplier Management Support

The primary supplier management relationship will be managed by LTSB from the UK. However, GSL will prvde LTSB with certain supplier management support services form time to time at LTSB's request such as seat utilisation audits at the location of the Outsource Provider."

6. For the services so rendered, the assessee was remunerated cost plus 10%. During the financial year 2007-08, the assessee has entered into following international transactions:-

(i)		Rendering of support services LTSB - Rs. 14,37,84,205;
(ii)		Reimbursement of expenditure - Rs. 5,82,33,539.

7. In relation to rendering of support services, the assessee in its T.P. study report has selected Transactional Net Margin Method (for short "TNMM") as most appropriate method and selected itself as "tested party" for the purpose of bench marking the international transaction entered into with LTSB. In the said report, the assessee has used multiple year data of 2005-06, 2006-07, 2007-08 and identified thirteen comparables. The Transfer Pricing Officer (for short "TPO") to whom matter was referred by the Assessing Officer under Section 92CA(1) for determining ALP on International Transactions, rejected the assessee's selection for multiple year data on the ground that as per rule 10B, relevant year data should be used. He, therefore, required the assessee to compute Profit Level Indicator (for short "PLI") of the comparables using the F.Y. 2007-08 data. Thereafter, the assessee submitted that out of thirteen comparables selected by it, eight were not comparable due to various factors, which are enumerated in para 9 of TPO's order. The TPO finally rejected the assessee's entire T.P. study report on various grounds which has been discussed at Para-11 of the order.

8. The TPO further required the assessee to conduct fresh search for the comparables using data of F.Y. 2007-08 and in pursuance of which the assessee submitted fresh set of following nine comparable companies having arithmetic mean of 16.10% as against 10.32% shown by the assessee.

Sl.no.	Name of Company	'PLI'
1.	Access India Advisors Ltd.	45.97%
2.	E D C I L (India) Ltd.	5.2%
3.	I C R A Management Consulting Services Ltd.	3.22%
4.	I D C (India) Ltd.	14.87%
5.	In House Productions Ltd.	0.56%
6.	India Tourism Devp. Corpn. Ltd.	9.4%
7.	Indus Technical & Financial Consultants Ltd.	13.53%
8.	Inmacs Management Services Ltd.	49%
9.	Overseas Manpower Corp. Ltd.	3.13%
	Arithmetic Mean	16.10%

9. The TPO, from the said comparables, however, accepted four comparable companies and rejected the five comparables in the following manner:-

Sl.no.	Name of Company	Remarks of the TPO
1.	Access India Advisors Ltd.	Selected in the TP study. Rejected vide letter dated 11th April 2011, selected in the fresh search. Accepted by the TPO.
2.	E D C I L (India) Ltd.	EdCIL (India) Limited is offering consultancy services areas of education and human resource development, in India and beyond national boundaries with special focus on developing countries of Asia and Africa. The functional profile of the company is different from the taxpayer.
3.	I C R A Management Consulting Services Ltd.	IMaCS is a management consulting firm and is engaged in Consulting, Analytics and Transaction Advisory services. The company is functionally different from the assessee.
4.	I D C (India) Ltd.	Accepted as comparable.
5.	In House Productions Ltd.	The company is into Medical Business Process Outsourcing business(BPO). The functional profile of the company is different from the taxpayer.
6.	India Tourism Devp. Corpn. Ltd.	The Corporation is running hotels, restaurants at various places for tourists, besides providing transport facilities, In addition, the company is engaged in production, distribution and sale of tourist publicity literature and providing entertainment and duty free shopping facilities to the tourists. The functional profile of the company Is different from the taxpayer.
7.	Indus Technical & Financial Consultants Ltd.	Accepted as comparable
8.	Inmacs Management Services Ltd.	Accepted as comparables
9.	Overseas Manpower Corp. Ltd.	OMG is engaged in the business of finding suitable overseas placements for the Indian professionals, skilled workers and others, who are desirous of securing jobs abroad. The functional profile of the company is different from the taxpayer. Therefore, the TPO has rejected it as comparables.

10. Before the TPO, the assessee made detail objections about the functional comparability of the five comparable companies rejected by him, the same has been discussed from Pages-7 to 11 of the TPO, however, The TPO rejected the said contentions of the assessee and after short listing following set of four comparable companies for the purpose of bench marking the international transactions :-

Sl.no.	Name of Company	PLI (OP/OC) IN %
1.	Access India Advisors Ltd.	45.97
2.	E D C I L (India) Ltd.	14.87
3.	Indus Technical and Financial Consultants Ltd.	13.53
4.	Inmacs Management Services Ltd.	49.00
	Average PLI	30.84

He made the upward adjustment of ALP at Rs.2,67,50,954/-

11. Thereafter, the assessee preferred to file detail objections before the DRP for the inclusion of five comparable companies which has been rejected by the TPO. However, the DRP rejected the assessee's contention and upheld the findings of the TPO. Against such directions, the assessee is in appeal before the Tribunal.

12. Learned Counsel, Mr. M.P.Lohia, after referring to the facts of the case and the nature of services provided by the assessee to its parent company, submitted before us that out of the nine comparable companies, which were finally selected after detail search process as per the direction of the TPO, the four comparable companies having high margin have been cherry picked by the TPO and the five comparable companies having low profit margin has been rejected. He referred to the functional profile and the business description of the comparable companies which are appearing at Pages-68 to 71 of the paper book and submitted that the basis for rejection of 5 comparables by the TPO on the ground that they are functionally different from the assessee are not correct. In support of his contention, he gave detail analysis of each and every five comparables which were rejected by the TPO. Alternatively, he submitted that if the criteria of functional similarity is to be taken into consideration, then none of the 4 comparables selected by the TPO can be said to be similar in nature. The TPO has done cherry-picking of high profit margin companies only and nothing else. He further brought to our notice that in the earlier assessment year i.e., 2007-08, the TPO has accepted the assessee's comparables out of which ICRA Management Consulting Services Ltd. and EDCIL India Ltd., were common. Once these two companies have been held to be comparable in the immediately preceding assessment year, then how the same two companies can be said to be functionally different in the present assessment year. He, therefore, pleaded that rule of consistency should be followed at least for these two companies.

13. Finally, he submitted the business description and functional profile of all the nine companies before us in the form of chart and heavily relied upon the same.

14. Per Contra, the learned Departmental Representative, relying upon the reasoning given by the TPO for rejecting the five comparables analysed the business description and functional profile of each and every comparables rejected by the TPO, vis-à-vis the business activity and functional profile of the assessee company. In the case of 'India Tourism Development Corp.' (ITDC), he submitted that it is a public sector undertaking which is operating in the business of hotel / restaurant operation; duty free shops / duty paid shops operations travel and tour operations; sound and light show (SEL); Ashok Reservation and Marketing Service Division (ARMS); Misc. operations; and construction and consultancy projects. Regarding segmental information about SEL and ARMS which has been taken into account by the assessee for benchmarking, he submitted that this division of ITDC is also functionally different which is evident from the description of the said activities given in Director's report, the relevant portion of which has been given at Pages- 248 and 249 of the paper book. He submitted that this division carries on the functions of handling of events and conferences, promotion and marketing of ITDC hotels and reservation of ITDC hotel by centralized reservation services. Whereas, assessee's scope of activities is entirely different, therefore, the functional test fails in the case of this company even at segmental level with that of the assessee and, hence, it has been rightly rejected by the TPO. He also drew our attention to the Profit & Loss account and the segmental details of ITDC and pointed out that income from services rendered by this company itself is functionally different from that of the assessee.

15. Regarding EDCIL, Educational Consulting India Ltd., he submitted that this company is also a public sector undertaking which is mainly engaged in recruitment of teachers and experts for clients in India and abroad and also focuses on promotion of Indian education at abroad. Even otherwise also, technical assistance and human resources development HRD which has been taken by the assessee as comparable is also different from the business profile of the assessee as these do not come within the purview of business support services. HRD functions are basically related to promotion of Indian education abroad and recruitment of personnel in middle East and African companies. The said company was having projects only for Government. The income from technical assistance is from educational aids and other Govt. projects and its income from HRD are mostly from placement of personnel. This company is, therefore, not comparable with that of the assessee.

16. Regarding ICRA Management Consulting Services, Ld. CITDR submitted that the area of the business activity of this company is risk management strategy, project consulting, transaction advisory policy, regulation and development consultancy. He specifically drew our attention to director's report as appearing in the paper book and drew our specific attention to one of the activities which relates to transportation in urban sectors and involvement in policy formulation, regulatory reform in investment advisory services. Thus, this company, he pleaded, is also functionally different from that of the assessee. He further submitted that even if this company along with EDCIL India Ltd. have been accepted to be comparable in the earlier years, then also it cannot be taken as comparable in this year as once error has been committed in the earlier year, the same should not be allowed to be perpetuated in the next year. For this, he relied on the judgment of the Hon'ble Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC).

17. Regarding Overseas Manpower Corporation Ltd., he submitted that it is a Government of Tamil Nadu Undertaking and basically is a placement company and its main source of income is from recruitment services only. Further, he submitted that this company is also doing air ticketing business. Therefore, this company cannot be taken as a comparable as the functional test completely fails in this case.

18. Regarding Inhouse Production Ltd., he submitted that this company is mainly engaged into knowledge processing outsourcing (KPO) and is entirely different from the functions carried out by the assessee. He further submitted that its main business is healthcare and media division which too are only related to KPO only and is also doing inhouse production. In support of his contention, he referred to the Director's report of the company as appearing in the paper book. Thus, this company, he pleaded, is also entirely different from the assessee and, therefore, the same has been rightly rejected by the TPO for taking into comparability analysis.

19. The learned Counsel for the assessee, in his rejoinder, submitted that one has to see the overall function and cannot see vertically because otherwise no two companies have similar functions. All these companies are into business support services which has a very vide connotation. If the criteria of rejection as have been canvassed by the learned Departmental Representative and by the TPO, then even the four comparables selected by the TPO are also functionally different. Just because the four companies have very high profit margin, therefore, they cannot be held to be functionally same and other companies which have a lower profit margin can be held to be functionally different. He, therefore, submitted that such cherry picking by the TPO is uncalled for. Regarding objection of the companies by the learned Departmental Representative that they are Public Sector Undertakings he submitted that the same does not have any bearing on the operating margin. In support of this contentions, he relied upon the decision of the ITAT, Pune Bench, in the case of Vishay Components India (P.) Ltd. v. Dy. CIT ITA No.133/Pune/2011. For the proposition that one has to go by the horizontal set of comparables of particular kind and class of services because it is very difficult to get accurate comparables having exact functional profiles. He placed heavy reliance on the decision of the ITAT, Delhi Bench, in the case of Actis Advisors (P.) Ltd. v. Dy. CIT ITA No.5277/Delhi/2011.

20. We have carefully considered the rival contentions of the parties, perused material placed on record and the impugned orders. The limited issue that is required to be adjudicated is whether the five comparable companies which has been rejected by the TPO on the ground that they are functionally different from the assessee can be included for comparability analysis for benchmarking the ALP of the assessee company. Insofar as the application of TNNM is concerned for bench marking the international transaction for determining the ALP, there is no dispute. For carrying out comparability analysis, comparison of controlled transactions with an uncontrolled transaction has to be seen whether they are comparable having regard to the characteristic of the property and service transferred, functions performed taking into assets used and risk assumed and other economic circumstances. While carrying out the comparability analysis one has to see economically significant activities and the responsibility taken by the unrelated parties in relation to the tested party. In this case, after detail search process and using various filtrations, nine comparable companies were short listed by the assessee as per the direction of the TPO. Out of such nine companies, four of them have been accepted by the TPO, prima-facie, which were having high PLI (Profit Level Indicator). He has rejected the other five companies mainly on the ground that they were functionally different without giving any reasons as to how the other four companies which has been accepted by him are functionally similar to that of the assessee's business activities. Be that as it may be, the four companies viz.; (i) Access India Advisors Ltd.; (ii) IDC India Ltd.; (iii) Indus Technical and Financial Consultants Ltd. and (iv) Inmacs management Services Ltd., both the parties have accepted to be a fit comparable cases. Now we have to see whether other five comparables are to be included in the comparability analysis or not. The business activities carried out by the assessee has been discussed in detail in the forgoing paragraphs which are mostly in the nature of business support services and liaisoning.

21. In the case of ITDC Ltd., it is seen that this company is mainly engaged in the business of running of hotel and restaurants at various tourist places besides providing transport facilities. Its main business activities revolve around promotion of tourism in India. Even going by the segmental data of reservation, marketing service and event management as adopted by the assessee for comparison, it is seen that these functions are entirely different from that of the activities of the assessee company. Under the ARMS division i.e., reservation and marketing services, this company is mainly handling event and conferences, promotion and marketing of ITDC hotels and reservations. The SEL i.e. sound and light activities carried on by this company are also different. The segmental details and also income from such service goes to show that income from services rendered have been classified into several categories which are entirely different from each other. The contentions raised by the learned Departmental Representative that the functional profile of the company is entirely different from the activities carried on by the assessee appears to be acceptable. Therefore, in our opinion, going by the functional profile as available on record before us, this company has rightly been rejected by the TPO and cannot be included as a comparable entity even at a segmental level for conducting any comparability analysis. Accordingly the assessee's contention for including the said company is rejected.

22. Now, coming to the EDCIL and ICRA Management Consulting Services, we find that these companies were accepted as a comparable by the TPO in the immediately preceding assessment year 2007-08 and there was no dispute among the parties in that year for taking them as a comparable company. Moreover, going by the functional profile specifically that of ICRA Management Consultant Services, prima-facie, it is seen that it is also engaged in the business support services like strategy risk management, process consulting, transaction advisory policy and regulation and development consulting. These functions are, by and large, similar to the assessee's activities also. Therefore, this company on merits also is includable in the set of companies. In the case of EDCIL, though main activities are functionally different, however, its technical assistance segment can be broadly considered to be functionally similar to the assessee. Since this company has been accepted as a comparable by the Department as well as by the assessee, therefore, following the rule of consistency, we hold that this company should also be included as comparable. We also find merits in the contentions of the Ld. Counsel that in the earlier year once these two companies have been found to be functionally similar, then in this year they cannot be rejected on functional analysis. Thus, both the aforesaid companies i.e. ICRA Management and EDCIL are directed to be included as comparable for the purpose of comparability analysis for determining the ALP of the international transactions of the assessee company.

23. Regarding Overseas Manpower Corp. Ltd., it is seen that it is purely recruitment and placement company and its main revenue is from recruitment services only. Thus, not only the functional profile, the other test of comparability analysis also fails in this case. Therefore, we fully agree with the contention of the Ld. CITDR that this company has rightly been rejected by the TPO for the purpose of comparability analysis and is to be excluded.

24. Lastly, in the case of Inhouse Productions Ltd., it is seen that this company is mainly engaged in the business of Knowledge Process Outsourcing (KPO) in the field of healthcare and is also engaged in media. The functions and the business activities of this company as seen from the records is not comparable to that of the business activities carried on by the assessee and the functional profile is also different. Therefore, this company has rightly been rejected by the TPO.

25. Thus, in our view, besides four companies, accepted both by the TPO as well as by the assessee, two more companies should also be included namely EDCIL and ICRA Management Services for the purpose of comparability analysis for determining the ALP. The balance three companies are to be excluded. The TPO is directed to work out the arithmetic mean for the finally selected six companies and determine the ALP. Accordingly, grounds no.2 and 4, are partly allowed.

26. In ground no.9, the assessee is aggrieved by the failure of the Assessing Officer to grant credit for advance tax of Rs. 64,07,100.

27. After hearing both the parties and going through the record, we direct the Assessing Officer to give credit of the advance tax paid after verifying it from AS26 or as per the challan. Accordingly, ground no.9, is treated as allowed subject to verification by the Assessing Officer.

28. In the result, assessee's appeal is partly allowed.

SB

---

*In favour of assessee.

CL-Unfair to try ex-JV partner for alleged breaches of JV when such disputes were settled in his favour

CL : JV partner directed to buy out other JV partner's shares(return his investment with 8% interest) by CLB & HC(in appeal) in petition filed by the latter for oppression/mismanagement under section 397/398 and directed the former to repay Instead of complying with the CLB & HC orders, the former harassed the latter by filing criminal complaints on matters related to JV contractual disputes which were already settled by CLB & HC. This clearly amounts to abuse of process of law and criminal proceedings and FIRs deserved to be quashed

Facts

• The appellant- Chandran Ratnaswami settled in Canada since 1974.

• Appellant a Director on the Board of various renowned companies including ORE Holdings Limited based in Mauritius.

• The said company ORE entered into a Joint Venture Agreement (JVA) with C.G. Holdings Private Limited (respondent No.1 - K.C. Palanisamy's Company) and N. Athappan for constructing and developing a hotel property, shopping complex etc. owned by Cherraan Properties Limited (CPL) and Vasantha Mills Limited (VML). ORE invested Rs.75 crores and got 45% in Cheran Enterprises Private Limited (CEPL). Athappan invested Rs. 4 crores and got 10%.

• Disputes arose between the parties when respondent No.1 alleged to have transferred shares of CPL and VML to CEPL instead of bringing money and got 45% shareholdings in CEPL.

• Respondent No.1 allegedly swindled the said 75 crores deposited by the appellant Company ORE and transferred the immovable assets of CPL and VML, subsidiaries of CEPL.

• Consequently, ORE filed Company Petition before the Company Law Board on account of alleged acts of oppression and mismanagement indulged by respondent No.1.

• The matter before the Company Law Board was hotly contested and finally the Company Law Board by order dated 13th August, 2008 directed respondent No.1, CG Holdings and CEPL to return the investment of appellant Company ORE and Athappan with 8% interest. On payment of money it was directed that respondent K.C. Palanisamy will take control of CEPL and its subsidiaries. Clarification Petition was also disposed of by Company Law Board on 13th August, 2008.

• Both the parties moved the Madras High Court by filing appeals and those Company Appeals were finally disposed of on 5th August, 2011 and the order passed by the Company Law Board was confirmed.

• The Division Bench of the Madras High Court while confirming the view taken by the Company Law Board held that both parties cannot jointly run the business and, therefore, to ensure smooth exit of ORE and Athappan, the Company Law Board passed the order.

• The said order of the Division Bench passed in appeals, however, was not challenged by respondent No.1 K.C. Palanisamy.

• The appellant filed execution case, which is pending. It further appears that a suit was also filed being O.S.No.90 of 2007 before the District Munsiff Court.

• Instead of complying with the order of the Company Law Board and the directions and observations made by the Madras High Court in the aforementioned Company Appeals, respondent No.1 started filing several criminal complaints against the appellant.

• The first complaint was filed by the respondent before the Economic Offences Wing (EOW), Chennai, alleging that ORE invested only Rs. 75 crores and for not bringing Rs. 300 crores in Joint Venture Company.

• The petition filed in the High Court seeking direction to EOW to take action on the complaint was, however, withdrawn.

• Respondent No.1 then filed a second complaint before the Judicial Magistrate, Perundurai which was dismissed after examining respondent No.1 and his two witnesses. The respondent then filed another complaint before the Judicial Magistrate, Kangeyam without disclosing the dismissal of the earlier complaint filed before the Judicial Magistrate, Perundurai. The said complaint finally came to be registered as FIR No.7 of 2007.

• The appellant moved the High Court for quashing the said FIR. In the said petition, the High Court, after noticing the similar complaint filed earlier by respondent No.1 in the court of Judicial Magistrate, Perundurai, finally observed that the second criminal proceeding initiated by respondent No.1 has no merit. The court further passed a stringent remark against the conduct of respondent No.1 for filing cases on the same issue.

• Respondent No.1 then moved the Supreme Court by filing SLP(Crl.) No.9853 of 2010 alleging the pendency of the protest petition and non-closure of the criminal case. The Court refused to interfere with the order but observed that if any protest petition is pending the same shall be disposed of in accordance with law.

• Curiously enough, on the report of Superintendent of Police, Tiruppur, the criminal case in FIR No.7 of 2007 was directed to be reopened for re-investigation.

• On this FIR, the Magistrate before whom the criminal case was pending passed various orders which were time to time challenged by the aggrieved party before the High Court and before the Supreme Court. Simultaneously, the appellant also filed counter criminal cases against the respondent which were also proceeded and are pending in those criminal courts.

Held

• In a nutshell, the dispute arising out of Joint Venture Agreement has been fully and finally settled by the Company Law Board and also the High Court and several directions were issued for compliance including the return of the amount by respondent No.1 to the appellant and to become the sole owner of those companies.

• After the dispute was finally settled by the Company Law Board and the Madras High Court in appeal, the respondent approached the Economic Offences Wing, who refused to entertain the complaint.

• The respondent then moved the complaint before the Judicial Magistrate, Perundurai for initiating criminal action against the appellant for breach of contract, which was dismissed by the Magistrate holding the same as nothing but to take vengeance. The Magistrate further held that if the conditions of the agreement are violated the respondent has to seek remedy under the Contract Act or the Company Law instead of filing criminal case.

• Suppressing the said complaint and the order passed by the Magistrate, the respondent tried again by filing a complaint before the Judicial Magistrate, Kangayam for initiating criminal action against the appellants for the breach of contract and conspiracy. Although the FIR was registered, but a closure report as a mistake of fact was prepared. The High Court while passing the order observed that the Court would frown upon the conduct of the complainant in indulging in repeated harassment of the petitioners appellants.

• Irrespective of the dispute with regard to the closure of the case, a fresh life was given to the criminal case at the instance of Superintendent of Police, who directed re-investigation and in course of the said criminal proceeding irrespective of FIR No.7/2007 the appellants were harassed and on technicalities various orders for surrender, arrest and their detention had been passed.

• In three writ petitions filed by respondent No.1, though not against the appellant but against the C.B.I. in respect of different transactions, the High Court dismissing all those writ petitions observed that the modus operandi of the writ petitioner (respondent No.1) was to defraud the person or entity and thereafter approach the Courts with multiple proceedings in order to distract attention from his own misdeeds.

• Neither the High Court nor the Magisterial Court have ever applied their mind and considered the conduct of the respondent and continuance of criminal proceedings in respect of the disputes, which are civil in nature and finally adjudicated by the competent authority i.e. the Company Law Board and the High Court in appeal.

• The complainant has manipulated and misused the process of Court so as to deprive the appellants from their basic right to move free anywhere inside or outside the country.

• Moreover, it would be unfair if the appellants are to be tried in such criminal proceedings arising out of alleged breach of a Joint Venture Agreement specially when such disputes have been finally resolved by the Court of competent jurisdiction.

• Hence, allowing the criminal proceedings arising out of FIR No.7 of 2007 to continue would be an abuse of the process of the Court and, therefore, for the ends of justice such proceedings ought to be quashed. Since the High Court failed to look into this aspect of the matter while passing the impugned order, the same could not be sustained in law.

• SLPs filed by appellant allowed and those filed by respondent dismissed. No order as to costs

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[2013] 33 taxmann.com 400 (SC)

SUPREME COURT OF INDIA

Chandran Ratnaswami

v.

K.C. Palanisamy

P. SathaSivam AND M.Y. EQBAL, JJ.

Civil Appeal Nos. 4540, 4537 & 4538 of 2013
Criminal Appeal Nos. 731-733, 734-735 & 736-737 of 2013
Contempt Petition (C) No. 166 of 2013
SLP (Crl.) No. 9853 of 2010

MAY  9, 2013 

E.C. Agrawala for the Appellant. Subramonium Prasad, M. Yogesh Kanna, A. Santha Kumaran, Ms. Sasi Kala and Senthil Jagadessan for the Respondent.

JUDGMENT

 

M.Y. Eqbal, J. - Leave granted.

2. Since common questions of law are involved, these appeals have been heard together and are being disposed of by this common judgment. However, for the sake of convenience, the factual matrix giving rise to these cases as alleged in the civil appeal arising out of SLP(C) No. 13120 of 2013 is set out hereinafter.

3. The appellant - Chandran Ratnaswami, alleged to have settled in Canada since 1974, is an officer of Hamblin Watsa Investment Counsel, a wholly-owned subsidiary of Fairfax Financial Holdings Limited (in short, "Fairfax") which is based in Canada and has also made investments in India worth more than USD 1 billion. The said appellant is also a Director on the Boards of various renowned companies including ORE Holdings Limited (in short, "ORE"), a Fairfax Group company, based in Mauritius, and has to travel to India on business commitments. The said holding company, ORE on 30th January, 2004 entered into a Joint Venture Agreement (JVA) with CG Holdings Private Limited (respondent No. 1 - K.C. Palanisamy's company) and N. Athappan (a Singapore citizen) for constructing and developing a hotel property, a shopping complex and an IT Park of the properties owned by Cherraan Properties Limited (CPL) and Vasantha Mills Limited (VML) (respondent No.1's companies). ORE invested Rs.75 crores and got 45% in Cheran Enterprises Private Limited (CEPL). N. Athappan invested Rs. 4 crores and got 10% in CEPL. It is alleged that as CPL and VML have immovable assets, respondent No. 1 transferred shares of CPL and VML to CEPL instead of bringing money and got 45% share holding in CEPL. Respondent No. 1 is alleged to have swindled the said Rs. 75 crores that was deposited in the bank account contrary to the JVA and transferred the immovable assets of CPL and VML, subsidiaries of CEPL. Thereupon, ORE filed Company Petition No. 76 of 2005 before the Company Law Board, Additional Principal Bench, Chennai (in short, "the CLB") on account of the alleged acts of oppression and mismanagement indulged in by respondent No. 1. The Company Law Board by order dated 13th August, 2008 directed respondent No. 1, CG Holdings Private Limited and CEPL to return the investment of ORE and N. Athappan amounting to Rs. 79 crores with 8% interest within one year, failing which the land of VML was to be transferred to ORE and N. Athappan. It was directed that once the aforementioned amount is paid, respondent No. 1 would take control of CEPL and its subsidiaries. The Company Law Board held as under:

"17. In view of the foregoing conclusions and in exercise of the powers under Sections 397 & 398 read with Section 402 and with a view to bringing to an end the grievances of CG Holdings, KCP, ORE and Athappan, the following order is passed:

CEPL shall return a sum of Rs. 75 crores and Rs. 4 crores invested by ORE and Athappan respectively, together with simple interest at the rate of 8% per annum from the date of investment till the date of repayment within a period of 12 months in one or more instalments, commencing from 01.11.2008. While making the payment CEPL, CG Holdings and KCP shall ensure that at least 25% of the amount due is paid in every quarter. CEPL CG Holdings and KCP are at liberty to make use of the fixed deposit held by CEPL with the SBI, Erode Main Branch, free of any liens or encumbrances towards refund of the investments of ORE and Athappan. VML shall not alienate or sell any of its immoveable properties till full payment is made to ORE, in terms of this order. In the event of any failure to make the repayment within the specified time, CEPL CG Holdings, KCP and VML will duly convey the immovable properties of VML, namely, 17.15 acres of land in favour of ORE and 7.80 acres of land in favour of Athappan by executing and registering necessary deeds of conveyance in strict compliance with all applicable laws, as consideration for reduction of capital and surrender of the shares of ORE and Athappan, upon which ORE as well as Athappan will deliver the share certificates and blank transfer forms in respect of their holdings in CEPL and the subsidiaries, if any, in favour of CG Holdings and KCP. CEPL is consequently authorized to reduce its share capital and in the meantime, operation of the impugned agreements is suspended, to expedite and ensure due completion of the modalities of exit by ORE and Athappan, thereby, bringing to an end the acts complained of in the present proceedings. CEPL shall ensure necessary statutory compliances till the whole process, in accordance with the aforesaid directions, is properly completed. The parties are at liberty to apply in the event of any difficulty in implementation of the smooth exist of ORE and Athappan from CEPL."

4. Cross appeals were filed by the parties before the High Court of Judicature at Madras and the High Court vide order dated 5th August, 2011 confirmed the order dated 13th August, 2008 passed by the CLB, in the following terms:

"54. On analysis of various aspects, Company Law Board concluded that it was no longer possible for the parties to carry out joint venture business of CEPL as per the terms of JVA. Only to have smooth exit of ORE and Athappan, the Company Law Board passed the order directing CEPL to repay Rs. 75 Crores and Rs. 4 Crores invested by ORE Holdings and Athappan respectively. By perusal of the order of Company Law Board, in our considered view, Company Law Board has elaborately gone into the issues arisen between the parties even though those objections were filed under Sections 397 and 398 of the Companies Act. As demonstrated infra, there are commonality of issues raised in both the Company Petitions, O.S. No.90 of 2007 and the petition filed before I.C.C. seeking for arbitration.

55. Criminal Cases:- The learned counsel for appellants Mr. Karthik Seshadri contended that the purport of the criminal proceedings are different and initiating of criminal complaints does not amount to waiver of arbitration. Of course, a party does not waive his right to invoke arbitration by filing criminal complaints. But what is relevant is the allegations in the plethora of criminal complaints filed at the instance of the appellants/father of KCP/respondents. Both parties have made serious allegations of cheating, forgery, falsification of records, etc., against one another. Even before the arbitral Tribunal, the same allegations are made. The Honourable Supreme Court and the Madras High Court have held that the arbitration is not the appropriate forum if allegations of fraud, misappropriation and complicated facts are involved.

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84. By a careful reading of the order of Company Law Board in C.P. Nos.65 and 76 of 2005, it is clear that the alleged breach of Clause 9.2 has been elaborately dealt with. Company Law Board dealt with not only the issues pertaining to the oppression and mismanagement of CEPL and also the larger issues arising between the parties. Only to ensure smooth exit of ORE and Athappan, the order dated 13.8.2008 came to be passed by the Company Law Board. It is pertinent to note that KCP had not challenged the said order of Company Law Board.

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112. As pointed out earlier, several criminal cases have been filed and number of quash petitions also came to be filed. Of course a party does not waive his right to invoke the arbitration of the dispute by filing of criminal complaints. When a party deliberately chooses not to adopt a particular course of action, the arbitration agreement becomes inoperative and as the parties have waived or abandoned the arbitration clause, by invoking the jurisdiction of Civil Court, the doctrine of wavier applies. The appellants had the option to go before ICC even in 2005 but the appellants chose to file C.P. No.65 of 2005 and also stoutly defended C.P. No.76 of 2005 filed by ORE Holdings. Even in C.P. No.76 of 2005, the appellants have not sought for reference to arbitration. By agitating the matter before the Company law Board for nearly two years, and filing the Civil Suit in O.S. No.90 of 2007 before District Munsif's Court, Kangeyam, by their conduct the appellants must be deemed to have given a go bye to the arbitration clause.

113. The parties have been engaged in pitched battle before the Company Law Board and orders were passed by the Company Law Board on 13.8.2008. When the matter was pending before the Company Law Board, the Company Law Board has passed interim orders at various stages. The learned counsel for plaintiffs would submit that even settlements/proposals have been made disclosing parties intentions and discovery process has been utilized. We find much force in the contention of the respondents that Athappans and Ore have spent consideration time and money before the Company Law Board. In so far as O.S. No.90 of 2007 pending before District Munsif's Court, Kangeyam, the suit is ready ripe for trial and the respondents are diligently defending the same. Having initiated proceedings before various forums, cannot now seek to invoke arbitration as an additional remedy.

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120. Company Appeal Nos. 21,25 to 27 and 29 of 2009:- The gist of order in C.P. Nos.65 and 76 of 2005 dated 13.8.2008 is that:-

CEPL, KCP and C.G.Holdings were to return Rs. 75 Crores to ORE and Rs. 4 Crores to Athappan. The money was to be paid within a period of one year starting 1.11.2008 with 25 percent of the same, being paid every year.

CEPL, KCP and C.G.Holdings were to utilize Rs. 20 Crores maintained in the fixed deposit at State Bank of India, Erode to pay ORE and Athappan. In the event of failure to pay the money the property of VMC situated in Coimbatore is to be transferred to ORE and Athappan in the proportion of 17.15 acres and 7.80 acres respectively. Until then VML was refrained from dealing with the property.

On receipt of money, ORE and Athappan were to surrender their shares in CEPL and CEPL shall accordingly be permitted to reduce its share capital.

The parties were given liberty to approach Company Law Board for limited purpose of overcoming difficulties in implementation of the said order.

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145. As per Order of Company Law Board amount invested by ORE has to be refunded which of course, must be in accordance with applicable laws: be it compliance with FEMA or other Regulations, ORE, being a foreign investor-an entity of foreign origin, as per FEMA, cannot own immovable property in India. Compliance of FEMA or other applicable regulations cannot be bypassed. By the order dated 3.8.2009, Company Law Board modified its earlier order directing VML to execute the sale deed conveying immovable properties of 17.15 acres to the nominee of ORE and thereby modified its earlier order. The Order of the Company Law Board modifying its earlier order directing VML to convey the properties to 'nominee of ORE' is to be modified to the effect that any such conveyance should be subject to applicable laws and regulations and with required approval/permission to be obtained by ORE from the competent authorities. The Order of the Company Law Board in C.A. No.155 of 2008 is to be modified to that extent.

146. …. Company Appeal Nos. 21 and 29 of 2009 preferred by ORE and Company Appeals Nos. 25 and 26 of 2009 preferred by N. Athappan and R. Athappan are allowed. Company appeal No.27 of 2009 is disposed of modifying the order of Company Law Board dated 3.8.2009 in C.A. No.155 of 2008 to the effect that the conveyance of immovable properties to nominee of ORE is subject to all applicable laws and regulations and if need be, with necessary approval/permission to be obtained by ORE from the competent authorities."

5. ORE and N. Athappan filed execution petitions before the CLB in December 2011 and the same are stated to be pending as on date.

6. While the proceedings before the CLB were pending, respondent No. 1 started filing multiple criminal complaints. On 27th February, 2006, respondent No. 1 filed a complaint before the Economic Offences Wing, Chennai (EOW) against ORE, Fairfax, Prem Watsa, Ramaswamy Athappan, Chandran Ratnaswami (appellant herein), Paul Rivett, M/s. Odyssey America Reinsurance Corporation and N. Athappan making them accused Nos. 1 to 8 inter alia on the following allegations:

"Through this strategic acquisition accused No. 1, through Accused No. 7 and Accused No. 4 through Accused No. 8 acquired substantial ownership and management rights in VML and CPL also. The complainant states that the sole objective of the sacrifice made by the complainant of his highly valuable prime immovable properties is the assurance of the Accused No. 3, 4, 5 & 6 that about Rs. 375 crores would be brought into the JV Company as investment and loans and projects worth thousands of crores would be commenced.

The complainant states that, as per the joint venture agreement dated 30.1.2004, M/s. Odyssey America Reinsurance Corporation, the 7th accused herein which is a subsidiary company of the Fair Fax Group and the Accused No. 2 had agreed to extend a Corporate Guarantee in favour of the lender for arranging the syndicated credit facility of US$ 65 Million (approximately Rs. 300 crores) to the JV company. In confirmation of the said fact the Accused No. 2, 3 and 4 and 8 while signing the JV agreement, cleverly included in the same, a model draft of the Irrevocable Corporate Guarantee Agreement to be furnished by the 7th accused in favour of the lender and even signed the said draft so as to make believe the complainant in no uncertain terms about their intention to honour their commitments. Thus, the joint venture business could commence only upon the 1st accused arranging for the syndicated credit facility of US$ 65 million, on the strength of the Corporate Guarantee to be given by the 7th accused.

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….. On the one hand the accused had miserably failed to organize the funds even after the complainant had parted with the ownership rights over valuable properties held by him through VML and CPL and on the other hand they defrauded and cheated the complainant by not organizing the promised funds, upon the receipt of which alone, the complainant would be able to commence the projects worth thousand of crores.

…. From the above, it is therefore evident that the consideration of entering into the JV agreement was the promise and assurance that the accused 2 to 6 shall also arrange for a loan of Rs. 300 crores in addition to the share investment of Rs. 75 crores as stipulated under the JV agreement.

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Thus the accused have induced the complainant to enter into an agreement under the guise of a joint venture agreement which was conceived in pursuance of a criminal conspiracy with an intention of cheating. In addition to the above, the accused 4 and 8 have also obtained a gratification, amounting to approximately Rs. 37.40 cr. from the complainant, by getting the shares of the companies allotted to them to a discounted rate, as consideration for facilitating the joint venture and for arranging the term loan thereby making wrongful gains to themselves while causing wrongful loss to the complainant. Moreover after receiving the said consideration in the form of shares at a discounted value, the accused 4 and 8 have now joined hands with M/s ORE Holdings Ltd. for gaining an illegal majority in the JV company and have thus defrauded the complainant of several crores of rupees.

Therefore, the accused Nos. 1 to 7 have committed various offences under section 120-B, read with sections 409, 420, 405, 471 and 389 among other provisions of the Indian Penal Code, which amount to the offences of Criminal Conspiracy, Cheating, Criminal Breach of Trust, making False Representation and Promises and Extortion by putting the fear of accusation of offences against the complainant among others, and have induced the complainant to part with the shares of his company and the control over the valuable immovable properties owned by him through VML and CPL on the strength of the false promises and assurances made by the accused."

7. Since the Economic Offences Wing refused to take any action, the Respondent No.1 filed Criminal O.P. No. 9791 of 2006 before the High Court seeking direction to EOW to take action, which petition was later withdrawn. Thereafter, he filed a similar private complaint (Criminal M.P. No. 6096 of 2006) for offences under Sections 406, 406 r/w 109, 420, 467 r/w 420 IPC before the Judicial Magistrate, Perundurai which was dismissed on 13th March, 2007 holding the same to wreak vengeance and observing as under:

"7. On a careful consideration of the aforesaid complaint, depositions, and Exhibits it is unbelievable to state that the respondents have cheated and committed breach of trust, the complainant who is a former member of the Legislative assembly, a former member of the parliament and running business houses which have properties worth of the more than 100 crores of Rupees. Because, no documents were filed to show that the shares of Rs. 10/- face value of the Cheran Properties were sold in the market for Rs.60/- and the shares of Rs.10/- face value of the Vasanthi Mills were sold at Rs.105/-. It is not believable that the shares of Rs. 10/- face value was transferred to the same value of Nandakumar and paid about Rs. 22 crores as commission, as the complainant himself has admitted in the complaint that some of the respondents and the complainant have started a Joint Venture Company. The memorandum of understanding/Joint venture agreement is not submitted for the perusal of the court. In the memorandum of understanding the details to the investment of each of the parties, the shares allotted to each of them, the relief to the parties when the conditions are violated, and the court which has jurisdiction to entertain such matter. The failure to file the memorandum of understanding in the court, and the failure to give the reasons for not filing the same is not acceptable.

8. It is clearly seen from the deposition of the petitioner and the complaint that the respondents have arranged for about 17 million American Dollars through a firm Odyssey. It is also seen that the said sum is with the Cheran Holdings Private Limited and the affidavit filed in the Hon'ble High Court at Delhi confirms the same, while examining details, it is seen that a sum of 17 million American Dollars have come to Cheran Holdings Limited in which the complainant is a share holder. Hence the petitioner complainant might not have sustained any loss. There is no explanation in the complaint as to whether after the receipt of 17 million American Dollars, it was invested in the business. In the first meeting of the petitioner with the respondents, it was agreed that foreign investments are to be made accordingly the same has been done. It is seen from the deposition of the petitioner that 17 million American Dollars, it is not believable that the respondents have cheated the petitioner/complainant.

9. It is seen that on orders of Hon'ble High Court, Delhi in C.P. No.292/2004, a sum of Rs. 78 crores has to be deposited and Cheran Enterprises and Cheran Holdings Limited have not deposited in the Bank Accounts. The reasons adduced by the complainant was hold an important post in the Cheran Group of Companies for not depositing the sum into the Bank, do not seem to be accepted. Moreover, Chandran Ratnaswami has obtained powers from the petitioner for the conduct of the case and as such, he has to face the consequences of the orders of the court. On that aspect also, the petition would sustain.

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12. The petitioner on 23.9.2005 sent an e-mail to the State Bank of India to give Bank guarantee to BSNL, that when he approached the Bank, he came to know that Chandra Ratnaswami and Athappan Ramaswamy have sent independent letters to the Bank requiring that the request of the petitioner should not be accepted. It cannot be considered by the Court as a criminal act. It can be considered as an act of safe guard in the trade. The proceedings between the petitioner and respondents are of civil nature relating to contract Act and Company Law. If the conditions therefore are violated, the petitioner has to seek remedy under Contract Act or Company Law. Instead the filing of this case terming the respondents as accused the court considers that it cannot be accepted.

13. On world level, the foreign investments made in each country enhance the economy and it is a day to day commercial activities. The petitioner and the respondents and some others, with an intention to establish a joint venture company having done so, have to take steps for the developmental activities, and one party should not, with intention to wreak vengeance against the other should not, term them as accused and approach the court, and this court cannot accept it. Because, the petitioner has not handed over any property to the respondents under section 406 IPC. Hence there is no ingredient for breach of trust. In the circumstances that the respondents have arranged for 17 million American Dollars, that Chandran Ratnaswamy himself has agreed to the Rs.78 crores case in the Hon'ble High Court, Delhi that the petitioner has not mentioned in the complaint that date, time and place where he was cheated, that like wise, the Respondent cheated the petitioner and thereby he sustained loss, and that there are no ingredients for sections 420, 467 read with 420 are found in the complaint or depositions. Therefore, no prima facie case to show that the respondents with criminal intention indulged in criminal activities is found in the complaint, or depositions or documents.

14. Hence, for the reasons as aforesaid, this petition is dismissed under Section 203 of Cr. P.C."

8. Respondent No. 1 then filed another similar complaint before Judicial Magistrate, Kangayam suppressing the fact of filing earlier complaints and the order dated 13th March, 2007 passed by the Magistrate Perundurai, whereupon the Crime Branch, Erode was directed to register an FIR. Accordingly, FIR No. 7 of 2007 was registered by Police Station DCB, Erode under Sections 120-B, 420, 169, 408, 409 IPC, but the case was said to have been closed on 20th May, 2009 and the police filed the Closure Report. Meanwhile, Criminal O.P. Nos. 12695 and 19384 of 2007 had been filed for quashing the FIR by the persons shown as accused in the said FIR, in which the High Court vide order dated 8th February, 2010 frowned upon the conduct of respondent No. 1 in the following terms:

"3. It is brought to the notice of this court by the learned Senior Counsel Mr. Habibullah Basha, appearing for the accused/petitioners 1 to 3 in Crl.O.P. No.12695 that the de facto complainant, on the very same allegations preferred a complaint in C.C. No.1096 of 2006 on the file of the learned District Munsif-cum-Judicial Magistrate Court at Perundurai and the said court was pleased to pass an order of dismissal under Section 203 Cr.P.C. It is impressed upon this court that such dismissal came about after consideration of the complaint and the statement of the witnesses and on finding no ground to proceed thereon.

4. Though in view of the submission made by the learned Government Advocate (Crl.side) nothing survives for consideration in the matter, this Court would frown upon the conduct of the defacto complainant in indulging in repeated harassment of the petitioners. The criminal original petitions shall stand closed. Consequently, connected miscellaneous petitions are closed."

9. The respondent then preferred Special Leave Petition in the Supreme Court being SLP (Crl.) No. 9853 of 2010 against the order dated 8th February, 2010, which was dismissed by this Court on 22nd November, 2010 with liberty to pursue protest petition, if any, said to be pending on the file of the Judicial Magistrate, Kangayem. It is alleged that no protest petition was pending on that day.

10. Though in different context, respondent No.1, K.C. Palanisamy, filed three writ petitions against the State of Tamil Nadu, Superintendent of Police, Economic Offences Wing, Chennai, Director General of Police, State of Tamil Nadu, Union of India, Central Bureau of Investigation and Reserve Bank of India, in which respondent No.1 prayed for issuance of writ of mandamus directing the respondents in writ petitions for investigation as also for transfer of investigation and FIR making allegations against another Company, DAIL. In the said writ petitions, the contention of the writ petitioner was that he was the resident of Coimbatore and former Member of Legislative Assembly of the State of Tamil Nadu and Managing Director of the Company viz. CEPL. The said Company was formed for the purpose of sharing a Joint Venture between the CG Holdings Private Limited, ORE Holdings Limited, Mauritius and one N. Athappan. As part of the Joint Venture business CEPL looked for acquiring a Telecom Company called DAIL which was a Delhi based Company involved in the business of International Long Distance Telephony Services and Internet Services. In those writ petitions, a common counter affidavit was filed by the respondents refuting all the averments made in the three writ petitions and stated that more than nine cases were pending against the respondent No.1, writ petitioner. In the order dated 19th October, 2011 passed by the Madras High Court in those three writ petitions, the numbers of cases pending against the writ petitioner were mentioned in para 19 of the order, extracted hereunder:

"19. The cases pending against the petitioner in various provisions of IPC including Section 420 IPC, there were as many as 9 cases in Coimbatore alone. They are as follows:-

"(a)		Coimbatore City Crime Branch Cr. No.37/99 u/s. 420 IPC.
(b)		Coimbatore City Crime Branch Cr. No.17/2000 u/s. 420 IPC.
(c)		Coimbatore City Crime Branch Cr. No.62/2000 u/s. 420 IPC.
(d)		Coimbatore City Crime Branch Cr. No.18/2001 u/s. 420 IPC.
(e)		Coimbatore City Crime Branch Cr. No.25/2001 u/s. 420 IPC.
(f)		Coimbatore City Crime Branch Cr. No.29/2001 u/s. 384 IPC.
(g)		Coimbatore City Crime Branch Cr. No.20/2002 u/s. 467, 468,471 472 and 477(A), IPC.
(h)		Coimbatore Economic Offences Wing Cr. No.03/2001 u/s. 408 IPC.
(i)		Coimbatore City Crime Branch Cr. No.26/2003 u/s.406 IPC."

11. In para 20 of the order dated 19th October, 2011, the Court observed that the modus operandi of the writ petitioner was to defraud a person or entity and thereafter approach the Courts with multiple petitions in order to distract attention from his own misdeeds.

12. The High Court dismissing all the afore-mentioned three writ petitions observed as under:-

"28. However, this Court is not inclined to accept the request made by the petitioner. The petitioner is not an innocent party in filing such complaints and he himself has not obeyed the order passed by the Delhi High Court in the application for winding up and asking him to refund the amount siphoned off by him which was obtained as a loan by DAIL. Parties who come to court must come with clean hands. Not only the petitioner has come to this Court with unclean hands, but he himself being an accused in several cases had also suppressed the entire proceedings of the Delhi High Court including the order directing the company to retransfer the money siphoned off from DAIL.

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31. In the present case, the petitioner has filed series of Crl.Ops including the prayer which has been made in the writ petitions and they were negatived by this Court more than once. All that this Court held was that investigation should be conducted by the State Police and a report should be filed expeditiously and that has been done in this case as noted in the counter affidavit filed by the second respondent.

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34. Therefore, in the light of the above, there is no case made out to grant any direction sought for by the petitioner either in the first writ petition or to call for a report from RBI as demanded in the second writ petition or for any direction to the Central Government to take steps to retransfer the funds siphoned off from this country. The petitioner has not made out any prima facie case for grant of any such direction and he has suppressed the information relating to winding up proceedings before the Delhi High Court. The petitioner himself is not a person above board and faced with several criminal cases under Section 420 IPC not only as revealed in the affidavit filed in support of the petition for impleadment but also as noted by this Court in the decision cited in Ramaswamy Athappan's case (cited supra). The petitioner himself is guilty of several commissions and omissions and at his instance no direction can be granted by this Court.

35. In view of the above, all the three writ petitions will stand dismissed. However, there will be no order as to costs. Consequently, connected miscellaneous petitions are closed."

13. Curiously enough, on 2nd January, 2012, respondent No. 6 -Superintendent of Police, Tiruppur allegedly in collusion with respondent No. 1 and relying upon the order dated 22nd November, 2010 reopened FIR No. 7 of 2007 and ordered re-investigation. Charge-sheet being CC 162 of 2012 ultimately came to be filed by respondent No. 5 - Dy. Superintendent of Police, District Crime Records Bureau, Erode before the Judicial Magistrate, Erode-III on 11th September, 2012 inter alia against Paul Rivett, Chandran Rathnaswami, Ramasamy Athappan, Nandakumar Athappan, M/s. Fairfax Financial Holdings Limited, M/s. Hamin Watsa Investment Council, Odyssey America Reinsurance Corporation and ORE Holdings Limited showing them respectively as accused Nos. 2, 3, 4, 6, 8, 9, 11 and 12 for committing offences under Sections 120-B, 420, 409 read with 109 IPC.

14. On the basis of aforesaid chargesheet, the Judicial Magistrate on 12th September, 2012 issued summons returnable on 12th October, 2012. On 26th September, 2012, the Dy. Superintendent of Police filed a report stating that he searched for the accused in Chennai and Mumbai but could not ascertain their whereabouts and accordingly prayed for issuance of Non-Bailable Warrants (NBWs) which were issued by the Judicial Magistrate, Erode on 27th September, 2012. Based upon the NBWs, the Superintendent of Police issued a Look-Out Circular on 9th January, 2013 against the appellant. Unaware of all this, the appellant landed in India and was detained by the immigration authorities. He filed a writ petition being W.P. No. 1764 of 2013 and on 22nd January, 2013 the High Court passed an interim order restraining appellant's detention and directed to post the writ petition on 29th January, 2013. SLP filed against this order was disposed of on 24th January, 2013 observing that the High Court had itself posted the matter on 29th January, 2013. On 29th January, 2013, the High Court directed the appellant to surrender before the trial court and pray for recall of NBWs vide order passed in Criminal O.P. No. 2283 of 2013 filed by him for quashing the chargesheet i.e. CC 162 of 2012. Crl.M.P. No. 3 of 2013 was also filed in Criminal O.P. No. 2283 of 2013 alleging fraud committed by the opposite party. On the same day, Crl.M.Ps. No. 3 in Criminal O.P. No. 2166 of 2013 filed by Ramasamy Athappan & N. Athappan and Criminal O.P. No.2282 of 2013 filed by Paul Rivett also came up before the High Court and they were also directed to surrender before the Judicial Magistrate No. III, Erode. Finally on 1st February, 2013 the High Court directed in respect of the appellant (petitioner in Criminal O.P. No. 2283 of 2013), Ramasamy Athappan & N. Athappan (petitioners in Criminal O.P. No. 2166 of 2013) and Paul Rivett (petitioner in Criminal O.P. No. 2282 of 2013) as under:

"5. Considering the submissions made by all the parties and also considering the facts and circumstances of the case, the order dated 29.01.2013 is modified as follows:

"The petitioners are directed to appear before the trial Court on or before 08.03.2013 and on such appearance, the warrant, if any, shall be recalled. If the offences are non-bailable in nature, the petitioners are directed to file bail application before the trial Court along with a bond for a sum of Rs. 10,000/- (Rupees ten Thousand) with two sureties each for like sum to the satisfaction of the trial court and on such sureties, the trial court shall dispose the bail applications on the same day. The petitioners are at liberty to file to withdraw the lookout application before this Court, if they are advised to do so.

With the above directions, these petitions are disposed of."

15. The appellant surrendered on 4th February, 2013 and NBWs were recalled by the Judicial Magistrate III, Erode. However, the immigration authorities did not allow the appellant to leave India on 5th February, 2013 stating that the court proceedings were pending. In the meanwhile, writ petition being W.P. No. 2739 of 2013 was filed by Ramaswamy Athappan praying to issue a writ of mandamus or any other writ, order or direction in the nature of a writ of mandamus forebearing the Superintendent of Police, Tiruppur (Tamilnadu) and Ministry of Home Affairs, New Delhi including its constituent officers at all airports from acting upon the non-bailable arrest warrant dated 27th September, 2012 issued against the petitioner (Ramaswamy Athappan) in respect of chargesheet CC No. 162 of 2012 pending on the file of Judicial Magistrate-III, Erode and the alleged Look Out Notice dated 9th January, 2013 issued by the Superintendent of Police and consequently from in any manner restraining/restricting the petitioner's entry into or exit out of India. Similar writ petition being W.P. No. 2740 of 2013 was also filed by the appellant - Chandran Ratnaswami who additionally prayed for directions to DSP, SP, MHA and respondent No. 1 herein K.C. Palanisamy to jointly and severally pay compensation of Rs. 10 crores to him for his illegal detention on 22nd January, 2013.

16. On 26th February, 2013, the High Court again directed the appellant to appear before the trial court by passing the following order in W.P. Nos. 2739 & 2740 of 2013 and Criminal O.P. Nos. 2166, 2282 and 2283 of 2013:

"10. Accordingly, Mr. Chandran Ratnaswami the accused should appear before the learned Judicial Magistrate, where CC No. 162/2012 is pending, within a period of two weeks from today to comply with the following:

(i)		he must file an affidavit of undertaking before the court that he would not evade the due process of law and ensure his appearance as and when required;
(ii)		he should execute his own bond for a sum of Rs.5,00,000/- (Rupees Five Lakhs only) and two cash sureties of Rs.5,00,000/- (Rupees Five Lakhs only) each to the satisfaction of the learned Judicial Magistrate-III, Erode on the same day.

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13. In this case, non-bailable warrant has been recalled on 04.02.2013 on the accused surrendering before the learned Magistrate. For non-compliance of the orders passed by this Court, I am inclined to pass the above order directing them to appear before the Court for the purpose of filing an affidavit and furnishing surety."

17. On 11th March, 2013, this Court granted stay of chargesheet i.e. CC 162 of 2012 by an order passed in SLP(Crl.) Nos. 1947-1948 of 2013 which have been filed by Paul Rivett, an other accused in the chargesheet CC 162 of 2012, challenging the orders dated 29th January and 1st February, 2013 respectively in Criminal O.P. No. 2282 of 2013 and Crl.M.P. No.3 of 2013 in Criminal O.P. No. 2282 of 2013. Paul Rivett is Law Officer in the Fairfax Group and is a Canadian citizen and he has also been made an accused in the chargesheet CC 162 of 2012. NBWs as well as the Look Out Notice were issued against Paul Rivett also.

18. On 12th March, 2013, the appellant prayed before the Single Judge of High Court that he may be permitted to file affidavit of undertaking there as proceedings in the trial court were stayed by this Court which prayer was opposed by respondent No. 1 on 13th March, 2013 urging that this Court was seized of the matter and the Single Judge could not pass any order. However, the Single Judge passed an order dated 14th March, 2013 in M.P. No. 2 of 2013 in W.P. No. 2740 of 2013 filed by the appellant seeking recall of the Look Out Notice and directed the appellant to file the affidavit of undertaking before the High Court and to furnish security deposit of Rs. 25 lakhs and permitted him to travel.

19. Challenging the above order of the Single Judge, respondent No. 1 filed a writ appeal being W.A. No. 517 of 2013 which was allowed by a Division Bench of the High Court vide order dated 22nd March, 2013 setting aside the order dated 14th March, 2013 passed by the Single Judge and observing:

"12. From the above narrated facts it is evident that the first respondent has not filed bail application while surrendering himself before the Judicial Magistrate No.III, Erode, for recalling the Non-bailable Warrant and the fact remains, till date he has not obtained any order of anticipatory bail/bail.

13. The appellant challenged the interim order dated 26.2.2013 passed in Crl. O.P. No.2166, 2282 and 2283 of 2013 before the Hon'ble Supreme Court in SLP (C ) Nos. 1924-1926 of 2013. Accused No.2 in the said C.C. No.162 of 2012 viz. Paul Rivert filed SLP (Crl) No.1947-1948 of 2013 and prayed to quash the proceedings pending before the Judicial Magistrate Court No.III, Erode and also prayed for an interim order to dispense with hi9s personal appearance before the Judicial Magistrate Court No.III, Erode in connection with C.C. No.162 of 2012. The Hon'ble Supreme Court refused to pass any interim order in the applications filed by the appellant herein.

14. Insofar as the applications filed by Paul Rivert (A-2), the Hon'ble Supreme Court refused to stay the order passed by this Court dated 29.01.2013 and 01.02.2013 in Crl. O.P. 2282 of 2013 and granted stay of the proceedings in CC 162 of 2013 pending on the file of Judicial Magistrate Court No.III, Erode, pending further orders. The prayer for dispensing with his appearance was not granted. The appellant thereafter filed Crl. M.P. Nos.5810 to 5812 of 2013 in SLP (Crl.) No.1924-1926 of 2013 and prayed for restraining the first respondent from leaving India, pending SLP direct the first respondent to surrender his passport before the Judicial Magistrate Court No.III, Erode No order was passed in the said petition and the matter is adjourned to 3.4.2013 before the Supreme Court for further hearing.

15. The first respondent thereafter moved this High Court to pass orders in M.P. No.2 of 2013 which was allowed by the leaned single Judge holding that since CC No.162 of 2012 is stayed by the Hon'ble Supreme Court and the NBW having been recalled, the basis of the Lookout Notice has gone."

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18. On a perusal of the prayer made in the writ petition, it is evident that the first respondent has challenged the Look-out Notice issued on 9.1.2013 and consequently prayed for payment of compensation. The learned Single Judge in the above miscellaneous petition has held that the Loo-out Notice dated 9.1.2013 is cancelled and allowed the first respondent to leave India after filing undertaking affidavit and deposit a sum of Rs. 25 lakhs.

19. It is not in dispute that the very same issues regarding the Look out Notice and the prayer to quash CC No.162 of 2012 pending on the file of JM III Court, Erode, which was filed at the instance of another accused (A-2 Paul Rivert) are posted for hearing before the Hon'ble Supreme Court on 3.4.2013. Admittedly the matter is seized of by the Hon'ble Supreme Court and only on interim stay of the proceedings in CC No.162 of 2012 was ordered by the Apex Court, that too at the instance of A-2 in the above C.C. No. 162 of 2013, and the prayer to dispense with the appearance of A-2 was not granted. If the order of the learned single Judge dated 14.3.2013 is to be implemented immediately, it may be difficult to secure the presence of the first respondent in the criminal case.

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22. On the above said background and in the light of the decision cited supra, we are of the considered view that the order passed by the learned single Judge in M.P. No.2 of 2013 in W.P. No.2740 of 2013 dated 14.3.2013 is liable to be set aside, and accordingly set aside. The writ appeal is allowed. Consequently, the first respondent is entitled to get refund of the amount deposited by him on 15.3.2013 pursuant to the interim order of the learned single Judge No costs. Connect M.P. No.1 of 2013 is closed."

20. Hence, this appeal arising out of SLP(C) No. 13120 of 2013 by the appellant - Chandran Ratnaswami. S.L.P.(Crl.) Nos. 3273-3274 of 2013 have also been filed by the same appellant (an accused in Chargesheet CC 162 of 2013) against orders dated 29th January, 2013 and 1st February, 2013 respectively in Criminal O.P. No. 2283 of 2013 and Crl.M.P. No.3 of 2013 in Criminal O.P. No. 2283 of 2013. In these SLPs, notice has not been issued and they are fresh ones.

21. Criminal Appeals arising out of S.L.P.(Crl.) Nos. 1924-1927 of 2013 have been filed by K.C. Palanisamy [respondent No. 1 in civil appeal arising out of SLP(C) No. 13120 of 2013] challenging the order dated 26th February, 2013 in Criminal O.P. Nos. 2283, 2282 and 2166 of 2013 and Civil Appeals arising out of S.L.P.(C) Nos. 11342-11343 of 2013 (D.No.7366/2013) have been filed challenging the order dated 26th February, 2013 in Writ Petition Nos. 2739 and 2740 of 2013. In these matters, the appellant - K.C. Palanisamy has challenged the said High Court's order by which the accused have been exempted from filing proper bail application under the Criminal Procedure Code.

22. Contempt Petition (C) No. 166 of 2013 in S.L.P.(Crl.) No. 9853 of 2010 has been filed by the applicant - Chandran Ratnaswami for wilful and deliberate violation and disobedience of order dated 22nd November, 2010 by re-opening the closed FIR No. 7 of 2007. In this contempt petition, notice has not been issued and it is a fresh one.

23. Mr. K.K. Venugopal, learned senior counsel appearing in SLP(C) No.13120 of 2013 assailed the impugned order passed by the Division Bench and also the orders passed in criminal proceedings as being illegal and wholly without jurisdiction. Learned counsel drew our attention to the entire facts of the case discussed hereinabove and submitted that respondent No.1 filed a series of complaints which have either been dismissed or quashed or stayed by the High Court or this Court. Learned counsel submitted that the criminal courts including the High Court have completely failed and erred in not condemning respondent No.1 for approaching the courts to obstruct the proceedings before the learned Single Judge of the Madras High Court. Learned counsel submitted that the disputes arose with regard to the Joint Venture Agreement between the parties have been finally adjudicated by the Company Law Board and the High Court, but respondent No.1 instead of complying with the directions of the Company Law Board and High Court started filing frivolous criminal cases against the appellant, which were either quashed or stayed by the High Court. Learned counsel seriously assailed the conduct of the Superintendent of Police, who directed reinvestigation in a matter which was finally closed. Learned counsel submitted that the Division Bench failed to note that the entire efforts of the respondent in prosecuting the appellant are serious abuse of the process of the Court. Learned counsel referred the allegations made in the complaint petition and submitted that the whole object of filing those complaints are nothing but to pressurize the appellant and to harass him. Learned counsel then submitted that the whole procedure in the proceedings initiated against the appellant is violative of Article 21 of the Constitution of India. It was contended that the conduct of respondent No.1 is deplorable and the same is contemptuous amounting to deliberate obstruction of the judicial proceedings and an abuse of the process of the Court. Learned counsel lastly contended that the Division Bench has erroneously set aside the order of the learned Single Judge on the ground that the issue was pending in this Court.

24. Mr. Mukul Rohatgi, learned senior counsel appearing in SLP(Crl.) Nos.1947-48 of 2013 after narrating the entire facts in the case and the sequence of events submitted that the continuation of criminal proceedings and the submission of the charge-sheet is the result of the wrong understanding of the order by Superintendent of Police, Tiruppur, who directed reinvestigation in a matter which was closed. Learned counsel, therefore, submitted that the order for reinvestigation passed by the Superintendent of Police is totally illegal, void and contemptuous. It was contended that series of complaints filed by respondent No.1 has either been dismissed or quashed or stayed by the High Court and that respondent No.1 has the propensity to abuse the legal process and utilize it as a tool to wreak vengeance against others involved with the CEPL so that the appellants' Company does not pursue the Company Law Board proceedings. Learned counsel submitted that it has been the modus operandi of respondent No.1 to file false and bogus complaints and utilize the same to harass and coerce the appellant. Lastly, learned counsel submitted that the dispute raised by the respondent is purely a civil dispute but it has been given the colour of criminal act with the sole objective to implicate and detain these two appellants, who are foreigners, in criminal cases and not to allow them to travel outside India.

25. Mr. C.A. Sundaram, learned senior counsel appearing for one of the appellants contended that it is a matter of record that every single complaint filed by respondent No. 1 has been either dismissed or quashed or stayed by the High Court or this Court and respondent No. 1 has the propensity to abuse the legal process and utilize it as a tool to wreak vengeance against others involved with CEPL so that the appellant's company does not pursue the Company Law Board proceedings. Learned counsel contended that it has been the modus operandi of respondent No. 1 to file false and bogus criminal complaints and to utilize the same to harass and coerce the appellant. Respondent No. 1 had malafidely filed a complaint CC 157/07 before the Judicial Magistrate, Perundurai. This was an ingenious case where respondent No. 1 deliberately and fraudulently signed and issued a cheque from the CEPL account to his own company, namely, Cherraan Constructions Limited (CCL) for Rs. 5 crore (when there was no transaction, liability to the payee or authority to issue the cheque) and then caused the cheque to be dishonoured. Promptly, CCL filed a Section 138 NI Act complaint against the appellant and the other Director of CEPL etc. but did not make respondent No. 1 an accused. The Madras High Court quashed this complaint in Criminal O.P. No. 29737 of 2007.

26. Mr. Karthik Sheshadri, learned counsel appearing for the respondent, on the other hand in support of continuance of criminal proceedings, submitted that the respondent - complainant made out a case in the complaint for prosecuting the appellant for cheating and misappropriation of money. With regard to the filing of FIR being No.7 of 2007, learned counsel submitted that immediately after the FIR was lodged, the appellants approached the High Court of Madras and got an order of stay for further investigation in Criminal O.P. No. 12695/2007 and Criminal O.P. No.19384 of 2007 and consequently all further investigation of the crime alleged came to be stayed. Appellants also filed a case for quashing of the FIR before the Madras High Court. Learned counsel vehemently argued that FIR No.7/2007 was never closed at any point of time and, therefore, the direction for the reinvestigation was perfectly justified. Based on the investigation, charge-sheet was filed. According to the learned counsel, the Superintendent of Police passed order for the reinvestigation only because no investigation was ever conducted because of the stay granted by the High Court. While justifying the legality and validity of reinvestigation, learned counsel submitted that even without permission of the Magistrate, Police Officer can direct further investigation. In support of that, learned counsel relied upon the decision of this Court in State of Bihar & Another v. J.A.C. Saldanna and Others, AIR 1980 SC 326. Lastly, learned counsel submitted that when the charge-sheet makes out a case then civil liberty is not the appropriate remedy for the aggrieved person.

27. In the light of factual situation and having gone through the entire facts and the sequence of events in the criminal proceedings before the criminal courts and the orders passed time to time by such courts, the question that falls for consideration is as to whether continuance of such criminal proceedings is an abuse of the process of the Court.

28. Before we embark upon dealing with the issue posed before us, we would like to discuss the principles laid down by various courts as to when continuance of criminal proceeding will amount to abuse of process of the Court.

29. The doctrine of abuse of process of court and the remedy of refusal to allow the trial to proceed is well-established and recognized doctrine both by the English courts and courts in India. There are some established principles of law which bar the trial when there appears to be abuse of process of court. Lord Morris in the case of Connelly v. Director of Public Prosecutions, [1964] 2 All ER 401 (HL) observed: "There can be no doubt that a court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction. A court must enjoy such powers in order to enforce its rule of practice and to suppress any abuse of its process and to defeat any attempted thwarting of its process". "The power (which is inherent in a court's jurisdiction) to prevent abuse of its process and to control its own procedure must in a criminal court include a power to safeguard an accused person from oppression or prejudice." In his separate pronouncement, Lord Delvin in the same case observed that where particular criminal proceedings constitute an abuse of process, the court is empowered to refuse to allow the indictment to proceed to trial.

30. In Hui Chi-Ming v. The Queen [(1992) 1 AC 34 (PC)], the Privy Council defined the word "abuse of process" as something so unfair and wrong with the prosecution that the court should not allow a prosecutor to proceed with what is, in all other respects, a perfectly supportable case.

31. In the leading case of Bennett v. Horseferry Road Magistrates' Court, [1993] 3 All ER 138, on the application of abuse of process, the court confirms that an abuse of process justifying the stay of prosecution could arise in the following circumstances:

(i)		where it would be impossible to give the accused a fair trial; or
(ii)		where it would amount to misuse/manipulation of process because it offends the court's sense of justice and propriety to be asked to try the accused in the circumstances of the particular case.

32. In R. v. Derby Crown Court ex p Brooks, [1985] 80 Cr.App.R. 164, Lord Chief Justice Ormrod stated: "It may be an abuse of process if either (a) the prosecution has manipulated or misused the process of the court so as to deprive the defendant of a protection provided by law or to take unfair advantage of a technicality, or (b) on the balance of probability the defendant has been, or will be, prejudiced in the preparation of conduct of his defence by delay on the part of the prosecution which is unjustifiable."

33. Lord Justice Neill in R. v. Beckford, [1996] 1 Cr.App.R. 94: [1995] R.T.R. 251 observed that: "The jurisdiction to stay can be exercised in many different circumstances. Nevertheless two main strands can be detected in the authorities: (a) cases where the court concludes that the defendant cannot receive a fair trial; (b) cases where the court concludes that it would be unfair for the defendant to be tried." What is unfair and wrong will be for the court to determine on the individual facts of each case.

34. This Court in State of Karnataka v. L. Muniswamy and Others, [1977] 2 SCC 699 observed that the wholesome power under Section 482 Cr.P.C. entitles the High Court to quash a proceeding when it comes to the conclusion that allowing the proceeding to continue would be an abuse of the process of the Court or that the ends of justice require that the proceeding ought to be quashed. The High Courts have been invested with inherent powers, both in civil and criminal matters, to achieve a salutary public purpose. A court proceeding ought not to be permitted to degenerate into a weapon of harassment or persecution. The Court observed in this case that ends of justice are higher than the ends of mere law though justice must be administered according to laws made by the legislature. It was held in this case (at p.703 of SCC):

"7.**

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In the exercise of this wholesome power, the High Court is entitled to quash a proceeding if it comes to the conclusion that allowing the proceeding to continue would be an abuse of the process of the Court or that the ends of justice require that the proceeding ought to be quashed. The saving of the High Court's inherent powers, both in civil and criminal matters, is designed to achieve a salutary public purpose which is that a court proceeding ought not to be permitted to degenerate into a weapon of harassment or persecution. In a criminal case, the veiled object behind a lame prosecution, the very nature of the material on which the structure of the prosecution rests and the like would justify the High Court in quashing the proceeding in the interest of justice. The ends of justice are higher than the ends of mere law though justice has got to be administered according to laws made by the legislature. The compelling necessity for making these observations is that without a proper realisation of the object and purpose of the provision which seeks to save the inherent powers of the High Court to do justice, between the State and its subjects, it would be impossible to appreciate the width and contours of that salient jurisdiction."

This case has been followed in a large number of subsequent cases of this Court and other courts.

35. In State of Haryana and Others v. Bhajan Lal and Others, 1992 Supp.(1) SCC 335, this Court in the backdrop of interpretation of various relevant provisions of Cr.P.C. under Chapter XIV and of the principles of law enunciated by this Court in a series of decisions relating to the exercise of the extraordinary power under Article 226 of the Constitution of India or the inherent powers under Section 482 Cr.P.C. gave the following categories of cases by way of illustration wherein such power could be exercised either to prevent abuse of the process of the court or otherwise to secure the ends of justice. Thus, this Court made it clear that it may not be possible to lay down any precise, clearly defined and sufficiently channelised and inflexible guidelines or rigid formulae and to give an exhaustive list to myriad kinds of cases wherein such power should be exercised: (SCC pp. 378-79, para 102)

"102. (1) to 6**

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(7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge."

36. This Court in Zandu Pharmaceutical Works Ltd. and Others v. Mohd. Sharaful Haque and Another, [2005] 1 SCC 122 observed thus: (SCC p. 128, para 8)

"8. … It would be an abuse of process of the court to allow any action which would result in injustice and prevent promotion of justice. In exercise of the powers, court would be justified to quash any proceeding if it finds that initiation/continuance of it amounts to abuse of the process of court or quashing of these proceedings would otherwise serve the ends of justice. When no offence is disclosed by the complaint, the court may examine the question of fact. When a complaint is sought to be quashed, it is permissible to look into the materials to assess what the complainant has alleged and whether any offence is made out even if the allegations are accepted in toto."

37. In Indian Oil Corpn. v. NEPC India Ltd. and Others, [2006] 6 SCC 736 this Court again cautioned about a growing tendency in business circles to convert purely civil disputes into criminal cases. The Court noticed the prevalent impression that civil law remedies are time consuming and do not adequately protect the interests of lenders/creditors. The Court further observed that: (SCC p. 749, para 13)

"13. … Any effort to settle civil disputes and claims, which do not involve any criminal offence, by applying pressure through criminal prosecution should be deprecated and discouraged."

38. In the case of Inder Mohan Goswami and Another v. State of Ut-taranchal and Others, [2007] 12 SCC 1, this Court after considering series of decisions observed:

"46. The court must ensure that criminal prosecution is not used as an instrument of harassment or for seeking private vendetta or with an ulterior motive to pressurise the accused. On analysis of the aforementioned cases, we are of the opinion that it is neither possible nor desirable to lay down an inflexible rule that would govern the exercise of inherent jurisdiction. Inherent jurisdiction of the High Courts under Section 482 CrPC though wide has to be exercised sparingly, carefully and with caution and only when it is justified by the tests specifically laid down in the statute itself and in the aforementioned cases. In view of the settled legal position, the impugned judgment cannot be sustained.

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50. Civilised countries have recognised that liberty is the most precious of all the human rights. The American Declaration of Independence, 1776, French Declaration of the Rights of Men and the Citizen, 1789, Universal Declaration of Human Rights and the International Covenant of Civil and Political Rights, 1966 all speak with one voice— liberty is the natural and inalienable right of every human being. Similarly, Article 21 of our Constitution proclaims that no one shall be deprived of his liberty except in accordance with procedure prescribed by law.

51. The issuance of non-bailable warrants involves interference with personal liberty. Arrest and imprisonment means deprivation of the most precious right of an individual. Therefore, the courts have to be extremely careful before issuing non-bailable warrants.

52. Just as liberty is precious for an individual so is the interest of the society in maintaining law and order. Both are extremely important for the survival of acivilised society. Sometimes in the larger interest of the public and the State it becomes absolutely imperative to curtail freedom of an individual for a certain period, only then the non-bailable warrants should be issued."

39. In G. Sagar Suri and Another v. State of U.P. and Others, [2000] 2 SCC 636, this Court observed that it is the duty and obligation of the criminal court to exercise a great deal of caution in issuing the process, particularly when matters are essentially of civil nature.

40. In the case of S.N. Sharma v. Bipen Kumar Tiwari and Others, AIR 1970 SC 786 (at p.789), this Court has stated thus:

"7. ….. It appears to us that, though the Code of Criminal Procedure gives to the police unfettered power to investigate all cases where they suspect that a cognizable offence has been committed, in appropriate cases an aggrieved person can always seek a remedy by invoking the power of the High Court under Article 226 of the Constitution under which, if the High Court could be convinced that the power of investigation has been exercised by a police officer mala fide, the High Court can always issue a writ of mandamus restraining the police officer from misusing his legal powers. The fact that the Code does not contain any other provision giving power to a Magistrate to stop investigation by the police cannot be a ground for holding that such a power must be read in Section 159 of the Code."

41. In the case of State of West Bengal and Others v. Swapan Kumar Guha and Others, AIR 1982 SC 949 while examining the power of a police officer in the field of investigation of a cognizable offence, Chandrachud, C.J. has affirmed the view expressed by Mathew, J. and observed as follows: (at p.958 of AIR)

"22. …. There is no such thing like unfettered discretion in the realm of powers defined by statutes and indeed, unlimited discretion in that sphere can become a ruthless destroyer of personal freedom. The power to investigate into cognizable offences must, therefore, be exercised strictly on the condition on which it is granted by the Code. …."

42. In the case of Uma Shankar Gopalika v. State of Bihar and Another, [2005] 10 SCC 336, this Court has held as under:

"6. Now the question to be examined by us is as to whether on the facts disclosed in the petition of complaint any criminal offence whatsoever is made out much less offences under Sections 420/120-B IPC. The only allegation in the complaint petition against the accused persons is that they assured the complainant that when they receive the insurance claim amounting to Rs 4,20,000, they would pay a sum of Rs 2,60,000 to the complainant out of that but the same has never been paid. Apart from that there is no other allegation in the petition of complaint. It was pointed out on behalf of the complainant that the accused fraudulently persuaded the complainant to agree so that the accused persons may take steps for moving the Consumer Forum in relation to the claim of Rs 4,20,000. It is well settled that every breach of contract would not give rise to an offence of cheating and only in those cases breach of contract would amount to cheating where there was any deception played at the very inception. If the intention to cheat has developed later on, the same cannot amount to cheating. In the present case it has nowhere been stated that at the very inception there was any intention on behalf of the accused persons to cheat which is a condition precedent for an offence under Section 420 IPC.

7. In our view petition of complaint does not disclose any criminal offence at all much less any offence either under Section 420 or Section 120-B IPC and the present case is a case of purely civil dispute between the parties for which remedy lies before a civil court by filing a properly constituted suit. In our opinion, in view of these facts allowing the police investigation to continue would amount to an abuse of the process of court and to prevent the same it was just and expedient for the High Court to quash the same by exercising the powers under Section 482 CrPC which it has erroneously refused."

43. Coming back to the instant case from the affidavits filed by the parties, the facts which come into light are that the appellant-Chandran Ratnaswami settled in Canada since 1974. He is holding executive posts in various companies based in Canada and has made investment in India worth more than 1 billion USD. He is also a Director on the Board of various renowned companies including ORE Holdings Limited based in Mauritius. The said company ORE entered into a Joint Venture Agreement (JVA) with C.G. Holdings Private Limited (respondent No.1 - K.C. Palanisamy's Company) and N. Athappan for constructing and developing a hotel property, shopping complex etc. owned by Cherraan Properties Limited (CPL) and Vasantha Mills Limited (VML). ORE invested Rs.75 crores and got 45% in Cheran Enterprises Private Limited (CEPL). Athappan invested Rs. 4 crores and got 10%.

44. Disputes arose between the parties when respondent No.1 alleged to have transferred shares of CPL and VML to CEPL instead of bringing money and got 45% shareholdings in CEPL. Respondent No.1 allegedly swindled the said 75 crores deposited by the appellant Company ORE and transferred the immovable assets of CPL and VML, subsidiaries of CEPL.

Consequently, ORE filed Company Petition before the Company Law Board on account of alleged acts of oppression and mismanagement indulged by respondent No.1. The matter before the Company Law Board was hotly contested and finally the Company Law Board by order dated 13th August, 2008 directed respondent No.1, CG Holdings and CEPL to return the investment of appellant Company ORE and Athappan with 8% interest. On payment of money it was directed that respondent K.C. Palanisamy will take control of CEPL and its subsidiaries. Clarification Petition was also disposed of by Company Law Board on 13th August, 2008.

45. Both the parties moved the Madras High Court by filing appeals and those Company Appeals were finally disposed of on 5th August, 2011 and the order passed by the Company Law Board was confirmed.

The Division Bench of the Madras High Court while confirming the view taken by the Company Law Board held that both parties cannot jointly run the business and, therefore, to ensure smooth exit of ORE and Athappan, the Company Law Board passed the order. The said order of the Division Bench passed in appeals, however, was not challenged by respondent No.1 K.C. Palanisamy.

46. The appellant filed execution case, which is pending. It further appears that a suit was also filed being O.S.No.90 of 2007 before the District Munsiff Court.

47. Instead of complying with the order of the Company Law Board and the directions and observations made by the Madras High Court in the aforementioned Company Appeals, respondent No.1 started filing several criminal complaints against the appellant. The first complaint was filed by the respondent before the Economic Offences Wing, Chennai, alleging that ORE invested only Rs. 75 crores and for not bringing Rs. 300 crores in Joint Venture Company. The petition filed in the High Court seeking direction to EOW to take action on the complaint was, however, withdrawn. Respondent No.1 then filed a second complaint before the Judicial Magistrate, Perundurai which was dismissed after examining respondent No.1 and his two witnesses. The respondent then filed another complaint before the Judicial Magistrate, Kangeyam without disclosing the dismissal of the earlier complaint filed before the Judicial Magistrate, Perundurai. The said complaint finally came to be registered as FIR No.7 of 2007. The appellant moved the High Court for quashing the said FIR. In the said petition, the High Court, after noticing the similar complaint filed earlier by respondent No.1 in the court of Judicial Magistrate, Perundurai, finally observed that the second criminal proceeding initiated by respondent No.1 has no merit. The court further passed a stringent remark against the conduct of respondent No.1 for filing cases on the same issue.

48. Respondent No.1 then moved this Court by filing SLP(Crl.) No.9853 of 2010 alleging the pendency of the protest petition and non-closure of the criminal case. This Court refused to interfere with the order but observed that if any protest petition is pending the same shall be disposed of in accordance with law.

49. Curiously enough, on the report of Superintendent of Police, Tiruppur, the criminal case in FIR No.7 of 2007 was directed to be reopened for re-investigation. On this FIR, the Magistrate before whom the criminal case was pending passed various orders which were time to time challenged by the aggrieved party before the High Court and before this Court. Simultaneously, the appellant also filed counter criminal cases against the respondent which were also proceeded and are pending in those criminal courts.

50. In a nutshell, the dispute arising out of Joint Venture Agreement has been fully and finally settled by the Company Law Board and also the High Court and several directions were issued for compliance including the return of the amount by respondent No.1 to the appellant and to become the sole owner of those companies.

51. It is pertinent to mention here that in course of arguments the action of Superintendent of Police was challenged by the learned counsel appearing for the appellant. In order to justify the action of the Superintendent of Police in directing the investigation, Mr. P.S. Narsimhan, learned senior counsel submitted that on the instruction of Inspector General of Police such reinvestigation was directed by the Superintendent of Police. However, no such letter of instruction has been produced before us by the learned counsel. At this juncture, we reiterate that the power of Police Officers in the field of investigation of a cognizable offence is not unlimited. Hence, the power during the investigation must be exercised strictly within the limitation prescribed in the Code of Criminal Procedure and such power may not result in destroying the personal freedom of a citizen.

52. As noticed above, after the dispute was finally settled by the Company Law Board and the Madras High Court in appeal, the respondent approached the Economic Offences Wing, who refused to entertain the complaint. The respondent then moved the complaint before the Judicial Magistrate, Perundurai for initiating criminal action against the appellant for breach of contract, which was dismissed by the Magistrate holding the same as nothing but to take vengeance. The Magistrate further held that if the conditions of the agreement are violated the respondent has to seek remedy under the Contract Act or the Company Law instead of filing criminal case. Suppressing the said complaint and the order passed by the Magistrate, the respondent tried again by filing a complaint before the Judicial Magistrate, Kangayam for initiating criminal action against the appellants for the breach of contract and conspiracy. Although the FIR was registered, but a closure report as a mistake of fact was prepared. The High Court while passing the order observed that the Court would frown upon the conduct of the complainant in indulging in repeated harassment of the petitioners-appellants. Irrespective of the dispute with regard to the closure of the case, a fresh life was given to the criminal case at the instance of Superintendent of Police, who directed re-investigation and in course of the said criminal proceeding irrespective of FIR No.7/2007 the appellants were harassed and on technicalities various orders for surrender, arrest and their detention had been passed. As noticed above, in the three writ petitions filed by respondent No.1, though not against the appellant but against the C.B.I. in respect of different transactions, the High Court dismissing all those writ petitions observed that the modus operandi of the writ petitioner (respondent No.1) was to defraud the person or entity and thereafter approach the Courts with multiple proceedings in order to distract attention from his own misdeeds.

53. Neither the High Court nor the Magisterial Court have ever applied their mind and considered the conduct of the respondent and continuance of criminal proceedings in respect of the disputes, which are civil in nature and finally adjudicated by the competent authority i.e. the Company Law Board and the High Court in appeal.

54. We are of the definite opinion that the complainant has manipulated and misused the process of Court so as to deprive the appellants from their basic right to move free anywhere inside or outside the country. Moreover, it would be unfair if the appellants are to be tried in such criminal proceedings arising out of alleged breach of a Joint Venture Agreement specially when such disputes have been finally resolved by the Court of competent jurisdiction. Hence, allowing the criminal proceedings arising out of FIR No.7 of 2007 to continue would be an abuse of the process of the Court and, therefore, for the ends of justice such proceedings ought to be quashed. Since the High Court failed to look into this aspect of the matter while passing the impugned order, in our opinion, the same could not be sustained in law.

55. For the reasons aforesaid, the appeals arising out of SLP (C) No.13120 of 2013, SLP (Crl.) Nos.3273-3274 of 2013 and SLP (Crl.) Nos.1947-1948 of 2013 are allowed, whereas the appeals arising out of SLP (Crl.) Nos.1924-1926 of 2013 and SLP (C) Nos.11342-11343 of 2013 are dismissed. There shall be no order as to costs.

56. Although we do not appreciate the action of a senior Superintendent of Police, but in view of the order passed in these appeals, we do not want to proceed any further in Contempt Petition (C) No.166 of 2013, which stands disposed of.

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IT-CIT can't ignore the directions given by ITAT(12AA) while remanding the case

IT : Where Tribunal had given a clear finding that assessee was entitled to registration under section 12A and remanded matter to Commissioner for limited purpose, Commissioner was not right in relooking at activities of trust and thereafter declining to grant registration to assessee

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[2013] 33 taxmann.com 317 (Chandigarh - Trib.)

IN THE ITAT CHANDIGARH BENCH 'A'

Sandhya Educational Trust

v.

Commissioner of Income-tax*

Ms. Sushma Chowla, JUDICIAL MEMBER
AND MEHAR SINGH, ACCOUNTANT MEMBER

IT APPEAL NO. 253 (CHD.) OF 2011

MAY  31, 2012 

Section 12A, read with section 12AA, of the Income-tax Act, 1961 - Charitable or religious trust - Registration of [Illustrations] - Assessee-trust was created with objects to run any school and to purchase land for running educational institution - Assessee's application for registration under section 12A was rejected by Commissioner - Tribunal held that activities of purchasing land and constructing building for setting up school was application for charitable purpose and, therefore, assessee was entitled for registration under section 12A - Accordingly, Tribunal set aside matter to file of Commissioner to consider case of assessee in accordance with decision of High Court in Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) - Commissioner however once again refused to grant registration observing that assessee was only engaged in leasing out building to third party, and no educational activities were provided by assessee - Whether in view of abovesaid finding of Tribunal, Commissioner was not right in relooking at issue i.e., activities of assessee trust, objects of entering into collaboration with a third party and, thereafter, holding that educational activities were not provided by trust - Held, yes - Whether assessee having fulfilled conditions for grant of registration under section 12A, Commissioner was to be directed to pass consequential order granting registration under section 12AA to assessee - Held, yes [Paras 16 & 20] [In favour of assessee]

CASES REFERRED TO

 

Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) (para 10), Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 (SC) (para 10), Punjab State Forest Corpn. Ltd. v. Addl. CIT [IT Appeal No. 693 (Chd.) of 2008, dated 26-3-2009] (para 13), Union of India v. Kamlakshi Finance Corpn. Ltd. 1991 (55) ELT 433 (SC) (para 14) and CIT v. Queen 's Educational Society [2009] 319 ITR 160/177 Taxman 326 (Uttaranchal) (para 15).

Harry Ricky for the Appellant. Smt. Jyoti Kumari for the Respondent.

ORDER

 

Ms. Sushma Chowla, Judicial Member - The assessee has filed the present appeal against the order passed by the Commissioner of Income Tax-II, Chandigarh dated 21.02.2011 under section 12AA r.w.s. 254 of the Income-tax Act (in short 'the Act').

2. The assessee has raised the following grounds of appeal:

1.		That the order of the Learned Commissioner of Income Tax II, Chandigarh is defective both in law and facts of the case.
2.		That the Learned Commissioner of Income Tax II, Chandigarh is not justified in rejecting the application of the appellant for the grant of registration u/s 12A of Income Tax Act, 1961 as the appellant Trust duly fulfils all the necessary conditions for registration under section 12A of Income Tax Act, 1961.
3.		That the Learned Commissioner of Income Tax - II. Chandigarh has brought on record no new facts and has ignored the directions given by the Hon'ble Income Tax Appellate Tribunal, Chandigarh vide its order dated 30-07-2010. Hence, the rejection of the appellant's application for the grant of registration u/s 12A of Income Tax Act, 1961 is uncalled for.
		That any other ground may kindly be allowed to be taken at the time of hearing. "

3. The brief facts of the case are that the assessee trust was created on 28.3.2002 but did not file an application for registration till 2007. The application was filed on 31.3.2008, which was rejected by the Commissioner of Income Tax vide order passed 29/30.9.2008. In appeal the Tribunal vide order dated 31.3.2009 held that the Commissioner of Income Tax had not given any finding that the objects of the trust were not of charitable nature and merely doubted the genuineness of its activities and the matter was restored back to the file of the Commissioner of Income Tax. In the second round, the Commissioner of Income Tax vide order dated 19.11.2009 rejected the application for grant of registration under section 12AA of the Act. The Tribunal vide order dated 30.7.2010 in ITA No.1189/Chd/2009 vide para 7 observed as under:

"7. We have heard the rival submissions and perused the record. The assessee trust was created on 28.03.2002. The copy of the trust deed is placed at pages 1 to 7 of the Paper Book. The aims and objects of the trust was to run any school and to purchase land for running the educational institution. The assessee in order to achieve its objects purchased land for the construction of school, which was allotted by the Chandigarh Administration vide order dated 16.10.2002. The copy of the allotment letter is placed at pages 15 to 18 of the Paper Book. The construction of the building had been undertaken by the assessee. The assessee claims that as it did not have expertise in the education line, it entered into a collaboration with M/s Fountainhead, franchise of Euro Kids. The assessee claims that the amount received on the sharing of revenue with M/s Fountainhead, was used for the objects of the trust i.e. for education of poor, scholarship, books and uniforms for the poor and needy. In assessment year 2009-10, the amount realized was utilized for payment of lease money and instalment to Chandigarh Administration. In financial year 2009-10, sum of Rs.22,500/- was utilized for purchase of books, which were distributed to the poor children in near-by colonies. "

4. The Tribunal took note of the fact that the assessee had purchased land for construction of school and the construction of the building had also been undertaken by the assessee. The assessee had entered into a collaboration with M/s Fountainhead franchise of Euro Kids and the amount received on the sharing of revenue were used in the objects of the trust. In the assessment year 2009-10 the amount realized was utilized for payment of lease money and instalment to Chandigarh Administration.

5. The Tribunal vide para 8 took note of the fact that though the assessee was compiling income and expenditure statement and Balance Sheet for the financial years 2004-05 to 2008-09, the application for registration of trust under section 12A of the Act was moved by the assessee on 31.3.2008. The Tribunal gave finding in para 10 that from the perusal, the objects of the assessee trust were to run a school and in order to achieve its objects the trust had purchased land and constructed school building on the same. The Tribunal thus held that "Such activities of purchasing the land and constructing the building for setting up the school is application for charitable purpose ". The assessee had further entered in a collaboration for running the school, which in turn established the bona fides of the assessee trust to carry on its object of imparting education. In conclusion, in para 10 the Tribunal held "The assessee is entitled to the claim of registration under section 12A of the Act from the date of filing the application under section 12A of the Act in accordance with law".

6. The other objection of Commissioner of Income Tax in refusing to grant registration to the assessee was addressed by the Tribunal in para 11, which reads as under:

"11. The second objection of the CIT in refusing to ground registration was in view of the ratio laid down by Hon'ble Uttarakhand High Court in CIT v Queen 's Educational Society [2009] 177 Taxman 326. The Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust v. Union of India [2010] 188 Taxman 402 have dissented from the ratio laid down by the Hon 'ble Uttarakhand High Court in Queen 's Educational Society (supra). Respectfully following the ratio laid down by the Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust (supra), we are of the view that the issue of grant of registration needs to be re-considered in line with the same. In the interest of justice we remit the issue back to the file of CIT to decide the issue in line with the ratio laid down by the jurisdictional High Court. Reasonable opportunity of hearing shall be allowed to the assessee."

7. The conclusion by the Tribunal in para 12 was that "there was no merit in the order of Commissioner of Income Tax in rejecting the registration under section 12A of the Act"

8. Para 10 of the order of the Tribunal reads as under:

"10. The CIT while granting registration u/.s 12A of the Act is to verify whether the objects of the trust are charitable in line with the ratio laid down by the Hon'ble Allahabad High Court in Fifth Generation Education Society v. CIT [1990] 87 CTR (All.) 169 : [1990] 185 ITR 634 (All.). We find from the perusal of the objects of the assessee trust before us was to run a school and in order to achieve its objects the trust had purchased land and constructed school building on the same. Such activities of purchasing the land and constructing the building for setting up the school is application for charitable purpose, The assessee had further entered in a collaboration for running the school, which in turn established the bona fides of the assessee trust to carry on its object of imparting education. The assessee had executed a trust deed and later executed a supplementary trust deed on 03.09.2008, wherein the assessee had clarified its intention with regard to the dissolution of the trust. The supplementary deed was executed for further clarification and the same is in continuation of the original trust deed. We find no merit in the objections raised by the CIT in this regard. The assessee is entitled to the claim of registration under section 12A of the Act from the date of filing the application under section 12A of the Act in accordance with law."

9. The Tribunal thus held the assessee entitled to claim of registration under section 12A of the Act from the date of filing the application under section 12A of the Act in accordance with law. However, the matter was remitted back to the file of the CIT (Appeals) to follow the ratio laid down in Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.).

10. The Commissioner of Income Tax in third round of proceedings has observed that the assessee has failed to file the Balance Sheet and Profit & Loss Account for the financial year 2007-08, which is the initial financial year from which the application of the trust was effective. The Commissioner of Income Tax thereafter embarked on the objects of the trust and held that the primary and predominant object of the assessee was to run the school by its own funds. In line thereof, the Commissioner of Income Tax observed, looking at the activities of the assessee trust in the relevant year and subsequent year the trust had nowhere conducted any activity of such kind. The Commissioner of Income Tax further observed that by entering into partnership with third party the assessee had not run any activity of its own and hence it was held that the education activities were not provided by the trust. The Commissioner of Income Tax thereafter applied the ratio laid down in Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 (SC) observing that though the above judgment was given in the in the context of section 11 of the Act, the same was applicable for grant of registration under section 12AA (1)(a) of the Act. The Commissioner of Income Tax held the assessee to be only engaged in leasing out the building to the third party and in the absence of the actual conduct and genuineness of the activities of imparting education, the Commissioner of Income Tax concluded that no charitable activity was undertaken during the relevant year and in the subsequent year. The Commissioner of Income Tax also held the assessee to be engaged in a type of activity which was beyond the objects of the trust. The Commissioner of Income Tax further held that any voluntary contributions for the period prior to 1.4.2007 were not within the scope of application of registration and hence not eligible for exemption. The Commissioner of Income Tax directed the Assessing Officer to bring to tax voluntary contributions made prior to financial year 2007-08. The application moved for registration under section 12AA of the Act was rejected.

11. The assessee is in appeal against the order of Commissioner of Income Tax and vide ground No.3 alleged that the Commissioner of Income Tax has brought on record no new facts and has ignored the directions of the Tribunal vide order dated 30.7.2010 and hence the rejection of application for grant of registration under section 12A of the Act was uncalled for. The assessee is also aggrieved by the order of the Commissioner of Income Tax in rejecting the application for grant of registration under section 12A as the assessee has fulfilled necessary conditions laid down under the Act.

12. On perusal of the order of the Tribunal in assessee's own case dated 30.7.2010 in ITA No.1189/Chd./2009, and the consequent order of the Commissioner of Income Tax passed under section 12AA of the Act dated 21.2.2011 we find that the Commissioner of Income Tax-II, Chandigarh has completely misguided himself in adjudicating the issue of grant of registration to the assessee under section 12A of the Act. The Commissioner of Income Tax acknowledges that the order under section 12AA of the Act has been passed r.w.s. 254 of the Act. However, while deciding the issue in hand the observations of the Tribunal in various paras of the order dated 30.7.2010 have been completely overlooked by the Commissioner of Income Tax and the various principles which have been settled by the Tribunal for grant of registration under section 12A of the Act have been relooked and redecided by the Commissioner of Income Tax by overreaching his jurisdiction in deciding the limited issue reverted back to his file.

13. The Tribunal in ITA No.693/Chandi/2008 in the case of Punjab State Forest Corpn. Ltd. v. Addl. CIT, Range, IV, Chandigarh relating to assessment year 2005-06 vide order dated 26.3.2009 had elaborately considered the order of the CIT (Appeals) in not giving due accord and regard to the order of the Tribunal which was brought to his knowledge and deciding the issue overlooking the said order of the Tribunal, which was brought to his notice by the assessee. The Tribunal held that the requirement of judicial discipline to follow the order of the Jurisdictional Tribunal as a binding precedent by the CIT (Appeals) is quite well settled and does not require any emphasis by us. The Tribunal further held as under:

"The said principles have been explained by various Courts, including the Hon'ble Supreme Court in the case of Kamalakshi Finance Corporation Ltd. (supra) wherein it is observed as under:

"The High Court has, in our view, rightly criticized this conduct of the Asstt. Collectors and the harassment to the assessee caused by the failure of these officers to give effect to the orders of the authorities higher to them in the appellate hierarchy. It cannot be too vehemently emphasized that it is of utmost importance that, in disposing of the quasi-judicial issues before them, Revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Asstt. Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Asstt. Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is 'not acceptable' to the Department in itself and objectionable phrase - and is the subject mailer of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent Court. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws. "

The Court further staled as under:

"It is clear that the observations of the High Court, seemingly vehement and apparently unpalatable to the Revenue, are only intended to curb a tendency in revenue matters which, if allowed to become widespread, could result in considerable harassment to the assessee public without any benefit to the Revenue. We would like to say that the department should take these observations in the proper spirit. The observations of the High Court should be kept in mind in future and utmost regard should be paid by the adjudicating authorities and the appellate authorities to the requirements of judicial discipline and the need for giving effect to the orders of the higher appellate authorities which are binding on them."

14. Likewise, in the case of Sub Inspector Roop Lal v. Lt. Governor, Delhi (supra) the Hon'ble Supreme Court held as under:

"We are indeed sorry to note the attitude of the Tribunal in this case which,, after noticing the earlier judgment of a coordinate bench and, after noticing the judgment of this Court, has still thought, it fit to proceed to lake a view totally contrary to the view taken in the earlier judgment thereby creating a judicial uncertainly in regard to I ha (sic) declaration of law involved in this case. Because of this approach of the latter bench of the Tribunal in this case, a lot of valuable time of the Court is wasted and parties to this case have been put to consideration hardship."

15. The aforesaid observations of the Hon'ble Supreme Court are quite eloquent and coming from the highest, Court of the Land, does not need any further emphasis by us. The impression of the CIT(Appeals) that the binding precedent was liable to be disregarded, because as per his interpretation, it did not, deal with a particular aspect of the controversy, cannot be a justifiable reason to disregard the binding nature of the order of the higher appellate authority which was required to be followed by him unreservedly on the principles of judicial discipline. We have observed earlier that the finding of the CIT (A) that the Tribunal's decision is in disregard of the amendment made by the Pittance Act, 1988 is misconceived. In this connection, a reference to the judgment of Hon'ble Delhi High Court in the case of Sita World Travels (I) Ltd. v. CIT [2005] 193 CTR (Del) 83 is most apt wherein it was held as under:

"The Court issued notice to the Officer who made the impugned order. In our earlier order, we have reproduced the paragraphs of judgments delivered by the Courts. It seems that the Officer has been made to understand what the law is by the counsel appearing for the Revenue and he has tendered and unconditional apology stating that a mistake has been committed an such mistake shall not be repeated in tax proceedings. Once the Court has pointed out the course to be followed, the Assessing Officer or Subordinate Officers including the Tribunal cannot justify their order by stating that Court has not observed certain aspects or the question has gone unanswered by the Court. His duty is to follow the orders and the law of the laud. Judicial discipline is required to be maintained. " [emphasis supplied]

16. The five Judges Bench of the Hon'ble Supreme Court in Ambika Prasad Mishra v. State of U.P. AIR 1980 SC 1762 has also explained the binding authority of a precedent in the following words which, in our view is also relevant in this case:-

"Every now discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. In this view, other submissions sparkling with creative ingenuity and presented with high-pressure advocacy, cannot persuade us to re-open, what was laid down for the guidance of the nation as a solemn preposition by the epic Fundamental Rights case………………………..

It is wise to remember that fatal flaws silenced by earlier rulings cannot survive after death because a decision does not lose its authority "merely because it was badly argued, inadequately considered and fallaciously reasoned."

17. In this backdrop, "we hold that the CIT(A) erred in disregarding the binding decision of the Tribunal for assessment year 2004-05 (supra) without any just and reasons. The order of the CIT (A) is therefore unsustainable in the eyes of law. "

18. In the above said backdrop of judicial precedent, we hold that the appellate authorities are to follow judicial discipline and there is a need to give effect to the orders of the higher appellate authorities which are binding on them. The said principle was laid down by the Hon'ble Supreme Court in Union of India v. Kamlakshi Finance Corpn. Ltd. 1991 (55) ELT 433. In view thereof we hold that the order of the Commissioner of Income Tax-II, Chandigarh is, therefore, unsustainable in the eyes of law.

15. The Tribunal while deciding the appeal against the order of Commissioner of Income Tax passed under section 12AA of the Act dated 19.11.2009 had elaborated upon the facts of the case that the assessee had purchased land for construction of school and the construction of school building had been undertaken by the assessee. Further the assessee had entered into a collaboration with M/s Fountain Head Franchise of Euro Kids as it did not have expertise in the education line. References is made to para 7 of the order of the Tribunal dated 30.7.2010. Thereafter in para 8 the Tribunal had given a finding that "Such activities of purchasing the land and constructing the building for setting up the school is application for charitable purpose". The Tribunal in para 10 have perused the objects of the assessee trust which was to run school and under which the assessee had purchased the land and had entered into collaboration for running school and has observed that the same establishes bona fide of the assessee trust to carry on objects of imparting education. The conclusion of the Tribunal vide para 10 was that "The assessee is entitled to the claim of registration under section 12A of the Act from the date of filing the application under section 12A of the Act in accordance with law". The Tribunal thereafter dealt with other objections of Commissioner of Income Tax in refusing to grant registration to the assessee under section 12A of the Act, in view of the ratio laid down by the Hon'ble Uttaranchal High Court in CIT v. Queen's Educational Society [2009] 319 ITR 160/177 Taxman 326 (Uttaranchal). The Tribunal observed that the Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust's case (supra) has dissented from the ratio laid down by the Hon'ble Uttaranchal High Court in Queen 's Educational Society (supra). In view of the ratio laid down by the Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust's case (supra), the matter was restored back to the file of the Commissioner of Income Tax for limited purpose.

16. However, the Tribunal in para 12 had categorically held that "there was no merit in the order of Commissioner of Income Tax in rejecting the registration under section 12A of the Act." In view of the abovesaid finding of the Tribunal wherein it was held that the assessee was entitled to the claim of registration under section 12A of the Act from the date of filing the application, the order of Commissioner of Income Tax dated 21/22.2.2011 in relooking at the issue i.e. activities of the assessee trust, objects of entering into collaboration with a third party and thereafter holding that the educational activities were not provided by the trust, was not in the domain of Commissioner of Income Tax to deliberate upon. The conclusion of the Commissioner of Income Tax that the assessee was engaged in leasing out the building to third party and hence no charitable activities was undertaken during the relevant year and in the subsequent year were incorrect, specially in view of the finding of the Tribunal in this regard and the matter being set aside to the file of the Commissioner of Income Tax for limited purpose of following the ratio laid down by the Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust's case (supra). In view of the order of the Tribunal dated 30.7.2010, the claim of the assessee that it was a charitable institution engaged in the activity of education and was entitled to the claim of registration under section 12A of the Act from the date of filing the application, in accordance with law, cannot be ignored by the Commissioner of Income Tax. The order passed under section 12AA of the Act dated 21/22.2.2011 is beyond the jurisdiction of giving effect to the order of the Tribunal under section 12A r.w.s. 254 of the Act.

17. Now coming to the aspects of the order of the Tribunal wherein vide para 11 the limited purpose for which it was set aside to the file of the Commissioner of Income Tax was to decide the same in line with the ratio laid down by the Jurisdictional High Court in Pinegrove International Charitable Trust's case (supra) held as under:

"8.13 From the aforesaid discussion, the following principles of law can be summed up:-

(1) It is obligatory on the part of the Chief Commissioner of Income Tax or the Director, which are the prescribed authorities, to comply with proviso thirteen (un-numbered). Accordingly, it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution has earned profit would not be deciding factor to conclude that the educational institution exists for profit.

(2) The provisions of section 10(23C)(vi) of the Act are analogues to the erstwhile section 10(22) of the Act, as has been laid down by Hon'ble the Supreme Court in the case of American Hotel and Lodging Association (supra). To decide the entitlement of an institution for exemption under Section 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn profit [See 5-Judges Constitution Bench judgment in the case of Surat Art Silk Cloth Manufacturers Association (supra)]. It has to be borne in mind that merely because profits have resulted from the activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon'ble the Supreme Court in para 33 of its judgment in American Hotel and Lodging Association's case (supra). Thus, on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions of the Act. The parameters of earning profit beyond 15 per cent and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensure compliance of those conditions. The cases here where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval.

(3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the total income.

(4) The educational institutions, which are registered as a Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10 (23C)(vi) of the Act. [See para 8.7 of the judgment - Aditanar Educational Institution case (supra)] "

(5) Where more than 15 percent of income of an educational institution is accumulated on or after 01.04.2002, the period of accumulation of the amount exceeding 15 per cent is not permissible beyond five years, provided the excess income has been applied or accumulated for application wholly and exclusively for the purpose of education.

(6) The judgment of Uttarakhand High Court rendered in the case of Queens Educational Society (supra) and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School (supra) lays down the correct law.

8.14. When the facts of the lead case are examined in the light of above discussion, it is evident that capital assets acquired/constructed by the educational institutions have been treated as income in a blanket manner without recording any finding whether the capital assets have been applied and utilised to advance the purpose of education. It is obligatory on the part of the prescribed authority while exercising power under un-numbered thirteenth proviso to consider whether expenditure incurred as capital investment is on the object of education or not. Therefore, the orders impugned in these petitions passed by the prescribed authority are liable to be quashed. It is appropriate to mention that in these cases the impugned orders passed by the Chief Commissioner of Income Tax, Chandigarh and those of by the Chief Commissioner of Income Tax, Ludhiana, are similar in substance and appear to have been inspired by the view taken by the Uttrakhand High Court in the case of Queens Educational Society (supra), which we have not accepted.

8.15 As a sequel to the aforesaid discussion, these petitions are allowed and the impugned orders passed by the Chief Commissioner of Income Tax withdrawing the exemption granted under Section 10(23C) (vi) of the Act are hereby quashed. However, the revenue is at liberty to pass any fresh orders, if such a necessity is felt after taking into consideration the various propositions of law culled out by us in para 8.13 and various other paras."

18. The objection of the Commissioner of Income Tax in refusing to grant registration to the assessee under section 12A of the Act was in view of the ratio laid down by the Hon'ble Uttaranchal High Court in Queen 's Educational Society (supra), which stands overruled by the Hon'ble Punjab & Haryana High Court in Pinegrove International Charitable Trust (supra). The ratio laid down by the Jurisdictional High Court is applicable to the assessee before us and merely because it earned profit would not be deciding factor to conclude that the educational institution exists for profit. In the facts of the present case before us and as pointed out at pages 1 and 2 of the order of Commissioner of Income Tax dated 21/22.2.2011 the assessee had received voluntary contribution to the corpus fund for the purposes of investment in land and construction of building in various years. The said contributions are to be considered only for the financial years 2007-08 and 2008-09 i.e. the date from which the assessee had filed the application for registration under section 12A of the Act. The observations of the Commissioner of Income Tax in respect of the contribution received in the earlier year was outside the domain of Commissioner of Income Tax while adjudicating the issue of grant of registration under section 12AA of the Act filed on 31.3.2008 of Income Tax. At page 9, the CIT (Appeals) had observed as under:

"Since the applicant trust has applied for registration on 31.03.08, so the relevant period under consideration is with effect from 1.04.07. So any voluntary contributions received by the applicant trust and transferred to corpus fund as well as investment in construction of building for the period prior to 1.04.07 are not within the scope of application of registration hence are not eligible for registration/exemption. In the absence of application for registration u/s 12AA for the period prior to 1.04.07, any voluntary contributions even in the form of corpus fund are liable to tax as per section 2(24)(iia) of the Income-tax Act. Therefore, prior to the F.Y. 2007-08, i.e. Financial Years 2002-03 to 2006-07, the Assessing Officer may in accordance with the law verify the sources of investment as well as the income of the trust, as no exemption u/s 12AA is available with the applicant for those periods."

19. The observations of the Commissioner of Income Tax are that once the applicant has applied for registration on 31.3.2008 the voluntary contributions received by the applicant trust and transferred to corpus fund, which in turn have been utilized for investment in construction of building for any period prior to 1.4.2007 are outside the scope of application of registration. The anomaly thereto is that such voluntary contributions which are received by the applicant trust for the period from 1.4.2007 are part of the corpus trust and are not the income of the assessee.

20. We find no merit in the order of the Commissioner of Income Tax in observating that no charitable activity had been undertaken during the financial year 2007-08 and in the subsequent years which is contrary to the finding of Tribunal in para 7 of the order dated 30.7.2010. The order of the Commissioner of Income Tax in rejecting the registration to the assessee while giving effect to the order of the Tribunal under section 12AA r.w.s. 254 of the Act merits to be dismissed for the above said lapses. The assessee having fulfilled the conditions for grant of registration under section 12A of the Act, we hold the assessee entitled to the registration of the trust for carrying out the charitable activities of imparting education. The Commissioner of Income Tax is directed to pass consequential order granting registration under section 12AA of the Act to the assessee. The grounds of appeal raised by the assessee are thus allowed.

21. In the result, the appeal of the assessee is allowed.

USP

---

*In favour of assessee.

IT-Brought forward unabsorbed depreciation can be set off against capital gains

IT : Brought forward unabsorbed depreciation can be set off against income from capital gain

■■■

[2013] 33 taxmann.com 328 (Allahabad)

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax

v.

Kisan Engineering Works Ltd.*

PRAKASH KRISHNA AND Ram Surat Ram (Maurya), JJ.

IT APPEAL No. 200 of 2005†

MARCH  6, 2013 

Section 32, read with sections 34A and 72, of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation [Restriction on] - Assessment year 1992-93- Whether unabsorbed brought forward depreciation and investment allowance shall be added to current depreciation and investment allowance to set off against income from 'Capital gain' - Held, yes [Para 18] [In favour of assessee]

FACTS

 

■		The re-assessment proceeding was initiated in view of the fact that income from long term capital gain after giving set off to the current year's business loss, was given set off against 66.67% of brought forward unabsorbed depreciation and investment allowance.
■		The Commissioner found that as per section 34A, the set off of unabsorbed depreciation and investment allowance is to be restricted to 2/3rd of such allowance and it is not permissible to be set off against any head of income other than the income from business and profession. He revised the assessment order.
■		On appeal, the Tribunal allowed full effect to the brought forward unabsorbed depreciation to be set off against income of the assessee including long term capital gain.
■		On appeal:

HELD

 

■		Section 34A was introduced in the Income-tax Act by Finance Act, 1992 to provide that in case of domestic companies, only 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and shall be carried forward and allowed in the subsequent years until the same is absorbed. [Para 9]
■		On a plain and simple reading of the section 34A, it is clear that it provides for the partial adjustment of the brought forward unabsorbed depreciation and investment allowance for set off to a limited extent against the business income. In other words, it no where talks about adjustment of such unabsorbed allowances against the income from capital gains. [Para 10]
■		A bare perusal of the order of the Tribunal would show that the Tribunal proceeded to decide the appeal on the footing that the law provides to give full effect to the unabsorbed depreciation and investment allowance as per provisions of section 32(2) /section 32A(3) whereas under section 34A it is 2/3rd of. It held that the view taken by the Commissioner that set off to 2/3rd of the unabsorbed depreciation and investment allowance is permissible only against the income from the business and profession and not from the income under the head 'income from other sources'. [Para 11]
■		Section 71(2) contemplates a situation where in respect of any assessment year, the net result of computation under any head of income, other than capital gains 'Capital gains', is a loss and the assessee has income assessable under the head 'Capital gains'. In such a situation, such loss may, subject to the provisions of this Chapter, be set off for and from assessment years 1992-93, against assessee's income if any, assessable for that assessment year under any head of income including the head 'Capital gains'. [Para 17]
■		The brought forward unabsorbed depreciation and brought forward investment allowance shall be added in the current depreciation and investment allowance to be set off against the income from capital gains. The business income is a loss. The view taken by the Tribunal is, therefore, fully justified. There was no merit in the argument of the revenue which proceeds on the footing that business loss and unabsorbed depreciation and unabsorbed investment allowance are one and the same thing. [Para 18]
■		CIT v. Kunal Engg. Co. Ltd. [2010] 325 ITR 328 (Mad.) wherein it was observed that set off unabsorbed income should be restricted to the extent of 2/3rd, the Commissioner of Income-tax as well as the Tribunal had correctly followed the above provisions, with reference to section 34A of the Income Tax Act. [Para 19]
■		In this view of the matter, the Commissioner was not justified in invoking the jurisdiction under section 263 of the Income-tax Act or not allowing the unabsorbed depreciation against income from capital gains to the extent of admissibility to 66.67%. [Para 20]

CASE REVIEW

 

CIT v. Kunal Engg. Co. Ltd. [2010] 325 ITR 328 (Mad.) (para 7) followed.

CASES REFERRED TO

 

CIT v. Kunal Engg. Co. Ltd. [2010] 325 ITR 328 (Mad.) (para 19)

Shambhu Chopra, A. Kumar, A.N. Mahajan, B.J. Agarwal, D. Awasthi, G. Krishna and R.K. Upadhyay for the Petitioner. Praveen for the Respondent.

ORDER

 

1. The above appeal has been filed under section 260-A of the Income Tax Act 1961 against the order of the Tribunal dated 16.9.2004 passed by the Income Tax Appellate Tribunal, Delhi Bench SMC-II, New Delhi in I.T.A No. 175/Del/2003 for the assessment year 1992-1993.

2. The appeal arises out of revisional proceedings initiated by Commissioner of Income Tax by invoking Section 263 of the Income Tax Act. The Assessing Officer completed the original assessment proceedings under section 143(3) on 26.2.1993 wherein business loss of Rs.1,86,333/- was computed and the long term capital gain computed at Rs.4,71,024/- was given set off of against the current years business loss. The proceedings under section 148 for re-assessment was initiated thereafter in view of the fact that income from long term capital gain which worked out to Rs.3,04,711/- after giving set off to the current year's business loss was given set off against 66.67% of brought forward unabsorbed depreciation and investment allowance. In response to notice for re-assessment, the assessee furnished its reply and participated in the proceedings. Re-assessment order was completed by the Assessing Officer by computing the income of the assessee in the following manner:

"The unabsorbed b/f depreciation takes the shape of current depreciation and, therefore, can be given set off against income under any head including income from long term capital gains. In view of above, the income of the assessee is computed as under:

	Income as computed vide order dated 26.2.93 before set off.	Rs. 3,04,711/-
	Less : Relief allowed by CIT(A) vide order dated 5.4.99	12,125/-
	Less : B/f depreciation as per I.T Records as discussed.	Rs. 3,33,459/-
	Balance unabsorbed depreciation (-)	Rs. 40,873/-

3. The said order was revised by the Commissioner of Income Tax by invoking Section 263 of the Income Tax Act.

4. The Commissioner of Income Tax found that the set off of unabsorbed depreciation and investment allowance is to be restricted to 2/3rd of such allowance and it is not permissible to be set off against any head of income other than the income from business and profession. The Commissioner of Income Tax revised the income by computing it in the following manner:

	Capital gain as per order under section 143 dated 26.2.1993	471024
Add:	Income from house property	20000
		492024
Less:	Business loss for current asstt. year as determined vide u/s 143(3) dated 26.02.1993	186333
		301691
Less:	Relief allowed by the C.I.T(A) vide order 05.04.99	12125
		292566
	or say	292570/-

5. The assessee carried the matter in appeal before the Income Tax Appellate Tribunal which has allowed it by the order under appeal.

In the memo of appeal, the following substantial question of law has been raised.

"Whether on the facts and in the circumstances of the case the Hon'ble ITAT was correct in setting aside the order under section 263 without appreciating properly the restrictive provisions brought to the statute by introducing section 34A by Finance Act, 1992?"

6. Shri Shambhu Chopra, learned standing counsel for the Department in support of the appeal submits that the Tribunal was not justified in interfering with the revisional order passed by the Commissioner of Income Tax. The submission is that under section 72(1)(i) of the Income Tax Act, unabsorbed brought forward depreciation and investment allowance cannot be set off against the income from capital gain. Section 34-A was introduced for limited period by the Finance Act 1992 it provides that in case of domestic companies, only 66 and 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and shall be carried forward and allowed until the same is absorbed. Section 34-A in no manner prescribes set off of unabsorbed depreciation and investment allowance against the income from capital gains.

7. Refuting the above, Shri Praveen Kumar, learned counsel for the assessee-respondent submits that the view taken by the Tribunal is correct in law and no substantial question of law as such is involved.

8. Considered the respective submissions of the learned counsel for the parties and perused the record.

9. Section 34-A was introduced in the Income Tax Act by Finance Act 1992 to provide that in case of domestic companies, only 66 and 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and shall be carried forward and allowed in the subsequent years until the same is absorbed.

10. On a plain and simple reading of the Section 34-A, it is clear that it provides for the partial adjustment of the brought forward unabsorbed depreciation and investment allowance for set off to a limited extent against the business income. In other words it no where talks about adjustment of unabsorbed such allowances against the income from capital gains.

11. A bare perusal of the order of the Tribunal would show that the Tribunal proceeded to decide the appeal on the footing that the law provides to give full effect to the unabsorbed depreciation and investment allowance as per provisions of Section 32(2)/Section 32A (3) whereas under Section 34A it is 2/3rd of. It held that the view taken by the CIT that set off to 2/3rd of the unabsorbed depreciation and investment allowance is permissible only against the income from the business and profession and not from the income under the head "income from other sources".

12. Section 32(2) as it stood at the relevant point, referred by the counsel for the parties is reproduced below:

"(2) Where, in the assessment of the assessee [(or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners)] full effect cannot be given to any allowance [under clause(ii) of sub-section (1)] in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of sub-section(2) of section 72 and sub section(3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year, and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years."

13. Section 71(2) as then stood and referred by the counsel for the parties is reproduced below:

"(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", such loss may, subject to the provisions of this Chapter, be set off against his income, it any, assessable for that assessment year under any head of income including the head "Capital gains" (Whether relating to short term capital assets or any other capital assets.)"

14. The relevant portion of Section 32-A(3) is also reproduced below:

"(3) Where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowances under section 33 and section 33A, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A) is nil or is less than the full amount of the investment allowance, -

(i)		the sum to be allowed by way of investment allowance for that assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil ; and
(ii)		the amount of the investment allowance, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the investment allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the investment allowance, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year.

Explanation.- Where for any assessment year, investment allowance is to be allowed in accordance with the provisions of this sub-section in respect of any ship or aircraft acquired or any machinery or plant installed in more than one previous year, and the total income of the assessee assessable for that assessment year (the total income for this purpose being computed after deduction of the allowances under section 33 and section 33A, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedure shall be followed, namely :-

(a)		the allowance under clause (ii) shall be made before any allowance under clause (i) is made; and
(b)		where an allowance has to be made under clause (ii) in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year."

15. The Income Tax Act as pointed out by Shri N.A. Palkhivala in his commentary makes a distinction in between unabsorbed depreciation and carried forward loss.

16. In the commentary, the following eight distinction have been pointed out:

"23. Unabsorbed Depreciation and Carried Forward Loss

This sub-section deals with the carry-forward of unabsorbed depreciation allowance; while s72(1) deals with the carry-forward of loss incurred under the head 'Business or profession'.

There are eight features which distinguish the two:

(a)		In a year in which the income is insufficient to absorb the full depreciation, the total income is taken as nil; while if there is a loss to be carried forward, the assessment order must show the figure of the loss.(s 157).
(b)		The unabsorbed depreciation is deemed to be part of the depreciation allowance for a subsequent year and will enter into the computation of the income of such subsequent year. Carried forward loss does not enter into such computation, but after the subsequent year's income is determined the carried forward loss is deducted therefrom.
(c)		The unabsorbed depreciation, as stated above, can be set off against any income of a subsequent year under any head; whereas the carried forward loss can be set off only against the carry-forward of any business or profession.
(d)		This sub-section allows the carry forward of depreciation allowance to any subsequent year without any time limit; while under s 72 a loss can be carried forward only for a period of eight years.
(e)		Section 79 which disentitles a company in certain circumstances upon a change in shareholding to carry forward an earlier year's loss does not apply to unabsorbed depreciation.
(f)		The condition in s 80 regarding furnishing the return by the assessee for the concerned year within the time specified under s 139(1), in order to be entitled to carry forward, applies to business loss, etc, and not to unabsorbed depreciation. Therefore, unabsorbed depreciation under s 32(2) can be carried forward even if the return for the concerned year is filed beyond the time specified under s 139(1). Due to the legal fiction contained in s 32(2) to the effect that unabsorbed depreciation becomes part of depreciation for the next year, such unabsorbed depreciation is allowed to be carried forward even if no return for the concerned year is filed.
(g)		In the year of set-off of business loss the same business in which the loss was incurred has to be carried on [proviso to s 72(1)(i)] (now deleted from 1 April 2000); whereas there is no such condition for carry-forward of unabsorbed depreciation.
(h)		Section 78 which dis entitles a firm to carry forward losses in certain cases of change in constitution does not apply to unabsorbed depreciation."

17. Section 71(2) reproduced above contemplates a situation where in respect of any assessment year, the net result of computation under any head of income, other than capital gains "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", In such a situation, such loss may, subject to the provisions of this Chapter, be set off for and from assessment years 1992-1993, against assessee's income if any, assessable for that assessment year under any head of income including the head "Capital gains".

18. The brought forward unabsorbed depreciation and brought forward investment allowance shall be added in the current depreciation and investment allowance be set off against the income from capital gains. The business income is a loss. The view taken by the Tribunal is therefore, fully justified. We do not find any merit in the argument of the learned counsel for the appellant which proceeds on the footing that business loss and unabsorbed depreciation and unabsorbed investment allowance are one and the same thing.

19. The learned counsel for the Department has placed reliance on CIT v. Kunal Engg. Co. Ltd. [2010] 325 ITR 328 (Mad.) wherein it was observed that set off unabsorbed income should be restricted to the extent of 2/3rd, the Commissioner of Income Tax as well as the Appellate Tribunal correctly followed the above provisions, with reference to Section 34-A of the Income Tax Act.

20. In this view of the matter, the Commissioner of Income Tax was not justified in invoking the jurisdiction under section 263 of the Income Tax Act or not allowing the unabsorbed depreciation against income from capital gains to the extent of admissibility to Rs.66.67 %.

21. Before closing the judgment it may be clarified that we were called upon to interpret the law relevant to assessment year 1992-93 only.

22. We do not find any merit in the appeal. The appeal is dismissed.

SB

---

*In favour of assessee.

†Arising out of order of Tribunal in IT Appeal No. 175/Delhi/2003, dated 16-9-2004.

T-CIT can exercise revisionary power, if AO omits to examine the vital issues in the assessment order

IT : Where Assessing Officer had not raised any query on issue of non-deductibility of TDS on roaming charges paid by assessee-telecom service provider in assessment proceedings, it was a fit case for Commissioner to exercise his revisional jurisdiction

■■■

[2013] 33 taxmann.com 210 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'A'

Bharti Hexacom Ltd.

v.

Commissioner of Income-tax, Delhi-I*

U.B.S. BEDI, JUDICIAL MEMBER
AND Shamim Yahya, ACCOUNTANT MEMBER

IT APPEAL NO. 2576 (DELHI) OF 2011
[ASSESSMENT YEAR 2007-08]

JANUARY  4, 2013 

Section 263, read with section 40(a)(ia), of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue [To make disallowance under section 40(a)(ia)] - Assessment year 2007-08 - Commissioner in exercise of power under section 263 set aside assessment order on ground that since assessee had not deducted TDS on payment of roaming charges to other distributor, and providing free airtime to distributor, such payments were disallowable under section 40(a)(ia) - Whether since Assessing Officer had not raised any query on issues raised by Commissioner and Assessing Officer had completely omitted issue in question from consideration, it was a fit case for Commissioner to exercise his revisional jurisdiction under section 263 - Held, yes [Paras 7 & 7.6] [In favour of revenue]

FACTS

 

■		The assessee, a telecom service provider, was assessed under section 143(3) for relevant assessment year.
■		Subsequently, the Commissioner having found that the assessee had provided free airtime to distributor, which was in nature of commission expenses, and paid roaming charges to various other operators without deducting TDS and no disallowance under section 40(a)(ia) was made by the Assessing Officer, set aside the assessment order.
■		On appeal:

HELD

 

■		As regards the issue of free airtime to distributors, the same has not at all been examined by the Assessing Officer in the course of assessment proceedings for assessment year 2007-08. No reference thereof is there in the assessment order. Similarly, Assessing Officer has not issued any query in this regard and not obtained necessary details. Hence, it cannot be said that Assessing Officer has applied one of the two views possible.
■		As regards the roaming charges paid, the assessee accepted that there is no discussion by the Assessing Officer in the assessment order in this regard. He also conceded that there is no enquiry in this regard made by the Assessing Officer. [Para 7]
■		The Assessing Officer has completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. Hence, it was a fit case for the Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order. [Para 7.6]

CASE REVIEW

 

Arvee International v. Addl. CIT [2006] 101 ITD 495 (Mum.) (para 7.4) and Gee Vee Enterprise v. Addl. CIT [1975] 99 ITR 375 (Delhi) (para 7.5) followed.

CASES REFERRED TO

 

CIT v. Hindustan Coca Cola Beverages (P.) Ltd. [2012] 331 ITR 192/198 Taxman 104/9 taxmann.com 104 (Delhi) (para 6.1), CIT v. Vikas Polymers [2012] 341 ITR 537/[2010] 194 Taxman 57 (Delhi) (para 6.1), CIT v. Vikram Aditya & Associates (P.) Ltd. [2006] 287 ITR 268/[2008] 167 Taxman 163 (Delhi) (para 6.1), CIT v. Arvind Jewellers [2002] 124 Taxman 615/[2003] 259 ITR 502 (Guj.) (para 6.1), CIT v. Max India [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 6.1), Metallizing Equipment v. Jt. CIT. [2005] 96 TTJ 827 (Jd.) (para 6.1), Sical Logistics Ltd. v. Addl. CIT [2010] 127 ITD 187 (Chennai) (para 6.1), Bagaria Vegetables Products Ltd. v. Jt. CIT [2007] 106 ITD 105 (Pune) (para 6.1), Idea Cellular Ltd. v. Dy. CIT [2010] 123 ITD 620 (Delhi) (para 6.1), CIT v. Central Warehousing Corpn. [IT Appeal Nos. 999 & 1091 of 2011, dated 18-4-2012] (para 6.1), Asstt. CIT v. Idea Cellular Ltd. [2010] 125 ITD 222 (Hyd.) (para 6.1), CIT v. DLF Ltd. [IT Appeal Nos. 236 & 364 of 2010, dated 17-9-2012] (para 6.1), ITO v. DG Housing Projects Ltd. [2013] 212 Taxman 132 (Delhi)(Mag.)/[2012] 20 taxmann.com 587 (Delhi) (para 6.1), CIT v. Kelvinator of India Ltd. [2011] 201 Taxman 88/12 taxmann.com 445 (Delhi) (para 6.1), CIT v. Honda Siel Power Products Ltd. [2010] 194 Taxman 175 (Delhi) (para 6.2), Arvee International v. Addl. CIT [2006] 101 ITD 495 (Mum.)(para 6.2), Ram Pyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) (para 7), CIT v. Idea Cellular Ltd. [2010] 189 Taxman 118 (Delhi)(para 7) and Gee Vee Enterprise v. Addl. CIT [1975] 99 ITR 375 (Delhi) (para 7.5).

Anil Bhalla for the Appellant. Mrs. Anuradha Misra for the Respondent.

ORDER

 

Shamim Yahya, Accountant Member - This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax, Delhi-I dated 24.3.2011 pertaining to assessment year 2007-08.

2. The issue raised is that Ld. Commissioner of Income Tax, Delhi-I erred in passing the order u/s. 263 of the I.T. Act.

3. In this case Ld. Commissioner of Income Tax referred to the assessment proceedings u/s. 143(3) of the I.T. Act for A.Y. 2008-09 in the case of M/s Bharti Hexacom Ltd. wherein inter-alia following two additions were made :-

(i)		Disallowance of free airtime to distributors u/s. 40(a)(ia) of the I.T. Act.
		It was observed that assessee has provided free airtime to distributors at Rs. 54.29 crores in A.Y. 2008-09, which was in the nature of commission expenses. However, the assessee has not deducted TDS u/s. 194H of the I.T. Act. Hence, the same was disallowed u/s. 40A(ia) of the I.T. Act in the order u/s. 143(3) of the I.T. Act. This issue has also been adjudicated by Hon'ble Delhi High Court in the favour of revenue in the judgement of CIT v. Idea Cellular Ltd. [2010] TIOL 139, wherein the relationship between the assessee, who was telecom service provider like the assessee in the present case, and the distributors was held to be one of principal to agent and the claimed discounts were held as commission liable to TDS u/s. 194H of the I.T. Act.
(ii)		Disallowance of roaming charges paid u/s. 40(a)(ia) of the I.T. Act.
		During the A.Y. 2008-09, assessee has paid roaming charges and inter connection charges at Rs. 13.74 crores to various other operators. Since the payments were clearly and non-ambiguously in the nature of fee for technical services liable for deduction of TDS u/s. 194J of the I.T. Act. However, the assessee has not deducted TDS on the same and hence the payments were disallowed u/s. 40(a)ia) of the I.T. Act."

4. Ld. Commissioner of Income Tax observed that the nature of business of the assessee is same for the A.Y. 2007-08 also and apparently it is clear from the assessment record that the assessee had shown billing revenue net of discount to the distributors in the form of free airtime and no TDS had been deducted on the same u/s. 194H of the I.T. Act. Ld. Commissioner of Income Tax further observed that assessee had also paid roaming and interconnection charges but as per record, no TDS had been deducted on the same u/s. 194J of the I.T. Act. That the Assessing Officer in his order u/s. 143(3) of the I.T. Act dated 30.11.2009 had not made any disallowance on these two issues. Ld. Commissioner of Income Tax further observed that assessee has not shown these figures separately in the audited accounts and the tax implication on this issues will be huge. Ld. Commissioner of Income Tax gave a finding that prima-facie Assessing Officer had not made any proper enquiry/ investigation on these issues and the same were apparently not in focus that time. Thus, Ld. Commissioner of Income Tax (A) opined that assessment u/s. 143(3) Act dated 30.11.2009 appeared pre-judicial to the interest of revenue and erroneous to that extent. In this regard, show cause notice was issued to the assessee. In reply assessee contended that it was not liable for TDS u/s. 194H on free airtime distributors and section 194J on roaming charges and thereby no disallowance was called for. Considering the facts and response in this regard, Ld. Commissioner of Income Tax observed that following facts emerge in this case.

(a)		Free airtime to distributors u/s. 40(a)(ia): The assessee was liable to deduct TDS on these payments u/s. 194H but has failed to do so. The issue has been settled by the jurisdictional High court in the favour of the Department as discussed at para no. 3. The Assessing Officer has not examined this issue during the course of assessment proceedings for A.Y. 2007-08. The free airtime provided to distributors by the assessee is liable to be allowed as an expense u/s. 40(a)(ia) of the I.T. Act for failure of the assessee to comply with the provision of section 194H of the I.T. Act.
(b)		Roaming charges paid: The assessee was liable to deduct TDS u/s. 194J on the roaming charges paid by it to the other telecom operators for allowing its subscribers to roam into other networks. These payments were in the nature of fee for technical services. Failure to comply with the provisions of Section 194J renders the deduction claimed on account of roaming charges to be disallowed u/s. 40(a)(ia). The Assessing Officer has not examined this issue in A.Y. 2007-08. In its arguments, the assessee has stated that there is no difference between the roaming and interconnection facility in so far as they both are a standard facility in which highly sophisticated machinery is used. However, the Assessing Officer in A.Y. 2008-09 has verified that while the assessee is drawing an analogy between roaming and interconnection charges, it has deducted TDS on inter connection charges while no TDS has been made of roaming. Thus, there is a fundamental incoherence in the argument of the assessee.

4.1 In light of the above discussion, Ld. Commissioner of Income Tax held that order dated 30.11.2009 passed u/s. 143(3) of the act is set aside u/s. 263 of the I.T. Act, as the same is held to be prejudicial to the interest of revenue in the absence of proper enquiry/investigation on the issues discussed at preceding paras and to that extent. Ld. Commissioner of Income Tax concluded that Assessing Officer is directed to examine the case afresh in view of the above two issues and after giving proper opportunity to the assessee make a speaking order.

5. Against the above order the Assessee is in appeal before us.

6. We have heard the rival contentions in light of the material produced and precedent relied upon. The submission of the ld. Counsel of the assessee is summarized as under in his synopsis.

"The proposition that the application of provisions of Section 194H of the Act to business transaction of sale of prepaid card to distributors for onward selling to retailer and subsequent selling to end customer, was debatable and two views were possible consequently the application of Section 40(a)(ia) to the discount was debatable and subject to two views -

Similarly, there was no issue that roaming reimbursed by Home Service provider to other telecom service provides (Roaming Circle) on account of the subscriber of Home service provider using the telecom service of roaming service provider. As explained such services are in para materia to normal calls made by subscriber on his home service provider network and therefore Section 194J was not applicable.

There is no cause of action of CIT to introduce another view that provisions of section 194J are attracted to reimbursement of roaming and because tax had not been deducted therefore provisions of Section 40(a)(ia) will apply.

No prejudice has been caused to the revenue as there is no loss of tax.

The order is not erroneous as complete information and facts were available in the balance sheet and profit and loss account available with the Assessing Officer at the time of assessment and such information was apparent and obvious and can only lead to one conclusion that the Assessing Officer has considered these issues as has been done by him since assessment year 2001-02.

That two views were possible in the case of applicability of the provisions of Section 194H to the discounts enjoyed by the prepaid card distributor on the purchases of such cards from the appellant company.

There was no contrary view in regard to applicability of Section 194J to the transaction of reimbursement of roaming charges to other telecom service providers.

CIT has not fulfilled his obligation of recording a detailed justification for holing that such charges were for payment of technical services.

Nor has the CIT made an independent judgement on the applicability of provision of Section 194H.

The CIT has not shown that the view taken by the Assessing Officer was not sustainable in law.

Order of CIT u/s. 263 must be quashed."

6.1 Ld. Counsel of the assessee further placed reliance on the catena of case laws including the following:-

-		CIT v. Hindustan Coca Cola Beverages (P.) Ltd. [2012] 331 ITR 192/198 Taxman 104/9 taxmann.com 104 (Delhi)
-		CIT v. Vikas Polymers [2012] 341 ITR 537/[2010] 194 Taxman 57 (Delhi)
-		CIT v. Vikram Aditya & Associates (P.) Ltd. [2006] 287 ITR 268/[2008] 167 Taxman 163 (Delhi)
-		CIT v. Arvind Jewellers [2002] 124 Taxman 615/[2003] 259 ITR 502 (Guj.)
-		CIT v. Max India [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC)
-		Metallizing Equipment v. Jt. CIT. [2005] 96 TTJ 827 (Jd.).
-		Sical Logistics Ltd. v. Addl. CIT [2010] 127 ITD 187 (Chennai)
-		Bagaria Vegetables Products Ltd. v. Jt. CIT [2007] 106 ITD 105 (Pune)
-		Idea Cellular Ltd. v. Dy. CIT [2010] 123 ITD 620 (Delhi)
-		CIT v. Central Warehousing Corpn. [IT Appeal Nos. 999 & 1091 of 2011, dated 18-4-2012]
-		Asstt. CIT v. Idea Cellular Ltd. [2010] 125 ITD 222 (Hyd.)
-		CIT v. DLF Ltd. [IT Appeal Nos. 236 & 364 of 2010, dated 17-9-2012]
-		ITA v. DG Housing Projects Ltd. [2013] 212 Taxman 132 (Delhi)(Mag.)/[2012] 20 taxmann.com 587 (Delhi)
-		CIT v. Kelvinator of India Ltd. [2011] 201 Taxman 88/12 taxmann.com 445 (Delhi)
-		CIT v. Honda Siel Power Products Ltd. [2010] 194 Taxman 175 (Delhi)
-		Copy of letter dated March 9, 2011 filed before CIT, Delhi-I, on 16.3.2011 for A.Y. 2006-07 u/s. 263 of the Act.

6.2 Ld. Departmental Representative on the other hand submitted that Assessing Officer has not made any enquiry/ investigation in this regard. Hence, it cannot be said that Assessing Officer has applied his mind on these issues. There is no discussion regarding the above issues in the assessment order, nor any enquiry has been raised by the Assessing Officer in this regard. Ld. Departmental Representative further stated that something that was of crucial significance has not been taken into account by the Assessing Officer or any question raised on the above subject. Ld. Departmental Representative further relied upon the following case laws :-

(i)		Arvee International v. Addl. CIT [2006] 101 ITD 495 (Mum.)
(ii)		Ram Pyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC)

7. We have carefully consider the submissions and perused the records.

Disallowance of free airtime to distributors u/s. 40(a)(ia) of the I.T. Act.

It was observed that assessee was liable to TDS on these payments u/s. 194H but has failed to do so. The issue has been settled by the Hon'ble Jurisdictional High Court in the favour of revenue in the judgement of CIT v. Idea Cellular Ltd. [2010] 189 Taxman 118 (Delhi). However, it is submission of the assessee's counsel that on these issues, there were case laws in favour of the assessee at that time. Hence, Assessing Officer has applied one of the two views possible. Hence, the order cannot be said to be erroneous and prejudicial to the interest of revenue. We find that this issues has not at all been examined by the Assessing Officer in the course of assessment proceedings for assessment year 2007-08. No reference thereof is there in the assessment order. Similarly, we find that Assessing Officer has not issued any query in this regard and not obtained necessary details. Hence, it cannot be said that Assessing Officer has applied one of the two views possible.

Roaming charges paid :- On this issue Revenue's contention is that assessee was liable to deduct TDS u/s. 194J on the roaming charges paid by it to the other telecom operators for allowing its subscribers to roam into other networks. These payments were in the nature of fee for technical services. That failure to comply with the provisions of Section 194J renders the deduction claimed on account of roaming charges to be disallowed u/s. 40(a)(ia). On this issue, ld. Counsel of the assessee accepted that there is no discussion by the Assessing Officer in the assessment order in this regard. However, he contended that Assessing Officer has applied his mind and not found any shortcomings. He also conceded that there is no enquiry in this regard made by the Assessing Officer. Ld. Counsel of the assessee further submitted that there is no difference between the roaming and interconnection facility in so far as they both are a standard facility in which highly sophisticated machinery is used. However, the Assessing Officer in A.Y. 2008-09 has verified that while the assessee is drawing an analogy between roaming and interconnection charges, it has deducted TDS on inter connection charges while no TDS has been made of roaming. It has further been noted by the Ld. Commissioner of Income Tax that failure to comply with the provisions of Section 194J renders the deduction claimed on account of roaming charges to be disallowed u/s. 40(a)(ia).

7.1 In this regard, we note that ld. Counsel of the assessee has further submitted that no prejudice has been caused to the revenue as there is no loss of tax. However, we do not find any cogency in the submission of the ld. Counsel of the assessee. That certain tax deductible at source have not been so deducted is clearly prejudice to the revenue. Hence, it cannot be said that there is no prejudice to the revenue.

7.2 Ld. Counsel of the assessee further submitted that the order is not erroneous as complete information and facts were available in the balance sheet and profit and loss account available with the Assessing Officer at the time of assessment and such information was apparent and obvious and can only lead to one conclusion that Assessing Officer has considered this issue. We find that the above submissions of the ld. Counsel of the assessee is also not sustainable. That something was available in the balance sheet, profit and loss account or books of accounts cannot lead to the conclusion that Assessing Officer has applied his mind. This is so because there is no discussion by the Assessing Officer on these subjects, nor Assessing Officer had made any enquiry on these subjects. Ld. Counsel of the assessee further submitted that the two views were possible in the case of applicability of the provision of section 194H to the discount enjoyed by the prepaid card distributors on the purchases of such cards from the assessee company. It has further been contended that there is no contrary view in regard to the applicability of Section 194J to the transaction of reimbursement of roaming chargers to other telecom service providers. As we have already found herein-above that these submissions of the ld. Counsel of the assessee do not have cogency. This is so because Assessing Officer has not made any discussion regarding these aspects in the assessment order, nor he has raised any query/enquiry in this regard.

7.3 As regards the case laws referred by the ld. Counsel of the assessee, we find that they are not supporting the case of the assessee. We further find that in the case of Arvee International (supra), the ITAT, Mumbai has held that the perusal of the assessment order passed by the Assessing Officer does not show any application of mind. It is simply says in one line that loss returned by the assessee is accepted. It was held that no greater evidence is required than the mere reproduction of the aforesaid order from the assessment order to establish that it is a case where the Assessing Officer has mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. No evidence had been placed that the claim made by the assessee was objectively examined or considered by the Assessing Officer either on record or in the assessment order. It was because of such non consideration of the issues on the part of the Assessing Officer that the loss claimed by the assessee stood automatically allowed without any scrutiny. The assessment order was clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer had completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. His order was completely non-speaking order. It was a fit case for the Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order, in accordance with the law, after giving reasonable opportunity of hearing to the assessee.

7.4 We find that the above case law is clearly applicable to the facts of the present case. Assessing Officer has not made any discussion regarding the subjects raised by the Ld. Commissioner of Income Tax u/s. 263. The Assessing Officer has mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. Similarly, no evidence had been placed that the claim made by the assessee was objectively examined or considered by the Assessing Officer either on record or in the assessment order.

7.5 Furthermore, we find that Hon'ble Jurisdictional High Court in Gee Vee Enterprise v. Addl. CIT [1975] 99 ITR 375 (Delhi) has held that the Ld. Commissioner of Income Tax can regard the ITO's order as erroneous on the ground that in the circumstances of the case the ITO should have made further enquiries before accepting the statements made by the assessee in his return. We find that this case law is also applicable on the facts of this case Assessing Officer in this regard has not made any enquiry and has accepted the statements made by the assessee in his return.

7.6 In the background of the aforesaid discussions and precedents, we hold that the Assessing Officer has completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. Hence, we hold that it was a fit case for the Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order, in view of the above two issues, after giving reasonable opportunity of hearing to the assessee and make a speaking order.

8. In the result, the appeal filed by the Assessee stands dismissed.

USP

---

*In favour of revenue.

 

Thanks & Regards,     

CA AMRESH VASHISHT, FCA, LLB, DISA (ICAI)

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