Whether expenditure incurred on borrowed funds for financing purchase and sell of shares on behalf of others can be disallowed, even if income earned from brokerage has been taxed: ITAT
THE issue before the Tribunal is - Whether the expenditure incurred by the assessee on borrowed funds for financing in respect to purchase and sell of shares on behalf of others cannot be allowed, although the income earned from brokerage has been taxed. And the answer goes against the Revenue.
Facts of the case
The assessee has borrowed huge funds from banks and also in the form of inter Corporate deposits etc. The AO has referred the matter to special audit u/s 142(2A), to study issue of utilization of the borrowed funds. The AO passed his order placing reliance on the findings of the Special Auditor, in which it was observed that the interest incurred by the assessee was in excess of the brokerage income. The Auditor also observed that the assessee had carried out huge volume of trade on which no brokerage has been charged, and thus he concluded that there was no commercial sense involved in the transactions of the assessee. The AO agreed with the observations of the Auditor that, there was no reason to allow the claim of interest incurred on financing the loan. Further, the AO relied on the fact that SEBI had debarred the assessee from trading in the stock market for two years for transactions against the public policy. He also came to a conclusion that the the borrowed capital was being utilized for financing the traders, which was not an active business of the assessee. The AO was of the strong opinion that any expense incurred in a business venture, which has no profit motive cannot be allowed as an expenditure
The CIT(A) allowed the appeal of the assesee by observing that on identical facts the issue has been decided in favour of the assessee for the assessment year 2001.
Aggrieved, the Revenue filed an appeal before the Tribunal.
The Departmental Representative strongly opposed the order of the CIT(A) and stated that the order of CIT(A) showed that he was allowing the contention of the assessee for the AY 2000-01 on the facts of that year and not on the facts of subsequent years's enquiry. The DR heavily relied on the order passed by the SEBI, in which an adverse finding was given against the assessee for involving in synchronized trade transactions with Ketan Parkeh group and facilitating circular trades and artificial volumes of the scrips in the markets. Finally, the DR argued that the transactions of the assessee were against public policy and hence expenditure incurred out of such transactions could not be allowed u/s 37(1) of the Act.
The counsel for the assessee contended that if the brokerage earned by the assessee from such illegal activities was taxed, the deduction of interest expenditure incurred to earn that brokerage has to be allowed. He argued that as per the subsequent amendments carried out to Section 37 empowered the AO only to disallow illegal expenditure incurred while carrying on legal business, and therefore even the activity of the assessee was treated as entirely illegal, still the expenditure has to be allowed. Further, he contended that the funds were borrowed for financing various traders from whom the assessee had earned brokerage which was more than the interest expenditure. He submitted that the AO had ignored the fact that brokerage of the assessee had increased substantially which was the basis for the CIT(A) to decide in favour of the assessee for the AY 2000-01
Disallowance u/s 14A
The AO disallowed the interest expenditure on the ground that the assessee had earned dividend income and, therefore, against exempted income, no expenditure on account of interest and other expenses were allowable. The CIT(A) relying upon the the identical facts of AY 2000-01, allowed the claim of expenditure.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Discrepancy of brokerage amount in service tax return vis-a-vis P/L Account
The AO has the added the excess brokerage shown in service tax return as compared to brokerage income shown in profit and loss account. The CIT(A) relying upon previous AY order allow the appeal and deleted the addition.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Allowability of prior period expenses
The AO disallowed certain expenses on the ground that they related to earlier years. On appeal, the CIT(A) deleted this addition following his earlier order.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Interest accrued but not due
The AO had added the interest amount in the income of the assessee which had accrued but not due. On appeal before the CIT(A), that the interest became due on the coupon date of security. It was stated that where the coupon date fell beyond the last date on a particular financial year, the interest was merely taken into books of account of the said financial year in accordance with the periodicity concept of accounting. It was also stated that the interest in securities was receivable only after the last date of financial year, and there was no right of the assessee to receive the interest in the year under consideration. Thereafter, the CIT(A) deleted the addition.
Having heard the parties, the Tribunal held that,
Allowability of interest incurred on borrowed funds
++ it is recorded that during the year under consideration the assessee has earned brokerage of Rs.108,85,85,105/- against brokerage earned of Rs.67,44,07,631/- in earlier year. The assessee has incurred interest cost of Rs.17,48,70,004/- from the sale transaction and has earned brokerage of Rs.72,89,83,531/-. Similarly, against interest cost of Rs.4,43,98,516/-, it was for the purpose of transaction. The assessee company has earned brokerage of Rs.28,67,13,513/-, total of the brokerage comes to Rs.108,85,85,105/-. Therefore, the contention of the AO as well as DR that against huge interest expenditure the assessee has earned less brokerage, is factually incorrect;
+ it is further seen that in immediately preceding year, the assessee incurred interest expenditure about Rs.12 crore or odd against which the assessee has shown brokerage income of Rs.67,44,07,631/-. This fact has been noted by the CIT(A) while allowing the issue in favour of the assessee for assessment year 2000-01. The main contention of the department in denying the claim of the interest expenditure is that the SEBI has passed an order giving adverse report against the assessee. We have seen the report of the Special Auditor and in the note the Special Auditor has noted that the activity of the assessee indulging in financing activity may construe that the assessee is indulged in illegal activity. For a moment if it is accepted that the assessee is indulged in unauthorized activity of financing in respect to purchase and sell of shares on behalf of others, in that case, we are of the view that the interest expenditure has to be set off against brokerage earned by the assessee because the interest expenditure is incurred by the assessee on borrowed money for the purpose of buying shares or making purchases of shares on behalf of others. Huge brokerage is charged, which is much more as compared to interest expenditure. This is not expenditure, which is prohibited under Explanation of Section 37(1) as this expenditure does not belong to bribery nor on account of fine or penalty or hafta paid to someone as these expenditures are on account of borrowed money used for the purpose of business transaction. Even the Courts have held that if for a moment it is accepted that some activities are on account of unauthorized activity, then also unauthorized income has to be set off against unauthorized expenses;
+ in case of Bank of America (nt & sa), the Mumbai Bench of the Tribunal has held that loss incurred by the assessee in security transaction in violation of Section 15 of the Securities Contract Regulation Act, 1956, undisputedly borne out that it was set off against profit from comparable transaction. In this case, it was argued on behalf of the department that losses incurred by the assessee are not allowable on account of expenses as they are relating to illegal activities. Thereafter it was held by the Tribunal that if the expenses are on account of illegal transaction, then income part of the same transaction has to be treated on account of illegal transaction and both i.e. income as well as expenditure is to be set off against each other;
+ in the present case also facts are similar. If the department treats the activities of the assessee are illegal, then income earned by the assessee as well as expenditure incurred by the assessee has to be treated on the same transaction and they have to be netted against each other;
+ the department has also taken a plea that on certain transaction even no brokerage has been charged by the assessee. This is well known and settled position of law that this is business man, who knows how to run its business activities. If by any reason the assessee does not charge any brokerage from certain parties, that may be on account of commercial expediency and to earn brokerage in future. It is not the case of the department that the assessee has not charged brokerage from a particular party from whom heavy transaction has been made by the assessee and heavy interest expenditure have been incurred by the assessee. Figure of interest expenditure against brokerage income has been tabulated somewhere above in this order. Brokerage income is much more than the interest expenditure;
+ keeping in view of all these facts and circumstances of the case and the finding of the CIT(A) for earlier year, which has been followed by the CIT(A) for the year under consideration, we are of the view that the CIT(A) was correct in allowing the issue in favour of the assessee. Accordingly, we confirm the order of the CIT(A) on this issue.
Disallowance u/s 14A
++ we found no infirmity in the finding of the CIT(A). We noted that the CIT(A) has taken into consideration that the assessee is a trader and the entire shares purchases have been kept under the head stock-in-trade. This fact has been accepted by the AO. Dividend income is the consequential income. Any expenditure incurred during the regular course of business is allowable. There is a direct nexus between the trading activity and incurring expenditure either on account of interest or on account of other administrative expenses. Therefore, we are of the considered view that disallowance made by the AO was not justified and CIT(A) was justified in not deleting the same. Accordingly, we confirm the order of the CIT(A) in this respect;
Discrepancy of brokearge amount in service tax return vis-a-vis P/L Account
++ we found that CIT(A) was justified in deleting this addition also. The issue was examined by the CIT(A) for immediately preceding year i.e. assessment year 2000-01. It was seen by the CIT(A) that the assessee has been reflecting the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage has been shown on actual basis on the basis of constant method adopted by the assessee. It was further noticed by the CIT(A) that sometime the assessee is required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee is also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This is a minor difference, which has been reconciled by the assessee. Therefore, we see no reason to interfere in the finding of the CIT(A) in this respect also;
Allowability of prior period expenses
++ CIT(A) examined the issue in earlier year and found that no such expenses were claimed in earlier year and in the year under consideration the final settlement was arrived at and, therefore, they were booked in the year when the final settlement was made. Similar issue is involved in the year under consideration. These expenses were not claimed in earlier year as they were claimed on the basis of final settlement during the year under consideration. Any claim of expenditure settled in a particular year is allowable in that year if the same is not claimed in earlier year. Undisputedly, these expenses were not booked in earlier year, therefore, in our view, lCIT(A) was justified in deleting the disallowance made by the AO on account of prior period expenses;
Interest accrued but not due
++ after considering the submission and taking into the consideration the case laws relied upon, CIT(A) found that the interest on Government securities is not received on day to day basis, but only on the specified coupon dates. It was found that the Tribunal has held that this is the correct legal position on the basis of which income should be computed and it was held that when the interest was received then only can be taxable. In view of these facts, CIT(A) deleted the addition also.
THE issue before the Tribunal is - Whether the expenditure incurred by the assessee on borrowed funds for financing in respect to purchase and sell of shares on behalf of others cannot be allowed, although the income earned from brokerage has been taxed. And the answer goes against the Revenue.
Facts of the case
The assessee has borrowed huge funds from banks and also in the form of inter Corporate deposits etc. The AO has referred the matter to special audit u/s 142(2A), to study issue of utilization of the borrowed funds. The AO passed his order placing reliance on the findings of the Special Auditor, in which it was observed that the interest incurred by the assessee was in excess of the brokerage income. The Auditor also observed that the assessee had carried out huge volume of trade on which no brokerage has been charged, and thus he concluded that there was no commercial sense involved in the transactions of the assessee. The AO agreed with the observations of the Auditor that, there was no reason to allow the claim of interest incurred on financing the loan. Further, the AO relied on the fact that SEBI had debarred the assessee from trading in the stock market for two years for transactions against the public policy. He also came to a conclusion that the the borrowed capital was being utilized for financing the traders, which was not an active business of the assessee. The AO was of the strong opinion that any expense incurred in a business venture, which has no profit motive cannot be allowed as an expenditure
The CIT(A) allowed the appeal of the assesee by observing that on identical facts the issue has been decided in favour of the assessee for the assessment year 2001.
Aggrieved, the Revenue filed an appeal before the Tribunal.
The Departmental Representative strongly opposed the order of the CIT(A) and stated that the order of CIT(A) showed that he was allowing the contention of the assessee for the AY 2000-01 on the facts of that year and not on the facts of subsequent years's enquiry. The DR heavily relied on the order passed by the SEBI, in which an adverse finding was given against the assessee for involving in synchronized trade transactions with Ketan Parkeh group and facilitating circular trades and artificial volumes of the scrips in the markets. Finally, the DR argued that the transactions of the assessee were against public policy and hence expenditure incurred out of such transactions could not be allowed u/s 37(1) of the Act.
The counsel for the assessee contended that if the brokerage earned by the assessee from such illegal activities was taxed, the deduction of interest expenditure incurred to earn that brokerage has to be allowed. He argued that as per the subsequent amendments carried out to Section 37 empowered the AO only to disallow illegal expenditure incurred while carrying on legal business, and therefore even the activity of the assessee was treated as entirely illegal, still the expenditure has to be allowed. Further, he contended that the funds were borrowed for financing various traders from whom the assessee had earned brokerage which was more than the interest expenditure. He submitted that the AO had ignored the fact that brokerage of the assessee had increased substantially which was the basis for the CIT(A) to decide in favour of the assessee for the AY 2000-01
Disallowance u/s 14A
The AO disallowed the interest expenditure on the ground that the assessee had earned dividend income and, therefore, against exempted income, no expenditure on account of interest and other expenses were allowable. The CIT(A) relying upon the the identical facts of AY 2000-01, allowed the claim of expenditure.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Discrepancy of brokerage amount in service tax return vis-a-vis P/L Account
The AO has the added the excess brokerage shown in service tax return as compared to brokerage income shown in profit and loss account. The CIT(A) relying upon previous AY order allow the appeal and deleted the addition.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Allowability of prior period expenses
The AO disallowed certain expenses on the ground that they related to earlier years. On appeal, the CIT(A) deleted this addition following his earlier order.
Aggrieved, the Revenue filed an appeal before the Tribunal.
Interest accrued but not due
The AO had added the interest amount in the income of the assessee which had accrued but not due. On appeal before the CIT(A), that the interest became due on the coupon date of security. It was stated that where the coupon date fell beyond the last date on a particular financial year, the interest was merely taken into books of account of the said financial year in accordance with the periodicity concept of accounting. It was also stated that the interest in securities was receivable only after the last date of financial year, and there was no right of the assessee to receive the interest in the year under consideration. Thereafter, the CIT(A) deleted the addition.
Having heard the parties, the Tribunal held that,
Allowability of interest incurred on borrowed funds
++ it is recorded that during the year under consideration the assessee has earned brokerage of Rs.108,85,85,105/- against brokerage earned of Rs.67,44,07,631/- in earlier year. The assessee has incurred interest cost of Rs.17,48,70,004/- from the sale transaction and has earned brokerage of Rs.72,89,83,531/-. Similarly, against interest cost of Rs.4,43,98,516/-, it was for the purpose of transaction. The assessee company has earned brokerage of Rs.28,67,13,513/-, total of the brokerage comes to Rs.108,85,85,105/-. Therefore, the contention of the AO as well as DR that against huge interest expenditure the assessee has earned less brokerage, is factually incorrect;
+ it is further seen that in immediately preceding year, the assessee incurred interest expenditure about Rs.12 crore or odd against which the assessee has shown brokerage income of Rs.67,44,07,631/-. This fact has been noted by the CIT(A) while allowing the issue in favour of the assessee for assessment year 2000-01. The main contention of the department in denying the claim of the interest expenditure is that the SEBI has passed an order giving adverse report against the assessee. We have seen the report of the Special Auditor and in the note the Special Auditor has noted that the activity of the assessee indulging in financing activity may construe that the assessee is indulged in illegal activity. For a moment if it is accepted that the assessee is indulged in unauthorized activity of financing in respect to purchase and sell of shares on behalf of others, in that case, we are of the view that the interest expenditure has to be set off against brokerage earned by the assessee because the interest expenditure is incurred by the assessee on borrowed money for the purpose of buying shares or making purchases of shares on behalf of others. Huge brokerage is charged, which is much more as compared to interest expenditure. This is not expenditure, which is prohibited under Explanation of Section 37(1) as this expenditure does not belong to bribery nor on account of fine or penalty or hafta paid to someone as these expenditures are on account of borrowed money used for the purpose of business transaction. Even the Courts have held that if for a moment it is accepted that some activities are on account of unauthorized activity, then also unauthorized income has to be set off against unauthorized expenses;
+ in case of Bank of America (nt & sa), the Mumbai Bench of the Tribunal has held that loss incurred by the assessee in security transaction in violation of Section 15 of the Securities Contract Regulation Act, 1956, undisputedly borne out that it was set off against profit from comparable transaction. In this case, it was argued on behalf of the department that losses incurred by the assessee are not allowable on account of expenses as they are relating to illegal activities. Thereafter it was held by the Tribunal that if the expenses are on account of illegal transaction, then income part of the same transaction has to be treated on account of illegal transaction and both i.e. income as well as expenditure is to be set off against each other;
+ in the present case also facts are similar. If the department treats the activities of the assessee are illegal, then income earned by the assessee as well as expenditure incurred by the assessee has to be treated on the same transaction and they have to be netted against each other;
+ the department has also taken a plea that on certain transaction even no brokerage has been charged by the assessee. This is well known and settled position of law that this is business man, who knows how to run its business activities. If by any reason the assessee does not charge any brokerage from certain parties, that may be on account of commercial expediency and to earn brokerage in future. It is not the case of the department that the assessee has not charged brokerage from a particular party from whom heavy transaction has been made by the assessee and heavy interest expenditure have been incurred by the assessee. Figure of interest expenditure against brokerage income has been tabulated somewhere above in this order. Brokerage income is much more than the interest expenditure;
+ keeping in view of all these facts and circumstances of the case and the finding of the CIT(A) for earlier year, which has been followed by the CIT(A) for the year under consideration, we are of the view that the CIT(A) was correct in allowing the issue in favour of the assessee. Accordingly, we confirm the order of the CIT(A) on this issue.
Disallowance u/s 14A
++ we found no infirmity in the finding of the CIT(A). We noted that the CIT(A) has taken into consideration that the assessee is a trader and the entire shares purchases have been kept under the head stock-in-trade. This fact has been accepted by the AO. Dividend income is the consequential income. Any expenditure incurred during the regular course of business is allowable. There is a direct nexus between the trading activity and incurring expenditure either on account of interest or on account of other administrative expenses. Therefore, we are of the considered view that disallowance made by the AO was not justified and CIT(A) was justified in not deleting the same. Accordingly, we confirm the order of the CIT(A) in this respect;
Discrepancy of brokearge amount in service tax return vis-a-vis P/L Account
++ we found that CIT(A) was justified in deleting this addition also. The issue was examined by the CIT(A) for immediately preceding year i.e. assessment year 2000-01. It was seen by the CIT(A) that the assessee has been reflecting the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage has been shown on actual basis on the basis of constant method adopted by the assessee. It was further noticed by the CIT(A) that sometime the assessee is required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee is also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This is a minor difference, which has been reconciled by the assessee. Therefore, we see no reason to interfere in the finding of the CIT(A) in this respect also;
Allowability of prior period expenses
++ CIT(A) examined the issue in earlier year and found that no such expenses were claimed in earlier year and in the year under consideration the final settlement was arrived at and, therefore, they were booked in the year when the final settlement was made. Similar issue is involved in the year under consideration. These expenses were not claimed in earlier year as they were claimed on the basis of final settlement during the year under consideration. Any claim of expenditure settled in a particular year is allowable in that year if the same is not claimed in earlier year. Undisputedly, these expenses were not booked in earlier year, therefore, in our view, lCIT(A) was justified in deleting the disallowance made by the AO on account of prior period expenses;
Interest accrued but not due
++ after considering the submission and taking into the consideration the case laws relied upon, CIT(A) found that the interest on Government securities is not received on day to day basis, but only on the specified coupon dates. It was found that the Tribunal has held that this is the correct legal position on the basis of which income should be computed and it was held that when the interest was received then only can be taxable. In view of these facts, CIT(A) deleted the addition also.
ST : Building constructed as hostel for residence of students studying in an educational institution is a non-commercial/non-industrial building and, therefore, such construction is not liable to service tax under Works Contract Services
[2013] 33 taxmann.com 59 (Mumbai - CESTAT)
CESTAT, MUMBAI BENCH
Anand Construction Co.
v.
Commissioner of Central Excise, Kolhapur*
Ashok Jindal, JUDICIAL MEMBER
AND P.R. CHANDRASEKHARAN, TECHNICAL MEMBER
AND P.R. CHANDRASEKHARAN, TECHNICAL MEMBER
ORDER NOS. S/1288/2012/CSTB/C-I &
A/690/2012/CSTB/C-I
APPLICATION NO. ST/S/684/2012-MUM.
APPEAL NO. ST/194/2012-MUM.
A/690/2012/CSTB/C-I
APPLICATION NO. ST/S/684/2012-MUM.
APPEAL NO. ST/194/2012-MUM.
SEPTEMBER 26, 2012
Section 65(105)(zzzza) of the Finance Act, 1994 - Works Contract Services - Period from October 2008 to September 2010 - Assessee constructed a Boys and Girls Hostel for students of educational institutions - Assessee paid service tax thereon under works contract services during April 2008 to September 2008 but stopped paying service tax on ground that they were not constructing any building which is being used for commercial purpose and applied for refund of service tax already paid - HELD : Building was constructed as hostel for residence of students studying in medical institute and there was no allegation that building was being used for any other purpose - Hence, in view of Circular No. 80/10/2004-ST, dated 17-9-2004, assessee was not liable to pay service tax on such building not meant for commercial or industrial purpose [Para 6] [In favour of assessee]
Circulars and Notifications : Circular No. 80/10/2004-ST, dated 17-9-2004
A.V. Naik for the Appellant. D.D. Joshi for the Respondent.
ORDER
Ashok Jindal, Judicial Member - The appellant are in appeal along with an application of stay against the impugned order wherein demand of Service Tax for the period October 2008 to September 2010 has been confirmed against them under the category of 'Commercial or Industrial Construction Services"/"Works Contracts Services".
2. The facts of the case are that the appellants have constructed a Boys and Girls Hostel, who are getting education from one of the educational institution. The appellant got registered themselves with the Revenue authorities and paid service tax on the said activity under works contract services for the period April 2008 to September 2008. Thereafter they realize that as they are not constructing any building which is being used for commercial purpose therefore they are not liable for service tax they stopped paying service tax but continuing to file their service tax return. The appellant also filed refund claim of the service tax paid by them for the period April 2008 to September 2008 i.e. these refund claim is not disputed before us. Later on two show-cause notices were issued on 18.10.2010 for the impugned period for demand of service tax aggregating Rs.5,51,923/- along with interest and various penalties under the Finance Act, on the premise that the appellant has not produced any evidence with regard to the building constructed by them is not to be used in commercial or industrial purpose. The adjudication was done and demand mentioned hereinabove were confirmed, the first appellate authority also confirmed the adjudication order, aggrieved from the said order the appellant is before us.
3. Shri A.V. Naik the learned counsel for the appellant appeared and submitted that this fact is not disputed that they have constructed the hostel for residence of boys and girls who are studying in a medical institute and the hostel is being used by boys and girls which is not an activity of commercial or industrial in nature. Therefore, they are not liable to pay service tax under the category of Works Contract Services as clarified by the CBEC Board Circular No. 80/10/2004-ST dated 17.9.2004. Therefore impugned order is to be set aside and waiver of pre-deposit be granted.
4. On the other hand, the learned Superintendent (A.R.) for the Revenue supports the impugned order and submitted that the appellant could not produce any evidence with regard the use of construction made by them. Therefore, they are liable to pay service tax under the category of Works Contract Service.
5. Heard both sides and considering the submissions made in detail. We find that issue involved is in a narrow compass, therefore we waive the requirement of pre-deposit of impugned demands and taken up appeal itself for final disposal.
6. Considering the fact that building is constructed as hostel for the residence of students studying in medical institute and there is no allegation that the building is being used for any other purpose. In that set of facts, the Board Circular No. 80/10/2004-ST, dated 17.9.2004 is applicable to the facts of this case which clarified as under:-
"The leviability of service tax would depend primarily upon whether the building or civil structure is used or to be used for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such constructions which are for the use of organizations or institutions being established solely for educational, religious charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable being, non-commercial in nature. Generally, government buildings or civil constructions are use for residential, office purposes or for providing civic amenities. Thus, normally Government constructions would not be taxable. However, if such constructions are for commercial purposes like local Government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax".
From the above circular, we find that appellant are not liable to pay service tax. Accordingly, we set aside the impugned order and allow the appeal with consequential relief if any.
7. The stay petition is also disposed of in the above terms.
Vineet *In favour of assessee.
Once commercial expediency of a payment is accepted and TDS has been effected, deduction will have to be allowed
IT : Claim for bad debts cannot be disallowed on ground that debts in question have not been established to have become bad
IT : Once commercial expediency of a payment is accepted and TDS has been effected, deduction will have to be allowed
■■■
[2013] 33 taxmann.com 40 (Bangalore - Trib.)
IN THE ITAT BANGALORE BENCH 'C'
Deputy Commissioner of Income-tax, circle 12(4), Bangalore
v.
Ray + Keshavan Design Associates (P.) Ltd.*
N.V. Vasudevan, JUDICIAL MEMBER
AND Jason P. Boaz, ACCOUNTANT MEMBER
AND Jason P. Boaz, ACCOUNTANT MEMBER
IT APPEAL NO. 472 (BANG.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JANUARY 11, 2013
I. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts [conditions precedent] - Assessment year 2008-09 - Amount outstanding from debtors against design and brand consultancy services rendered were written off as bad debts by assessee - Whether following deletion of word 'established' in section 36(1)(vii) with effect from 1-4-1989, it is not necessary for assessee to establish that debt, in fact, has become irrecoverable - Held, yes - Whether, therefore, Assessing Officer was not justified in making disallowance of claim for deduction on account of bad debts on ground that debts in question had not been established to have become bad - Held, yes [Paras 8 & 9] [In favour of assessee]
II. Section 37(1), read with sections 40(a)(ia), 192 and 194J, of the Income-tax Act, 1961 - Business expenditure - Allowability of [Legal and professional charges] - Assessment year 2008-09 - Assessee company made certain payment as professional charges to its director and deducted tax at source under section 194J - According to Assessing Officer, payment in question was a salary and, therefore, assessee ought to have deducted tax at source under section 192 - He, accordingly, disallowed payment under section 40(a)(ia) - Whether once commercial expediency of a payment is accepted and TDS has been effected, deduction will have to be allowed - Held, yes - Whether, further, there was a consultancy agreement and payment in question prima facie was a payment for professional services rendered and could not be treated as a payment of salary, disallowance of this business expenses could not be sustained - Held, yes [Para 16] [In favour of assessee]
A. Sundararajan for the Appellant. Ajith Shah for the Respondent.
ORDER
N.V. Vasudevan, Judicial Member - This is an appeal by the revenue against the order dated 13.01.2012 of the CIT(Appeals)-III, Bangalore relating to assessment year 2008-09.
2. Ground No.1 raised by the revenue is general in nature. Ground No.2 raised by the revenue reads as follows:-
"2. The CIT(A) erred in allowing the bad debts written off to the P & L account, amounting to Rs.26,58,077/- which represented amount outstanding from debtors against designing and brand consultancy services rendered, even though the assessee company had not taken any effective steps to recover the amount and the genuineness of the bad debts written off was not proved by the assessee company."
3. The assessee is a company. It derives income from carrying out the activity of designing advertisements. In the profit & loss account, the assessee had debited a sum of Rs.32,50,530 as bad debts written off. The sum was claimed as deduction while computing total income. The AO disallowed the claim of the assessee on the ground that the assessee had not established that the debts have become bad. Against the aforesaid decision, the assessee preferred an appeal before the CIT(Appeals). Before the CIT(Appeals), the assessee submitted as follows:-
| "(a) | The amount of bad debts written off to the Profit & Loss Account represents amount outstanding from debtors against designing and brand consultancy services rendered; | |
| (b) | The bad debts have been accounted as part of income and have entered in the quantification of total income of the assessee of the relevant years in which the corresponding invoices were raised and accounted; | |
| (c) | Write off was on account of non-acceptance of the job(s) by the customers, dispute(s) regarding the bill amount(s) and after constant follow-up client did not pay. Amounts were written off based on the evaluation and honest judgement reached by the management of the Assessee after taking into account the relevant factors of the recoverability of the amount(s) involved. Personal follow-ups were made by Ms. Meeta Malhotra (Director) and Mr. Arvind Hegde (Business- Director) for recovery and after proper evaluation on non recoverability of the debts and honest judgment reached by the Management, the Management of the Assessee decided to write off the debts under reference. Since follow-ups were made personally there are no written communications by and between the Assessee and the respective Clients/s whose debts have been written as bad debts. | |
| (d) | The bad debts which have been disallowed by the Ld. AO are in relation to Hindustan Lever Limited and Mumbai International Airport Limited [the said clients] amounting to Rs. 14,08,077/- and Rs. 12,50,000/- respectively. The Assessee also enclosed a statement showing bill-wise break-up of the amounts written off in respect of the said clients, alongwith job description and the reasons for writing off the same. | |
| (e) | The Assessee also filed Declaration of Ms. Meeta Malhotra (Director) and Mr. Arvind Hegde (Business Director) of the assessee with respect to the write off of debts due from the said clients. | |
| (f) | We have charged off the debts as bad as these we(re) not recoverable from the said clients and were written off as bad debts during the year ended 31st March, 2008." |
4. The CIT(Appeals) on a consideration of the submissions of the assessee, held as follows:-
"3.4. I have carefully considered the issue on appeal before me. At the outset, I must mention that the premise on which the AO declared the debts to be "not genuine" is insufficient. Recovery efforts not having been made to an externally-expected extent does not automatically render a debt to be recoverable. The law allows this judgment to be exercised by the prudent management of a business. In the present case, the details of the debts are provided both at the assessment and appellate stages. The management have made efforts to the extent deemed commercially prudent and expedient to recover the debts, which are owed by two reputed companies. While it is no-doubt open to argument as to at which stage of the recovery process a debt should normatively be designated as bad, the caselaw on the subject is very clear. The Hon'ble Supreme Court in the case of TRF Ltd. v. CIT (2010), after noticing the change in law w.e.f. 1-4-89 has held that from 1.4.1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In this judgement, the Hon'ble Court followed the ratio of earlier decisions in the case of Vijaya Bank v CIT [2010] 323 ITR 166 [SC] and Southern Technologies Ltd v. JCIT [2010] 320 ITR 577 [SC]. Accordingly, this ground of appeal is allowed."
5. Aggrieved by the order of the CIT(Appeals), the revenue has raised ground No.2 before the Tribunal.
6. The ld. DR relied on the order of the Assessing Officer, while the ld. counsel for the assessee reiterated the submissions as were made before the CIT(Appeals).
7. We have heard the rival submissions . Prior to 1stApril, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act', for short]. For the sake of clarity, we re-produce hereinbelow provisions of Section 36(1)(vii) of the Act, both prior to1st April, 1989 and post-1st April, 1989:
"Pre-1st April, 1989 :
Other deductions: 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28(i) to (vi)
| ** | ** | ** |
(vii) subject to the provisions of sub-section(2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.
Post-1st April, 1989:
Other deductions:36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section28(i) to (vi)
| ** | ** | ** |
(vii) subject to the provisions of sub-section(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year."
8. In TRF Ltd. v. CIT [2010] 190 Taxman 391 (SC), the Hon'ble Supreme has held that after 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In view of the above, the AO was not justified in making the disallowance of claim for deduction on account of bad debts on the ground that the debts in question have not been established to have become bad.
9. Apart from the above, it is clear that the assessee had given all the details and it is not the case of the Assessing Officer that any other condition for grant of deduction u/s. 36(1)(vii) of the Act, have not been satisfied. In the circumstances, we are of the view that the order of the CIT(Appeals) does not call for interference. Consequently, ground No.2 raised by the revenue is dismissed.
10. Ground No.3 raised by the assessee reads as follows:-
"The CIT(A) erred in allowing the legal and professional charges of Rs.46,00,000/- on the ground that Sec.192 of the I.T. Act, 1961 is outside the purview of Sec.40(a)(ia) of the IT. Act, 1961."
11. The assessee made a payment of Rs.46 lakhs as professional charges to Ms. Meeta Malhotra, director of the assessee company. In respect of the aforesaid payment, the assessee had deducted tax at source u/s. 194J of the Act treating the payment as a payment for professional charges rendered. According to the AO, the payment was being made in the normal course of business and therefore the payment should have been considered as salary paid to an employee. The AO was of the view that there was an employer-employee relationship between Ms. Meeta Malhotra and the assessee. The AO therefore concluded that the payment in question was a salary. The AO also noticed that in the return of income filed by Ms. Meeta Malhotra, she had declared the sum of Rs.46 lakhs as professional charges received from the assessee and claimed expenditure of Rs.36,47,785 and reflected the income of only Rs.9,52,215. The AO was of the view that had the Assessee treated the payment in question as salary, then Ms. Meeta Malhotra can claim only permissible deductions under the head salaries and not a sum of Rs.36,47,785/. The AO therefore concluded as follows:-
"7.11 The Assessee Company has Misrepresented the above "Salary" of Rs.46,00,000/- as "Professional Charges" and Deducted Tax at Source u/s 194J of the Income Tax Act, 1961. This has been specifically done to give an undue advantage to Ms.Meeta Malhotra who is the Director of the Assessee Company holding 5% of the same to claim Additional Expenses in her Return of Income.
7.12. Therefore, an amount of Rs.46,00,000/- is Disallowed and Added Back to the Total Income of the Assessee Company.
Thus the Disallowance under this head is Rs. 46,00,000/-."
12. Before the CIT(A), the assessee pointed out that the Assessing Officer had issued summons to Ms. Meeta Malhotra by invoking the provisions of Section 131 of the Act. Based on her Return of Income for the year ended 31st March 2008, the Learned AO has observed and come to the following conclusions:
| (a) | Ms. Meeta Malhotra was rendering services to the Assessee as a consultant and not as a salaried employee (observation); | |
| (b) | However, except for receipt of Professional Charges of Rs. 46,00,000/- from the Assessee, she has no other professional receipts; | |
| (c) | On the aforesaid Professional Receipts, she has, claimed expenditure of Rs. 36,47,785/- and consequently, has offered net income of Rs.9,52,215/- to tax; | |
| (d) | The services are rendered on a monthly basis; and | |
| (e) | There exist an Employer-Employee relationship whereby Ms. Meeta Malhotra has not rendered consultancy services but was under direct supervision control of the Assessee. |
13. It was also submitted that though the AO has not spelt out the reason for making the disallowance, the apparent reason was that the assessee ought to have deducted tax at source u/s. 192 of the Act, treating the payment in question as a salary. If it is construed as salary, then Ms. Meeta Malhotra could not have claimed expenses, except standard deduction. The assessee further submitted that the question whether it is salary or professional income in the hands of Ms. Meeta Malhotra, will have no bearing on the allowability of deduction in the hands of the assessee. It was submitted that the AO has not disputed the fact that the expenditure in question has been incurred wholly & exclusively for the purpose of business of the assessee and therefore deduction ought to have been allowed. It was also pointed out that even if a higher rate of tax ought to have been deducted treating the same as salary (u/s. 192 of the Act), even then a disallowance of the expenses u/s. 40(a)(ia) of the Act could not have been made as those provisions do not apply to payment of salaries.
14. The CIT(Appeals), on a consideration of the above submissions, held as follows:-
"4.2. Having examined the ratio adopted by the AO and the grounds relied upon by the appellant, I find that once the commercial expediency of a payment is not questioned, and the TDS is actually effected, the question of a perceived misapplication of the particular TDS provision becomes academic. The appellant has accepted its liability to deduct the tax at source. A consultancy agreement exists, and its genuineness is not contested y the AO with any rigour. Various courts have held that it is not for the Department to dictate the operations of an assessee's business, or dictate to him the extent of commercial expediency to be pursued. The technical contribution of the consultant to the appellant company is not contested. I also agree with the defence of the appellant that the provisions of Sec 192 being outside the purview of Sec 40(a)(ia), the AO has put himself into a conundrum where the addition cannot be made under the latter section once Sec 192 is invoked. It is also curious to see that the very same AO in the order for the AY 2009-10 has allowed the same charges without demur. All this is reflective of the fact that the addition under appeal before us was not made with proper application of mind and based on sufficient evidence. I find the addition made to be unsustainable, and accordingly delete the same."
15. Aggrieved by the order of the AO, the revenue has preferred ground No.3 before the Tribunal.
16. We have heard the submissions of the ld. DR, who relied upon the order of the Assessing Officer. We are of the view that the order of the CIT(Appeals) does not call for any interference. As rightly pointed out by him, once commercial expediency of a payment is accepted and TDS has been effected, the deduction will have to be allowed. We also find that there was a consultancy agreement and the payment in question prima facie is a payment for professional services rendered. The AO seems to have proceeded on a misapprehension that the nomenclature given to a payment by the payer will be conclusive in the hands of the payee. As rightly held by the CIT(Appeals), the payment in question was a payment for professional services rendered and could not be treated as a payment of salary. In any event, the disallowance of this legitimate business expenses in the hands of the assessee is without any basis and cannot be sustained. We therefore dismiss ground No.3 raised by the revenue.
17. In the result, the appeal by the revenue is dismissed.
USP *In favour of assessee.
Court's prior permission isn't required for compounding offence by CLB under sec. 621A
CL : The legislature has conferred the same power to the Company Law Board which can exercise its power either before or after the institution of any prosecution whereas the criminal court has no power to accord permission for composition of an offence before the institution of the proceeding. The legislature in its wisdom has not put the rider of prior permission of the court before compounding the offence by the Company Law Board and in case the contention of the appellant is accepted, same would amount to addition of the words "with the prior permission of the court" in the Act, which is not permissible
Facts
• According to the complaint, M/s. Sunair Hotels Ltd., for short 'the Company", had taken this land from New Delhi Municipal Corporation on licence and the Company only pays the yearly licence fee thereof.
• Without any right, such land was shown as land in the Schedule of fixed assets, which is not a true and fair view and punishable under section 211(7) of the Companies Act, hereinafter referred to as "the Act". ROC, Haryana (complainant) filed a complaint and the Company and its Chairman-cum-Managing Director were arrayed as accused.
• However, before the court in seisin of the case could proceed with the complaint, the Company and its Managing Director jointly filed an application before the Company Law Board for compounding the offence. The Northern Region Bench of the Company Law Board, by its order dated 9th of August, 2000 acceded to the prayer and compounded the offence against the Managing Director on payment of Rs. 1000 for each offence each year.
• Aggrieved by the same, appellant-complainant ROC preferred Company Appeal before the High Court, inter alia, contending that the power of compounding could be exercised by the criminal court and not by the Company Law Board. High Court dismissed the appeal. The appellant-complainant-ROC preferred further appeal to Supreme Court.
Held
• From a plain reading of section 621A(1) of the Companies Act,1956 it is evident that any offence punishable under the Act, not being an offence punishable with imprisonment only or with imprisonment and also with fine, may be compounded either before or after the institution of the prosecution by the Company Law Board and in case, the maximum amount of fine which may be imposed for such offence does not exceed Rs. 5000, by the Regional Director on payment of certain fine.
• The penal provisions of the Companies Act,1956 provide for different kinds of punishments for variety of offences and can be categorised as follows: (i) offences punishable with fine only, (ii) offences punishable with imprisonment only, (iii) offences punishable with fine and imprisonment, (iv) offences punishable with fine or imprisonment, (v) offences punishable with fine or imprisonment or both.
• section 211(7) of the Act provides for punishment with imprisonment for a term which may extend to six months or with fine or with both. Therefore, an accused charged with the offence under section 211(7) of the Act has not necessarily to be visited with imprisonment or imprisonment and also fine but can be let off by imposition of fine only. Therefore, the punishment provided under section 211(7) of the Act comes under category (v) aforesaid.
• section 621A(1) excludes such offences which are punishable with imprisonment only or with imprisonment and also with fine.
• The nature of offence for which the accused has been charged necessarily does not invite imprisonment or imprisonment and also fine. Hence, the nature of the offence is such that it was possible to be compounded by the Company Law Board.
• Both sub-section (1) and sub-section (7) of section 621A of the Act start with a non-obstante clause. As is well known, a non-obstante clause is used as a legislative device to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non-obstante clause.
• Ordinarily, the offence is compounded under the provisions of the Code of Criminal Procedure and the power to accord permission is conferred on the court excepting those offences for which the permission is not required.
• However, in view of the non-obstante clause, the power of composition can be exercised by the court or the Company Law Board.
• The legislature has conferred the same power to the Company Law Board which can exercise its power either before or after the institution of any prosecution whereas the criminal court has no power to accord permission for composition of an offence before the institution of the proceeding.
• The legislature in its wisdom has not put the rider of prior permission of the court before compounding the offence by the Company Law Board and in case the contention of the appellant is accepted, same would amount to addition of the words "with the prior permission of the court" in the Act, which is not permissible.
• As is well settled, while interpreting the provisions of a statute, the court avoids rejection or addition of words and resort to that only in exceptional circumstances to achieve the purpose of Act or give purposeful meaning. It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning.
• When the language is clear and unambiguous, it must be interpreted in an ordinary sense and no addition or alteration of the words or expressions used is permissible. As observed earlier, the aforesaid enactment was brought in view of the need of leniency in the administration of the Act because a large number of defaults are of technical nature and many defaults occurred because of the complex nature of the provision.
■■■
[2013] 33 taxmann.com 199 (SC)
SUPREME COURT OF INDIA
V.L.S. Finance Ltd.
v.
Union of India
CHANDRAMAULI KR. PRASAD AND V. Gopala Gowda, JJ.
Civil Appeal No. 2102 of 2004
MAY 10, 2013
JUDGMENT
Chandramauli Kr. Prasad, J. - This appeal by special leave arises out of an order dated 5th of November, 2003 passed by the Company Judge, Delhi High Court in Company Appeal (B) No. 1 of 2001 whereby it has dismissed the appeal assailing the order of the Company Law Board allowing the compounding of offence under Section 211(7) of the Companies Act.
2. Short facts giving rise to the present appeal are that the Registrar of Companies, NCT of Delhi and Haryana laid complaint in the Court of Chief Metropolitan Magistrate, Tis Hazari, inter alia alleging that during the course of inspection it was noticed in the balance sheet of 1995-96 Schedule of the fixed assets included land worth Rs. 21 crores. According to the complaint, M/s. Sunair Hotels Ltd., for short 'the Company", had taken this land from New Delhi Municipal Corporation on licence and the Company only pays the yearly licence fee thereof. Thus, according to the complainant, without any right land has been shown as land in the Schedule of fixed assets, which is not a true and fair view and punishable under Section 211(7) of the Companies Act, hereinafter referred to as "the Act". The Company and its Chairman-cum-Managing Director, S.P. Gupta were arrayed as accused.
3. However, before the court in seisin of the case could proceed with the complaint, the Company and its Managing Director jointly filed an application before the Company Law Board for compounding the offence. The Northern Region Bench of the Company Law Board, by its order dated 9th of August, 2000 acceded to the prayer and compounded the offence against the Managing Director on payment of Rs. 1000/- for each offence each year. While doing so, the Company Law Board has held as follows:
"…The exercise of powers by the Company Law Board under 621A(1) is independent of exercise of powers by the court under sub-section (7) and all offences other than those which are punishable with imprisonment only or with imprisonment and also fine, can be compounded by Company Law Board without any reference to sub-section (7), even in cases where prosecution is pending in a criminal court. Thus, it is clear that Company Law Board if so approached can compound offences and in such case no prior permission of the Court is necessary."
4. Aggrieved by the same, appellant preferred Company Appeal before the High Court, inter alia, contending that the power of compounding could be exercised by the criminal court and not by the Company Law Board. Said submission has not found favour and the Company Judge, in this connection, observed as follows:
"18. In the light of the aforesaid discussions, it is held that the person seeking compounding of an offence in accordance with the procedure laid down in the Criminal Procedure Code can do so before the criminal Court with the permission of the Court under sub-section (7) of Section 621A of the Act, which normally cannot be done under the provisions of the Criminal Procedure Code. Such compounding of offence would always be relatable to the offence punishable with imprisonment or with fine or with both as is made clear under clauses (a) and (b) of sub-section (7). Under the aforesaid sub-section the offence punishable with imprisonment or with fine or both shall be compoundable with the permission of the Court and for such compounding the procedure laid down under the Criminal Procedure Code is to be followed in that regard provided the prosecution is pending in that Court. I also hold the Company Law Board can compound an offence of the nature prescribed under sub-section (1) either before the institution of the criminal proceeding or even after institution of the criminal proceeding and the said power is not subject to the provisions of sub-section (7). Both are parallel powers to be exercised by the prescribed authorities who have been empowered under the statute and one power is not dependent on the other……"
Accordingly, the Company Judge dismissed the appeal.
That is how the appellant is before us.
5. We have heard Mr. R. Shankaranarayanan, for the appellant, Ms. Binu Tamta, for the respondent-Union of India and Mr. Jayant Bhushan, Senior Advocate for the Company and its Managing Director.
6. It is an admitted position that the allegations made exposed the accused to an offence punishable under Section 211(7) of the Act. The same reads as under:
"211. Form and contents of balance-sheet and profit and loss account.—
| ** | ** | ** |
(7) If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both:
Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
| ** | ** | ** |
Thus, the offence alleged is punishable with imprisonment for a term which may extend to six months or with fine which may extend to Rs. 10,000/- or with both.
7. Mr. Shankaranarayanan has taken an extreme stand before this Court and contends that the Company Law Board has no jurisdiction to compound an offence punishable under Section 211(7) of the Act as the punishment provided is imprisonment also. Mr. Bhushan, however, submits that imprisonment is not mandatory punishment under Section 211(7) of the Act and, hence, the Company Law Board has the authority to compound the same. He also points out that this submission was not at all advanced before the Company Law Board and, therefore, the appellant cannot be permitted to raise this question for the first time before this Court. We are not in agreement with Mr. Bhushan in regard to his plea that this question cannot be gone into by this Court at the first instance. In our opinion, in a case in which the facts pleaded give rise to a pure question of law going to the root of the matter, this Court possesses discretion to go into that. The position would have been different had the appellant for the first time prayed before this Court for adjudication on an issue of fact and then to apply the law and hold that Company Law Board had no jurisdiction to compound the offence.
8. Here, it is an admitted position that the allegation made exposed the Company and its Managing Director for punishment under Section 211(7) of the Act which provides for imprisonment or fine or with both. In the face of the same, no fact needs to be adjudicated and the point being a pure question of law going to the root of the matter, same can be permitted to be raised before this Court for the first time. But that does not help the appellant as we are inclined to accept the submission of Mr. Bhushan on merit. Section 621A was inserted by the Companies Amendment Act, 1988 on the recommendation of the Sachar Committee. It was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults are of technical nature and arise out of ignorance on account of bewildering complexity of the provisions. Section 621A of the Act; as stood at the relevant time and relevant for our purpose reads as follows:
"621A. Composition of certain offences.- (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act whether committed by a company or any officer thereof, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded by-
| (a) | the Company Law Board; or | |
| (b) | where the maximum amount of fine which may be imposed for such offence does not exceed five thousand rupees, by the Regional Director, on payment or credit, by the company or the officer, as the case may be, to the Central Government of such sum as that Board or the Regional Director, as the case may be, may specify: |
Provided that the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded:
Provided further that in specifying the sum required to be paid or credited for the compounding of an offence under this sub-section, the sum, if any, paid by way of additional fee under Sub-section (2) of Section 611 shall be taken into account.
| ** | ** | ** |
(4)(a) Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon, to the Company Law Board or the Regional Director, as the case may be.
(b) Where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the offence is so compounded.
(c) Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder of the company or by any person authorised by the Central Government against the offender in relation to whom the offence is so compounded.
(d) Where the composition of any offence is made after the institution of any prosecution, such composition shall be brought by the Registrar in writing, to the notice of the Court in which the prosecution is pending and on such notice of the composition of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.
| ** | ** | ** |
(7) Notwithstanding anything contained in the Code of Criminal Procedure, 1973,-
| (a) | any offence which is punishable under this Act with imprisonment or with fine, or with both, shall be compoundable with the permission of the Court, in accordance with the procedure laid down in that Act for compounding of offences; | |
| (b) | any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable. |
(8) No offence specified in this section shall be compounded except under and in accordance with the provisions of this section."
From a plain reading of Section 621A(1) it is evident that any offence punishable under the Act, not being an offence punishable with imprisonment only or with imprisonment and also with fine, may be compounded either before or after the institution of the prosecution by the Company Law Board and in case, the minimum amount of fine which may be imposed for such offence does not exceed Rs. 5000/-, by the Regional Director on payment of certain fine. The penal provisions of the Act provide for different kinds of punishments for variety of offences and can be categorised as follows:
| (i) | offences punishable with fine only, | |
| (ii) | offences punishable with imprisonment only, | |
| (iii) | offences punishable with fine and imprisonment, | |
| (iv) | offences punishable with fine or imprisonment, | |
| (v) | offences punishable with fine or imprisonment or both. |
9. Section 211(7) of the Act provides for punishment with imprisonment for a term which may extend to six months or with fine or with both. Therefore, an accused charged with the offence under Section 211(7) of the Act has not necessarily to be visited with imprisonment or imprisonment and also fine but can be let off by imposition of fine only. Therefore, the punishment provided under Section 211(7) of the Act comes under category (v) aforesaid. Section 621A(1) excludes such offences which are punishable with imprisonment only or with imprisonment and also with fine. As we have observed above, the nature of offence for which the accused has been charged necessarily does not invite imprisonment or imprisonment and also fine. Hence, we are of the opinion that the nature of the offence is such that it was possible to be compounded by the Company Law Board.
10. Mr. Shankaranarayanan, then submits that sub-section (7) of Section 621A confers jurisdiction on the court to accord permission for compounding of the offence punishable with imprisonment or with fine or with both, the jurisdiction of the Company Law Board is excluded and, therefore, the Company Law Board erred in acceding to the request of the accused for compounding of the offence. Sub-section (1) of Section 621A and sub-section (7) thereof are differently worded but on their close reading it is evident that both cover such offences depending upon the nature of punishment. Sub-section (1) of Section 621A excludes offence punishable with imprisonment only or with imprisonment and also fine and includes the residue offences which will obviously include offence punishable with imprisonment or with fine or with both whereas sub-section (7) specifically include those and excludes, like sub-section (1), offences punishable with imprisonment only or with imprisonment and also fine. Therefore, both cover similar nature of offences. Hence, the power for compounding can be exercised in relation to the same nature of offences by the Company Law Board or the court in seisin of the matter with the difference that the Company Law Board can proceed to compound such offence either before or after the institution of any prosecution. In this connection, it shall be relevant to refer to Section 621A(4)b) of the Act, which provides that where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the Company to the Registrar within 7 days from the date on which the offence is compounded. Section 621A(4)d) mandates that where the composition of any offence is made after the institution of any prosecution, such composition would be brought by the Registrar in writing to the notice of the court in which the prosecution is pending and on such notice of the composition of the offence being given, the accused in relation to whom the offence is so compounded shall be discharged.
11. From the conspectus of what we have observed above, it is more than clear that an offence committed by an accused under the Act, not being an offence punishable with imprisonment only or imprisonment and also with fine, is permissible to be compounded by the Company Law Board either before or after the institution of any prosecution. In view of sub-section (7) of Section 621A, the criminal court also possesses similar power to compound an offence after institution of the prosecution.
12. Now the question is whether in the aforesaid circumstances the Company Law Board can compound offence punishable with fine or imprisonment or both without permission of the court. It is pointed out that when the prosecution has been laid, it is the criminal court which is in seisin of the matter and it is only the magistrate or the court in seisin of the matter who can accord permission to compound the offence. In any view of the matter, according to the learned counsel, the Company Law Board has to seek permission of the court and it cannot compound the offence without such permission. This line of reasoning does not commend us. Both sub-section (1) and sub-section (7) of Section 621A of the Act start with a non-obstante clause. As is well known, a non-obstante clause is used as a legislative device to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non-obstante clause.
13. Ordinarily, the offence is compounded under the provisions of the Code of Criminal Procedure and the power to accord permission is conferred on the court excepting those offences for which the permission is not required. However, in view of the non-obstante clause, the power of composition can be exercised by the court or the Company Law Board. The legislature has conferred the same power to the Company Law Board which can exercise its power either before or after the institution of any prosecution whereas the criminal court has no power to accord permission for composition of an offence before the institution of the proceeding. The legislature in its wisdom has not put the rider of prior permission of the court before compounding the offence by the Company Law Board and in case the contention of the appellant is accepted, same would amount to addition of the words "with the prior permission of the court" in the Act, which is not permissible.
14. As is well settled, while interpreting the provisions of a statute, the court avoids rejection or addition of words and resort to that only in exceptional circumstances to achieve the purpose of Act or give purposeful meaning. It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning. When the language is clear and unambiguous, it must be interpreted in an ordinary sense and no addition or alteration of the words or expressions used is permissible. As observed earlier, the aforesaid enactment was brought in view of the need of leniency in the administration of the Act because a large number of defaults are of technical nature and many defaults occurred because of the complex nature of the provision.
15. From what we have observed above, we are of the opinion that the power under sub-section (1) and sub-section (7) of Section 621A are parallel powers to be exercised by the Company Law Board or the authorities mentioned therein and prior permission of Court is not necessary for compounding the offence, when power of compounding is exercised by the Company Law Board. In view of what we have observed above, the order impugned does not require any interference by this Court.
16. In the result, we do not find any merit in the appeal and it is dismissed accordingly but without any order as to costs.
CIT (A) proceedings shall be restricted to only matters referred to him by the Tribunal
IT : Where Tribunal remanded proceedings to Commissioner (Appeals) to consider question of taxing after verifying that whether sales-tax was retained by assessee or deposited with Government, it was not open for Commissioner (Appeals) to examine entire nature of payment
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[2013] 33 taxmann.com 37 (Gujarat)
HIGH COURT OF GUJARAT
Whiteline Chemicals
v.
Income-tax Officer*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
Tax Appeal No. 340 of 2012†
FEBRUARY 25, 2013
Section 251 of the Income-tax Act, 1961 - Commissioner (Appeals) - Powers of [Scope of power] - Whether where Tribunal remanded proceedings to Commissioner (Appeals) to consider question of taxing after verifying that whether sales-tax was retained by assessee or deposited with Government, Tribunal set out parameters, within which Commissioner (Appeals) had to reconsider issue - Held, yes - Whether, therefore, it was not open for Commissioner (Appeals) to examine entire nature of payment to consider whether same could be considered as taxable in hands of assessee - Held, yes [Paras 10 & 11] [In favour of assessee]
FACTS
| ■ | The revenue had questioned the order of the Commissioner (Appeals) before the Tribunal in which the Commissioner (Appeals) had deleted the addition under section 69C made by the Assessing Officer. Before the Tribunal, the contention of the assessee was that the transaction with 'S' was only a paper transaction and there was no real sale of goods. The payment was received from 'S' and after deducting three per cent as sales tax, balance amount was returned to 'S'. The Tribunal held that if, the assessee had retained three per cent towards sales tax and deposited it with the Government, no addition could be warranted. However, in the event, if the said three per cent remained with the assessee, the same would form the part of the income of the assessee. On such basis, the Tribunal remanded the proceedings before the Commissioner (Appeals). | |
| ■ | In the remand proceedings, the Commissioner (Appeals) instead of confining its inquiry with respect to three per cent of sales tax examined the very nature of the transaction between the assessee and 'S'. He was of the opinion that the payments were made from 'S' by cheque but the same were returned by the assessee through cash payment. On that basis, he justified the addition made by the Assessing Officer. | |
| ■ | The assessee approached the Tribunal against the order passed by the Commissioner (Appeals) contending that the Commissioner (Appeals) travelled beyond the scope of remand proceedings. The Tribunal, however, rejected the contention and vide impugned order confirmed the addition also. |
HELD
| ■ | The Tribunal did not permit the full-fledged fresh inquiry by the Commissioner (Appeals) in such remand proceedings. This is clear from the following facts: |
| (1) | The Tribunal's conclusion to the effect that the question of taxing three per cent would arise only after verifying, whether the Sales Tax was retained by the assessee or deposited with the Government, if it was already deposited with the Government, then, the question of taxing the same would not arise. | |
| (2) | The Tribunal permitted the Commissioner (Appeals) to reconsider the issue in light of the above observations. Thus, this sets out the parameters, within which the Commissioner (Appeals) had to reconsider the question. | |
| (3) | If the Tribunal was of the opinion that irrespective of whether the question of retention or otherwise by the assessee of the three per cent element of the Sales Tax, the entire amount was liable to be taxed in the hands of the assessee under section 69, there was no purpose for the Tribunal to remand the issue before the Commissioner (Appeals) for verifying any Sales Tax was deposited with the Government or not. In other words, the Tribunal could have duly allowed the assessee's appeal in its entirety. Mere fact that in the impugned order, the Tribunal interpreted its previous order as open and is not hedged by any limitation would not be sufficient to debar the assessee from arguing the contrary. Once, the Tribunal passed an order, it has become functus officio and such order can only by legal terms interpreted, but, not varied. Therefore, whatever the observations of the Tribunal in the impugned order, the same would have only a persuasive value for the High Court and cannot bind the parties qua the Tribunal's real intention in remanding the proceedings in the first round of litigation. Therefore, such order is interpreted in the background of the facts of the case and the observations made by the Tribunal, while ordering the remand. [Para 10] |
| ■ | In the result, it was not open for the Commissioner (Appeals) to examine the entire nature of the payment to consider, whether, the same can be considered as taxable in the hands of the assessee. It was only for the Commissioner (Appeals) to examine that any part of the three per cent of the Sales-Tax element was or was not deposited by the assessee with the Government and to decide the assessee's tax liability to pay tax. [Para 11] | |
| ■ | In the result, the appeal is allowed and the question is answered in favour of the assessee and against the respondent. [Para 12] |
Manish J. Shah for the Appellant. Manav A. Mehta for the Respondent.
ORDER
Akil Kureshi, J. - The assessee is in appeal against the judgment of the ITAT, Dated 16.11.2011.
2. While issuing notice on 03.12.2012, we have made following observations,
"4. Prima facie, we are of the opinion that the Tribunal's previous order dated 30.8.2005 had made certain conclusive observations with respect to the nature of transaction and had desired that the CIT(Appeals) should examine whether the sales tax was actually deposited with the Government authorities and thereafter to decide the appeal bearing in mind such observations."
3. For the purpose of this Tax Appeal and for final disposal thereof, we frame the following substantial question of law,
"Whether, the Income Tax Appellate Tribunal was right in law in upholding the addition of Rs.18,83,613/- under Section 69C of the Income Tax Act, 1961, the Tribunal had set out parameters for CIT Appeals to examine the question on the basis of certain observations?"
4. The revenue had questioned the order of CIT (Appeals), dated : 11.10.2004, before the Tribunal in which the CIT(Appeals) had deleted the addition of Rs.18,83,000/-(rounded off) under Section 69C of the Act. Before the Tribunal the assessee contended that the transaction with M/s. Swami Chemicals, totaling to Rs. 18,83,613/- was only a paper transaction and there was no real sell of the goods. The payments were received from Swami Chemicals and after deducting three per cent as Sales Tax, balance amount was returned to Swamy Chemicals. In this context, the Tribunal observed that the CIT(Appeals) had not properly appreciated the issue. If, the assessee had retained three percent towards Sales Tax and deposited it with the Government, no addition would be warranted. However, in the event, if, the said three per cent remained with the assessee to that extent, the same would form the part of the income of the assessee. On such basis, the Tribunal remanded the proceedings before the CIT(Appeals) "to decide the matter afresh, in accordance with law, keeping in view the above observations and after affording the reasonable opportunity of hearing to both the sides."
5. In the remand proceedings, the CIT(Appeals) decided the entire issue in favour of the Revenue. Instead of confining its inquiry with respect to three per cent of Sales Tax, he examined the very nature of the transaction between the assessee and the Swamy Chemicals. He was of the opinion that the payments were made from Swamy Chemicals by cheque, but, the same were returned by the assessee through cash payments. On such basis, he justified the addition made by the Assessing Officer.
6. This time around, the assessee approached the Tribunal against the order passed by the CIT(Appeals) after remand and primarily contended that the CIT(Appeals) traveled beyond the scope of the remand proceedings. The Tribunal, however, did not upheld such contention and vide impugned order confirmed the addition also.
7. We have heard learned Counsel for the parties. Shri. M.J. Shah, repeated his contentions, which he had made on 03.12.2012, when we had issued the notice for final disposal.
8. Learned Counsel, Mr. Manav Mehta, for the department, on the other hand, contended that the Tribunal had merely remanded the issue for fresh consideration by the CIT(Appeals) and there were no directions in such order in what manner, after remanding the matter, the issue should be reconsidered. In short, his contention was that the Tribunal left the full discretion to the CIT(Appeals). He drew our attention to the impugned order passed by the Tribunal in which the tribunal has expressed the similar sentiments.
9. To our mind, however, the issue is quite simple and clear. In the first round, the Revenue had approached the Tribunal complaining about the order of CIT(Appeals) deleting the entire addition of Rs.18,83,000/- made by the Assessing Officer. The Tribunal remanded the proceedings back to the Commissioner of Appeals on the ground that if the assessee had retained three percent of the Sales Tax out of the payment made by the Swamy Chemicals, but, no tax is deposited with the Government, surely, the same would become the income of the assessee. The Tribunal also observed that if such Sales Tax was deposited with the Government, there would be no question of taxing the assessee. On such basis, the proceedings were remanded for fresh consideration by the CIT(Appeals).
10. To our mind, the Tribunal did not permit the full-fledged fresh inquiry by the CIT(Appeals) in such remand proceedings. This is clear from the following facts;
| (1) | The Tribunal's conclusion to the effect that the question of taxing three per cent would arise only after verifying, whether the Sales Tax was retained by the assessee or deposited with the Government, if it was already deposited with the Government, then, the question of taxing the same would not arise, | |
| (2) | The tribunal permitted the CIT(Appeals) to reconsider the issue in light of the above observations. Thus, this sets out the parameters, within which the CIT(Appeals) had to reconsider the question, | |
| (3) | If the Tribunal was of the opinion that irrespective of whether the question of retention or otherwise by the assessee of the three percent element of the Sales Tax, the entire amount of Rs.18,83,000/- was liable to be taxed in the hands of the assessee under Section 69 of the Act, there was no purpose for the Tribunal to remand the issue before the CIT Appeals for verifying any Sales Tax was deposited with the Government or not. In other words, the Tribunal could have duly allowed the respondent's appeal in its entirety. Mere fact that in the impugned order, the Tribunal interpreted its previous order as open and is not hedged by any limitation would not be sufficient to debar the assessee from arguing the contrary. Once, the Tribunal passed an order, it has become functus officio and such order can only by legal terms interpreted, but, not varied. Therefore, whatever the observations of the Tribunal in the impugned order, the same would have only a persuasive value for us and cannot bind the parties qua the Tribunal's real intention in remanding the proceedings in the first round of litigation. We have, therefore, interpreted such order in the background of the facts of the case and the observations made by the Tribunal, while ordering the remand. |
11. In the result, we are of the opinion that it was not open for the CIT(Appeals) to examine the entire nature of the payment of Rs.18,83,000/-, to consider, whether, the same can be considered as taxable in the hands of the assessee. It was only for the CIT(Appeals) to examine that any part of the three percent of the Sales Tax element was or was not deposited by the assessee with the Government and to decide the assessee's tax liability to pay tax.
12. In the result, the appeal is allowed and the question is answered in favour of the assessee and against the respondent. The impugned judgment of the tribunal is reversed to the extent above.
Lata __._,_.___
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