Service-tax can't be charged on apportionment of income
ST : Appropriation of income cannot be liable to service tax, as service tax can only be charged on consideration for service provided
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[2013] 33 taxmann.com 495 (New Delhi - CESTAT)
CESTAT, NEW DELHI BENCH
Jai Shree Road Lines
v.
Commissioner of Central Excise, Jaipur-II*
D.N. PANDA, JUDICIAL MEMBER
AND RAKESH KUMAR, TECHNICAL MEMBER
AND RAKESH KUMAR, TECHNICAL MEMBER
FINAL ORDER NO. 55538 OF 2013
APPLICATION NO. ST/STAY/2789 OF 2012
APPEAL NO. ST/2134 OF 2012-CU(DB)
APPLICATION NO. ST/STAY/2789 OF 2012
APPEAL NO. ST/2134 OF 2012-CU(DB)
FEBRUARY 8, 2013
Section 66 of the Finance Act, 1994 - Charge of service tax - Service tax on consideration received for transport services had already been deposited - On sharing of such consideration between assessee and truck owners, department sought to levy service tax under 'Business Auxiliary Services" treating it as commission - HELD : Appropriation of income cannot be liable to service tax, as service tax can only be charged on consideration for service provided - Hence, demand was set aside [Para 1] [In favour of assessee]
O.P. Agarwal for the Appellant. N. Pathak for the Respondent.
ORDER
D.N. Panda, Judicial Member - Shri Agarwai says that the. consideration towards GTA service in question has already been deposited. But when the consideration was received by appellant and that was shared between the appellant and the truck owner »:hat was again sought to be taxed as commission receipt from Business Auxiliary Service provided. It is surprising, how appropriation of income shall make the appropriation liable to tax since the consideration for service provided is only subject to taxation under Finance Act, 1994. In view of such basic principle, first appellate order is liable to be set aside and appeal is accordingly allowed. So also stay application allowed.
Vineet *In favour of assessee.
L- Winding up petition against co. admitted as it didn't repay the dues even after direction of the Court
CL : Where reasons given by respondent-company, TTL for not adhering to order directing it to make payment to petitioner were neither satisfactory nor convincing and TTL was not in a position to pay outstanding amount, winding up petition against TTL was to be admitted
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[2013] 33 taxmann.com 521 (Delhi)
HIGH COURT OF DELHI
Australia and New Zealand Banking Group Ltd.
v.
Tulip Telecom Ltd.
S. Muralidhar, J.
CCP (Co.) No. 3 of 2013
Co. Petition No. 395 of 2012
Co. Application Nos. 454 & 455 of 2013
Co. Petition No. 395 of 2012
Co. Application Nos. 454 & 455 of 2013
APRIL 25, 2013
Section 433 of the Companies Act, 1956 - Winding up - Circumstances in which a company may be wound up - Petitioner- ANZ had sanctioned to respondent-company i.e., TTL a working capital facility - TTL proposed repayment schedule and gave cheque to ANZ but same was dishonoured - ANZ filed winding up petition against TTL on ground that TTL was unable to pay its debts - Court by order dated 21-11-2012 directed to respondent to pay a sum with agreed interest - On appeal, against impugned order, Division Bench held that there was no need to interfere with that order - TTL prayed for modification of impugned order - Whether reasons given by TTL for not adhering to impugned order were neither satisfactory nor convincing - Held, yes - Whether from affidavits tendered in Court, it was clear that TTL was not in a position to repay outstanding amounts which it owed to ANZ and, therefore, a case for passing order under section 433 was made out - Held, yes – Whether, thus, winding up petition was to be admitted and Official Liquidator was to be appointed - Held, yes [Paras 23, 28 & 31]
FACTS
| ■ | Petitioner-ANZ had sanctioned to respondent company i.e., TTL a working capital facility. | |
| ■ | TTL proposed repayment schedule and gave cheque to ANZ but same was dishonoured. | |
| ■ | ANZ filed winding up petition against TTL on the ground that TTL was unable to pay its debts. | |
| ■ | An order was passed to pay a sum to the petitioner and the Court directed the TTL to adhere to the payment schedule as directed by it . The respondents had agreed to pay the balance sum. | |
| ■ | Later, the Court was informed that the parties had arrived at a settlement and that the respondent was willing to pay the balance sum along with interest at the agreed rate on the reducing balance basis. | |
| ■ | The Court by order dated 21-11-2012 directed the respondent to pay a sum with agreed interest. | |
| ■ | However, against that order TTL filed an appeal, which was disposed of by the Division Bench ('DB') holding that there was no need to interfere with the impugned order. | |
| ■ | Following the above order of the DB, ANZ filed company application seeking revival of winding up petition. | |
| ■ | Simultaneously, ANZ also filed contempt petition against the TTL. | |
| ■ | TTL in affidavit stated that various banks and financial institutions, who were secured lenders of TTL, participated in a corporate debt restructuring ('CDR') mechanism, at the instance of TTL; and, that TTL's failure to make payment to ANZ in terms of the settlement entered into between the parties as recorded in the order dated 21-11-2012 was not intentional and was beyond the control of TTL. | |
| ■ | It was stated that the money owing to ANZ constituted 1.44 per cent of the sum owing to other lenders and stated that any disruption of TTL's business would shut down the operations of a large number of banks who would not be accepting the payments. | |
| ■ | It was prayed that 'the order dated 21.11.2012' might be modified/varied 'to the extent of directions' having been issued for the appointment of the Official Liquidator and further that the Court should withdraw the notice of contempt. |
HELD
| ■ | The reasons stated in the affidavits filed by TTL by way of explanation as to why TTL was unable to adhere to the undertaking given by it to the Court, as recorded in the order dated 21-11-2012, are neither satisfactory nor convincing. The said order was affirmed by the DB on 28-1-2013. Despite the DB giving TTL liberty to apply to the Court for modification of the order dated 21-11-2012, including the condition regarding appointment of the PL, TTL filed no such application. It is only in the affidavit tendered in Court that TTL has made a prayer for modification of the order but without indicating what modification is being sought. It is difficult to believe that when the Court passed the order dated 17-12-2012, the CDR Scheme was not already in contemplation and yet, neither ANZ nor the Court was informed of it at that stage. Independent of any notice that ICICI may have sent ANZ about the meeting of secured lenders, it is inexcusable that having filed an affidavit undertaking to make payments in terms of the agreement recorded in the order dated 21-11-2012, TTL made no effort to inform the Court of its inability to honour that commitment. [Para 23] | |
| ■ | Despite sufficient opportunities and time granted to TTL, it has been unable to satisfactorily explain the disobedience of the order dated 21-11- 2012. If, indeed, TTL was not in a position to adhere to its commitment, as recorded in the order dated 21-11-2012, it ought to have informed the Court, making a full disclosure of the application made by it for the CDR Scheme and sought modification in terms of the leave granted by the DB. It is not even clear whether the DB was made aware of the CDR mechanism when the appeal was heard by it.[Para 24] | |
| ■ | An officer of TTL dealing with finance was present in the Court. He explained that the current bank balance of TTL is only Rs. 10 lakhs and that the daily income to the tune of around Rs. 60 lakhs is being utilised to pay statutory and other dues. It is plain that given the fund position, TTL would be in no position to repay its debt owing to ANZ.[Para 25] | |
| ■ | Even according to CDR, TTL is expected to restructure the debt owing to ANZ. Till date, TTL has not even proposed any such restructuring. [Para 26] | |
| ■ | Significantly, the CDR does not envisage creating any pari passu charge in favour of ANZ for the amount owed by TTL to ANZ. TTL states that there is no such restriction on TTL. However, the Court would not like to go by that statement since there is nothing in the CDR Scheme to suggest that creation of a pari passu charge in favour of an unsecured lender is permissible. [Para 27] | |
| ■ | From the affidavits tendered in Court it is clear to the Court that as of now, TTL is not in a position to repay the outstanding amounts which it owes ANZ. A case for passing orders under section 433(e) and (f), read with sections 434 and 439 is made out. While it is possible that the CDR Scheme grants a moratorium to TTL on repayments of loans of the secured lenders, the payment of the dues owing to TTL is entirely governed by the order dated 21-11-2012 which has not been varied till date and, having attained finality, is binding on TTL. The CDR Scheme approved by the lenders does not deal with this aspect at all except requiring TTL to restructure the liability. TTL has not taken the first step in that direction. Only in response to the notice issued to it in the contempt petition, and after two adjournments it has come up with a vague prayer for modification of the order dated 21-11-2012. Again, TTL has not been able to explain how it proposes to clear the outstanding dues of ANZ and within what time frame. [Para 28] | |
| ■ | The order dated 21-11-2012 is unambiguous about the consequences of any default committed by TTL in making payments to ANZ in terms of the agreement recorded in that order. [Para 29] | |
| ■ | The fact that there has been disobedience by TTL of the above order is plain. The conduct of TTL in not making any move to have the order varied, despite the order of the DB, despite TTL applying for the CDR Scheme and despite TTL knowing that it was going to be unable to adhere to the payment schedules stated in the affidavit, leads the Court to conclude that the disobedience of the order dated 21-11-2012 by TTL is wilful and not bona fide. The background to the passing of the order dated 21-11-2012 has also to be kept in view. The apology now offered by TTL is unconvincing and cannot be accepted. TTL does appear to have taken it for granted that the CDR Scheme somehow absolved TTL of the responsibility of having to honour its commitments to the Court. The binding nature and the solemnity of the undertaking given by parties to the Court has to be enforced if there has to be respect for the rule of law. [Para 30] | |
| ■ | Thus, the winding up petition is to be revived. The Official Liquidator is appointed as the PL of TTL. [Para 31] |
CASES REFERRED TO
Madhusudan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125 (SC) (para 26), New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corpn. [1986] 59 Comp. Cas. 183 (Guj.) (para 26) and Rishi Enterprises, In re [1992] 73 Comp. Cas. 271 (Guj.) (para 26).
Neeraj Kishan Kaul, Rajendra Barot and Gaurav Kothari for the Petitioner. G.L. Rawal, Kuljeet Rawal, Himanshu Singh and H.S. Bedi for the Respondent.
ORDER
1. Co. Pet. No. 395 of 2012 was filed by the Petitioner, Australia and New Zealand Banking Group Ltd. ('ANZ'), under Section 433(e) and (f)read with Sections 434 and 439 of the Companies Act, 1956 ('Act') seeking the winding up of Tulip Telecom Ltd. ('TTL'), on the ground that TTL was unable to pay its debts.
2. Pursuant to a facility agreement dated 3rd August 2011, ANZ sanctioned TTL a working capital facility aggregating to Rs. 50,00,00,000 of which Rs. 20,00,00,000 were in the form of overdraft facility and Rs. 30,00,00,000 in the form of short term loan. TTL executed a demand promissory note of the same date in favour of ANZ for a sum of Rs. 50,00,00,000. According to ANZ, as on 29th June 2012, the total outstanding dues of TTL were Rs. 49,22,89,203 along with interest @ 4% p.a. over and above the applicable rate of interest. A legal notice dated 29th June 2012 was issued by ANZ, followed by reminders on 13th and 24th July 2012.
3. It is stated that on or around 26th July 2012, ANZ received a proposal from TTL setting out a repayment schedule agreeing to pay Rs. 50,00,00,000 and in addition, a sum of Rs. 2,50,00,000 towards interest in four instalments, beginning 7th August 2012 and ending 7th November 2012.ANZ, in response, offered a revised repayment schedule which was agreed to by TTL by a letter dated 1st August 2012. TTL also issued post dated cheques ('PDCs') and furnished a personal guarantee dated 31st July 2012 issued and executed by its Managing Director ('MD') Lt. Col. Hardeep Singh Bedi (hereinafter referred to as 'Lt. Col. Bedi'). A request was made by TTL to ANZ to defer depositing PDCs by ten days but the said request was declined. When ANZ presented the first PDC in the sum of Rs. 12,50,00,000 on 7th August 2012 for payment, it was dishonoured. Thereafter, the winding up petition was filed.
4. At the first hearing of the petition on 31st August 2012, Mr. G.L. Rawal, learned Senior counsel along with Mr. Himanshu Singh, learned counsel, appeared on behalf of TTL. The following order was passed by the Court on that date:
"CO.PET. No. 395/2005 (sic. 2012) & C.A. No. 1606/2012
Petitioner seeks winding up of the respondent company; the parties had entered into a facility agreement on 03.8.2011 pursuant to which respondent had borrowed a sum of Rs.50 crore which has been sanctioned under the aforenoted agreement. On 02.5.2012 the respondent had agreed to pay the outstanding dues to the petitioner (page 69 of the paper book); thereafter post dated cheques issued by the respondent stood dishonoured; the details of these cheques find mention at para 98 of the paper book. Submission being that in spite of issuance of legal notice the amount has not been liquidated.
At this stage learned counsel for the respondent has put in appearance; he accepts notice. Complete set of paper book has been furnished. Learned counsel for the respondent under instructions from his client states that a sum of Rs. 8 crores would be paid within two weeks from today and another sum of Rs.2 crores will positively be paid within 10 days thereafter. The proposal for paying the balance amount in a time bound frame shall be placed before the Court on the next date. In case the undertaking so given before this Court is not honoured, learned counsel for the petitioner states that he would press for orders on his application for interim relief. Counsel for the petitioner further points out that the respondent has committed default qua other creditors also and he wishes to bring this fact on record; additional affidavit is permitted to be filed by the petitioner within a period of one week from today.
Renotify on 18.09.2012."
5. On 18th September 2012, the following order was passed:
"Learned counsel for the petitioner points out that the undertaking given by the respondent in terms of the last order has not been complied as the cheque issued by the respondent stood dishonoured.
Learned counsel for the respondent undertaking on behalf of his client undertakes that the said payment will be made through banker's cheque/demand draft to the petitioner tomorrow; he requests that the matter be listed for directions only for that purpose for tomorrow.
Learned counsel for the petitioner presses his interim application C.A. No.1606/2012. Additional affidavit of the petitioner dated 12.9.2012 is also on record detailing the liabilities of the respondent qua other persons. In view of the aforenoted circumstances which have now emanated it would be expedient that the respondent is restrained from transferring, alienating or dissipating his assets immovable and moveable except in the normal course of business till further orders.
Renotify for directions for 19.9.2012."
6. On 19th September 2012, the Court noted that a sum of Rs.8,00,00,000 had been paid to learned counsel for ANZ by way of a demand draft. The Court directed that "the payment schedule as contained in the earlier order of this Court be adhered to." On 12th October 2012, the following order was passed in CA No. 1961 of 2012:
"Learned counsel for the petitioner points out that the sum of Rs.2crores which had to be paid by 25.9.2012 has not been paid. Payment schedule has also not been furnished.
Learned counsel for the respondent undertakes (on behalf of his client) that he shall pay this amount of Rs. 2 crores within 10 days from today and the payment schedule shall also be furnished within 10 days.
Reply be also filed within 10 days.
For compliance; renotify for 02.11.2012."
7. On 2nd November 2012, the following order was passed:
"C.A. No. 1961/2012 in Co.Pet.395/2012
In terms of the last direction Rs.2 crores have since been paid by the respondent to the petitioner.
The respondent has tendered a submission duly supported by the affidavit of the Mr. Hardeep Singh Bedi, Managing Director of the respondent company. The proposal states that the balance sum of Rs.40 crores shall be paid in monthly instalments of Rs.2 crore each with interest at the agreed rate on the reducing balance; which figure is disputed by the learned counsel for the petitioner who has drawn attention of this Court to Page 98 of the paper book wherein the agreed amount to be repaid by the respondent to the petitioner is Rs.42.5 crores. This proposal is not acceptable to the learned counsel for the petitioner who states that the sum involved is heavy and he is not agreeable to this proposal and the respondent himself in the month of August had issued post dated cheques up to 07.11.2012 for complete payment and he cannot now wriggle out of this proposal. He is asking for enlargement of time which is not acceptable to the petitioner.
This Court has put a proposal to the respondent which is to the effect that the entire payment be paid by the respondent to the petitioner within an outer limit of 10 months from the next date of hearing with interest at the agreed rate on the reducing balance. Learned counsel for the petitioner will also take instruction on this proposal which has been put to the respondent by the Court. Learned counsel for the respondent also seeks time to take instruction in this regard. In case this proposal does not to fructify arguments will be heard on merits.
Reply if any be filed within 10 days with advance copy.
List for direction on 21.11.2012."
8. Subsequent to the above hearing, when the case was listed on 21st November 2012, the Court was informed that the parties had arrived at a settlement and that the Respondent was willing to pay the balance sum along with interest at the agreed rate on the reducing balance basis. The following order was passed on that date:
"The parties have arrived at a settlement. Respondent shall pay a sum of Rs. 45.50 crores along with interest at the agreed rate on the reducing balance within a period of 14 months from today. Complete payment shall be made by 31.12.2013; the payment shall be made by installment i.e. Rs. 3 crores per month; the first installment of Rs. 3 crores shall be paid by the respondent to the petitioner on or before 30.11.2012; second installment shall be paid on or before 31.12.2012 and so on; the last installment will be in the sum of Rs. 3.50 crores along with interest at the agreed rate on the reducing balance and as noted supra this complete payment shall be made by 31.12.2013.
An affidavit to the said effect of the Director of the Company shall be filed within one week from today detailing the schedule of these payments; in case of even one single default the petitioner shall be at liberty to take appropriate action under the contempt law; in such an eventuality, the provisional liquidator shall also stand appointed.
Both the parties agreed that this order shall not be communicated or used in the Media or Press by either party. This order may not also be uploaded on the net.
With these directions, this petition as also the pending applications stand disposed of."
9. An affidavit dated 5th December 2012 was filed by Lt. Col. Bedi in terms of the above order dated 21st November 2012 detailing the schedule of paymentsas agreed between the parties. Subsequently, an application, CA No.2438 of 2012 was filed for correcting the figure of Rs. 45.50 crores to Rs. 42.50 crores in the order dated 21st November 2012. The said application, with the consent of both the parties, was by an order dated 17th December 2012, allowed and the figure was corrected accordingly. Another application, CA No. 2424 of 2012, for directions was disposed of on the same day by the following order:
"Co. Application No. 2424/2012
Averments contained in the application have been denied by the respondent. Submission of the applicant is that the settlement amount of Rs.42.50 crores which has to be paid along with interest at the agreed rate on the reducing balance in terms of the directions of this Court dated 21.11.2012 had clearly stipulated that the interest on the reduced balance shall be paid along with each instalment. Learned counsel for the respondent states that the order was ambiguous. This is now clarified. It is made clear that the interest on the reduced balance at the agreed rate on each instalment shall be paid along with the instalment. Learned counsel for the respondent points out that the instalment of November, 2012 has since been paid; admittedly interest on the said instalment has not been paid; learned counsel for the respondent states that this interest shall be paid positively on or before 31.12.2012 and the interest falling due on the instalment of December, 2012 shall be cumulatively paid along with interest due for January, 2013 instalment.
Application disposed of in the above terms.
Order dasti."
10. It appears that against the order dated 21st November 2012, TTL filed an appeal, being Co. Appeal No. 5 of 2013, which was disposed of by the Division Bench ('DB') on 28th January 2013 by the following order:
"Co.App. 5/2013 & CM No. 1361/2013 (Stay)
The impugned order dated 21.11.2012 refers to and incorporates the settlement arrived at between the parties. The appellant herein has agreed to pay a sum of Rs. 45.50 crores along with interest at the agreed rate on the reducing balance within a period of 14 months from 21.11.2012in instalments of 3 crores each per month. The last instalment is to be paid on or before 31.12.2013.
Learned counsel for the appellant submits that instalments for the month of November and December, 2012 have already been paid with interest and the instalment for the month of January, 2013 will be paid by31.01.2013.
The grievance of the appellant herein is that the learned Company Judge while recording the settlement has observed that in case there is a default of even one single instalment, the respondent would be at liberty to take appropriate action under the contempt law and in such an eventuality the provisional liquidator should also be appointed. We notice that interests of the appellant have also been protected by observing that the order passed by the Court would not be communicated or used in the Media or Press by either party or uploaded on the net.
We do not think there is any need for this Court to interfere with the impugned order as it is based upon the settlement arrived at between the parties. In case the appellant requires any clarification or modification for any reason including the said term/condition was not agreed or accepted, they can approach the Company Court for the said clarification/modification.
Keeping in view the nature of the order, we are not inclined to issue notice. The appeal is disposed of accordingly. Pending application also stands disposed of.
Dasti."
11. Following the above order of the DB, ANZ filed CA No. 455 of 2013 seeking revival of Co. Pet. No. 395 of 2012.CA No. 454 of 2013 was for appointment of the Official Liquidator ('OL') as the Provisional Liquidator ('PL') of TTL. The other prayer was that pending the final hearing and disposal of the said application TTL should be restrained from in any manner transferring, selling, disposing off, parting with possession of or encumbering any of its assets. It must be noted at this stage that although the DB granted TTL leave to file an application seeking modification of the order dated 21stNovember 2012, TTL filed no such application. It was ANZ who filed the aforementioned two applications. Notice was directed to issue in the said two applications by the Court on 22nd March 2013, and they were listed on 18th April 2013.
12. Simultaneously, ANZ also filed CCP (Co.) No. 3 of 2013 against TTL in which notice was directed to issue by the Court on 22nd March 2013. At that hearing, Mr. Sheetesh Khanna, Advocate accepted notice on behalf of TTL. The Court directed replies to be filed both to CA Nos. 454 and 455 of 2013 as well as CCP (Co.) No. 3 of 2013 by 10th April 2013 and rejoinder to be filed before the next date. When the matter was listed on 18th April 2013, the Court noted that no reply had been filed by TTL, and passed the following order:
| "1. | The Court finds that despite opportunity granted on 22nd March 2013 to the Respondent in this contempt petition to file a reply on or before 10th April 2013 no reply has been filed by the Respondent till date. | |
| 2. | Mr. G.L. Rawal, learned Senior counsel appearing for the Respondent prays for some more time to file a reply. | |
| 3. | The Court had enquired of Mr. Rawal whether the Respondent would be willing to, as a condition for being granted more time to file a reply, and considering that this is a contempt petition arising out of the earlier orders passed by the Court on 21st November 2012, offer security in the form of unencumbered fixed assets of the Respondent for the outstanding amount of over Rs. 32 crores owing to the Petitioner. The matter was passed over till 2.15 pm for this purpose. At 2.15 pm Mr. Rawal was unable to make a categorical statement on whether any of the fixed assets that are sought to be offered by the Respondent as security are unencumbered. | |
| 4. | The Court finds that the order dated 21st November 2012 stated that in case of "even one single default" by the Respondent the Petitioner would be at liberty to take appropriate action under the contempt law, and "in such an eventuality the provisional liquidator shall also stand appointed". | |
| 5. | Mr. Rawal submitted that the order appointing the provisional liquidator should not be passed today and that the Respondent should be given an opportunity of placing on record certain documents concerning a corporate debt restructuring ('CDR') Scheme that has been arrived at with the secured creditors. He, however, is candid that the said CDR Scheme does not deal with the liability owing to the Petitioner. In the circumstances, the Court finds no justifiable reason for the Respondent not filing a reply to the contempt petition till date. | |
| 6. | The Court has been shown a copy of order dated 28th January 2013 of the Division Bench in Company Appeal No. 5 of 2013 which was filed by the Respondent against the order dated 21st November 2012. While dismissing the said appeal the Division Bench gave liberty to the Respondent to apply to this Court for clarification or modification of the order dated 21st November 2012. Till date the Respondent has not filed such an application for modification or clarification of the said order. | |
| 7. | In the circumstances, the Court sees no reason why further indulgence should be granted to the Respondent. Consequently, for necessitating today's adjournment, the Respondent will pay to the Petitioner a sum of Rs. 25,000 as costs by the next date. The Managing Director of the Respondent is directed to remain present in Court on the next date, i.e., 22nd April 2013 at 10.30 am. | |
| 8. | List on 22nd April 2013 at 10.30 am. | |
| 9. | Order be given dasti to learned counsel for the parties under the signature of the Court Master." |
13. On 22nd April 2013, Lt. Col. Bedi appeared in Court. Mr. Rawal tendered an affidavit of that date of Lt. Col. Bedi. The opening para of the affidavit stated that the MD of TTL was making "submission for dropping the notice of contempt and modification" of the order dated 21st November 2012 regarding appointment of the OL. Inter alia, it was stated that TTL had already made a total payment to ANZ of Rs. 20,01,68,000 and that this showed that TTL had "all bonafide to pay the amount to the petitioner." It was pointed out in para 6 of the affidavit that TTL is in the field of providing internet and data service; it is servicing to more than 5,000 customers across 200 cities on wireless and across 300 cities through 16,000 km fibre network; it has a market capitalization of over Rs. 30 billion; it has an investment of Rs. 32.8 billion partly funded and partly through operational cash flows; that 4000 families are surviving by direct employment provided by TTL while more than 6-7000 people are earning their livelihood besides providing business to TTL suppliers of raw material and services; that TTL is contributing a huge amount of direct and indirect revenue by way of taxes running into thousands of crores of rupees and that the present turnover of TTL is Rs. 2,000 crores. It was pleaded that due to severe economic crisis worldwide and adverse situation in the market, TTL took a temporary blow to its working and its market capitalization fell from Rs. 30 billion to Rs. 5 billion. Consequently, there had been an adverse impact on the cash flow of TTL.
14. It was stated in para 9 of the affidavit that various banks and financial institutions, who were secured lenders of TTL, "in or about January 2013", participated in a corporate debt restructuring ('CDR') mechanism, at the instance of TTL. These included Bank of India, Indian Overseas Bank, Punjab National Bank, Axis Bank Limited, IDBI Bank, Canara Bank, Bank of Baroda, Dena Bank, Central Bank of India, Andhra Bank, LIC of India and others. It was stated that TTL's failure to make payment to ANZ in terms of the settlement entered into between the parties as recorded in the order dated 21st November 2012 was not intentional and was beyond the control of TTL. It was added that even the payment of salaries of the employees of TTL has been delayed. It was stated in para 13 of the affidavit that the valuation by an independent valuer of the assets of TTL was undertaken at the instance of the secured lenders, of which the leading was ICICI bank ('ICICI'). The valuation exercise so undertaken placed the value of the assets of TTL as Rs. 4,426.19 crores, whereas the liabilities owing towards CDR and other lenders, inclusive of ANZ, worked out to Rs. 3067.63 crores. On this basis, it was stated that the money owing to ANZ constituted 1.44% of the sum owing to other lenders. It is stated that "now in terms of CDR no preferential payment can be made as such in these circumstances respondent hands are tied as the survival of the respondent on the strength of CDR." In para 17 of the affidavit it was stated as under:
"I say respondent has all intend and bonafide to pay the amount to the petitioner though at present the petitioner is unsecured lender and the respondent is ready to make it secured lender and to create pari pasu (sic. pari passu) charge towards liability of about Rs. 32 crores (and interest as may have accrued) out of the various assets of respondent company as detailed in the valuation report."
15. In the above circumstances, it is stated that any disruption of TTL's business will shut down the operations of a large number of banks who would not be accepting the payments. In para 19 of the affidavit it is stated that TTL applied for CDR on 31st December 2012 covering the period from 1st October 2012 to 31st December 2012 and its request has been accepted by all the major banks who have lent it Rs. 2,300 crores. It is stated that "it is advisable" that ANZ should become a "secured lender" at par with other secured lenders. In paras 20 and 21, Lt. Col. Bedi states that he was responsible for computerization of the Army Headquarters at Delhi for about three years during his service in the Army and that he was awarded the Vishisht Seva Medal for that work. He stated in para 21 that he is a law abiding citizen and respects the orders of the Court and "have taken all my best and bonafide efforts to comply with the orders, however, for the reason as above said further amounts could not be paid as CDR prohibits, respondent from making any preferential payments and now CDR is requirement for the survival of the respondent company." In the above circumstances, in para 22 of the affidavit, it was prayed that "the order dated 21.11.2012" may be modified/varied "to the extent of directions" having been issued for the appointment of the OL and further that the Court should withdraw the notice of contempt.
16. Enclosed with the affidavit is a letter dated 12th April 2013 written by Mr. Prakash Joshi, Dy. General Manager of CDR Cell to Mr. Naveen Atrishi, Dy. General Manager, ICICI communicating the decision taken by CDR in its EG meeting held on 25th March 2013. It is stated that the CDR Scheme of TTL has been approved. Inter alia, various proposals for repayment of term loans of the secured lenders have been set out. The manner of restructuring of the holders of fully convertible commercial bonds ('FCCB') has also been set out. In para (x) of the said letter, it is stated as under:
"(x) The company has to ensure that all non-CDR lenders including FCCB are to be restructured as stipulated in final scheme. The company to provide undertaking for the same."
17. Enclosed with the letter is the CDR Scheme that has been approved. Sub-para VI of para 1.5, which is relevant for the present purpose, reads as under:
"VI. TTL should open a Current Account with the MI, to be designated pre-TRA account and all transactions to be routed through this account. Company should submit cash budget for 3 months. "Holding-on-operations" shall be allowed in the Pre TRA account by the lenders till implementation of the package."
18. In para 4.4 titled "Unsecured loans, lessors etc." the CDR Scheme notes that, as on 30th September 2012, a sum of Rs. 42 crores is due to ANZ. The said para notes in a foot note that "TTL has paid Rs.15 Crore to ANZ under a court order. The balance amount is proposed to be restructured in line with other TL lenders."
19. Considering that Lt. Col. Bedi has in his affidavit stated that TTL had applied for the CDR on 31st December 2012, more than a month after the order dated 21st November 2012 was passed, the Court enquired whether he had told the secured lenders' participating in the CDR about the Court orders, and in particular the order dated 21st November 2012. In response, Mr. Rawal drew the attention of the Court to the foot note in para 4.4 of the CDR Scheme which has been extracted hereinbefore. It simply notes that a sum of Rs. 15 crores has been paid under 'Court orders'. It is, therefore, not clear at all whether the CDR members were aware of the order dated 21st November 2012 and its true import.
20. In response to another query whether TTL had informed ANZ of its complying with CDR on 31st December 2012 and further whether it informed ANZ that as a result of CDR it would be unable to make any payment, Lt. Col. Bedi stated that several meetings have been held by ANZ when it was asked to participate in the CDR, but it failed to do so. The above submission was denied, on instructions, by Mr. Neeraj Kishan Kaul, learned Senior counsel for ANZ. He submitted that in any event, irrespective of whether ANZ was informed by TTL, which it was not, TTL ought to have accepted the order dated 21st November 2012, which recorded TTL's undertaking to make payment in terms of the settlement recorded in that order.
21. By way of an application dated 22nd April 2013, supported by an affidavit dated 23rd April 2013 of Lt. Col. Bedi (tendered in the Court by Mr. Rawal at the time of mentioning on 23rd April 2013) two documents were sought to be placed on record. The first is a letter dated 2ndJanuary 2013 addressed by ICICI Bank to the lenders of TTL, including ANZ, inviting them to a meeting on the CDR Scheme on 8th January 2013 at New Delhi. The second is a letter dated 10th January 2013 addressed by ICICI Bank to the lenders of TTL, including ANZ, enclosing the minutes of the meeting held on 8th January 2013. It is stated in the application that despite the said notice ANZ did not attend the meeting of the lenders. It is further stated that "as per understanding and bonafide belief further amount could not be released" to ANZ in terms of the order dated 21st November 2012. In the application and in the affidavit dated 23rd April 2013 of Lt. Col. Bedi in support thereof it is stated that the MD of TTL tenders "unconditional apology and throw(s) himself at the mercy of the Court."
22. The Court is not a little surprised that despite the unambiguous language of the order dated 21st November 2012, TTL did not seek directions from this Court when it became plain to it that it would be unable to adhere to the undertaking given to the Court in the event that the CDR Scheme was approved. On the contrary, it is pointed by ANZ that part-payments were made of the January 2013 instalment by TTL in February 2013. Also, Lt. Col. Bedi was unable to produce any document whereby any of the other secured lenders of TTL had expressly prohibited TTL from making the payment to ANZ.
23. The reasons stated in the affidavits filed by Lt. Col. Bedi by way of explanation as to why TTL was unable to adhere to the undertaking given by it to the Court, as recorded in the order dated 21st November 2012, are neither satisfactory nor convincing. The said order was affirmed by the DB on 28th January 2013. As already noted, despite the DB giving TTL liberty to apply to the Court for modification of the order dated 21st November 2012, including the condition regarding appointment of the PL, TTL filed no such application. It is only in the affidavit tendered in Court that TTL has made a prayer for modification of the order but without indicating what modification is being sought. It is difficult to believe that when the Court passed the order dated 17th December 2012, the CDR Scheme was not already in contemplation and yet, neither ANZ nor the Court was informed of it at that stage. Independent of any notice that ICICI may have sent ANZ about the meeting of secured lenders, it is inexcusable that having filed an affidavit undertaking to make payments in terms of the agreement recorded in the order dated 21st November 2012, TTL made no effort to inform the Court of its inability to honour that commitment.
24. Despite sufficient opportunities and time granted to TTL, it has been unable to satisfactorily explain the disobedience of the order dated 21st November 2012. If, indeed, TTL was not in a position to adhere to its commitment, as recorded in the order dated 21st November 2012, it ought to have informed the Court, making a full disclosure of the application made by it for the CDR Scheme and sought modification in terms of the leave granted by the DB. It is not even clear whether the DB was made aware of the CDR mechanism when the appeal was heard by it.
25. An officer of TTL dealing with finance was present in the Court. He explained that the current bank balance of TTL is only Rs. 10 lakhs and that the daily income to the tune of around Rs. 60 lakhs is being utilised to pay statutory and other dues. It is plain that given the fund position, TTL would be in no position to repay its debt owing to ANZ.
26. Even according to CDR, TTL is expected to restructure the debt owing to ANZ. Till date, TTL has not even proposed any such restructuring. Mr. Rawal states that some time may be given for that purpose. He has also tendered a synopsis of submissions in which reliance is placed on the decisions in Madhusudan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125 (SC), New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corpn. [1986] 59 Comp. Cas. 183 (Guj), Rishi Enterprises , In re [1992] 73 Comp. Cas. 271 (Guj). Mr. Kaul on the other hand presses for the appointment of the PL as that was an eventuality already stipulated in the order dated 21st November 2012.
27. Significantly, the CDR does not envisage creating any pari passu charge in favour of ANZ for the amount owed by TTL to ANZ. Lt. Col. Bedi states that there is no such restriction on TTL. However, the Court would not like to go by that statement since there is nothing in the CDR Scheme to suggest that creation of a pari passu charge in favour of an unsecured lender is permissible.
28. From the affidavits tendered in Court it is clear to the Court that as of now, TTL is not in a position to repay the outstanding amounts which it owes ANZ. A case for passing orders under Section 433(e) and (f) read with Sections 434 and 439 of the Act is made out. While it is possible that the CDR Scheme grants a moratorium to TTL on repayments of loans of the secured lenders, the payment of the dues owing to TTL is entirely governed by the order dated 21st November 2012 (as corrected by the order dated 17th December 2012) which has not been varied till date and, having attained finality, is binding on TTL. The CDR Scheme approved by the lenders does not deal with this aspect at all except requiring TTL to restructure the liability. TTL has not taken the first step in that direction. Only in response to the notice issued to it in the contempt petition, and after two adjournments it has come up with a vague prayer for modification of the order dated 21st November 2012. Again, TTL has not been able to explain how it proposes to clear the outstanding dues of ANZ and within what time frame.
29. The order dated 21st November 2012 is unambiguous about the consequences of any default committed by TTL in making payments to ANZ in terms of the agreement recorded in that order. The relevant portion of the order reads thus:
"An affidavit to the said effect of the Director of the Company shall be filed within one week from today detailing the schedule of these payments; in case of even one single default the petitioner shall be at liberty to take appropriate action under the contempt law; in such an eventuality, the provisional liquidator shall also stand appointed."
The affidavit dated 5th December 2012 filed by Lt. Col. Bedi on behalf of TTL, in terms of the above order, reaffirmed the agreement between the parties and was in the nature of an undertaking to stand by the agreement. The consequence of the failure to do so was spelt out in the order dated 21st November 2012 itself. One was the appointment of a PL and the other the initiation of contempt proceedings against TTL.
30. The fact that there has been disobedience by TTL of the above order is plain. The conduct of TTL in not making any move to have the order varied, despite the order of the DB, despite TTL applying for the CDR Scheme and despite TTL knowing that it was going to be unable to adhere to the payment schedules stated in the affidavit dated 5th December 2012, leads the Court to conclude that the disobedience of the order dated 21st November 2012 by TTL is wilful and not bonafide. The background to the passing of the order dated 21st November 2012 has also to be kept in view. The apology now offered by Lt. Col. Bedi is unconvincing and cannot be accepted. TTL does appear to have taken it for granted that the CDR Scheme somehow absolved TTL of the responsibility of having to honour its commitments to the Court. The binding nature and the solemnity of the undertaking given by parties to the Court has to be enforced if there has to be respect for the rule of law.
31. In light of the above discussion, the following conclusions and directions are issued:
| (i) | CA No. 455 of 2013 is allowed and Co. Pet. No. 395 of 2012 is revived. | |
| (ii) | Co. Pet. No. 395 of 2012 is admitted. A copy of the petition be served on the OL attached to this Court within five days. | |
| (iii) | The OL is appointed as the PL of TTL. The OL is directed to take over all the assets, books of accounts and records of TTL forthwith. The OL shall also prepare a complete inventory of all the assets of TTL before sealing the premises in which they are kept. He may also seek the assistance of a valuer to value the assets. He is permitted to take the assistance of the local police authorities, if required. | |
| (iv) | Publication of the citation of the petition be effected in the Official Gazette, 'The Statesman' (English) and 'Veer Arjun' (Hindi) in terms of Rule 24 of the Companies (Court) Rules, 1959 ('Rules'). The cost of publication shall be borne by ANZ. | |
| (v) | The Directors of TTL are directed to strictly comply with the requirements of Section 454 of the Act and Rule 130 of the Rules and furnish to the OL a statement of affairs in the prescribed form verified by an affidavit within a period of 21 days from when this order becomes operational. They will also file affidavits in this Court, with advance copies to the OL, within four weeks setting out the details of all the assets, both movable and immovable, of TTL and enclose therewith the balance sheets, profit and loss accounts and copies of the statements of all the bank accounts for the last three years. | |
| (vi) | The order and directions at (ii) to (v) above will not be given effect to for a period of nine weeks from today to enable TTL to make payment of the outstanding amount to ANZ by that time. It will also be open to both ANZ and TTL to approach the Court for further directions in that regard. | |
| (vii) | In the event that no payment is made and/or neither party applies to the Court for any directions, the above order appointing the PL will become operational on the expiry of nine weeks from today. In that event, ANZ will forthwith inform the OL who will thereafter proceed to take steps in terms of this order without delay. In such event the OL will file a status report by the next date. | |
| (viii) | TTL represented by Lt. Col. Bedi is found to have wilfully disobeyed the order dated 21st November, 2012, as modified by the order dated 17th December, 2012. TTL through Lt. Col. Bedi will now show cause on the next date as to why TTL should not be punished for contempt of Court. Lt. Col. Bedi, as MD of TTL, is permitted to file an affidavit on this aspect before the next date. He shall also be personally present in the Court on the next date. |
32. List on 10th July, 2013.
IT: Where possession of new flat is received within 3 years from date of transfer, in exchange of old flat under development agreement, it amounts to construction of property under section 54
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[2013] 33 taxmann.com 344 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Smt. Veena Gope Shroff
v.
Income-tax Officer -19 (1)(2), Mumbai*
B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 7159 (MUM.) OF 2010
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
JULY 4, 2012
Section 54, read with section 54EC, of the Income-tax Act, 1961 - Capital gains - Profit on sale of property used for residential house [Construction] - Assessment year 2006-07 - Assessee exchanged an old flat, for a new flat and cash compensation under development agreement with builder - She claimed exemption under section 54 with regard to capital gains on exchange of flat and under section 54EC by investing certain portion of cash in NABARD bonds - Assessing Officer disallowed exemptions on ground that construction of new house was not done by assessee within 3 years from date of transfer - Whether, where new flat received in exchange of old flat was constructed by builder and its possession was given to assessee within 3 years from date of transfer, it amounted to construction, and therefore exemptions under section 54 and 54EC were allowable - Held, yes [Para 4] [In favour of assessee]
FACTS
| ■ | The assessee exchanged an old flat for a new flat and cash compensation, under the development agreement with the builder. She claimed capital gains arising on account of transfer of old flat as exempt under section 54 and further claimed exemption under section 54EC by investing certain portion of cash in NABARD bonds. Balance was shown as LTCG. | |
| ■ | The Assessing Officer on observing that the assessee had neither purchased a house property within 1 year before or two years after the date of transfer nor had constructed a new residential house within a period of three years from the date of transfer, disallowed the exemption claimed under section 54 and 54EC and recomputed the capital gains. | |
| ■ | On first appeal, Commissioner (Appeals) confirmed the disallowance made by Assessing Officer. | |
| ■ | On second appeal assessee contended that new flat had been constructed by the builder and its possession was handed over to her within a period of three years from the date of transfer and, therefore, this amounted to construction of new flat. She further contended that entire cash could not be taxed as capital gain since certain portion was invested in NABARD bonds under section 54EC. |
HELD
| ■ | The dispute was regarding allowability of exemption under section 54 and computation of long-term capital gain in respect of exchange of old flat with a new flat under development agreement with the builder. View taken by revenue authorities was not justified. The exemption under section 54 is allowable in case the assessee transfers a residential house and within a period of 1 year before or 2 years after the date of transfer, purchases a new residential house or constructs a new residential house within a period of 3 years from the date of transfer. In this case, the assessee had exchanged old flat with new flat to be constructed by the builder under development agreement which amounts to transfer under section 2(47). Thus, the only other condition which is required to be satisfied is that assessee either purchases a new residential flat within the prescribed limit or constructs a new residential flat within a period of 3 years from the date of transfer. | |
| ■ | The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view is supported by the decision of the Tribunal in the case of Jatinder Kumar Madan v. ITO [2012] 51 SOT 583/21 taxmann.com 316 (Mum). | |
| ■ | Therefore, the provisions of section 54 are applicable and assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in NABARD bonds, the exemption under section 54EC will be available. | |
| ■ | Therefore, the claim of exemption under section 54 was allowable and the order of the Commissioner (Appeals) was set aside directing the Assessing Officer to allow the claim of the assessee. [Para 9] |
CASE REVIEW
Jatinder Kumar Madan v. ITO [2012] 51 SOT 583/21 taxmann.com 316 (Mum) (para 9) followed.
Vimal Punmiya for the Appellant. A.K. Mod for the Respondent.
ORDER
Vivek Varma, Judicial Member- This appeal by the assessee is directed against the order dated 16-07-2010 of CIT(A) for the assessment year 2006-07. The assessee in this appeal has raised basically one issue of computation of LTCG.
2. The dispute is regarding computation of Rs. 61,87,271/- as against Rs. 3,25,800/- as long term capital gain on account of surrender of flat, as declared by the assessee.
3. The facts in brief are that the assessee vide development agreement dated 08.07.2005, had surrendered her own flat of carpet area 866 sq.ft. to the builder and in lieu of the surrender of the flat, the assessee had been allotted new flat of carpet area 1040 sq.ft. and also given cash compensation of Rs. 11,25,800/-. Rs. 8,00,000/- out of the cash compensation received by the assessee, had been invested in NABARD bonds which was claimed as exempt under section 54EC and the balance Rs. 3,25,800 was shown as LTGC. Since the assessee had acquired the new flat in lieu of the old flat, capital gain arising on account of the transfer of the old flat was treated as exempt under section 54 of the Income tax Act, 1961 (the Act).
4. The AO however, observed that for applicability of provisions of section 54, the assessee should have purchased a house property within one year before or two years after the date of transfer or constructed a new residential house within a period of 3 years from the date of transfer. In this case, the assessee had neither purchased nor constructed the house property. The AO, therefore, held that the assessee was not entitled for exemption under section 54 of the Act. He, therefore, did not allow the claim of deduction under section 54. The AO arrived at the sale consideration in respect of transfer of the old flat and computed the same at Rs. 86,89,960/- consisting of sum of Rs. 75,64,160/- being market value of the new flat and Rs. 11,25,800/- being cash compensation and thus, long term capital gain was computed at Rs. 61,87,271/- after deducting the indexed cost of acquisition from the sale consideration.
5. In appeal, CIT(A) agreed with the AO that exchange of old flat with new flat constituted transfer and the capital gain was therefore taxable. He also agreed with the AO that the assessee had not fulfilled the conditions of section 54 for allowing exemption under the said section. He therefore, confirmed the disallowance made by AO.
6. Aggrieved by which the assessee is in appeal before the Tribunal.
7. Before us, the AR for the assessee submitted that the provisions of section 54 are applicable in case the assessee transfers a residential house and purchases a new house within a period of one year before or after 2 years after date of transfer or constructs a residential house within a period of 3 years from the date of transfer. In this case, the assessee had exchanged the old flat with a new flat which amounted to transfer, which was also admitted by the revenue authorities. Thereafter, the new flat had been built by the builder and possession handed over to the assessee which amounted to construction of a new flat which had been done within a period of 3 years from the date of transfer as the construction of the new flat was completed on 14.6.2007. In this connection, he referred to the letter dated 30.5.2007, by the builder, addressed to society in which it was mentioned that possession of the flat would be given on 14.06.2007, and which was actually given on 15-06-2007 (letter of possession on record). The AR also referred to the decision of the Tribunal in the case of Jatinder Kumar Madan v. ITO [2012] 51 SOT 583/21 taxmann.com 316 (Mum.) (where one of us was a party) wherein another occupant i.e. Mr. J. K. Madan was one of the signatories of the same agreement as that of the assessee, in which it was held that acquisition of new flat under a development agreement with a builder in exchange of old flat amounted to construction of new flat and therefore, the time period of 3 years from the date of transfer as mentioned in section 54 would apply for the acquisition of new flat.
8. The DR on the other hand supported the order of authorities below and argued that provisions of section 54 were not applicable as the assessee had neither purchased a new residential house nor constructed a new residential house.
9. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of exemption under section 54 of the Act and computation of long term capital gain in respect of exchange of old flat with a new flat and cash compensation under development agreement with the builder. The revenue authorities have held that since assessee had neither purchased a new flat or constructed a new flat, the provisions of section 54 are not applicable. We, however, do not subscribe with the view taken by revenue authorities. The exemption under section 54 is allowable in case the assessee transfers a residential house and within a period of 1 year before or 2 years after the date of transfer, purchases a new residential house or constructs a new residential house within a period of 3 years from the date of transfer. In this case, the assessee had exchanged old flat with new flat to be constructed by the builder under development agreement which amounts to transfer under section 2(47) of the Act. Thus, the only other condition which is required to be satisfied is that assessee either purchases a new residential flat within the prescribed limit or constructs a new residential flat within a period of 3 years from the date of transfer. The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view is supported by the decision of the Tribunal in the case of another co-owner in the case of Jatinder Kumar Madan(supra). Therefore, the provisions of section 54 are applicable and assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. The AR has also argued that entire cash compensation received by the assessee amounting to Rs. 11,25,800/- cannot be taxed as capital gain as assessee had invested a sum of Rs. 8,00,000/- lacs in NABARD bonds under section 54EC. Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in NABARD bonds, the exemption under section 54EC will be available. As regards the completion of new flat within a period of 3 years, assessee has filed a copy of letter dated 30.05.2007 of the builder in which it has been mentioned that the builder had applied for occupation certificate and possession was to be given on 14.6.2007, which in fact was given the very next day, i.e. 15-06-2007. We, therefore, allow the claim of exemption under section 54, and set aside the order of CIT(A) and direct the AO to allow the claim of the assessee.
10. In the result, appeal is allowed.
ESHA*In favour of assessee.
IT/ILT : Where assessee, an Indian company, acquired 100 per cent stake in a foreign company and consequently, Indian subsidiary of said foreign company came to be merged with assessee, Assessing Officer observed that income had accrued to foreign company from indirect transfer of shares of subsidiary and it was taxable under section 9(1)(i) Commissioner (Appeals) could not entertain additional evidence without confronting it to Assessing Officer
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[2013] 33 taxmann.com 342 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
Income-tax Officer (International Taxation) TDS - 3, Mumbai
v.
Infomedia India Ltd.*
R.S. SYAL, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 3152 (MUM.) OF 2009
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
MARCH 15, 2013
Section 9, read with section 195, of the Income-tax Act, 1961, read with article 13 of DTAA between India and UK - Income - Deemed to accrue or arise in India [Capital gains] - Assessment year 2006-07 - Assessee, an Indian company, acquired 100 per cent stake in a foreign company - Consequently, Indian subsidiary of said foreign company came to be merged with assessee - Assessing Officer observed that income had accrued to foreign company from indirect transfer of shares of subsidiary and it was taxable under section 9(1)(i) and since assessee did not deduct TDS from said payment, he made addition to assessee's income - However, Commissioner (Appeals) entertained additional evidence produced by assessee and deleted said addition - Whether since Commissioner (Appeals) relied upon additional evidence without confronting it to Assessing Officer, said order could not be sustained and matter was to be remitted back to Assessing Officer - Held, yes [Para 4] [Matter remanded]
FACTS
| ■ | The assessee, an Indian resident company, acquired 100 per cent stake in a foreign company and, consequently, got acquisition over Indian subsidiary of said foreign company in which the foreign company was holding 49 per cent equity shares. | |
| ■ | The Assessing Officer observed that from indirect transfer of shares of subsidiary, income had accrued to the foreign company which was taxable under head 'Capital gain' and since assessee did not deduct tax at source from said payment, it was liable to be treated as assessee-in-default under section 201 and made addition to income of the assessee. | |
| ■ | Before the Commissioner (Appeals), the assessee submitted additional evidence on basis of which the Commissioner (Appeals) deleted said addition. | |
| ■ | On second appeal: |
HELD
| ■ | It is manifest that the assessee has clearly mentioned that all these documents were submitted before the Commissioner (Appeals) only. As it is patent that the Commissioner (Appeals) entertained additional evidence and deleted the liability of deducting tax at source by relying on such additional evidence without confronting it to the Assessing Officer, his order cannot be sustained. Therefore, the impugned order was to be set aside and the matter remitted to the file of Assessing Officer for deciding the issue afresh as per law after allowing a reasonable opportunity of being heard to the assessee. [Para 4] |
CASES REFERRED TO
Aditya Birla Nuvo Ltd. v. Dy. DIT (International Taxation) [2012] 342 ITR 308/[2011] 200 Taxman 437/12 taxmann.com 141 (Bom.) (para 4).
Ms. Neeraja Pradhan for the Appellant. Milind Kothari for the Respondent.
ORDER
R.S. Syal, Accountant Member - This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 13.03.2009 in relation to the assessment year 2006-2007.
2. The only issue raised in this appeal through various grounds is against the direction of the ld. CIT(A) in not taking cognizance of the income under the head 'Capital Gains' of Rs. 1,28,37,866/- arising to the non-resident from the indirect transfer of 49% share in the India Company, embedded in the sale consideration for acquisition of 100% shares of the foreign company and thereby directing the Assessing Officer not to treat the assessee in default under section 195 of the Act read with sections 201(1) and 201(1A) of the Act.
3. Briefly stated the facts of the case are that the assessee is a resident Indian company which was incorporated in 1955 as Tata Press Limited. The assessee acquired 100% stake in a company called M/s. Keyword Group Limited, a U.K. based publishing company. Equity shares of Keyword Group Limited were held by two U.K. resident citizens, namely, Mr. Alan Rodwell (700 shares holding to 70% stake) and Mr. Stephen Johnson (300 shares holding to 30% stake) who sold it for an agreed consideration of $3.35 million dollars through agreement dated 13.01.2006. With the acquisition of Keyword Group Limited, its Indian subsidiary company, namely, M/s. Cepha Imaging Private Limited also came to be acquired by the assessee as Keyword Group Limited held 49% equity shares of Cepha Imaging Private Limited with voting rights. Apart from that the assessee further directly acquired 41% of the equity shares of Cepha Imaging Private Limited from two resident Indians. The Assessing Officer observed that 49% shares of Cepha Imaging Private Limited were acquired by Keyword Group Limited in the financial year 2004-2005. Since such shares represented an asset or source of income or a capital asset of Keyword Group Limited situated in India, the same was indirectly transferred to the assessee through sale of 100% equity shares of the holding company in U.K. The A.O. held that the income accrued in India to Keyword Group Limited from the indirect transfer of shares in India of Cepha Imaging Private Limited, which was taxable as per section 9(1)(i) of the Act covering even indirect accrual of income. Resultantly the capital gain on account of indirect transfer of 49% shares by Keyword Group Limited was held to be chargeable to tax for assessment year 2006-2007 as the transfer was effected through agreement dated 13.01.2006. The assessee's contention about non-chargeability did not find favour with the A.O., who held that the primary motive for acquisition of Keyword Group Limited was acquisition of shares of Cepha Imaging Private Limited. The A.O. also called for the balance sheet of Keyword Group Limited and noticed that it was incurring heavy losses. But for the investments held in Cepha Imaging Private Limited, the business of Keyword Group Limited was found to be loss making and liability imposing. In this background of facts, the A.O. reached the conclusion that the assessee acquired the shares of Keyword Group Limited mainly to acquire the stake in Cepha Imaging Private Limited. In the order passed u/s 201 read with section 195, the Assessing Officer held that since the assessee-company failed to deduct tax at source from income chargeable to tax from indirect payment to non-resident, namely, Keyword Group Limited falling under the head "capital gains", it was liable to be treated as the assessee-company in default u/s 201 for payment of tax to the extent of Rs. 1,32,12,381 from indirect payment to Keyword Group Limited made through the erstwhile shareholder of that company as no proof of payment of tax on this capital gain was placed. The assessee challenged the order u/s 201 read with section 195 before the ld. CIT(A) by filing various documents in support of its contention that there was no liability to deduct tax at source and hence the assessee should not be treated as assessee in default. Based on such additional evidence placed before the learned CIT(A), he disagreed with the A.O. on the question of chargeability of capital gain on transfer of capital asset thereby absolving the assessee from liability to deduct tax at source.
4. The learned Departmental Representative strongly relied on the judgment of the Hon'ble jurisdictional High Court in Aditya Birla Nuvo Ltd. v. Dy. DIT (International Taxation) [2012] 342 ITR 308/[2011] 200 Taxman 437/12 taxmann.com 141 (Bom.) and thus opposed the CIT(A)'s decision in vacating the A.O.'s order u/s 201. She submitted that the learned CIT(A) relied on the additional evidence without confronting it to the Assessing Officer or calling for any remand report. On a pertinent query from the Bench, the learned AR was fair enough to accept that the additional evidence filed before the learned CIT(A) was not sent to the A.O. for his comments. From the paper book filed before us consisting of 73 pages, it is manifest that the assessee has clearly mentioned that all these documents were submitted before the learned CIT(A) only. As it is patent that the learned CIT(A) entertained additional evidence and deleted the liability of deducting tax at source by relying on such additional evidence without confronting it to the Assessing Officer, we are of the considered opinion that his order cannot be sustained. We, therefore, set aside the impugned order and remit the matter to the file of A.O. for deciding the issue afresh as per law after allowing a reasonable opportunity of being heard to the assessee. Needless to say the assessee will be at liberty to lead any fresh evidence in its defense before the Assessing Officer in such de novo proceedings.
5. In the result, the appeal is allowed for statistical purposes.
POOJA*Matter remanded.
IT : Where assessee was a charitable institution and delay in filing appeal happened due to wrong advice and ignorance of law, delay in filing appeal should be condoned
IT : Where Commissioner failed to dispose application of registration within stipulated period of six months, application for registration was deemed to have been allowed
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[2013] 33 taxmann.com 516 (Jodhpur - Trib.)
IN THE ITAT JODHPUR BENCH
Nosegay Public School Management Committe
v.
Commissioner of Income-tax*
HARI OM MARATHA, JUDICIAL MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
IT APPEAL NOS. 127 & 128 (JODH.) OF 2012
DECEMBER 19, 2012
I. Section 12A of the Income-tax Act, 1961 - Charitable or religious trust - Registration of [Time limit for filing application for registration] - Assessee-trust filed instant appeal along with an application for condonation of delay of about 1660 days - Reason for this delay was stated to be due to wrong advice and ignorance of law of persons who were managing this institution - Whether considering fact that assessee was a charitable institution and Assessing authorities had found objects of assessee charitable in nature, delay in filing appeal was to be condoned - Held, yes [Para 11] [In favour of assessee]
II. Section 12A of the Income-tax Act, 1961 - Charitable or religious trust - Registration of [Time limit for disposal of application] - Assessee filed an application for registration under section 12A - Date of creation of institution was mentioned as 9-11-1985 - Commissioner disposed of application after six months from date of receipt and granted registration with effect from 1-4-2005 - Whether, since impugned order was passed beyond six months period, application for registration was deemed to have been allowed - Held, yes - Whether therefore, Commissioner was to be directed to grant registration to assessee with effect from 9-11-1985 - Held, yes [Para 12][In favour of assessee]
CASE REVIEW-I
Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC); Vedabai alias Vijayantabhai Baburao Patil v. Shantarm Baburao Patil[2002] 253 ITR 798/122 Taxman 144 (SC); CIT v. Ram Kishan Gupta [2007] 295 ITR 578 (All.) and Motilal Padampat Sugar Mill Co. Ltd. v.State of Uttar Pradesh [1979] 118 ITR 325 (SC) (para 11) followed.
CASE REVIEW-II
Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Paramarth Dham Trust v. CIT [2007] 117 SOT 281 (Delhi)(SB)(para 12)followed.
CASES REFERRED TO
Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) (para 7), Vedabai alias Vijayantabhai Baburao Patil v. Shantarm Baburao Patil [2002] 253 ITR 798/122 Taxman 144 (SC) (para 7), CIT v. Ram Kishan Gupta [2007] 295 ITR 578 (All.) (para 8), Motilal Padampat Sugar Mill Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 325 (SC) (para 9) and Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Paramarth Dham Trust v. CIT [2007] 17 SOT 281 (Delhi)(SB)(para 11).
Suresh Ohja for the Appellant. G.R. Kokani for the Respondent.
ORDER
Hari Om Maratha, Judicial Member - Both the appeals by the assessee committee (trust) is directed against the order passed by learned CIT (Admn.), Bikaner dt. 14th June, 2007 passed under s. 12A(a) of the IT Act, 1961 (hereinafter referred to as "the Act" in short). By this common order, we will dispose of both the appeals which are interrelated.
2. Briefly stated, the facts of the case are that the appellant had filed application for registration of a charitable trust/institution under s. 12A(a) of the Act in Form No. 10A. As per his application in Column No. 4, date of creation of the Institution has been mentioned as 9th Nov., 1985. The assessee received a notice of hearing in this case in which it is stated that since you have applied for registration under s. 12A(a) on 30th March, 2006, after expiry of one year from the date of registration under the Rajasthan Societies Registration Act (RSRA), 1958 (on 9th Nov., 1985), therefore, you are directed to attend this office on 22nd Aug., 2006 at 11.00 AM and explain the reasons for the delay. The assessee filed condonation petition on 2nd April, 2007 stating therein that due to lack of awareness of the law, we could not apply for registration of the society in time and when it came to our notice, we immediately applied for the same. Through this letter, it was prayed that the delay in filing the application may be condoned. It was also suggested in the alternative that in case the delay is not condoned, registration may be granted from 1st April, 2005 in view of cl. (ii) of proviso to s. 12A(a) of the Act. The CIT had inquired into the nature and objects of this Committee/Institution and had found that its objectives are undisputedly charitable in nature and, therefore, it deserves registration under s. 12A(a) of the Act. Later on, on 14th June, 2007, the learned CIT registered the assessee under s. 12A(a) w.e.f. 1st April, 2005.
3. But despite fact that certificate of registration under the Act was granted, the appellant is aggrieved on two grounds :
| (i) | that the order passed by the CIT, Bikaner on 14th June, 2007 is not as per law and as such it is illegal because as per law the CIT is bound to pass order accepting or rejecting application for registration under s. 12A. within six months from the date of application filed in his office, and | |
| (ii) | the assessee has mentioned the date of registration of the society as 9th Nov., 1985, the registration deemed to have been granted w.e.f 9th Nov., 1985, as the CIT has not considered the condonation petition at all. It was argued that without giving reasons for rejection of condonation application and without mentioning anything in this regard, the CIT cannot reject the application. The deemed rejection of application will also not arise. |
4. In this manner, the appellant has pleaded - one that the order in question is not at all a valid order in the eyes of law because it has been passed beyond the permitted time, and two, deemed registration would be from the date of its registration, when order was not passed within six months of the receipt of application for registration by the CIT.
5. Before us, lengthy arguments were advanced by learned Authorised representative which was controverted by learned CIT-Departmental Representative who supported the appellate order. Because the issue before us is admixture of facts and law, we would like to extract the entire submissions which was made by the assessee before CIT, in verbatim, as under :
"To
The CIT, Bikaner.
Reg. Nosegay Public School Management Committee, Sriganganagar
Assessment year:
Sub : For grant of s. 12A of IT Act 1961
Dear Sir,
I want to draw your kind attention towards the fact that an application for registration was submitted by the society on dt. 30th March, 2006. In this connection it is stated that in the application the date of creation of the society was mentioned as 9th Nov., 1985.
In this connection, it is stated that after application of registration what I have been able to understand that one report from the AO/Jt. CIT was called for. The order sheet dt. 8th Aug., 2006 is crystal clear, for your ready reference the contents thereof are being reproduced herewith :
The predecessor of your goodself issued one notice dt. 9th Aug., 2006 in respect of the fact that the registration application was submitted after expiry of one year from the date of registration. The assessee submitted replies vide letter dt. 2nd April, 2007 stating full facts and the reasons mentioned therein were on account of lack of awareness, of the law. The relevant paragraph is being reproduced hereunder :
But due to lack of awareness of the law we could not apply for the registration of the society in time and when it came to our notice, we applied for the registration.
From the perusal of the above you will observe that your predecessor was requested so as to condone the delay and to grant registration retrospectively.
Now, I want to draw your kind attention towards the provision of s. 12AA of the IT Act. The relevant provisions are being reproduced hereunder :
(2) Every order granting or refusing registration under el. (b) of sub-s. (1) / shall be passed before the expiry of six month from the end of the month in which the application was received under cl. (a) or cl. (aa) of sub-s. (1) of s. 12A.
In this respect from the perusal of above you will observe that order has to be passed within six month from the date of submission of the application. In case of the assessee an application was submitted on 30th March, 2006. The six month expired on 30th Sept., 2006. In the meanwhile no order for refusal was passed by the CIT, Bikaner. The word shall has been used. Therefore in case of the assessee the registration shall be deemed to have been granted in view of the above provisions.
It is. therefore, humbly prayed that necessary order for the period prior to 1st April, 2005 may kindly be passed so that the assessee may be able to take legal benefit as provided in the Act. Hope you will consider the request and pass the order for granting registration from the date of application.
I also want to draw your kind attention that the Department himself has accepted that the society is a charitable institution. The report of the lower authorities is self explanatory in this regard.
Without prejudice to above it is stated that if the predecessor of your goodself was of the opinion that registration cannot be granted retrospectively in that case speaking order should have been passed.
There is no order at all in respect of refusal of registration under s. 12AA/12A of the IT Act, 1961.
Further, without prejudice to above it will be worth mentioning here that only on account of delay adverse view should not be drawn. There is a direct judgment of Hon'ble Supreme Court in case of Collector, Land Acquisition v. Mst Katiji & Ors. [1987] 62 CTR (SC) 23 : [1987] 167 ITR 471 (SC). The relevant paras are being reproduced hereunder :
1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.
4. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.
5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs serious risk.
6. It must be grasped that the judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
The judgment of Supreme Court is very clear regarding the subject.
As far as the ignorance of law is concerned I want to draw your kind attention towards the order of Tribunal Jodhpur Bench, Jodhpur reported in 30 TW 158 the relevant portion is being reproduced as under :
In this case the Honb'le Supreme Court has held that Court should adopt rational, common sense and pragmatic approach. And reliance can also be placed on the judgment of apex Court in the case of Motilal Padampat Sugar Mill Co. Ltd. v. State of Uttar Pradesh & Ors . [1979]118 ITR 326 (SC). In this case it was held that 'there is no presumption that even; person knows the law. It is often said that everyone is presumed to know the law, but that is not correct statement. There is no such maxim known to the law.
From the perusal of the above you will observe that there was reasonable cause made known to the CIT Bikaner regarding delay. Though the matter became barred by limitation by that time but the reason was submitted to the CIT, Bikaner.
In above mentioned fact and circumstances you will observe that the order passed by your predecessor is a cyclostyled order in which the period seems to have been typed under some wrong impression.
I want to also draw your kind attention that the matter in respect of the period prior to 1st April, 2005 remained undisposed of in the order. In the other word there is no order for the period prior to 1st April, 2005. It is, therefore, prayed that order may kindly be passed, in view of s. 12AA of the IT Act, 1961, in case of disposal of application after expiry of six month.
It is therefore prayed that necessary order for the period prior to 1st April, 2005 may kindly be passed for granting registration under s. 12A and 12AA of the IT Act, 1961.
It is also prayed that a chance of personal hearing may kindly be allowed so that the assessee may be able to come forward with suitable submission and put his submission.
Hope you will consider the request.
Yours faithfully,
Sd/-
For Nosegay Public School Management Committee
dt. 11th Jan., 2012"
6. It was found that the appeal filed before the Tribunal is time barred. This appeal was received in this office on 5th March, 2012. This appeal is directed against the order of learned CIT dt. 14th June, 2007. The delay in filing this appeal is 1660 days. A condonation petition has been filed which is duly supported by an attested affidavit. The averments taken in this affidavit of the Managing Trustee are being reproduced verbatim, to understand the 'reasons' for this delay :
"Affidavit
I Papinder Singh Sudan s/o Shri Hakam Singh Sudan, age 60 years, resident of Chak 7-E Chhoti, Sriganganagar declare on oath as under :
That I am Managing Trustee of Nosegay Public School, Sriganganagar and conversant with the affairs of the trust and also competent to swear this Affidavit.
That Nosegay Public School Management Committee is a Society created vide Memorandum of Association and was got registered videregistration certificate dt. 9th Nov., 1985,
That an application under s 12A of the IT Act was submitted vide application dt. 30th March, 2006 before the CIT, Bikaner.
That the CIT, Bikaner allowed the registration to the Society Nosegay Public School Management Committee w.e.f. 1st April, 2005.
That the society applied for registration since its beginning i.e. from date of creation.
That the society now submitted an appeal before the Tribunal Jodhpur Bench, Jodhpur against the order of the CIT, Bikaner dt. 14th June, 2007. The appeal is barred by limitation.
That the appeal in question is delayed substantially on account of ignorance of law and as per the advice of the tax consultant of the Society at that time.
That now the present consultants of the Society advised that an appeal should have been submitted. It has also been made known that no order can be passed on an application under s. 12A of the IT Act after period of six months from the date of application.
That since the Members of Society were not aware about the IT Act and consequences thereof but the consultant advised that it makes no difference if the registration to the Society has been granted w.e.f. 1st April, 2005 in place of dt. 9th Nov., 1985 whereas the society was created and running for fulfilment of aims and objects thereof after creation.
That the application under s. 12A of the IT Act submitted by the Society was decided by the CIT, Bikaner vide order dt. 14th June, 2007 i.e. after expiry of 6 months from the date of submitting of the application.
That an application in respect of condonation of delay was also submitted before the CIT Bikaner vide application dt. 2nd April, 2007 prepared by the then consultant.
What has been stated above is true to the best of my knowledge and nothing has been concealed. God may help me.
Deponent
Sd/-
(Papinder Singh Sudan)"
7. With the support of this affidavit and application for condonation of delay it has been prayed that in the interest of substantial justice, this delay may kindly be condoned. This request was repelled by learned CIT- Departmental Representative stating that this delay is inordinate, therefore, it should not be condoned. After considering rival stands, we have found that the reason for this delay is stated to be due to wrong advice and 'ignorance of law' of the persons who are managing this institution. We have gone through the decisions relied upon by the learned Authorised Representative in respect of condonation of this delay. We have noticed that the Hon'ble Supreme Court, as back as in the year 1987, had an occasion to decide such an issue in the case of Collector, Land Acquisition v. Mst Katiji [1987] 167 ITR 471 (SC). The Hon'ble Supreme Court has titled (tilted) their decision overwhelmingly in the favour of the substantial justice when it is pitted against the pedantic reasons. Subsequently, the Hon'bie apex Court reiterated their view while deciding the case of Vedabai alias Vijayanatabai Baburao Patil v. Shantaram Baburao Patil [2002] 253 ITR 798/122 Taxman 114 (SC) in which their lordship have held as under:
"In exercising discretion under s. 5 of the Limitation Act, 1963, to condone delay for sufficient cause in not preferring an appeal or other application within the period prescribed, Courts should adopt a pragmatic approach. A distinction must be made between a case where the delay is inordinate and a case where the delay is of a few days. Whereas in the former consideration of prejudice to the other side will be a relevant factor and calls for a more cautious approach, in the latter case no such consideration may arise and such a case deserves a liberal approach. No hard and fast rule can be laid down in this regard. The Court has to exercise its discretion on the facts of each case keeping in mind that in construing the expression 'sufficient cause' the principle of advancing substantial justice is of prime importance. The expression 'sufficient cause' should receive a liberal construction."
8. Similarly, Hon'ble Allahabad High Court has very succinctly dealt with this issue threadbare while deciding the case of CIT v. Ram Kishan Gupta[2007] 295 ITR 578. It has been held in this case as under:
"In view of the aforesaid discussions, we are of the view that the sufficient cause had been brought on record to condone the delay of five days. In the circumstances, the impugned judgment and order dt. 26th July, 1999, is set aside. The delay in filing the appeal before the Tribunal is condoned and the Tribunal is directed to decide the appeal on the merits in accordance with law. Since the appeal was filed in the year 1992, it would be appropriate that the Tribunal expedites the hearing of the appeal and decide the same within a period of three months from the date of production of certified copy of this order.
The appeal stands allowed as above, however in the facts of the case, there shall be no order as to costs."
9. The Hon'ble apex Court has laid down a firm law vide which 'ignorance of law' has been treated as a 'sufficient cause' and reasonable excuse for any default committed under the law when the cause of substantial justice is under consideration. The Hon'ble apex Court while dealing with the case ofMotilal Padampat Sugar Mill Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 325 (SC) has held thus :
"On the basis of an announcement in a newspaper that the State of U.P. had decided to grant exemption from sales-tax for a period of three years to all new industrial units in the State, the appellant wrote a letter in October, 1968, to the director of industries of its intention to set up an industrial unit for the manufacture of Vanaspati, in reply to which the director confirmed that there will be no sales-tax on the finished product of the appellant's Vanaspati factory from the date it gets power connection for commencing production. Thereupon the appellant approached financiers for financing the project and initiated negotiations with manufacturers for the purchase of machinery for the factory. In December, 1968, the Chief Secretary to Government and adviser to the Governor reiterated the assurance that the appellant would be entitled to the tax holiday. On the appellant's request for confirmation, the Chief Secretary in a reply dt. 22nd Dec, 1968, confirmed that 'the State Government will be willing to consider your request for grant of exemption from U.P. sales-tax for a period of three years from the date of production', and the appellant to apply formally to the Secretary in the Industries Department and in the meantime to 'go ahead with the arrangements for setting up of the factory'. Since the financial institutions were not satisfied with that reply, the appellant approached the Chief Secretary again and the latter wrote a letter dt. 23rd Jan., 1969, to the effect that the appellant 'will be entitled to exemption from U.P. sales-tax for a period of three years from the date of going into production', the exemption being applicable to Vanaspati sold in the State, and in view of this assurance the appellant went ahead with the setting up of the Vanaspati factory. Thereafter, the State Government took a policy decision in January, 1970, that new Vanaspati units will be given only a graded partial concession during the first three years of production and once again the State Government revised its policy in August, 1970, rescinding even the partial exemption. In the meantime, the appellant had written a letter to the effect that it would be availing of the partial exemption. The appellant thereupon filed a writ petition which it amended and in the amended petition raised the plea that the Chief Secretary, acting on behalf of the State Government, had given an unequivocal assurance that the appellant would be entitled to exemption from payment of sales-tax for a period of three years from the date of commencement of production, intending or knowing that it would be acted upon by the appellant, and the appellant, relying on that assurance, established the factory by investing a large amount, and, therefore, the State Government was bound to Honour the assurance and exempt Vanaspati manufactured and sold by the appellant for a period of three years from 2nd July, 1970. The High Court rejected the plea. On appeal to the Supreme Court:
Held, reversing the decision of the High Court, that the facts necessaiy for invoking the doctrine of promissory estoppel were clearly present and the Government was bound to carry out the representation and exempt the appellant from sales-tax in respect of sales of Vanaspati effected by it in Uttar Pradesh for a period of three years from the date of commencement of production and was not entitled to recover such sales-tax from the appellant :
Held, also, on the facts, that the fact that the appellant wrote a letter accepting the concessional rate of sales-tax did not amount to waiver.
It is elementary that waiver is a question of fact and it must be properly pleaded and proved. No plea of waiver can be allowed to be raised unless it is pleaded and the factual foundation for it is laid in the pleadings. Waiver means abandonment of a right and it may be either express or implied from conduct, but its basic requirement is that if must be "an intentional act with knowledge', There can be no waiver unless the person who is said to have waived is fully informed as to his right and with full knowledge of such right, he intentionally abandons it.
Where one party by his words or conduct makes to another a clear and unequivocal promise which is intended to create legal relations or effect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective of whether there is any pre-existing relationship between the parties or not.
It is not necessary, in order to attract the applicability of the doctrine of promissory estoppel, that the promisee, acting in reliance on the promise, should suffer any detriment. What is necessary is only that the promisee should have altered his position: the alteration of position need not involve any detriment to the promisee. The detriment in such a case is not some prejudice suffered by the promisee by acting on the promise, but the prejudice which would be caused to the promisee, if the promisor were allowed to go back on the promise.
Where the Government makes a promise knowing or intending that it would be acted on by the promisee and, in fact, the promisee, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promisee, notwithstanding that there is no consideration for the promise and the promise is not recorded in the forni of a formal contract as required by Article 299 of the Constitution.
Since the doctrine of promissory estoppel is an equitable doctrine, it must yield when equity so requires. If it can be shown by the Government that having regard to the facts as they have subsequently transpired, it would be inequitable to hold the Government to the promise made by it, the Court would not raise an equity in favour of the promisee and enforce the promise against the Government, because, on the facts, equity would not require that the Government should be held bound by the promise made by it. When the Government is able to show that in view of the facts which have transpired since the making of the promise, public interest would be prejudiced if the Government were required to carry out the promise, the Court would have to balance the public interest in the Government carrying out a promise made to a citizen which has induced the citizen to act upon it and alter his position and the public interest likely to suffer if the promise were required to be carried out by the Government and determine which way the equity lies. It would not be enough for the Government just to say that public interest requires that the Government should not be compelled to carry out the promise or that the public interest would suffer if the Government were required to Honour it. The Government cannot claim to be exempt from the liability to carry out the promise on some indefinite and undisclosed ground of necessity or expediency; nor can the Government claim to be the sole judge of its liability and repudiate it on an ex parte appraisement of the circumstances. The Government will have to disclose to the Court what are the subsequent events on account of which the Government claims to be exempt from the liability and it would be for the Court to decide whether those events are such as to render it inequitable to enforce the liability against the Government. Mere claim of change of policy would not be sufficient to exonerate the Government from the liability: the Government would have to show what precisely is the changed policy and also its reason and justification so that the Court can judge for itself which way the public interest lies and what the equity of the case demands. It is only if the Court is satisfied, on proper and adequate material placed by the Government, that overriding public interest requires that the Government should not be held bound by the promise but should be free to act unfettered by it, that the Court would refuse to enforce the promise against the Government. The Court, would insist on a highly rigorous standard of proof in the discharge of the Government's burden in this regard.
But even where there is no such overriding public interest, it may still be competent to the Government to resile from the promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position provided of course it is possible for the promisee to restore status quo ante. If, however, the promisee cannot resume his position, the promise would become final and irrevocable
The doctrine of promissory estoppel cannot be applied in the teeth of an obligation or liability imposed by law. Promissory estoppel cannot be invoked to compel the Government or even a private party to do an act prohibited by law. There can also be no promissory estoppel against the exercise of legislative power. The legislature can never be precluded from exercising its legislative. function by resort to the doctrine of promissory estoppel.
Per curiam : (i) If the U.P. Sales-tax Act, 1948, did not contain a provision enabling the Government to grant exemption it would not be possible to enforce the representation against the Government, because the Government cannot be compelled to act contrary to the statute, but since s. 4A of the U.P. Sales-tax Act, 1948, confers power on the Government to grant exemption from sales-tax, the Government can legitimately be held bound by its promise to exempt the appellant from payment of sales-tax. It is true that taxation is a sovereign or Governmental function, but no distinction can be made between the exercise of a sovereign or Governmental function and a trading or business activity of the Government, so far as the doctrine of promissory estoppel is concerned.
(ii) There is no presumption that every person knows the law. It is often said that everyone is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law.
Decision of the Allahabad High Court reversed."
10. Therefore, taking the cumulative effect of these decisions, particularly when appellant before us is a Charitable Institution, and the CIT as well as the ITO have found the objects of the appellant 'charitable in nature' no doubt has been raised in this regard, we are left with no option to condone this delay in filing appeal before Tribunal. In such a institution the trustee or any in-charge has got no personal interest, but such institutions serve the public cause of charity. Anybody so connected may have perfunctory interest and such like long delays usually occur. There are raft of decisions which favour condonation of such delays, instead of defeating the cause of charity at the very threshold. That is why the law has permitted such institution to exist and flourish for public cause. We are aware that there may be some institutions which may also work against the dictum of the law and avail personal benefits of its trustees but such cases have to be segregated. In the light of the above decisions, we are of the considered opinion that this appeal deserves to be admitted after condoning the delay. Accordingly, we admit this appeal.
11. Coming to the merits of the case, we have found that the CIT undeniably has passed the order under s. 12A(a) beyond six months of the receipt of application in Form No. 10A in its office on 30th March, 2006. The impugned order was passed on 14th June, 2007, beyond six months as has been prescribed in s. 12A. In such eventualities, the application for registration is deemed to have been allowed. We may rely on the decision of Hon'ble Special Bench of Tribunal, Delhi rendered in the case Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT[2007] 17 SOT 281 (Delhi) (SB). In the above order it has been held that if the order is not passed by CIT within 6 months of receipt of application in Form 10A, under s. I2A, it is deemed that it stand allowed. The order passed by CIT refusing registration was treated as a 'nullity' liable to be quashed. Thus, registration was deemed to be granted 'as applied for by the assessee'. In this case also, similar situation has occurred. The only difference is that the CIT has registered the Institution but w.e.f. 1st April, 2005, ignoring the date of registration given in the Form No. 10A. The ratio of the above Tribunal order of the Special Bench the application is 'deemed allowed' as applied for by the assessee. Since the assessee had applied to get registration from the date of its inception, it is wrong and illegal to allow the same w.e.f. 1st April, 2005 under this deeming provision. This registration has to be treated to have been granted with effect from the date of its inception i.e. 9th Nov., 1985. Accordingly, we direct the CIT to grant registration to the appellant w.e.f. 9th Nov., 1985, which already deemed to have been granted. In view of our above finding, the other appeal would be of academic interest only.
12. In the result, both the appeals stand allowed.
IT : Where Tribunal proceeded to decide certain issues on merits without giving an opportunity of being heard to assessee, order so passed by Tribunal suffered from an error apparent on face of record which was to be rectified in exercise of power under section 254(2)
■■■
[2013] 33 taxmann.com 518 (Gujarat)
HIGH COURT OF GUJARAT
Deputy Commissioner of Income-tax
v.
Rajendra M. Vyas*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 1158 OF 2013
FEBRUARY 12, 2013
Section 254 of the Income-tax Act, 1961 - Appellate Tribunal - Powers of [Power of rectification] - Whether where Tribunal proceeded to decide certain issues on merits without giving an opportunity of being heard to assessee, order so passed by Tribunal suffered from an error apparent on face of record which was to be rectified in exercise of power under section 254(2) - Held, yes [In favour of assessee]
CASES REFERRED TO
Neesa Leisure Ltd. v. Union of India [2011] 338 ITR 460/[2012] 204 Taxman 86/[2011] 16 taxmann.com 163 (Guj.) (para 4) and Dy. CIT v. Manu P. Vyas [2013] 32 taxmann.com 176/214 Taxman 86 (Guj.) (para 6).
Mrs. Mauna M. Bhatt for the Petitioner.
ORDER
Ms. Sonia Gokani, J. - This petition is preferred challenging the order of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 23.7.2012 challenging the validity of the order of the Tribunal in MA No.88/Ahd/2012, whereby the Tribunal exercised the powers under Section 254(2) of the Income Tax Act ("the Act" for short).
2. The respondent assessee preferred appeal before CIT(Appeals), which was partly allowed on 25.1.2006, whereby it confirmed various additions by virtue of such order. Aggrieved by the same, both the sides challenged the order of CIT(Appeals) before the Tribunal. Challenge was made for the entire block period of 1.4.1995 to 26.2.2002. The Tribunal, after an elaborate discussion, passed an exhaustive order on 30.3.2012 and dismissed the appeal of the Revenue.
3. Miscellaneous Application was preferred by respondent under Section 254(2) of the Act and the Tribunal allowed such an application on 23.7.2012, recalling its own order on 30.3.2012 and fixed rehearing of the appeal.
4. It is contended before us by the Revenue that it is not open for the Tribunal to examine validity of search proceedings in view of the decision of this Court rendered in the case of Neesa Leisure Ltd. v. Union of India [2011] 338 ITR 460/[2012] 204 Taxman 86/16 taxmann.com 163 (Guj.). It is urged that when by a detailed judgment, the Tribunal has adjudicated the dispute by and between the parties, the Tribunal's order suffers from the vice and requires to be quashed and set aside. It it also urged that it is wholly impermissible for the Tribunal to hear the appeal afresh as it has no power of review. It emerges from the record the Tribunal, after detailed hearing, it adjudicated the controversy in favour of the Revenue and against the assessee respondent. The Tribunal also gave its final findings examining various additions made by CIT(Appeals) in Miscellaneous Civil Application for rectification moved by the assessee respondent. The stand taken by the assessee respondent is that the only question that was required to be examined by the Tribunal was in respect of its jurisdiction to consider the assessee's challenge to the validity of the search itself. The Tribunal was not to adjudicate the case on merits.
5. The Tribunal, after noting rival contentions of the parties, concluded in MA No.88/2012 that the assessee, since was prevented from arguing the matter on merits, at the time of hearing, it was essential for the Tribunal to recall its own order dated 30.3.2012 and place the matter for hearing afresh. This has perturbed the Revenue, and therefore, present petition has been preferred.
6. Identical question arose in Special Civil Application No.1159 of 2013, where also we had called for the record from the learned advocate for the Revenue as our initial impression was that no arguments on the merits had taken place before the Tribunal. After considering the material placed before us on record, we have dismissed the petition and the present petition also needs to meet the same fate. Instead of giving fresh reasonings in respect of this petition, the issue being identical, it shall have to be accorded the same treatment. It will be appropriate to reproduce the relevant observations made in the case of Dy. CIT v. Manu P. Vyas [2013] 32 taxmann.com 176/214 Taxman 86 (Guj.)
"5. From the original order passed by the Tribunal on 30.03.2012, we had gathered a strong prima facie impression that the assessee was correct in contending before the Tribunal that no arguments on merits beyond the question of applicability of the decision of this Court in case of Neesa Leisure Ltd and anr v. Union of India Through Secretary and ors. (supra) were made. Further, since the Tribunal itself had, in its rectification order, gone on record to suggest that the assessee was correct in making such a statement we had also inquired with the counsel for the revenue whether there was anything on record to suggest that the impression carried by the assessee and as confirmed by the Tribunal in its rectification order could be stated to be erroneous and there was any material to enquire further, particularly, when we find that the Tribunal was a best judge to record what had transpired during oral hearing before the said forum, the above question became more relevant.
6. Learned counsel Mr. Bhatt for the revenue placed on record a communication dated 08.02.2012 from one Mr. S.K. Gupta, who had appeared before the Tribunal on behalf of the revenue during the said proceedings before the Tribunal, in his letter to the Commissioner of Income Tax, he has stated as under:
"2.2 However, with respect to the arguments and merits, I do not recall whether such arguments were made or not because it is a very old matter being more than one year old. Every day we were arguing 15 to 20 appeals and therefore, being one year old, I do not have any memory with respect to the query made by Shri Manish Bhatt, Advocate as to whether the arguments were advanced on merits or not."
7. From the record therefore, it clearly emerges that the impression carried by the assessee as confirmed by the Tribunal, is not rebutted from any further evidence on record. We would, therefore, proceed to accept the Tribunal's recollection of what transpired during the oral hearing before it true and accurate.
8. In the result, we do not find any merits in the petition in which the principal stand of the department is that the Tribunal could not have recalled its order which was rendered on merits after by-partite hearing. When we find that the Tribunal proceeded to decide certain issues on merits without giving full opportunity to the aggrieved party to make submissions thereon, the order did certainly suffer from an error apparent on the record. Tribunal, therefore, committed no error in exercising power of rectification. We may, however, clarify that by recalling the said order, the Tribunal cannot seem to have recalled its earlier conclusions. With respect to the applicability of the decision of this Court in case of Neesa Leisure Ltd. v.Union of India Through Secretary (Supra). We may hasten to add however that with respect to such an issue as far as we are concerned, we have expressed no opinion."
7. This Petition also is being disposed of with the same clarifications as has been done in the above referred matter. Petition is dismissed.
SUNIL*In favour of assessee.
IT : Where contract for improvement of cities came under purview of section 194C, payment for ancillary jobs relating to same would also come under same section
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[2013] 33 taxmann.com 484 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'F'
Assistant Commissioner of Income-tax, Circle - 2, Ghaziabad
v.
Pankaj Bhargava*
RAJPAL YADAV, JUDICIAL MEMBER
AND T.S. KAPOOR, ACCOUNTANT MEMBER
AND T.S. KAPOOR, ACCOUNTANT MEMBER
IT APPEAL NO. 86 (DELHI) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
OCTOBER 26, 2012
Section 194C, read with section 194J, of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to - Assessee was engaged in providing consultancy services related to planning, development and improvement of cities, towns and villages - He outsourced work of data collection, sampling, marking and deducted tax at source under section 194C on payment of same - Assessing Officer opined that services availed were of technical nature and therefore tax was to be deducted at source under section 194J - Whether, where contract entered for development or improvement of cities, came under purview of section 194C, payment for ancillary jobs related to same would also come under section 194C and not 194J - Held, yes - Whether, therefore, AO was not justified - Held, yes [Paras 8 & 11][In favour of assessee]
FACTS
| ■ | The assessee was engaged in providing consultancy services related to planning, development and improvement of cities, towns and villages as per the terms of contract. In order to complete these contracts, assessee outsourced certain work and on payment, deducted tax at source under section 194C. | |
| ■ | The Assessing Officer was of the opinion that the services availed on outsourcing were of technical nature; therefore while making payment assessee should have deducted them under section 194J. Thus, the difference calculated on the basis of rate under sections 194C and 194J was disallowed under section 40(a)(ia). | |
| ■ | On first appeal, the Commissioner (Appeals) examined that the work outsourced to parties was of sampling, marking and other types of data/information collection which was feeded into the technical design of the assessee. Thus, he held that the services rendered could be more appropriately characterized as contract work under section 194C. He therefore deleted the disallowance. | |
| ■ | On second appeal assessee contended that the complete work undertaken by him fell within the ambit of section 194C, therefore, sub-assignment of such work could not fall under section 194J. | |
| ■ | He further contended that in case of short deduction of tax on account of difference in opinion about the applicability of TDS provisions he could be held in default under section 201 but no disallowance could be made under section 40(a)(ia). |
HELD
| ■ | The bare perusal of section 194C would reveal that in case payment is being made with regard to a contract entered for the purpose of dealing with and satisfying the need for housing accommodation for the purpose of planning, development or improvement of cities, towns and villages than such payment would come within the ambit of section 194C. On the other hand, Explanation appended to section 194J suggested that professional service would be constituted, all those services which are rendered by a person in the course of carrying on legal, medical, engineering or architectural profession etc. The jobs availed by the assessee from the persons did not fall within the ambit of this explanation, rather they are ancillary jobs connected with main performed by the assessee, which falls within the ambit of clause F & I of Explanation 1 to section 194C. The first appellate authority had examined this aspect in detail. Considering the finding of Commissioner (Appeals) on this issue, there was no reason to interfere in the order of the Commissioner (Appeals). [Para 8] | |
| ■ | With regard to the proposition that once tax was deducted by the assessee though under a wrong provision than on account of short deduction of tax, the assessee can be treated in default under section 201, but no disallowance under section 40(a)(ia) of the Income-tax Act is to be made. The ITAT, Calcutta examined this issue in detail and held that section 40(a)(ia) refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default under section 201 and no disallowance can be made by invoking the provisions of section 40(a)(ia). [Para 11] | |
| ■ | In the result, the appeal of the revenue is dismissed. [Para 13] |
Sanjay Jain for the Appellant. Ashwani Taneja and Tarun Kumar for the Respondent.
ORDER
Rajpal Yadav, Judicial Member - The revenue is in appeal before us against the order of Ld. CIT(A), Ghaziabad dated 24.10.2011 passed for AY 2008-09. The grounds of appeal taken by the revenue are not in-consonance with Rule 8 ITAT Rules. They are descriptive and argumentative in nature. In brief the grievance of revenue is that Ld. CIT(A) has erred in deleting the disallowance made u/s 40(a)(ia) of the Income Tax Act, 1961. This disallowance was made by the AO on the ground that assessee has deducted the tax at source u/s 194C @ 1 %, whereas it ought to have deductive the tax u/s 194J @ 10 %. The difference calculated on the basis of the rate has been disallowed u/s 40(a)(ia).
2. The brief facts of the case are that assessee is running a proprietorship concern in the name and style of M/s Alps Engineers, which is engaged in providing consultancy services to its clients related to planning, development or improvement of cities, towns and villages as per terms of the letter of award granted to him. He has filed his return of income electronically on 29.09.2008 declaring income of Rs.13,95,360/-. On scrutiny of the accounts, it revealed to the AO that the assessee has shown total turn over of Rs.1,14,03,987/-. In the immediately preceding year, the net profit rate shown by the assessee was 15.29%, whereas this year such rate is 12.25%. The Ld. AO found that assessee has made payment of service charges as well as commission. The Ld. AO was of the opinion that services availed by the assessee from different individual are of technical nature, therefore, while making the payment, he ought to have deducted the tax u/s 194J instead of deducting the tax u/s 194C of the Act. The Ld. AO directed the assessee to produce some of the parties to whom the design charges, survey charges and commission have been paid. According to the AO only two persons were produced before him, who have deposed that they have carried out non-technical work for the assessee. The AO thereafter issued summons and in response to the summons, two parties namely Jai Ambey Computers and S.K. Nigam appeared before the AO. Their statements were recorded. According to the AO, both of them have stated that work performed by them pertains to specific technical/professional services. On the basis of their reply, Ld. AO has harboured a belief that the persons who have not appeared before him or the assessee failed to produce them before him, have provided technical services to the assessee and, therefore, TDS ought to have been deducted u/s 194J of the Income Tax Act. The AO in this way has made the addition.
3. Dissatisfied with the additions, assessee carried the matter in appeal before Ld. CIT(A). He filed detailed return of submission vide letter dated 05.10.2011. These submissions have been reproduced by the Ld. First Appellate Authority on pages No.-6-17 of the impugned order. Ld. CIT(A) has allowed the appeal of assessee and delete the disallowance. Ld. First Appellate Authority is of the opinion that work performed by these parties was not of technical nature. In the earlier years, similar payments were made by the assessee and no disallowance was made. The observations of the Ld. CIT(A) in paragraph 5.8 are worth to note which read as under:-
"5.8 I find that all these parties were given composite 'work contract', by the appellant, in as much as that they were given work of sampling, marking, on-the-spot physical verification and other types of data/information-collection, which were, then, feeded into the technical design being prepared by the appellant. This itself implies that these parties were, rather than giving any professional/technical consultancy, performing composite work-order to suit the technical requirement of the appellant. Thus, the services rendered can more appropriately be characterized as 'work contract u/s 194C, than as 'technical professional services u/s 194J.
Here, it is important to mention that the two parties treated by the AO as performing professional/technical work in A.Y 2007-08 has now been accepted by the AO himself as not performing any professional/technical work after the parties were produced by the assessee & for which no addition is made by the AO after verification.
Thus looking to the entire facts of the case & legal interpretation above, though the contention of the assessee appears to be correct that the payments in question are attracted by provisions of sec. 194C & not by sec. 194J."
4. Ld. DR relied upon the order of the AO. He pointed out that AO has arrived at a conclusion that assessee availed skilled/technical work from the persons to whom payments were made. Therefore, he ought to have deducted the TDS u/s 194J. On the other hand, Ld. Counsel for the assessee raised three propositions. In his first fold of contention, he apprised us about the nature of work performed by the assessee and how that nature of work falls within the ambit of clause F & I of Explanation-1 to section 194C. According to him, if the complete work undertaken by the assessee, under an award falls within the ambit of section 194C then, how sub assignment of such work would fell within the ambit of section 194J. In his next fold of submission, he submitted that assessee has made payments to sixteen parties, out of those two parties were produced before AO, they confirmed about the performance of non-skilled work. Out of the remaining 14, the AO could procure the persons of two parties, their statements were recorded from the back of assessee and no opportunity to cross-examination, of those persons were granted. He further submitted that on the basis of information supplied by those parties, how AO can assume that work performed by all other persons is of technical nature and falls within the ambit of explanation appended to section 194J. The third fold of submission, is based on the decision of ITAT, Calcutta wherein it has been held that disallowance u/s 40(a)(ia) can be made in two situations, namely where assessee has failed to deduct the tax or where after deducting the tax failed to deposit into the government accounts. In the case of short deduction of tax on account of difference of opinion about the applicability of provision, the assessee could be held in default u/s 201 but no disallowance can be made by invoking the provisions of section 40(ia) of the Act. He placed on record a copy of Tribunal's Order, passed in ITA No. 1135/Kol/2010 in the case of Dy. CIT v. S.K. Tekriwal [2011] 48 SOT 515/15 taxmann.com 289 (Kol.).
5. We how duly considered the rival contention and gone through the record carefully. The stand of the assessee is that he has providing consultancy services to its clients who have engaged him for preparation of detailed project reports related to planning, development, improvement of cities, towns and villages, as per the term of contracts. In furtherance of such contract, the assessee provide consultancy relating to water supply, solid waste management, sewerage and drainage system of various Municipal Bodies and government companies engaged in construction of housing accommodation. In order to fulfill these contracts, assessee has to out-source certain non-technical works such as collection of data, locating and marketing of certain buildings, office etc. The assessee further contended that the persons to whom work was out-sourced has performed following activities:-
| (i) | marking of landmarks such as important monuments, institutional buildings, offices, hospitals, schools, college, culverts, water bodies etc., naming of major roads, mohallas etc. on map provided by assessee. | |
| (ii) | Computer job work i.e. marking node nos. on map, length or dia of pipe on computer & delivering number of sets of the print thereof on the basis of engineering design data given by assessee. | |
| (iii) | Field inspection, door to door waster collection, information collection regarding existing facility, collection of soil sample & getting soil sample test from any soil testing laboratory & submission of the test report to assessee i.e. simply a door to door data collection. |
6. Thus, according to the assessee all technical work was performed by himself and the parties from whom work was out-sourced has only performed, non-skilled work either by supplying non-skilled labours at the site for helping assessee to monitor the work or by specialized machines operated by non-technical persons. Now the question for adjudication is, whether the work performed by the persons to whom payment was made by the assessee was of technical nature or a simple work contract. In order to adjudicate this dispute, it is imperative upon us to take note in section 194C and 194J. The relevant part of section 194C read as under :-
"194C(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall..........
Explanation - For the purposes of this section:-
"Specified Person "shall mean,-
| (a) and (b)** | ** | ** |
(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
(I) any person, being an individual or a Hindu undivided family or an association of or a body of individuals, if such person,-
(A) does not fall under any of the preceding sub-clauses; and
(B) is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.
7. The relevant part of section 194J read as under :-
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of -
| (a) | fees for professional services, or | |
| (b) | fees for technical services, [or] | |
| (c) | royalty, or | |
| (d) | any sum referred to in clause (va) of section 28 |
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, which ever is earlier, deduct an amount equal to [ten] per cent of such sum as income-tax on income comprised therein:
Explanation - For the purposes of this section-
| (a) | 'professional services' means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as in notified by the Board for the purposes of section 44AA or of this section; | |
| (b) | 'fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9. |
8. The bare perusal of section 194C would reveal that in case payment is being made with regard to a contract entered for the purpose of dealing with and satisfying the need for housing accommodation for the purpose of planning, development or improvement of cities, towns and villages than such payment would come within the ambit of section 194C. On the other hand, explanation appended to section 194J suggest that professional service would be constituted, all those services which are rendered by a person in the course of carrying on legal, medical, engineering or architectural profession etc. The jobs availed by the assessee from the persons did not fall within the ambit of this explanation, rather they are ancillary jobs connected with main performed by the assessee, which falls within the ambit of clause F & I of Explanation-1 to section 194C. The Ld. First Appellate Authority has examined this aspect in detail. Considering the finding of CIT(A) on this issue, we do not see any reason to interfere in the order of the Ld. CIT(A).
9. As far as the second fold of submissions raised by the Ld. Counsel for the assessee is concerned, we are of the opinion that evidence possessed by the Ld. AO is not sufficient to say that all these persons have performed technical duties. The AO has been harping upon the statement given by representative of Jai Ambey and S.K. Nigam HUF. Both these persons have given undertaking that they have performed non-technical works which include computer job work, data entry etc. The copies of the undertakings are available on page Nos-32 to 40B of the paper book.
10. In view of this contrary stand, it is difficult to infer that all the entities were rendering technical services. The Ld. First Appellate Authority has examined the quality of evidence available on the record vis-a-vis the explanation made by the assessee. We do not see any reason to interfere the order of Ld. CIT(A) on this aspect also.
11. With regard to third proposition that once tax was deducted by the assessee though under a wrong provision than on account of short deduction of tax, the assessee can be treated in default u/s 201, but no disallowance u/s 40(a)(ia) of the Income Tax Act is to be made. The ITAT, Calcutta has examined this issue in detail. The following finding of the ITAT, Calcutta is worth to note:-
"We are of the view that the condition laid down u/s 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s 194C(2) of the Act and not u/s 1941 of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act."
12. Taking into consideration all these aspects, we do not find any merit in this appeal and accordingly it is dismissed.
13. In the result, the appeal of the revenue is dismissed.
ESHAST-'Work contracts' under VAT to be treated as same under service tax as well
ST : Goods sold in course of providing interior designs services on which VAT had been paid are, prima facie, eligible for exemption under Notification No. 12/2003-ST
ST : Any contract is considered as works contract for VAT purposes deserves to be treated as works contract for levy of service tax and value of goods on which VAT had been paid cannot be charged to service tax
ST : Service tax cannot be demanded on "receivables" viz. amounts which have not actually been received
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[2013] 33 taxmann.com 608 (Bangalore - CESTAT)
CESTAT, BANGALORE BENCH
Nag Interiors (P.) Ltd.
v.
Commissioner of Central Excise, Bangalore*
P.G. CHACKO, JUDICIAL MEMBER
AND M. VEERAIYAN, TECHNICAL MEMBER
AND M. VEERAIYAN, TECHNICAL MEMBER
STAY ORDER NO. 907 OF 2012
APPLICATION NO. ST/STAY/1807 OF 2011
APPEAL NO. ST/2906 OF 2011
APPLICATION NO. ST/STAY/1807 OF 2011
APPEAL NO. ST/2906 OF 2011
MAY 9, 2012
I. Section 65(25b) of the Finance Act, 1994 - Commercial or Industrial Construction Services - Stay Order - Period from 16-6-2005 to 31-5-2007 - Assessee was undertaking execution of "interior designs" as designed by different architects - It was paying service tax thereon but claimed exemption under Notification No. 12/2003-ST in respect of bought-out items like wood laminates, pipes, electrical items, plumbing items and glass etc. - HELD : Assessee had paid VAT on value of goods element - Hence, prima facie, benefit of Notification No. 12/2003 was available in light of documents submitted by assessee which contained detailed specifications and value of material supplied/utilized while rendering services [Paras 4.3 & 5] [In favour of assessee]
II. Section 65(105)(zzzza) of the Finance Act, 1994 - Works Contract Services - Stay Order - Period from 1-6-2007 to 31-3-2010 - Assessee was undertaking execution of "interior designs" as designed by different architects - It was not paying service tax on value of goods involved on which VAT was paid - HELD : Any contract which is considered as works contract involving payment of VAT deserves to be treated as works contract for purposes of levy of service tax - Hence, prima facie, assessee was eligible for deduction of value of goods involved on which VAT had been paid [Paras 4.3 and 4.4] [In favour of assessee]
III. Rule 6 of the Service Tax Rules, 1994 - Payment of service tax - Stay Order - Period from 16-6-2005 to 31-3-2010 - Department confirmed demand treating amounts mentioned as "receivables" as service charges received by assessee - HELD : This was erroneous as service tax was liable to be paid on actual amounts received and not on amounts which may be receivable and not yet received - Hence, prima facie, demand to that extent was unsustainable [Para 4.2] [In favour of assessee]
Circulars and Notifications : Notification No. 12/2003-ST, dated 20-6-2003, Circular No. B-1/16/2007-TRU, dated 22-5-2007
CASES REFERRED TO
Aggarwal Colour Advance Photo System v. CCE [2011] 33 STT 33/13 taxmann.com 192 (New Delhi - CESTAT) (para 3).
B.N. Gururaj for the Appellant. R.K. Singla for the Respondent.
ORDER
M. Veeraiyan, Technical Member - The application seeks waiver of pre-deposit of service tax amounting to Rs. 2,36,80,916/- relating to the period 16th June, 2005 to 31st March, 2010 along with interest and penalties imposed under various sections.
2.1 Learned advocate for the appellant submits that they were undertaking execution of "interior designs", as designed by different architects. They were executing the work after using bought-out items like wood laminates, pipes, electrical items, plumbing items and glass etc. They were paying service tax under the category of "Commercial and Industrial Construction" services with effect from 16-6-2005 up to 30-6-2007 and thereafter started paying under the category of works contract. A show-cause notice dated 7-9-2010 was issued proposing demand of service tax amounting to Rs. 2,36,80,916/- alleging that the appellants were not eligible for the benefit of Notification No. 12/2003-S.T., dated 20-6-2003 and that they were also not eligible for paying service tax under the category of works contract. Commissioner confirmed the demand along with interest and imposed penalties as mentioned above.
2.2 Learned advocate challenges the order of the Commissioner on the following grounds :
| (a) | During the relevant period, they have executed the orders worth about Rs. 20.29 crore. A part of these amounts was mentioned as due from sundry debtors but has not actually been received. | |
| (b) | They have utilized/supplied goods valued about Rs. 13.11 crore while rendering the services and they have paid VAT under different schemes as applicable in respect of such goods. | |
| (c) | The taxable value excluding the value of goods which was subject to VAT was only Rs. 2,95,64,113/- and the duty payable comes to Rs. 18,42,876/-, which they have paid. | |
| (d) | The denial of the benefit of exemption under Notification No. 12/2003 on the ground that no documents have been produced was not justified as the invoices raised on the service recipients clearly indicated the rate analysis of various items which were supplied/utilized while rendering the services and on that basis on the supply/sale of such items, VAT was paid. | |
| (e) | Denial of benefit under the works contract was not justified. The Commissioner has held that no option was exercised for paying service tax under the head Works Contract. The option under Works Contract would arise only when service tax was sought to be paid under the composite scheme and not for regular assessees. | |
| (f) | Referring to Board's Circular No. B-1/16/2007-TRU, dated 22-5-2007, he submits that any contracts which are treated as works contracts for purposes of levy of VAT/sales tax shall also be treated as works contract for purposes of levy of service tax. |
3. Learned Commissioner (A.R.) reiterated the findings and reasoning of the Commissioner. He relied on the decision of the Larger Bench of the Tribunal in the case of Aggarwal Colour Advance Photo System v. CCE [2011] 33 STT 33/13 taxmann.com 192 (New Delhi - CESTAT) and submitted that for the purpose of Notification No. 12/2003, only actual sales could be considered and not the deemed sales. He further submitted that Commissioner has denied the benefit as the appellants have failed to produce necessary documents indicating sale of the goods. For the purpose of paying service tax under works contract, the contract should involve supply of goods and rendering of services in a composite manner. Once the appellants exclude the value of the goods, they cannot seek assessment under works contract.
4.1 We have carefully considered the submissions from both sides and perused the records.
4.2 The Commissioner has confirmed the demand treating the amounts mentioned as "receivables" as service charges received by the appellant. This is erroneous as the service tax is liable to be paid on actual amounts received and not on amounts which may be receivable and not yet received.
4.3 Further, we find that the appellants have executed orders worth about Rs. 20 crore and they claim that value of goods involved in rendering of the said services is over Rs.13 crore. Commissioner has totally disallowed the claim for deduction of value of goods. In other words, he has taken the entire value of Rs.20 crore as value of services rendered. It is not disputed that the appellants have paid VAT on goods valued about Rs.13 crore.
4.4 As per Board's clarification dated 22-5-2007, any contract which is considered as works contract involving payment of VAT deserves to be treated as works contract for purposes of levy of service tax.
5. Further, for the period prior to 1-6-2007, the denial of benefit of Notification No. 12/2003 may not be justified in the light of documents submitted by the assessee which contained detailed specifications and value of the material supplied/utilized while rendering the services. Prima facie, the appellants were eligible for benefit of Notification No. 12/2003. Undisputedly, the appellants have paid service tax of Rs. 18,42,993/- which according to them was payable after availing the benefit of Notification No. 12/2003 and under works contract from 1-6-2007.
6. In view of the above, we hold that the appellant has made out a case for waiver of balance of dues as per the impugned order and, accordingly, we grant waiver of pre-deposit of balance of dues and stay recovery thereof till disposal of the appeal.
Vineet *In favour of assessee.
IT : Where all shares were acquired only in course of business of assessee, pro rata interest on funds relatable to such investment could not be held as outgo in capital field
IT : Section 14A is not applicable in respect of investment in share application money
IT : Intention with which shares were acquired is a relevant criterion for application of section 14A
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[2013] 33 taxmann.com 508 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'D'
MSA Securities Services (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Company Circle - IV(3)*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND S.S. GODARA, JUDICIAL MEMBER
AND S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NOS. 1523 & 1524 (MDS.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
OCTOBER 17, 2012
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Interest] - Assessment year 2008-09 - Whether an assessee can take any amount of loan for purpose of its business and such loans can be used for purpose of acquiring fixed assets or current assets and as long as such fixed assets and current assets were relatable to its business, interest on loans paid for acquiring such assets are nothing but business expenditure of assessee - Held, yes - Whether further, where all shares were acquired only in course of business of assessee, pro rata interest on funds relatable to such investment could not be held as outgo in capital field - Held, yes [Para 11] [In favour of assessee]
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Share dealing] - Assessment year 2008-09 - Whether section 14A is not applicable in respect of investment in share application money - Held, yes [Para 12] [In favour of assessee]
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Share dealing] - Assessment year 2008-09 - Whether intention of assessee cannot be treated as irrelevant when assessee admittedly was a dealer in shares and was also in receipt of short-term capital gains on account of its share dealings - Held, yes - Whether, therefore, where assessee was in business of dealing in shares and sale consideration received on account of sale of shares was admitted as capital gains, disallowance under section 14A was not warranted - Held, yes [Para 17][In favour of assessee]
FACTS
| ■ | The assessee was in the business of dealing in shares and investment counselling. It had taken unsecured loans. It had invested in shares of 'SCPL' and had also paid share application money. | |
| ■ | The Assessing Officer having found that the assessee had invested in shares of 'SCPL' and also earned dividend income held that interest on borrowed funds insofar as it was utilised for acquiring shares and giving share application money could not be considered as business expenditure. Accordingly, pro rata disallowance was made. Further, the Assessing Officer also invoked provisions of section 14A and disallowed part of interest expenditure. | |
| ■ | The Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | On second appeal: |
HELD
Whether pro rata interest on funds relatable to investment in shares was an outgo in capital field?
| ■ | It is not disputed that assessee had received a dividend. However, there is no finding by the Assessing Officer that the said dividend income had come from shares held in SCPL. At para 2 of the assessment order, it is clearly mentioned that assessee had converted its investment in shares into stock-in-trade on 1-4-2007, which is the first day of relevant previous year. The assessee had also returned short-term capital gains on the sale of shares effected by it. Acquisition of shares in SCPL, whether as investment or as stock-in-trade, in such circumstances, could not be considered as something done outside the course of business of assessee. Therefore, the finding of the Commissioner (Appeals) that pro rata interest on funds relatable to such investment was an outgo in capital field is incorrect. An assessee can take any amount of loan for the purpose of its business and such loans can be used for the purpose of acquiring fixed assets or current assets. As long as such fixed assets and current assets were relatable to its business, interest on loans paid for acquiring such assets are nothing but business expenditure of the assessee. | |
| ■ | Therefore, the view of the Assessing Officer that interest relatable to borrowed funds attributable to investment of shares of SCPL and for placing share application money with the said company could not be considered as business expenditure, cannot be accepted. Similarly, the view of the Commissioner (Appeals) that such interest expenditure could be in the capital field also cannot be accepted. Reason for discounting both these view is that all these shares were acquired and share application money placed with SCPL only in the course of business of the assessee. [Para 11] |
Whether section 14A was applicable in respect of investment in share application money?
| ■ | The assessee had earned both dividend income as well as short-term capital gains. Dividend income was claimed as exempt under Income-tax Act. A sum of Rs. 47.51 crores was placed by the assessee with SCPL as share application money. Till such period share application money got converted into shares, assessee was not entitled to any dividend. There is no case for the revenue that assessee had received any interest on such share application money. Share application money, till such point of time it was converted into shares, will not yield any income whatsoever, whether exempt or not. When there is no possibility of earning of any income at all, there can be no disallowance under section 14A. | |
| ■ | Thus, when there is no possibility of any income arising to the assessee from the investment, question of application of section 14A(1) would not arise at all. [Para 12] |
Whether intention with which shares were acquired is relevant for application of section 14A?
| ■ | Commissioner (Appeals) has given a finding that intention with which shares were acquired is not a criterion for application of section 14A. The intention of the assessee cannot be treated as irrelevant when assessee admittedly was a dealer in shares and was also in receipt of short-term capital gains on account of its share dealings. The assessee, being a trader in share, even if the shares were held as a part of its investment, such holding of shares could still be considered only as a part of its business. When such holdings were considered as a part of its business, whether the intention for such holding of shares was to receive the benefit of dividend has to be seen from the facts and circumstances. All along assessee's plea was that such shares were held by it as a part of its business and not for the purpose of earning dividend income. [Para 13] | |
| ■ | In the instant case, the assessee was in the business of dealing in shares and investment counselling. When shares held by it as investments were sold, it had admitted capital gains also. Against an investment of Rs. 10,99,00,000 for equity share in SCPL and share application money of Rs. 47,51,00,000 placed with the same company, the total dividend earned was a miniscule amount of Rs. 10,11,449. There is no finding whether even this dividend had come from such shareholding. Thus, facts clearly indicate that assessee had acquired or purchased the shares not with an intention of earning any dividend. The Commissioner (Appeals) fell in error when he held that whether shares were acquired to earn gains on sale thereof or to have controlling interest, were irrelevant factors. The circumstances, on the other hand, clearly show that dividend received was only incidental to assessee's business of dealing in shares. [Para 17] |
Conclusion
| ■ | In the circumstances of the case, disallowance under section 14A was not warranted. The acquisition of shares and placing share application money were in the course of business of the assessee and a disallowance under Section 36(1)(iii) also could not have been made. Interest paid on loans also could not be considered as an outflow of capital nature, since it was not in the nature of any pre-incorporation or pre-operative expenses. Thus there is no hesitation in deleting the disallowances made. [Para 17] |
CASE REVIEW
CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.) (para 17) and CIT v. Delite Enterprises Ltd. [IT Appeal No. 110 of 2009, dated 26-6-2007] (para 17) followed.
CASES REFERRED TO
CIT v. Walfort Share & Stock Brokers (P) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC) (para 7), Siva Industries & Holdings Ltd. v. Asstt. CIT[2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai) (para 9), Shriram Transport Finance Co. Ltd. v. ACIT [I.T.A. No. 701/Mds/2012, dated 28-6-2012] (para 9), Avshesh Mercantile (P.) Ltd. v. Dy. CIT [2012] 54 SOT 19 (URO)/26 taxmann.com 43 (Mum.)(SC) (para 9), CIT v.Delite Enterprises Ltd. [IT Appeal No. 110 of 2009 dated 26-6- 2009] (para 9), Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390 (Delhi) (para 9), CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.) (para 9), Cheminvest Ltd. v. ITO[2009] 121 ITD 318 (Delhi)(SB) (para 14) and CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 17).
R. Sivaraman for the Appellant. K.E.B. Rengarajan for the Respondent.
ORDER
Abraham P. George, Accountant Member - These are appeals of the assessees, directed against orders dated 31.5.2012 of Commissioner of Income Tax (Appeals)-V, Chennai. These appeals are considered together since grounds taken by the assessees are similar.
2. Appeal in I.T.A. No. 1524/Mds/2012 of assessee, M/s NMS Consultancy Private Ltd. is considered first for disposal.
3. Grievances of the assessee are that CIT(Appeals) upheld disallowance of interest of Rs. 1,38,93,443/- pertaining to certain investments made by the assessee in one M/s Sringaravalli Consultants Pvt. Ltd. and also held that Section 14A of Income-tax Act, 1961 (in short 'the Act') was applicable on interest paid on borrowed funds utilized for purchasing equity shares.
4. Facts as culled out from assessment order are that assessee, dealing in shares and also doing investment counselling, had filed return of income declaring a loss of Rs. 3,48,57,095/- for the impugned assessment year. Such loss was reduced to Rs. 3,45,49,595/- through a revised return filed. During the course of assessment proceedings, it was noted by the Assessing Officer that assessee had substantial unsecured loans coming to Rs. 1,27,13,79,000/- as at the end of the relevant previous year. Assessing Officer further noted that assessee had invested in shares of one M/s Sringaravalli Consultants Pvt. Ltd. for a sum of Rs. 10,99,00,000/- and had also paid share application money of Rs. 47,51,00,000/- to the same company. Profit & Loss account of the assessee showed a sum of Rs. 3,95,63,859/- as interest charged on the loans taken by it. Assessing Officer was of the opinion that interest on borrowed funds insofar as it was utilised for acquiring shares and giving share application money could not be considered as business expenditure. A pro rata disallowance of Rs. 1,38,93,443/- was made.
5. Assessing Officer also found from Profit & Loss account that assessee had received dividend income of Rs. 10,11,449/-, which was exempt from tax. As per the A.O., this called for application of Section 14A of the Act. Total expenditure debited in Profit & Loss account of the assessee for relevant previous year came to Rs. 4,57,84,435/-. As per the A.O., expenditure incurred in earning exempt income could not be allowed and Rule 8D of Income-tax Rules, 1962 had to be applied. He, therefore, applied sub-clause (2) of Rule 8D and made a further disallowance of Rs. 2,35,73,989/- for interest. While computing such interest disallowance, Assessing Officer deducted from the total interest of Rs. 3,95,63,859/-, the interest amount Rs. 1,38,93,443/- which he disallowed as non-business expenditure. In other words, while applying the formula mentioned in sub-clause (2) of Rule 8D, A.O. took only the balance interest after considering the disallowance made by him for non-business expenditure. Under Rule 8D(2)(iii), he made a further disallowance taking 0.5% of the average investment and such disallowance came to Rs. 15,93,169/-. The effective disallowance under Rule 8D came to Rs. 2,51,67,158/-. The assessment was completed accordingly.
6. Aggrieved, assessee moved in appeal before CIT(Appeals). Its argument was that the investment in M/s Sringaravalli Consultants Pvt. Ltd. (SCPL) was in the course of its business of dealing in shares. As per the assessee, the shares acquired in M/s SCPL formed part of its stock-in-trade and could not be considered as an investment which would result in exempt income. According to assessee, sale of such shares would give rise to capital gains which was includible in the total income, and further, it had got controlling right in such company by the acquisition of shares. As per the assessee, the investment was made for business expediency and not for the purpose of earning dividend income. It was, therefore, argued that Section 14A had no application. Thus, the main crux of its argument was that dividend income was only an incidental income, whereas, main income of the assessee was on account of trading in equity shares.
7. However, CIT(Appeals) was not impressed. According to him, amounts spent for the purchase of shares in SCPL and share application money paid to the said company were shown by the assessee as investment in its books of accounts. In the opinion of CIT(Appeals), such investment yielded dividend which was exempt from tax. Just because capital gains would also arise when such shares were sold, would not alter the position in any manner. As per the CIT(Appeals), the intention with which the expenditure was incurred was not a criteria to be adopted for applying Section 14A of the Act. Expenditure incurred by the assessee had direct nexus with earning dividend income. Further, as per the CIT(Appeals), loans on which interest was paid by the assessee, were fully utilized in making investment and therefore, expenditure in the nature of interest on such loans, would be in capital field and could not be justified as allowable on the reasons of business expediency. CIT(Appeals) also found that Rule 8D clearly specified that expenditure whether direct or indirect, not attributable or relatable to earning of taxable income, had to be disallowed. Assessee having admitted dividend income of Rs. 10,11,449/-, it could not say that Section 14A and Rule 8D would not apply. Relying on the decision of Hon'ble Apex Court in the case of CIT v.Walfort Share & Stock Brokers (P) Ltd. [2010] 326 ITR 1/192 Taxman 211, he dismissed the appeal of the assessee.
8. Now before us learned A.R., strongly assailing the orders of lower authorities, submitted that assessee was doing share business both as investment and trade. Investments were in the course of its business only. Dividends which the assessee earned, were only incidental. Though assessee had earlier shown such amount as investment, it had converted it into stock-in-trade at the beginning of the relevant previous year. Whether investment or stock-in-trade, sale of such shares yielded capital gains or business income, both of which were exigible to tax. Therefore, according to learned A.R., it could not be stated that investments were for earning exempt income. It might be true that assessee had dividend income of Rs. 10,11,449/-, but nevertheless, such dividend was small when compared to the shares acquired and this itself would show that such investment was made not for the purpose of earning dividend, but only in the course of its business for earning capital gains or business income. Section 14A could not be applied in such a situation.
9. In any case, according to the learned A.R., substantial portion of investment made in M/s SCPL was by way of share application money. It could not be considered that share application money would yield any dividend at all. Learned A.R. pointed out that Assessing Officer had made disallowance of interest of Rs. 1,38,93,443/- for a reason that it was not business expenditure. Again, when he was calculating a disallowance under Rule 8D, a part of the interest charged to Profit & Loss account was disallowed. This also resulted in excess disallowance of interest. Ld. CIT(Appeals) had applied Section 14A while justifying both the disallowances made by the A.O., but, nevertheless, ignored the double disallowance of interest. Reliance was placed by the learned A.R. on the decision of co-ordinate Bench of this Tribunal in the case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai), that of Shriram Transport Finance Co. Ltd. v. ACIT [I.T.A. No. 701/Mds/2012, dated 28.6.2012], that of Mumbai Bench of the Tribunal in the case of Avshesh Mercantile (P.) Ltd. v. Dy. CIT [2012] 54 SOT 19 (URO)/26 taxmann.com 43 and that of Hon'ble Bombay High Court in the case of CIT v. Delite Enterprises Ltd. [I.T.A. No. 110 of 2009 dated 26th June, 2009). According to him, in the case of Shriram Transport Finance Co. Ltd. (supra), this Tribunal had considered judgment of Hon'ble Delhi High Court in the case ofMaxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390, where it was clearly held that recording of dissatisfaction with the correctness of the claim of expenditure or claim of no expenditure made by the assessee was a pre-requisite for invocation of Rule 8D. In any case, according to learned A.R., Hon'ble Delhi High Court had, in the latter case, held that Rule 8D would apply only from 24.3.2008 and not prior to that. Strong reliance was placed on the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 for arguing that when shares were retained, not with an intention of earning dividend income and dividend income was incidental, there could be no disallowance under Section 14A of the Act.
10. Per contra, learned D.R. submitted that investment made by the assessee in M/s SCPL was shown by the assessee itself as investment in its balance sheet. Investment had also resulted in a dividend income of Rs. 10,11,449/-. It is not necessary that there should be substantial dividend income received by an assessee for application of Section 14A. Assessee had made such investment for building up of an infrastructure of investments, which would later result in substantial dividend income. Intention of the assessee was to earn dividend income and dividend income was indeed earned during the relevant previous year. Once assessee had shown dividend income and claimed it exempt, it could not say that the investments were not for the purpose of earning dividend income but for some other purpose. Therefore, according to him, the disallowance of interest as well as disallowance made under Rule 8D were justified. Regarding the case laws relied on by the assessee, learned D.R. submitted that these were related to years prior to assessment year 2008-09 when Rule 8D was not in existence. Learned D.R., therefore, argued that there is no infirmity in the orders of lower authorities.
11. We have perused the orders and heard the rival submissions. Facing sheet of the assessment order mentions assessee's business as investment counselling. Nevertheless, at para 1of the assessment order, the Assessing Officer also states that the assessee was a dealer in shares. Read together, this would clearly imply that assessee was both, doing investment as well as share trading as a part of its business. Assessee had invested a sum of Rs. 10,99,00,000/- in the share of M/s SCPL. In addition, it had also placed share application money with same company to the tune of Rs. 47.51 Crores. It is not disputed that assessee had received a dividend of Rs. 10,11,449/-. However, there is no finding by the Assessing Officer that the said dividend income had come from shares held in M/s SCPL. At para 2 of the assessment order, it is clearly mentioned that assessee had converted its investment in shares into stock-in-trade on 1.4.2007, which is the first day of relevant previous year. Assessee had also returned short-term capital gains on the sale of shares effected by it. Acquisition of shares in M/s SCPL, whether as investment or as stock-in-trade, in such circumstances, could not be considered as something done outside the course of business of the assessee. Therefore, the finding of the CIT(Appeals) that pro rata interest on funds relatable to such investment was an outgo in capital field is, in our opinion, incorrect. An assessee can take any amount of loan for the purpose of its business and such loans can be used for the purpose of acquiring fixed assets or current assets. As long as such fixed assets and current assets were relatable to its business, interest on loans paid for acquiring such assets are nothing but business expenditure of the assessee. Therefore, the view of the A.O. that interest relatable to borrowed funds attributable to investment of shares of M/s SCPL and for placing share application money with the said company could not be considered as business expenditure, cannot be accepted. Similarly, the view of the CIT(Appeals) that such interest expenditure could be in the capital field also cannot be accepted. Reason for discounting both these view is that all these shares were acquired and share application money placed with M/s SCPL only in the course of business of the assessee.
12. This leaves us with the aspect of application of Section 14A of the Act. As already mentioned by us, assessee had earned both dividend income as well as short-term capital gains. Dividend income was claimed as exempt under Income-tax Act. What we find is that a sum of Rs. 47.51 Crores was placed by the assessee with M/s SCPL as share application money. Till such period share application money got converted into shares, assessee was not entitled to any dividend. There is no case for the Revenue that assessee had received any interest on such share application money. Share application money, till such point of time it was converted into shares, will not yield any income whatsoever, whether exempt or not. When there is no possibility of earning of any income at all, there can be no disallowance under Section 14A of the Act. Sub-section (1) of Section 14A clearly bars deduction being allowed on expenditure incurred by the assessee in relation to income which does not form part of total income. Thus, when there is no possibility of any income arising to the assessee from the investment, question of application of 14A(1) would not arise at all.
13. CIT(Appeals) has given a finding that intention with which shares were acquired is not a criterion for application of Section 14A of the Act. In our opinion, intention of the assessee cannot be treated as irrelevant when assessee admittedly was a dealer in shares and was also in receipt of short-term capital gains on account of its share dealings. Assessee, being a trader in share, even if the shares were held as a part of its investment, such holding of shares could still be considered only as a part of its business. When such holdings were considered as part of its business, whether the intention for such holding of shares was to receive the benefit of dividend has to be seen from the facts and circumstances. All along assessee's plea was that such shares were held by it as a part of its business and not for the purpose of earning dividend income. Now the question boils down to the relevance of the intention of the assessee insofar as application of Section 14A is considered.
14. Though learned D.R. did not rely on the decision of Maxopp Investment Ltd. (supra) of Hon'ble Delhi High Court, it is very relevant since ld. CIT(Appeals) has mentioned that one of the claim made by the assessee before him was that shares were held for having controlling interest. Argument of the assessee in Maxopp Investment Ltd. (supra) also was that such shares were held as a part of its business for acquiring control over the companies in which it was holding the shares. Hon'ble Delhi High Court rejected this line of reasoning and held that even if shares were acquired for getting controlling interest, still Section 14A applied, if dividend income is received from such shares and such dividend income was claimed exempt. Their Lordship held that the words "in relation to" used in Section 14A was a very broad expression and wide import having direct and indirect significance depending on context. Nevertheless, their Lordship observed that if an A.O. rejected a claim of taxpayer that no expenses were incurred or a particular amount alone was expended for earning the exempt income, the A.O. would have to give cogent reasons for doing so. At this juncture, it will be inappropriate if we do not do a real time check of the decision of Special Bench of this Tribunal in Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi), where an argument was raised that unless income is earned and claimed as exempt, Section 14A cannot be applied. Repulsing this line of reasoning, Special Bench held that for application of Section 14A, it was not necessary that actual earning of exempt income was necessary, but the intention to earn such exempt income by virtue of the investment would suffice.
15. Pitted against the above are the judgments of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) dated 28.2.2012 and that of Hon'ble Bombay High Court in the case of Delite Enterprises (supra). In the former case, assessee had spent Rs. 27.24 lakhs as brokerage for arranging loans, which were utilised for acquiring shares in one M/s Kurlon Ltd. and certain other companies. It earned dividend income of Rs. 46.67 lakhs and A.O. held Rs. 27.24 lakhs as expenses relating to earning exempt income and made a disallowance under Section 14A of the Act. In further appeals of assessee, this Tribunal held that in addition to disallowance of brokerage, A.O. ought have made a disallowance for the part of indirect expenses under Section 14A, as well. When the matter reached the Hon'ble High Court, it was held that when the shares were retained not with an intention of earning dividend income and dividend income was incidental to assessee's business of selling shares, which arose on shares remaining unsold, it could not be said that expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and should be disallowed. It was held by Hon'ble Karnataka High Court at para 5 of its judgment, as under:-
"5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside."
In other words, Hon'ble Karnataka High Court held that there could be no disallowance when shares were held not with an intention of earning dividend income.
16. In the case of Delite Enterprises Ltd. (supra), Hon'ble Bombay High Court affirmed a decision of the Mumbai Tribunal holding that when exempt income is not there, there cannot be a disallowance under Section 14A of the Act. Of course, this decision was in relation to interest payment for funds used for investment in capital of a partnership firm, which was disallowed for a reason that share income from a firm was exempt under Section 10(2A) of the Act. Mumbai Tribunal in the case of Avshesh Mercantile (P.) Ltd. (supra), placed on record by learned A.R., held that refusal of Hon'ble High Court to entertain the question in this regard raised by the Revenue in Delite Enterprises Ltd. (supra), gave the stamp of authority on the proposition of law enunciated by the Tribunal in the same case.
17. In the case before us also, assessee was in the business of dealing in shares and investment counseling. When shares held by it as investments were sold, it had admitted capital gains also. Against an investment of Rs. 10,99,00,000/- for equity share in M/s SCPL and share application money of Rs. 47,51,00,000/- placed with the same company, the total dividend earned was a miniscule amount of Rs. 10,11,449/-. There is no finding whether even this dividend had come from such shareholding. Thus, facts clearly indicate that assessee had acquired or purchased the shares not with an intention of earning any dividend. In our opinion, ld. CIT(Appeals) fell in error when he held that whether shares were acquired to earn gains on sale thereof or to have controlling interest, were irrelevant factors. The circumstances, on the other hand, clearly show that dividend received was only incidental to assessee's business of dealing in shares. Decisions of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) and that of Hon'ble Bombay High Court in the case of Delite Enterprises Ltd. (supra) definitely come to the aid of the assessee. When two reasonable constructions can be given to a Section, then the one which helps the assessee has to be given preference, by virtue of decision of Hon'ble Apex Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. In the circumstances of the case, we are of the view that disallowance under Section 14A was not warranted. The acquisition of shares and placing share application money were in the course of business of the assessee and a disallowance under Section 36(1)(iii) of the Act also could not have been made. Interest paid on loans also could not be considered as an outflow of capital nature, since it was not in the nature of any pre-incorporation or pre-operative expenses. We thus have no hesitation in deleting the disallowances made.
18. Now coming to appeal of the assessee in I.T.A. No. 1523/Mds/2012, we find that the fact situation is very much similar to assessee in I.T.A. No. 1523/Mds/2012. However, here assessee is aggrieved only on the disallowance of Rs. 2,38,203/- made by the A.O. under Section 14A of the Act, which was sustained by CIT(Appeals). For the same reason as stated by us at paras 11 to 17 above, we allow the appeal of assessee here also.
19. To summarize the result, the appeals filed by both the assessees are allowed.
IT-Exemption to a trust not to be denied on pretext of religious objects unless actual exp. is incurred on them
IT : Where revenue could not point out any expenditure which could be said to have been incurred exclusively for a particular religion, denial of exemption under section 11 on ground that objects of assessee were religious one could not be upheld
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[2013] 33 taxmann.com 469 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'I'
Additional Director of Income-tax (E)-II (1)
v.
Islamic Research Foundation*
I.P. BANSAL, JUDICIAL MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER
IT APPEAL NO. 6069 (MUM.) OF 2011
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JANUARY 9, 2013
Section 11, read with section 13, of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [General] - Assessment year 2008-09 - Assessing Officer denied exemption under section 11 to assessee-trust on ground that objects of assessee were partly religious and partly charitable and thus provisions of section 13(1)(b) were applicable - Documents on record showed that major expenses of assessee was incurred on conducting a peace conference and focus of conference was to create communal harmony - Whether since revenue could not point out any expenditure which could be said to have incurred exclusively for a particular religious community, denial of exemption to assessee could not be justified - Held, yes - Whether further even assessee was a mixed trust, clause (b) of section 13(1) was not applicable as such clause was applicable to purely charitable trust - Held, yes [Paras 7.1 & 7.2] [In favour of assessee]
FACTS
| ■ | The assessee-trust was registered with Director of Income tax (Exemption) under sections 12A and 80G and had been availing benefits under said sections. | |
| ■ | During the year under consideration the Assessing Officer found that objects of the assessee also included to propagate to Islamic faith and he, accordingly, held that assessee-trust was a mixed trust and consequently provisions of section 13(1)(b) were applicable in the case of the assessee. Accordingly, Assessing Officer denied exemption under section 11 to the assessee and brought the income to tax. | |
| ■ | The Commissioner (Appeals) considering the objects and activities of the assessee held that aim and object of assessee was not confined to Muslim alone but all community at large. He accordingly, held that provisions of section 13(1)(b) was not applicable in case of assessee and directed the Assessing Officer to grant benefit under section 11 to the assessee. | |
| ■ | On second appeal: |
HELD
| ■ | The Assessing Officer has not discussed the activities of the assessee carried out during the year under consideration. The Commissioner (Appeals) has discussed the activities of the trust in detail and he has found that out of total expenditure incurred by the assessee at Rs. 5,53,27,631 the major expenses of the assessee is on conducting a peace conference which were to the tune of Rs. 4,84,61,830. It was a 10 days peace conference and the focus was to create communal harmony and awareness and understanding of Islam and its message of peace for entire humanity to help, remove misconception, false fear, hate of Islam globally to help realize that justice, human rights, moral values and peace be it on any individual or at worldwide collective level are a must for effective human progress and realistic global unity. The said conference was attended by various dignitaries. The said peace conference cannot be held to be a mere religious activity for the benefit of a particular community. | |
| ■ | The revenue could not point out any of such expenditure which can be stated to have incurred exclusively for the purpose of a particular religious community. Therefore, simply on the basis of one or two objects stated in the objects of the trust which are limited to religious activity, it cannot be said that in the year under consideration the assessee has suddenly become purely religious trust. In one of the assessment orders, Assessing Officer has specifically mentioned about the issue of religious nature of trust and exemption has been granted to the assessee under section 11 after satisfying with the reply submitted by the assessee. Therefore, the case of the assessee is also acceptable on the basis of principle of consistency. [Para 7.1] | |
| ■ | Even if one has to go by the observation of Assessing Officer in the assessment order that assessee is a mixed trust, even then clause 13(1)(b) cannot be applied as it is applicable to purely charitable trust as held by Gujarat High Court in the case of CIT v. Barkate Saifiyah Society [1995] 213 ITR 492. [Para 7.2] | |
| ■ | Thus, there was no infirmity in the order passed by Commissioner (Appeals) vide which it has been held that assessee has wrongly been denied benefit of exemption under section 11. [Para 7.5] |
CASE REVIEW
Ghulam Mohidin Trust v. CIT [2001] 248 ITR 587/114 Taxman 543 (J&K) (para 7) distinguished.
CIT v. Barkate Saifiyah Society [1995] 213 ITR 492 (Guj.) (para 7.2) and Nirmal Agricultural Society v. ITO [1999] 71 ITD 152 (Hyd.) (para 7.4) followed.
CASES REFERRED TO
CIT v. Barkate Saifiyah Society [1995] 213 ITR 492 (Guj.) (para 2.2), CIT v. Dawoodi Bohara Jamat [2009] 317 ITR 342/184 Taxman 222 (MP) (para 3), Trustees of the Charity Fund v. CIT [1959] 36 ITR 513 (SC) (para 3), CIT v. Sri Gujarathi Mandal [1999] 240 ITR 293/[1998] 101 Taxman 647 (Mad) (para 3), Addl. CIT v. Ahmedabad Millowner's Association [1977] 106 ITR 725 (Guj.) (para 3.1), Bar Council of Maharashtra v. CIT [1980] 126 ITR 27 (Bom.) (para 3.1), Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 6.4), CIT v. Shree Ram Memorial Foundation [1986] 158 ITR 3/[1987] 33 Taxman 438 (Delhi) (para 6.5), Samaj Kalyan Parishad v. ITO [2007] 105 ITD 29 (Delhi) (SB) (para 6.5), Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 (SC) (para 6.7), Oppenheim v. Tobacco Securities Trust Co. Ltd. [1951] AC 297 (PC) (para 6.7), CIT v. Chandra Charitable Trust [2007] 294 ITR 86/[2006] 156 Taxman 19 (Guj.) (para 6.7), Shiya Dawoodi Bohra Jamat v. CIT [2011] 133 ITD 271/15 taxmann.com 154 (Ahd.) (para 6.7), Ghulam Mohidin Trust v. CIT [2001] 248 ITR 587/114 Taxman 543 (J&K) (para 6.8), State of Kerala v. M.P. Shanti Verma Jain [1998] 231 ITR 787 (SC) (para 6.8), Nirmal Agricultural Society v. ITO [1999] 71 ITD 152 (Hyd.) (para 6.9) and CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC) (para 7).
P.K. Shukla for the Appellant. Vijay Mehta for the Respondent.
ORDER
I.P. Bansal, Judicial Member - This is an appeal filed by the Revenue. It is directed against the order passed by Ld. CIT(A)-I, Mumbai dated 23/6/2011 for assessment year 2008-09.
The grounds of appeal read as under:
| "1. | Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A), Mumbai, erred in directing the AO to allow the exemption u/s.11 of the I.T. Act ignoring the elaborate discussion of the issues and facts." | |
| 2. | "Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A), Mumbai, erred in directing the AO to allow the exemption u/s.11 of the I.T. Act which is in contrary to the provisions of clause (a) and (b) of section 13(1) of law." | |
| 3. | The appellant prays that the order of the Commissioner of Income Tax (Appeals)-I, Mumbai be set aside and that of Assessing Officer be restored." |
2. The assessee is registered with the Director of Income Tax (Exemption), Mumbai, under section 12A and 80G of the Income Tax Act, 1961 (the Act). During the year under consideration the AO denied the benefit of exemption to the assessee and has assessed it at an income of Rs. 8,15,58,623/- in place of nil income returned by the trust. The AO issued notice to the assessee under section 142(1) which has been reproduced in the assessment order and required the assessee to show cause as to why exemption claimed by it under section 11 should not be denied. The AO has referred to the objects of the trust which were also mentioned in letter dated 11/11/2009 filed by the assessee as under:-
| "(a) | To create a fund primarily to promote charitable, educational, moral, socio-economic development and religious activities. | |
| (b) | To propagate the Islamic Faith. | |
| (c) | (i) To establish, construct, maintain, manage, administer, assist, encourage, promote and extent financial and other support and assistance to schools, orphanages, mosques, madressas, libraries, research and educational institutions, hospital dispensaries convalescence homes and the like; (ii) To provide food, meals, boarding, lodging, clothing, education, medical and financial aid or assistance, necessaries, comforts or amenities to the old, distressed needy, afflicted, diseased, destitute, handicapped, widows orphans, infirm or indigent persons; | |
| (d) | To provide relief in the event of natural calamities such as earthquake, fire flood, riots, civil commotions or otherwise. | |
| (e) | To put in joint efforts with other organizations for humanitarian and religious advancement. | |
| (f) | To give scholarships, prizes and educational support to the deserving students." |
2.1 The AO observed that the objects of the assessee trust inter-alia included to propagate the Islamic faith and to promote religious activities of Islamic faith. According to AO "religious purpose" is not definite in the Act, but it will include advancement, support or propagation of a religion and its tenets and AO observed that there being also charitable objects, the trust is "Religious and Charitable Trust". It is also noticed by the AO that assessee trust was started in Feb.1991. Reference is made by the AO to the following decisions:
1. Ghulam Mohidin Trust v. CIT [2001] 248 ITR 587 (J&K), in which it has been held that Tribunal was right in holding that the object of the trust providing for promotion of Science and Technology and Muslim theology amongst the Muslims intelligentsia was hit by the provisions of clause (a) and (b) of section 13(1) of the Act. According to AO such observations in respect of vulnerability of mixed object was the subject matter of comments in Landmark cases in 249 ITR 17 as under:
"Where a trust is purely religious in its objects, there is no difficulty in getting exemption as a public religious trust, through the donors would not be eligible for tax deduction under section 80G of the Income Tax Act. Where there is admixture of charitable and religious objects, it may get disqualified on the ground that it is for the benefit of a particular religious community, but also forfeit its claim as a public religious trust, because of its other objects, if such trust had been established on or after 1st April, 1961. This was the fact of the trust in Ghulam Mohidin Trust v. CIT [2001] 248 ITR 587 (J&K), which as a trust established after 01/01/1961 had to conform to the requirement of Section 11. Since it was a public trust partly religious, it was found to be ineligible for exemption, following a number of decisions of the Supreme Court as for example in State of Kerala v. M.P. Shanti Verma Jain [1998] 231 ITR 787."
2.2 Accordingly AO held that the trust of the assessee is mixed trust and the provisions of section 13(1)(b) are squarely applicable in the case of the assessee. However, assessee contended that benefit of exemption cannot be denied to the assessee in view of the decision of Hon'ble Gujarat High Court in the case of CIT v. Barkate Saifiyah Society [1995] 213 ITR 492/78 Taxman 6. Ld. AO did not accept such submission of the assessee on the ground that in the said decision of Hon'ble Gujarat High Court the society was charitable trust as against society being religious trust in the case of the assessee. It is in this manner Ld. AO has denied exemption to the assessee and has assessed the aforementioned income being taxable in the hands of the assessee.
3. An appeal was filed before Ld. CIT(A) which has been decided by the impugned order dated 23/6/2011. Before Ld. CIT(A) the contentions of the assessee were as under:
| (i) | According to the decision of Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra), where the trust is involved in the activity of charitable as well as religious provisions section 13(1)(b) are not attracted. | |
| (ii) | The decision relied upon by AO could not be applied to the facts of the assessee's case. | |
| (iii) | The exemption to the assessee cannot be denied in view of the following decisions and facts; |
| (a) | CIT v. Dawoodi Bohara Jamat [2009] 317 ITR 342/184 Taxman 222 (MP), in which it was held that section 13(1)(b) is not attracted in the case of public religious trust as the same is applicable only to charitable trust. | |
| (b) | Trustees of the Charity Fund v. CIT [1959] 36 ITR 513 (SC), in which it has been held that charitable trust created after 1st April, 1962 would lose exemption on account of section 13(1)(b) if it is for the benefit of any particular religious community or caste but a religious trust by definition would be for the benefit given to religious community. Thus trust for the establishment and worship of idols and performance of religious festivals would be exempt under section 11, though they may be for the benefit of a particular religious community or caste. However, it may be noted as charitable trust will not lose exemption merely because a discretion is given to the trustees to give preference, other things being equal, to the members of a particular religious community or caste. | |
| (c) | CIT v. Sri Gujarathi Mandal [1999] 240 ITR 293/[1998] 101 Taxman 647 (Mad.)Sri Gujrathi Mandal (supra) in which it has been held that section 13(1)(b) would have no application if what is sought to be done by the trust is to promote the interest of a linguistic group, as language cannot be equated to religion. The main object of the trust was to impart knowledge and education, primarily in Gujarati language and to hold, promote religious, social and moral stands of the mandal members, which was capable of including the promotion of the interest of diverse religions followed by its members and exemption under section 11 was granted. | |
| (d) | Reference was made to Schedule B of the accounts of the society trust to show that out of total expenditure incurred by the assessee of Rs. 5,53,27,631/-, an expenditure of Rs. 4,84,61,830/- was incurred on the peace conference, which was focused on creating communal harmony and an awareness and understanding of Islam and its message of peace for entire humanity, to help remove misconception, false fear and hate of Islam and Muslims globally, to help realize that justice, human rights, moral values and peace be it on any individual or at a worldwide collective level, are a must for effective human progress and realistic global unity (sic). It was submitted that in the peace conference there were eminent speakers from Islamic faith from the the world over as well as from other communities. The conference was also attended by Shri Anwar Ibrahim, Ex Dy. Prime Minister of Malaysia, Shri Digvijay Singh, General Secretary of All India Congress Committee, Sri Sri Ravishankar, Founder of Art of Liming, Shri Mahesh Bhatt, a noted film directors, Shri Hosbet Suresh, Retired Mumbai High Court Judge, Shri Hasan Gaffor, Ex-Police Commissioner of Mumbai, Shri Kolse Patil, Retired Judge, Pune and many other dignitaries. The aim of the peace conference was to create communal harmony and to create a brotherhood among the people of all faith is so as to maintain peace and harmony in the country in particular and globally in general. This conference was conducted as per one of the objectives of the trust which are described in the aims and objectives of the trust. Thus it was submitted that activities of the trust could not be held to be as confined only to a particular caste or community. |
3.1 After considering the aforementioned contentions of the assessee and going through the details Ld. CIT(A) has observed that assessee is enjoying registration under section 12A of the Act. Aims and objects of the trust are quite in its spirit and contents and the aims and objects do not reveal that benefits are meant only to a particular religious community. The benefits are available to general public at large. Provisions of section 13(1)(b) are not applicable to the facts of the case as the same can be applied only in the cases of the trust which are solely and exclusively created for benefit of particular religious community or caste. The decisions of Jammu & Kashmir High and Kerala High Court relied upon by Ld. AO suggest that both the trusts were created solely and exclusively for the benefit of a particular religious community or caste and therefore, those cases are different from the case of the assessee trust. The assessee has convened international peace conference in Mumbai which was attended by aforementioned dignitaries. The purpose of convening peace conference was not merely for the purpose of religious community. The object was of general public utility. Ld. CIT(A) has referred to the decisions in which the term "general public utility" has been considered namely: Addl.CIT v. Ahmedabad Millowners Association [1977] 106 ITR 725 (Guj.). He also referred to decision of Bombay High Court in the case of Bar Council of Maharashtra v. CIT [1980] 126 ITR 27, wherein it has been held that 'general' means pertaining to whole clas, 'public' means the body of people at large including any class of the public and 'utility' means usefulness. Thus Ld. CIT(A) arrived at a conclusion that advancing any object beneficial to the public or a section of public as distinguished from an individual or group would be a charitable purpose. The object of the trust is, therefore, to provide the benefit to all the communities by giving a clear and loud message of peace as a whole. The aim and object cannot be held as object for particular community or caste and thus not confined to Muslim alone but all community at large. Provisions of section 13(1)(b) are not applicable. The decision of Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra), is squarely applicable. Denial of exemption under section 11 is not justified. The DIT (Exemption) had granted exemption to the assessee on the basis of trust deed filed by the assessee and also did not point out any violation of any of the provisions of the trust deed. Therefore, Ld. CIT(A) has held that the AO was not justified in denying the exemption to the assessee. He directed the AO to allow exemption to the under section 11. The department is aggrieved, hence in appeal and has raised aforementioned grounds of appeal.
4. It may be mentioned here that when the appeal was received it was marked as a belated appeal. The date of communication of impugned order passed by Ld. CIT(A) was mentioned as 26/6/2011 in form No.36. However, later on vide letter dated 10/10/2012 which is placed on record, it is mentioned that the captioned order was received by the office of the appellant on 12/9/2011, therefore, the last day of filing of appeal was 9/9/2011 as against that the department has filed the appeal on 30/8/2012, which is within the time. After verifying the record it was seen that in the authorized memo itself it was written that the order of the Commissioner was received on 12/7/2011, therefore, contention of the department appears to be correct and the appeal filed by the department is not belated one. Hence, we proceed to decide the appeal filed by the department.
5. After narrating the facts Ld. DR vehemently submitted that objects of the trust clearly stated that it was to propagate the Islamic faith, thus the trust is religious trust and, therefore, it was not entitled to get exemption under section 11. Relying upon the cases which have been relied on by the AO and which have been discussed in detail in the above part of this order it was submitted by Ld. DR that the AO was right in denying the exemption to the assessee under section 11 of the Act. He submitted that the decision of Hon'ble Jammu & Kashmir High Court (supra) it was held that the Tribunal was right in holding that where the object of the trust provide for promotion of scientific, technical and Muslim theology amongst Muslim intelligentsia the trust was hit by the provisions of section 13(1)(a) & (b). Relying upon the order passed by the AO it was submitted by him that the Ld. CIT(A) has wrongly granted the relief to the assessee and his order should be set aside and that of AO be restored.
6. On the other hand, referring to the assessment order and the observations of the AO at various places in the assessment order, it was submitted by Ld. AR that AO has held that trust of the assessee is mixed trust. Firstly, he invited our attention to the following observation of AO at page-2 of the assessment order:
"From the aforesaid objects of the Trust and other Objects as mentioned in the Trust Deed which are Charitable in nature it is evident that the assessee trust is 'Religious and Charitable Trust'.
Secondly, he also invited our attention the following observation of the AO at page-3 of the assessment order.
"Accordingly, it is held that yours is a mixed trust and the provisions of Section 13(1)(b) is squarely applicable in your case. Accordingly, you are requested to show cause why exemption claimed should not be denied.
6.1 He thus submitted that AO has himself admitted that the assessee trust is a mixed trust. He invited our attention towards following observations of Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra) to contend that provisions of section 13(1)(b) will not be applicable to a mixed trust which is charitable as well as religious.:-
"Further, as stated earlier, in the three different clauses, namely, (a)(b) and (c) of sub-section (1) of section 13, the Legislature has used different phrases. Clause (a) as, stated earlier, deals with a trust for private religious purposes. Clause (b) deals with a trust for charitable purposes or a charitable institution, clauses (c) and (d) deal with a trust for charitable or religious purposes or a charitable or religious institution. From this different phraseology used by the Legislature in clauses (a), (b) and (c), it can be inferred that the Legislature intended to cover only trust for charitable purposes under clause (b). That means, if a trust is composite, that is, for religious and charitable purposes, then it would not be covered. It is also apparent that if the trust is only for religious purposes, clause (b) would not be applicable.
In view of the aforesaid discussion, in our view, the Tribunal has rightly held that section 13(1)(b) applies only to trusts which were purely for charitable purposes and the assessee trust was charitable as well as religious in nature and the assessee was entitled to exemption under section 11. Hence, question No.1 is answered in the affirmative in favour of the assessee and against the Revenue."
6.2 Thus it was pleaded by Ld. AR that even as per the version of AO, applying the provisions of section 13(1)(b) benefit of exemption under section 11 cannot be denied to the assessee. He submitted that this argument of the assessee is without prejudice to the other arguments.
6.3 He submitted that the first case of the assessee is that the trust is in existence since 4/10/1990 and it has never been denied exemption under section 11 by the revenue and since then it has been enjoying the benefit of registration under section 12A. He submitted that this is the only year when the department has denied the exemption to the assessee. He submitted that for A.Y 2006-07 AO required the assessee to explain as to why the exemption under section 11 should not be denied to the assessee as the assessee trust was to propagate Islamic religion and a detailed reply dated 15/12/2008 was filed. The AO after considering the reply has granted the exemption to the assessee by way of an order dated 30/12/2008 passed under section 143(3) of the Act. He submitted before us a copy of the detailed reply filed by the assessee running into 13 pages and the assessment order vide which assessee's return filed at nil was accepted with the following observations:
"The trust is registered under the Bombay Public Trust Act 1950 and has also been registered under Section 12A of the I.T. Act 1961 by the Commissioner of Income Tax, Mumbai City-1, Mumbai. The assessee is not registered u/s. 80-G of the I.T. Act.
The aims and objects of the trust are:
| 1. | To create a fund primarily to provide charitable, educational, moral, socio-economic development and religious activities of Islamic faith. | |
| 2. | To propagate the Islamic Faith. |
As mentioned in the Trust Deed, the assessee trust is following the religious activities. The assessee has submitted the explanations which were called for during the course of assessment proceedings which were examined and discussed.
Subject to the above remarks, the assessee's total income is computed as under:
Total income as per statement of income Rs. NIL
Assessed u/s. 143(3) of the I.T. Act. Issue demand notice/RO etc. to the assessee along with copy of order."
He then referred to the assessment order in respect of A.Y 2004-05, which is an order dated 29/12/2006 passed under section 143(3) of the Act. In that order also the income of the assessee has been assessed at Nil, granting exemption to the assessee under section 11 of the Act. Copies of all these documents were also given to Ld. D.R.
6.4 Referring to the aforementioned assessment orders it was submitted by Ld. AR that the case of the assessee is acceptable simply on the basis of rule of consistency which has been recognized by Hon'ble Apex Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248. He submitted that the said case was also a case of religious and charitable trust, wherein accepting the plea of consistency their Lordship have held that assessee is entitled to get exemption under section 11 & 12 on the basis of consistency. He invited our attention towards following observation of their Lordship from the decision.
"We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee -we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12 of the Income-tax Act of 1961".
6.5 To further support such proposition Ld. AR relied on the following decisions:
| 1. | CIT v. Shree Ram Memorial Foundation [1986] 158 ITR 3/[1987] 33 Taxman 438 (Delhi). In that case the department had already allowed similar type of expenses in earlier three years and noting that there was no change in law it was held that it was not appropriate on the part of the revenue to take different view suddenly and levy heavy tax on the assessee when it was the same project going on for all these period. It was found that assessee's work once was recognized as charity for several years and assessee was carrying on same object, it was not for the Court to re-open the same point from time to time. | |
| 2. | Samaj Kalyan Parishad v. ITO [2007] 105 ITD 29 (Delhi) (SB). In this case relying upon rule of consistency the relief was held allowable to the assessee with the following observations: | |
| "9. Moreover, the CIT took proceedings under section 263 to deny the exemption to the assessee-trust for the assessment years 1978-79 and 1979-80 but dropped the proceedings. For the assessment years 1984-85 to 1999-2000 the Assessing Officer himself granted the exemption and these assessments have not been disturbed. For the assessment years 1982-83 and 1983-84, the Tribunal allowed the exemption. In such circumstances, following the rule of consistency also, apart from the reasons given by us earlier, the assessee's claim has to be upheld. The Hon'ble Delhi High Court has taken the view in CIT v. Lagan Kala Upvan [2003] 259 ITR 489/126 Taxman 205 and DIT v. Lovely Bal Shiksha Parishad[2004] 266 ITR 349/135 Taxman 34 that the income-tax authorities cannot take inconsistent views on the same set of facts. Respectfully following these decisions and applying the rule of consistency, the assessee's claim requires to be upheld. This reasoning of ours is independent of the other reasons given by us in the earlier paragraphs to uphold the assessee's claim." |
6.6 Coming to the merits of the case it was submitted by Ld. A.R that under section 11(1) religious activity of a trust is not a bar. Referring to the language of the section he submitted that income derived from the property held under trust established wholly for charitable or religious purposes shall not be included in the total income of the previous year of the person who has received such income and which is applied for such purposes in India. He submitted that bar regarding religious activities, if any, is mentioned in section 13(1)(c) which specifies the category of the trust which carry out the religious as well as charitable activities. He submitted that section 13(1)(a) is applicable on the trust which are private religious trust. Section 13(1)(b) applies to the institution who are established for carrying out activities of charitable in nature. He submitted that religious and charitable trust are categorized by section 13(1) in three categories namely (1) private religious trusts; (2) charitable trusts and; (3) trusts which are carrying out mixed activities of religious as well as charitable.
6.7 He submitted that it has already been contended that even AO has held that the assessee's trust is a mixed trust and even if case of AO is accepted then also only section 13(1)(c) is applicable as per law laid down in the decision of Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra). He submitted that in the aforementioned case it has been held that where the trust is composite i.e., for religious and charitable purposes, then it will not be covered by the provisions of section 13(1)(b), which has been applied by the AO. He submitted that though the objects of assessee's trust contain the provisions regarding activities of religious nature but that is not confined to a particular class, but is for the benefit of a entire Muslim religious community. He submitted that Hon'ble Supreme Court in the case of Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 have approved the decision of Privy Council in the case of Oppenheim v. Tobacco Securities Trust Co. Ltd. [1951] AC 297, wherein it has been held that a group of person may be numerous, but, if the nexus between them is their personal relationship to a single propsitus or to several propositi, they are neither the community nor a section of the community for charitable purposes. (sic). Referring to the same their Lordship have observed that it is unable to comprehend that how the trust of Rana Caste started in Ahmedabad can be regarded as having been introduced in the caste by consideration of their personal status as individual. He submitted that though religious activity has been stated as one of the object in the memorandum of Trust, but in fact during the year under consideration the assessee has incurred major expenses only in respect of peace conference which cannot be described as religious activity alone. He in this regard referred to the observations of Ld. CIT(A) vide which it was mentioned that the peace conference was attended by the dignitaries of all the religions prevailing in India. Further supporting his case, to contend that section 13(1)(b) would be applicable only to charitable trust, apart from relying upon the aforementioned decision of Hon'ble Gujarat High Court Ld. AR relied upon the following decisions:
| 1. | CIT v. Chandra Charitable Trust [2007] 294 ITR 86/[2006] 156 Taxman 19 (Guj.), wherein it has been held that Jainism was accepted to be a religion, from the covenants of the trust deed it could be spelt out that not only to propagate Jainism or help or assist maintenance of temple, Sadhus, Sadhvis, etc. yet other goals were set in the trust deed. The trust would then become a charitable trust and also a religious trust or it could be addressed as a charitable religious trust, and if that be so section 13(1)(b) would not be applicable. | |
| 2. | Shiya Dawoodi Bohra Jamat v. CIT [2011] 133 ITD 271/15 taxmann.com 154 (Ahd.), wherein it was held that assessee was religious trust for benefit of community, the registration was rejected on the ground that assessee trust was not established for the benefit of general public and had violated the provisions of section 13(1)(a) and 13(1)(b). It was the contention of the assessee that section 13(1)(b) would not be applicable to religious trust. It was held that section 13(1)(b) is applicable to a trust which is established for charitable purposes and does not applicable for religious trust. |
6.8 Ld. A.R distinguished the decisions relied upon by AO. He submitted that in the case of Ghulam Mohidin Trust v. CIT [2001] 248 ITR 587/114 Taxman 543 (J&K), though the decision of Gujarat High Court was existing but was not considered. He submitted that applicability of section 13(1)(b) was not examined. So it relates to another case of State of Kerala v. M.P. Shanti Verma Jain [1998] 231 ITR 787 (SC) the trust was a private family trust, therefore, the same is not applicable to the facts of the present case. He submitted that as per well established principle of law, for applying decision a context considered by the Court should be considered relevant.
6.9 Alternatively, he submitted that what has been assessed by the AO is the gross receipts without giving set off of expenditure. He submitted that only net surplus, if any, could be assessed. For supporting this proposition Ld. AR relied upon the decision of the Tribunal in the case of Nirmal Agricultural Society v. ITO [1999] 71 ITD 152 (Hyd.), wherein it has been held that where the assessee has been assessed in the status of AOP denying relief under section 11 and 13, AO could assess only net income of the assessee and not the gross receipts. Thus it was submitted by him that order of Ld. CIT(A) should be upheld and departmental appeal should be dismissed.
7. We have carefully considered the rival submissions in the light of material placed before us. We have also carefully gone through the assessment order, order passed by Ld. CIT(A), documents referred before us and the case law relied upon by both the parties. In the assessment order AO has not discussed anything about the activities performed by the assessee during the year under consideration. The ITO has only referred to the objects of the trust as stated in clause (a) to (f) and finding that the assessee's object included religious activities the AO has held that assessee is a mixed trust on which provisions of section 13(1)(b) are applicable. A show cause notice was given to the assessee which has been reproduced in the assessment order and assessee was asked to explain as to why it being mixed trust provisions of section 13(1)(b) should not be applied and exemption should not be denied. In response to such notice the assessee placed reliance on the decision of Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra). The AO did not accept such case of the assessee on the ground that the decision of Hon'ble Gujarat High Court is totally different from the case of the assessee. He observed that in the case of Barkate Saifiyah Society (supra) the trust was charitable trust, whereas the assessee is religious trust. It is in these circumstances he has denied the exemption to the assessee and has assessed the entire gross receipts as income of the assessee out of which only establishment expenses and depreciation have been allowed. It is in this manner AO has assessed the assessee at a sum of Rs. 8,15,58,620/- against the nil income. For arriving at a conclusion that assessee is not entitled to get exemption under section 11 AO has mainly referred to the decision of Hon'ble Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust (supra). In the said case the ITO had rejected the claim of assessee for grant of exemption under section 11 on the ground that assessee trust was not charitable trust and it was hit by the provisions contained in section 13(1)(b). The claim was also rejected on the ground that income was not applied for charitable purposes, but only for construction of building for commercial purposes which was not one of the objects of the trust. In appeal AAC found that the trust is partly charitable and partly religious in nature. Therefore, AAC held that part of the income, which was used for charitable purposes, was exempted under section 11 of the Act. He directed the AO to bifurcate the income of the assessee in the two objects and allow exemption in respect of the part which was applied for charitable purposes. The AAC also held that the income of the trust was properly applied for the purposes of the trust notwithstanding the fact that the assessee had used the same in the construction of building for commercial purposes. The Tribunal after analyzing the clauses 13 & 14 of the trust deed held that the trust was partly charitable and partly religious and as there was no apportionment of income between two objects of the trust and it was left to the exclusive discretion of the trustees to spent what ever they like on any objects, the assessee was not entitled to claim exemption under section 11 of the Act. Their Lordship of the High Court found that clause 13 & 14 of the instrument which contain objects of the trust were clearly showing that the trust was a religions trust created exclusively for the benefit of persons belonging to a particular religious community, which is Muslim community. Even the ex-gratia grants and loans on easy terms for further studies and research are confined to Muslims. It for that reason their Lordship observed that the trust was covered within the ambit of clause (b) of section 13(1) which denies exemption of income to such trusts under section 11 of the Act. Their Lordship further observed that clause (a) of section 13(1) of the Act was also attracted because whole of the income from property held under the trust, which is private religious trust does not enure for the benefit of the public. Thus in these circumstances it was held that Tribunal was right in holding that assessee trust was not entitled to claim exemption under section 11 of the Act for the income derived by it from the property held under the Trust. As mentioned earlier, AO had applied this decision of Hon'ble Jammu & Kashmir High Court to the case of the assessee. According to well settled principle of law in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC) a judgment of a Court has to be read in the context in which the question arose for decision in that case. It was further held that it is not desirable or permissible to pick out a word or sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the question which were before the Court. The decision of the Court takes its colour from the question involved in the case in which it was rendered and while applying decision to a later case, the Court must carefully try to ascertain the true principle laid down by the decision and not pick out words or sentences from the said judgment divorced from the context of the question considered by the Court in that case to support their reasoning. Considering the facts of the decision in the case of Ghulam Mohidin Trust (supra), it cannot be said that the said case is applicable to the case of the assessee as none of the object of the trust has limited the application of entire income to a particular community. From the facts of that case it was observed by the Hon'ble High Court that the trust was in the nature of private religious trust and therefore, it did enure for the benefit of the public. These observations of their Lordship are stated in para 5 of the said judgment. Therefore, to reject the claim of the assessee regarding exemption under section 11 reliance cannot be placed on the decision of Hon'ble Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust (supra).
7.1 It has already been pointed out that AO has not discussed the activities of the assessee carried out during the year under consideration. Ld. CIT(A) has discussed the activities of the trust in detail and he has found that out of total expenditure incurred by the assessee at Rs. 5,53,27,631/- the major expenses of the assessee is on conducting a peace conference which were to the tune of Rs. 4,84,61,830/-. It was a 10 days peace conference and the focus was to create communal harmony and awareness and understanding of Islam and its message of peace for entire humanity to help, remove misconception, false fear, hate of Islam globally to help realize that justice, human rights, moral values and peace be it on any individual or at world wide collective level are a must for effective human progress and realistic global unity. The said conference was attended by various dignitaries, the names of whom have already been mentioned in the earlier part of this order. The said peace conference cannot be held to be a mere religious activity for the benefit of a particular community. In fact during the course of hearing referring to the details of expenditure incurred Ld. AR was specifically required to describe that as to which expenditure can specifically be assigned as religious expenditure incurred exclusively for Muslim community. It was submitted by Ld. AR that the major expenses were on peace conference and none of the expenses can be said to have incurred exclusively for religious activity. Ld. DR also could not point out any of such expenditure which can be stated to have incurred exclusively for the purpose of a particular religious community. It has already been mentioned that AO has not pointed out any such expenditure. Therefore, simply on the basis of one or two objects stated in the objects of the trust which are limited to religious activity, it cannot be said that in the year under consideration the assessee has suddenly become purely religious trust. Ld. AR has carried us through assessment orders of earlier years. In one of the assessment order AO has specifically mentioned about the issue of religious nature of trust and exemption has been granted to the assessee under section 11 after satisfying with the reply submitted by the assessee. The contents of the assessment order have already been reproduced in the above part of this order. Therefore, the case of the assessee is also acceptable on the basis of principle of consistency relying upon the decision referred by the Ld. AR, which has already been discussed in the above part of this order.
7.2 Even if one has to go by the observation of AO in the assessment order that assessee is a mixed trust, even then clause 13(1)(b) cannot be applied as it is applicable to purely charitable trust as held by Hon'ble Gujarat High Court in the case of Barkate Saifiyah Society (supra). The relevant observations have already been reproduced in the earlier part of this order in para 6.1. Therefore, also benefit of exemption under section 11 cannot be denied to the assessee under section 13(1)(b) of the Act.
7.3 Though it is not the case of AO that exemption under section 11 is not allowable to the assessee applying the provisions of section 13(1)(a), but as ground has been taken by the revenue this aspect of the matter was also argued by the Ld. AR. According to his submission section 13(1)(a) is applicable only to the trust for "private religious" purpose which does not enure for the benefit of the public. Section 13(1)(a) read as under:
"13. (1) Nothing contained in section 11 or section 12] shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-
(a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public;"
It is not even the case of AO that the assessee is a trust for private religious purposes which does not enure for the benefit of public. Therefore, the assessee trust cannot be held to be debarred from claiming the exemption under section 11 on the basis of section 13(1)(a).
7.4 There is also force in the contention of Ld. AR that entire gross income could not be assessed as income of the assessee as in case it is held that trust is not eligible for exemption under section 11, then net income should be assessed and such arguments is supported by decision relied by the Ld. AR in the case of Nirmal Agricultural Society (supra) and no contrary decision has been brought to our notice.
7.5 In view of the above discussions, we find no infirmity in the order passed by Ld. CIT(A) vide which it has been held that assessee has wrongly been denied benefit of exemption under section 11 of the Act. We decline to interfere and the appeal filed by the revenue is dismissed.
8. In the result, the appeal filed by the revenue is dismissed.
USP *In favour of assessee.
Thanks & Regards,
CA AMRESH VASHISHT, FCA, LLB, DISA (ICAI)
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