IT : For initiating valid jurisdiction under section 153C, even if Assessing Officer of person searched and Assessing Officer of such other person is same, he has to first record satisfaction in file of person searched and then such note along with seized document/books of account is to be placed in file of such other person and thereafter he has to issue notice under section 153C
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[2013] 33 taxmann.com 420 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'B'
DSL Properties (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Central Circle - 8*
G.D. AGRAWAL, VICE-PRESIDENT
AND CHANDRA MOHAN GARG, JUDICIAL MEMBER
AND CHANDRA MOHAN GARG, JUDICIAL MEMBER
IT APPEAL NO. 1344 (DELHI) OF 2012
[ASSESSMENT YEAR 2004-05]
[ASSESSMENT YEAR 2004-05]
MARCH 22, 2013
Section 153C, read with sections 132 and 153A, of the Income-tax Act, 1961 - Search and Seizure - Assessment in case of [Satisfaction note] - Assessment year 2004-05 - Whether for initiating action under section 153C recording of satisfaction by Assessing Officer of person searched that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized belong to person other than person searched as well as handing over of books of account, other documents or assets seized to Assessing Officer of such other person is a sine qua non - Held, yes - Whether if Assessing Officer of person searched and Assessing Officer of such other person is same, he has to first record satisfaction in file of person searched and then such note along with seized document/books of account is to be placed in file of such other person and thereafter in capacity of Assessing Officer of such other person, he has to issue notice under section 153C, read with section 153A - Held, yes [Paras 9,12,15,21and 22] [In favour of assessee]
FACTS
| ■ | For the assessment year 2004-05, the assessee-company filed the return of income on 20-9-2004, in which the audited profit and loss account and balance-sheet were duly furnished. Later on 29-4-2008 the authorized officer conducted a search under section 132 upon Chaurasia Group of Companies and found from the premises of director/shareholder of assessee-company the photocopy of the profit and loss account and balance-sheet of the assessee-company for the assessment year 2004-05. Thereupon the Assessing Officer of the assessee on the basis of aforesaid photocopy of the profit and loss account and balance-sheet of the assessee-company had issued on the assessee a notice under section 153C read with section 153A on 21-6-2010 for the assessment year 2004-05. Further he passed an order under section 153C read with section 153A for the assessment year 2004-05 on the assessee. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer. | |
| ■ | On second appeal, the assessee contended that (i) in the instant case the conditions for issue of notice under section 153C were not fulfilled, and (ii) the notice issued was barred by limitation. |
HELD
| ■ | From a reading of section 153C(1) it is evident that action under section 153C can be taken in respect of any other person than the person searched if the Assessing Officer of the person searched is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents belong to a person other than the person searched. In such circumstances, he shall hand over to the Assessing Officer of such other person money, bullion, jewellery or other valuable article or thing or books of account or documents. Thereafter the Assessing Officer of such other person shall proceed against the said person to assess or reassess his income in accordance with the provisions of section 153A. Therefore, recording of satisfaction by the Assessing Officer of the person searched that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized belong to the person other than the person searched as well as handing over of books of account, other documents or assets seized to Assessing Officer of such other person is a sine qua non for initiating action under section 153C. [Paras 9 and 12] | |
| ■ | From a perusal of the satisfaction note recorded under section 153C, it is evident that this note does not indicate in whose case this satisfaction was recorded and who is the officer recording the satisfaction. In the satisfaction note the Assessing Officer has mentioned the name of various assessees, who have been covered for search and seizure action under section 132(1). Now during the search of whose premises it was found is not mentioned. The last line of the satisfaction note reads: I am satisfied that the above documents belong to the assessee and thus its case is being taken up for assessment under section 153C. A plain reading of the above sentence indicates that it is recorded by the Assessing Officer, who is taking action under section 153C. Thus it seems that the satisfaction note is recorded by the Assessing Officer of the assessee. This inference is fortified from the fact that on the very same date, i.e., 21-6-2010 the notice under section 153C is issued by the same person. The revenue also stated that the satisfaction note was recorded by the ACIT, Circle 8, who issued notice under section 153C read with section 153A. However, it tried to justify the action of the ACIT on the ground that after the order under section 127 by the Commissioner, Delhi-IV, the jurisdiction of the person searched as well as the assessee both were centralized with the ACIT, Circle 8. It also stated that since the Assessing Officer of both the persons was the same, there was no question of handing over and taking over of the documents. The Bench does not agree with this view of the revenue. If the Assessing Officer is assessing the person searched as well as other person whose assets, books of account or documents were found at the time of search, then also, first while making the assessment in the case of the person searched, he has to record the satisfaction that the money, bullion, jewellery or other valuable article or thing or books of account or documents belong to the person other than the person searched. Then the copy of this satisfaction note is to be placed in the file of such other person and the relevant document should also be transferred from the file of person searched to the file of such other person. Thereafter in the capacity of the Assessing Officer of such other person, he has to issue the notice under section 153C read with section 153A. The Assessing Officer of the person searched and such other person may be the same, but these are two different assessees and, therefore, the Assessing Officer has to carry out the dual exercise, first as the Assessing Officer of the person searched, in which he has to record the satisfaction during the course of assessment proceedings of the person searched. After recording such satisfaction note in the file of the person searched, the same is to be placed in the file of such other person. Then in his capacity as the Assessing Officer of such other person, he should take cognizance of such satisfaction note and thereafter issue notice under section 158BC. In the instant case this exercise of recording the satisfaction during the assessment proceedings of the person searched has not been carried out. On the other hand, the Assessing Officer recorded the satisfaction in the case of such other person which does not satisfy the condition of assuming jurisdiction under section 153C. Therefore, the above satisfaction note cannot be said to be a valid satisfaction note within the meaning of section 153C. [Para 15] | |
| ■ | In the instant case the jurisdiction under section 153C has been assumed only on the basis that during the course of search on Chaurasia Group of Companies the photocopy of the audited profit and loss account and balance-sheet of the assessee for the assessment year 2004-05 was found from the premises of director/shareholder of the assessee-company. It is not in dispute that the search had taken place on 29-4-2008, while the return of income for the assessment year 2004-05 along with the original profit and loss account and balance-sheet was already filed more than three and a half years before the date of search. [Para 16] | |
| ■ | The assessee has vehemently contended that the photocopy of the audited profit and loss account and balance-sheet were belonging to the shareholder/director from whom the same were found and not to the assessee. When a company supplies photocopy of its profit and loss account and balance-sheet to its shareholders/directors, such photocopy of the profit and loss account and balance-sheet belong to such shareholder/director and not to the assessee-company. If the argument of the revenue is accepted, then if during the course of search of any person the photocopy of the profit and loss account/balance-sheet of any listed company, say, Reliance Industries, Tata Motors or Bajaj Auto is found, then as per the interpretation of section 153C by the revenue the Assessing Officer would be entitled to take action under section 153C in the case of such listed company. That interpretation would lead to absurd results. Therefore, the underlying condition for invoking the jurisdiction under section 153C is not satisfied in the instant case. [Para 17] | |
| ■ | The assessee has also argued that the issue of notice under section 153C is barred by limitation as per proviso to section 153C. The above proviso refers to second proviso to sub-section (1) of section 153A. From a reading of section 153A(1) and its first and second provisos it is evident that as per clause (b) of sub-section (1) of section 153A and second proviso, the Assessing Officer can issue notice for assessment or reassessment of total six assessment years immediately preceding the assessment year relevant to previous year in which search is conducted. As per proviso to section 153C, the date of search is to be substituted by the date of receiving the books of account or documents or assets seized by the Assessing Officer having jurisdiction over such other person. The revenue has stated that since the Assessing Officer of the person searched and the Assessing Officer of such other person was the same, no handing over or taking over of the document was required. Section 153C(1) and its proviso have to be read together in a harmonious manner. While interpreting section 153C, it has been held earlier that for initiating valid jurisdiction under section 153C, even if the Assessing Officer of the person searched and the Assessing Officer of such other person is the same, he has to first record the satisfaction in the file of the person searched and thereafter such note along with the seized document/books of account is to be placed in the file of such other person. The date on which this exercise is done would be considered as the date of receiving the books of account or document by the Assessing Officer having jurisdiction over such other person. Since in the instant case satisfaction is recorded on 21-6-2010 and notice under section 153C is also issued on the same date, then only conclusion that can be drawn is that the Assessing Officer of such other person has taken over the possession of seized document on 21-6-2010. Accordingly, as per section 153A(1) the Assessing Officer can issue the notice for the previous year in which search is conducted (for the purpose of section 153C the document is handed over) and six assessment years preceding such assessment year. In the instant case, the previous year in which the document is handed over is 1-4-2010 to 31-3-2011. The assessment year would be 2011-12. Six preceding previous years and relevant assessment year would be as: 2010-11, 2009-10, 2008-09, 2007-08, 2006-07 and 2005-06 [Paras 18,19,20 and 21] | |
| ■ | The Assessing Officer has issued notice under section 153C for assessment year 2004-05, which is clearly barred by limitation. Therefore, issue of notice under section 153C cannot be sustained on both the above counts, i.e., it is legally not valid as conditions laid down under section 153C has not been fulfilled and it is barred by limitation. In view of the above, the notice issued under section 153C was liable to be quashed and consequently the assessment completed in pursuance to such notice also required to be quashed. [Para 22] |
CASE REVIEW
Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) (para 12) followed.
CASES REFERRED TO
Sinhgad Technical Education Society v. Asstt. CIT [2012] 50 SOT 89 (URO)/16 taxmann.com 101 (Pune) (para 3), Vijay M. Vimawal v. Asstt. CIT [2009] 34 SOT 34 (Ahd.) (URO) (para 5), Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) (para 9) and CIT v.Meghmani Organics Ltd. [Tax Appeal No.2077 of 2009] (para 11).
R.S. Singhvi for the Appellant. Dr. Sudha Kumari for the Respondent.
ORDER
G.D. Agrawal, Vice-President - This appeal by the assessee is directed against the order of learned CIT(A)-XXXII, New Delhi dated 23rd February, 2012 for the AY 2004-05.
2. Ground No.1 of the assessee's appeal reads as under:-
| "1 (i) | That CIT(A) has erred in confirming order passed u/s 153C read with sec. 153A even though same was illegal and without jurisdiction. | |
| (ii) | That impugned proceedings were not in accordance with limitation in terms of provisions of sec. 153C of the Income Tax Act, 1961 and as such assessment order is not sustainable under the law. | |
| (iii) | That lower authorities have failed to appreciate that allegation about seized material during the course of search is without any factual and legal basis and even otherwise, there being no requisite satisfaction and as such there is no legal basis to assume jurisdiction u/s 153C. | |
| (iv) | That alleged proceedings are merely on the basis of change of opinion in respect of same set of facts which are already part of record and as such provisions of sec. 153C/153A are not relevant and applicable. | |
| (v) | That even otherwise, in the absence of any assessment being pending on the date of initiation of proceedings u/s. 153C, it is not open to assume jurisdiction u/s. 153C read with sec. 153A of the Income Tax Act, 1961." |
3. At the time of hearing before us, the learned counsel for the assessee argued at length. He stated that there was search at Chaurasia Group of cases. However, there was no search operation at the premises of the assessee company. The Assessing Officer took action under Section 153C read with Section 153A of the Income-tax Act, 1961 by issuing notice on 21st June, 2010. He stated that notice under Section 153C was issued on the basis of photocopy of the profit & loss account and balance sheet of the assessee company found from the premises of director/shareholder of the assessee company. That the search has taken place on 29th April, 2008 while the assessee has filed the return for AY 2004-05 i.e. the year under appeal on 22nd September, 2004 in which the audited profit & loss account and balance sheet was duly furnished. That what was found from the shareholder/director was only the photocopy of the audited profit & loss account and balance sheet while the original was already furnished by the assessee. That on these facts, it cannot be said that the photocopy of the profit & loss account and balance sheet is the document belonging to the assessee found and seized from some other person. That the photocopy of the balance sheet was given by the company to its director/shareholder and, therefore, it was belonging to such director/shareholder. Moreover, when the said profit & loss account and balance sheet is already furnished with the return of income and the income had been disclosed as per such profit & loss account and balance sheet, admittedly, there is no undisclosed income as per such profit & loss account and balance sheet. Therefore, such profit & loss account and balance sheet cannot be said to be incriminating document on the basis of which action under Section 153C can be taken. In support of this contention, he relied upon the decision of ITAT in the case of Sinhgad Technical Education Society v. Asstt. CIT [2012] 50 SOT 89 (URO)/16 taxmann.com 101 (Pune).
4. The learned counsel further stated that if a search takes place at the premises of a Chartered Accountant from whom copies of the balance sheets of all his clients would be found, whether action under Section 153C can be taken in the case of all of his clients. He gave another example that the profit & loss account and balance sheet are supplied by every listed company to its shareholders alongwith the notice of the AGM. Suppose, from any person, the audited balance sheet of Reliance Industries or Tata Motors is found, can action under Section 153C can be taken in their case. He further submitted that the satisfaction under Section 153C is to be recorded by the Assessing Officer of the person searched and then he alongwith the satisfaction note should forward the copy of the seized document to the Assessing Officer of the person to whom such document belongs. That in this case, from the photocopy of the satisfaction note furnished by the DR, it is evident that the satisfaction note does not indicate the designation of the Assessing Officer who recorded the satisfaction. There are only signatures of somebody without any name and designation. From a perusal of the satisfaction note, it is evident that it is recorded by the Assessing Officer of the assessee and not the Assessing Officer of the person searched. Therefore, such satisfaction recorded by the Assessing Officer of the assessee for taking up action under Section 153C in this case cannot be said to be a valid satisfaction.
5. The learned counsel further submitted that the issue of notice under Section 153C is barred by limitation. He stated that the search has taken place at the Chaurasia Group of companies on 29th April, 2008. However, the alleged satisfaction note on the basis of which action under Section 153C is taken is dated 21st June, 2010. That as per proviso to Section 153C, for taking action under Section 153C, the date of search would be substituted by the date of receiving the books of account or the documents or the asset seized by the Assessing Officer having jurisdiction over such other person. Though the Revenue has not given any specific date on which the document was received by the Assessing Officer of the assessee from the Assessing Officer of the person searched, but, from the papers produced by the Revenue, it is evident that the satisfaction note under Section 153C is recorded on 21st June, 2010 and notice under Section 153C is also issued on the same date. Therefore, in the absence of any evidence to the contrary, it is to be assumed that on the same date i.e. 21st June, 2010, material has been handed over by the Assessing Officer of the person searched to the Assessing Officer of the assessee. Then, the year of search would be 2010-11 i.e. AY 2011-12 and six earlier assessment years would be 2005-06 to 2010-11. The Assessing Officer has issued notice under Section 153C for AY 2004-05 which is clearly barred by limitation. In support of this contention, the learned counsel relied upon the decision of ITAT Ahmedabad Bench in the case of Vijay M. Vimawal v. Asstt. CIT [2009] 34 SOT 34 (URO).
6. In view of the above, it is contended by the learned counsel that the conditions for issue of notice under Section 153C are not fulfilled and secondly, the notice issued is barred by limitation. Therefore, the same should be quashed.
7. Learned DR, on the other hand, fairly admitted that the original satisfaction note is not available in the file. However, photocopy of the satisfaction note is available. The same is submitted by him. He stated that the Officer who signed the satisfaction note is Shri Jeetendra Kumar who is ACIT, Central Circle-8, New Delhi. He stated that Shri Jeetendra Kumar is the Assessing Officer of the person searched by virtue of the order under Section 127 dated 10th September, 2009 passed by the CIT, Delhi-IV. That the same person is the Assessing Officer of the assessee. Therefore, he was already in the possession of the seized material and, the contention of the learned counsel, that the seized material was received only on 21st June, 2010 for the purpose of counting the period for which notice under Section 153C can be issued, cannot be accepted. He further submitted that the scheme of Section 153C is not similar to Section 158BD. The Assessing Officer has recorded proper satisfaction for taking action under Section 153C read with Section 153A, copy of which is already placed before the Bench, therefore, the issue of notice under Section 153C for AY 2004-05 was valid as well as within time limit permissible under Section 153C. The same should be upheld. In this regard, he also relied upon the order of learned CIT(A).
8. We have carefully considered the arguments of both the sides and perused the material placed before us. Section 153C of the Income-tax Act, 1961 reads as under:-
"153C. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A:]."
9. From the above, it is evident that action under Section 153C can be taken in respect of any other person than the person searched if the Assessing Officer of the person searched is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents belong to a person other than the person searched. In such circumstances, he shall hand over to the Assessing Officer of such other person money, bullion, jewellery or other valuable article or thing or books of account or documents. Thereafter, the Assessing Officer of such other person shall proceed against the said person to assess or reassess his income in accordance with the provisions of Section 153A. Therefore, recording of satisfaction by the Assessing Officer of the person searched that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized belong to the person other than the person searched is a sine qua non for initiating action under Section 153C. This interpretation of Section 153C by us is supported by the decision of Hon'ble Apex Court in the case of Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 wherein their Lordships at page 348 held as under:-
"The condition precedent for invoking a block assessment is that a search has been conducted under section 132, or documents or assets have been requisitioned under section 132A. The said provision would apply in the case of any person in respect of whom search has been carried out under section 132A or documents or assets have been requisitioned under section 132A. Section 158BD, however, provides for taking recourse to a block assessment in terms of section 158BC in respect of any other person, the conditions precedent wherefor are : (i) satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act; (ii) the books of account or other documents or assets seized or requisitioned had been handed over to the Assessing Officer having jurisdiction over such other person; and (iii) the Assessing Officer has proceeded under section 158BC against such other person.
The conditions precedent for invoking the provisions of section 158BD, thus, are required to be satisfied before the provisions of the said Chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under section 132A of the Act."
10. It was contended by the learned DR that Sections 158BD and 153C have different language, therefore, any judicial precedent with reference to Section 158BD would not be applicable to Section 153C. To appreciate the contention of the learned DR, let us compare the language of Section 153C and Section 158BD. Section 153C has already been reproduced above in paragraph No.8. Section 158BD reads as under:-
"158BD. Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom documents or any assets were requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed [under section 158BC] against such other person and the provisions of this Chapter shall apply accordingly."
11. We find that Hon'ble Gujarat High Court, in the case of CIT v. Meghmani Organics Ltd. vide Tax Appeal No.2077 of 2009, compared the language of Section 153C and Section 158BD at internal page 6 of their order held as under:-
"Section 153C which is similarly worded to section 158BD of the Act, provides that where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in Section 153-A he shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person. However, there is a distinction between the two provisions inasmuch as under section 153C notice can be issued only where the money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belong to such other person, whereas under Section 158BD if the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or assets were requisitioned under section 132A, he shall proceed against such other person under section 158BC."
12. From the above and also from the comparison of language of Sections 153C and 158BD, we find that the condition for recording satisfaction by the Assessing Officer of the person searched is present in both the cases. In Section 158BD, the Assessing Officer of the person searched is to be satisfied that any undisclosed income belong to any person other than the person searched, while, in the case of Section 153C, the Assessing Officer of the person searched is to be satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents belong to a person other than the person searched. Thereafter, the subsequent procedure in both Sections 158BD and 153C is the same, i.e., the Assessing Officer of the person searched has to hand over the books of account, documents or asset seized to the Assessing Officer having jurisdiction over such other person and thereafter, the Assessing Officer of such other person has to proceed to assess such other person. Thus, the basic condition of recording the satisfaction by the Assessing Officer of the person searched as well as handing over of books of account, other documents or assets seized to the Assessing Officer of such other person is present in both the Sections. To that extent, the decision of Hon'ble Apex Court in the case of Manish Maheshwari (supra) would be squarely applicable while interpreting Section 153C.
13. In the above legal background, let us now examine the facts of the assessee's case so as to find out whether the notice issued under Section 153C is valid.
14. During the course of hearing, learned DR was directed to produce the satisfaction note recorded under Section 153C. Learned DR fairly admitted that the original satisfaction note is not traceable but only photocopy of the said satisfaction note is available. He produced the photocopy of the satisfaction note, copy of which is annexed herewith as Annexure "A".
15. From a perusal of the said satisfaction note, it is evident that this paper does not indicate in whose case this satisfaction was recorded and who is the officer recording the satisfaction. There is no mention of name of the assessee. There is no mention of the name of the Assessing Officer and no seal of the Assessing Officer. In the satisfaction note, the Assessing Officer has mentioned the name of various assessees who have been covered for search and seizure action under Section 132(1). The number of such assessees are eight. Now, during the search of whose premises it was found, is not mentioned. The last line of the satisfaction note reads "I am satisfied that the above documents belong to M/s DSL Properties Pvt. Ltd. and thus its case is being taken up for assessment under section 153C of the Income Tax Act 1961." A plain reading of the above sentence indicates that it is recorded by the Assessing Officer who is taking action under Section 153C. Thus, it seems that the satisfaction note is recorded by the Assessing Officer of the assessee. This inference is fortified from the fact that on the very same date, i.e., 21st June, 2010, the notice under Section 153C is issued by the same person. The learned CIT-DR also stated that the satisfaction note was recorded by Shri Jeetendra Kumar, ACIT, Circle-8, who issued notice under Section 153C read with Section 153A. However, he tried to justify the action of the Revenue on the ground that after the order under Section 127 of the Income-tax Act by the CIT, Delhi-IV, the jurisdiction of the person searched as well as the assessee both were centralized with the ACIT, Central Circle-8. He also stated that since the Assessing Officer of both the persons was the same, there was no question of handing over and taking over of the documents. We are unable to agree with this view of the learned DR. If the Assessing Officer is assessing the person searched as well as other person whose assets, books of account or documents were found at the time of search, then also, first while making the assessment in the case of the person searched, he has to record the satisfaction that the money, bullion, jewellery or other valuable article or thing or books of account or documents belong to the person other than the person searched. Then, the copy of this satisfaction note is to be placed in the file of such other person and the relevant document should also be transferred from the file of person searched to the file of such other person. Thereafter, in the capacity of the Assessing Officer of such other person, he has to issue the notice under Section 153A read with Section 153C. The Assessing Officer of the person searched and such other person may be the same but these are two different assessees and, therefore, the Assessing Officer has to carry out the dual exercise, first as the Assessing Officer of the person searched in which he has to record the satisfaction, during the course of assessment proceedings of the person searched. After recording such satisfaction note in the file of the person searched, the same is to be placed in the file of such other person. Then, in his capacity as the Assessing Officer of such other person, he should take cognizance of such satisfaction note and thereafter issue notice under Section 158BC. In this case, this exercise of recording the satisfaction during the assessment proceedings of the person searched has not been carried out. On the other hand, the Assessing Officer recorded the satisfaction in the case of such other person which does not satisfy the condition of assuming jurisdiction under Section 153C. Moreover, no original satisfaction note is available on record. The photocopy of the satisfaction note produced before us does not bear name of any assessee, name of the Assessing Officer or any seal of the Assessing Officer. Therefore, the above satisfaction note cannot be said to be a valid satisfaction note within the meaning of Section 153C.
16. Apart from above, we find that jurisdiction under Section 153C has been assumed only on the basis that during the course of search of one of the persons of Chaurasia Group, the photocopy of the audited profit & loss account and balance sheet of the assessee for the FY 2003-04 relevant to AY 2004-05 was found. It is not in dispute that the assessee had filed the return for AY 2004-05 on 22nd September, 2004 alongwith the original copy of the audited profit & loss account and balance sheet. Search had taken place on 29th April, 2008 while the return of income alongwith the original profit & loss account and balance sheet was already filed more than three and a half years before the date of search. In the remand report dated 30th January, 2011, the Assessing Officer has also not disputed the above fact but he tried to justify action under Section 153C on the ground that for issue of notice under Section 153C, it is not necessary that the document found and seized should be of incriminating nature.
17. At the time of hearing before us, the learned counsel for the assessee has vehemently contended that the photocopy of the audited profit & loss account and balance sheet was belonging to the shareholder/director from whom the same was found and not to the assessee. We agree with this contention of the learned counsel. When a company supplies photocopy of its profit & loss account and balance sheet to its shareholders/directors, such photocopy of the profit & loss account and balance sheet belong to such shareholder/director and not to the assessee company. If the argument of the Revenue is accepted, then, if, during the course of search of any person the photocopy of the profit & loss account/balance sheet of any listed company, say, Reliance Industries, Tata Motors or Bajaj Auto is found, then, as per the interpretation of Section 153C by the Department, the Assessing Officer would be entitled to take action under Section 153C in the case of such listed company. That interpretation would lead to absurd results. Therefore, we hold that the underlying condition for invoking the jurisdiction under Section 153C is not satisfied in the case of the assessee.
18. The learned counsel for the assessee has also argued that the issue of notice under Section 153C is barred by limitation as per proviso to Section 153C. He stated that as per the Revenue, the satisfaction for initiating proceedings under Section 153C was recorded on 21st June, 2010 and notice under Section 153C was also issued on 21st June, 2010. Thus, obviously, the seized paper was handed over to the Assessing Officer of such other person on 21st June, 2010. Now, as per proviso to Section 153C, the date of search is to be substituted by the date of receiving the books of account or documents or assets seized. Accordingly, the assessment can be reopened of the preceding six years than 21st June, 2010. They would be AY 2005-06 to 2010-11. The Revenue has reopened assessment for AY 2004-05 which is clearly barred by limitation. The learned DR has contended that since in this case the Assessing Officer of the person searched and the Assessing Officer of such other person was the same, there is no question of handing over and taking over of the document, therefore, for the purpose of limitation, the date of search would be relevant and not the date of initiation of proceedings under Section 153C.
19. We have carefully considered the rival submissions. Proviso to Section 153C reads as under:-
"Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to [sub-section (1) of] section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person:]."
20. The above proviso refers to second proviso to sub-section (1) of Section 153A. That Section 153A(1) and its first and second provisos read as under:-
"153A. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall -
| (a) | issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139; | |
| (b) | assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made : | |
| Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: | ||
| Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this [sub-section] pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate:." |
21. From the above, it is evident that as per clause (b) of sub-section (1) of Section 153A and second proviso, the Assessing Officer can be issue notice for assessment or reassessment of total six assessment years immediately preceding the assessment year relevant to previous year in which search is conducted. As per proviso to Section 153C, the date of search is to be substituted by the date of receiving the books of account or documents or assets seized by the Assessing Officer having jurisdiction over such other person. Learned DR has stated that since the Assessing Officer of the person searched and the Assessing Officer of such other person was the same, no handing over or taking over of the document was required. That Section 153C(1) and its proviso have to be read together in a harmonious manner. While interpreting Section 153C, we have already held that for initiating valid jurisdiction under Section 153C, even if the Assessing Officer of the person searched and the Assessing Officer of such other person is the same, he has to first record the satisfaction in the file of the person searched and thereafter, such note alongwith the seized document/books of account is to be placed in the file of such other person. The date on which this exercise is done would be considered as the date of receiving the books of account or document by the Assessing Officer having jurisdiction over such other person. Though while examining the facts of the assessee's case we have arrived at the conclusion that no such exercise has been properly carried out and therefore initiation of proceedings under Section 153C itself is invalid, however, since both the parties have argued the issue of period of limitation also, we deem it proper to adjudicate the same. Since in this case satisfaction is recorded on 21st June, 2010 and notice under Section 153C is also issued on the same date, then only conclusion that can be drawn is that the Assessing Officer of such other person has taken over the possession of seized document on 21st June, 2010. Accordingly, as per Section 153(1), the Assessing Officer can issue the notice for the previous year in which search is conducted (for the purpose of Section 153C the document is handed over) and six assessment years preceding such assessment year. Now, in this case, the previous year in which the document is handed over is 1st April, 2010 to 31st March, 2011. The assessment year would be AY 2011-12. Six preceding previous years and relevant assessment year would be as under:-
| Previous Year | Assessment Year |
| 1.4.2009 to 31.3.2010 | 2010-11 |
| 1.4.2008 to 31.3.2009 | 2009-10 |
| 1.4.2007 to 31.3.2008 | 2008-09 |
| 1.4.2006 to 31.3.2007 | 2007-08 |
| 1.4.2005 to 31.3.2006 | 2006-07 |
| 1.4.2004 to 31.3.2005 | 2005-06 |
22. The Assessing Officer has issued notice under Section 153C for AY 2004-05 which is clearly barred by limitation. Therefore, issue of notice under Section 153C issued by the Revenue cannot be sustained on both the above counts, i.e., it is legally not valid as conditions laid down under Section 153C has not been fulfilled and it is barred by limitation. In view of the above, we quash the notice issued under Section 153C and consequently, the assessment completed in pursuance to such notice, is also quashed.
23. Since we have quashed the assessment order itself, the additions challenged by the assessee by way of other grounds of appeal do not survive, and, therefore, do not require any adjudication.
24. In the result, the appeal of the assessee is allowed.
ANNEXURE A
Satisfaction Note for taking up the case of M/s DSL Properties Pvt. Ltd. u/s 153C
A search and seizure action u/s 132(1) of the IT Act, 1961 was conducted on 29/04/2008 in the case of Sh. Anand Kumar Chaurasia, Kamal Naveen Kumar Chaurasia, Kamal Kishore Chaurasia, Shashi Kant Chaurasia, Chaurasia Holding Pvt. Ltd. Cryogenic Food Processors Pvt. Ltd., Viraj Steels & Energy, K.P Pouches Pvt. Ltd. and the residence addressed 6/3 East Patel Nagar, New Delhi, was covered under the above action. As a consequence of the search and seizure action on the above premises, some papers were seized as Annexure LP-6 part of which belongs to M/s DSL Properties Pvt. Ltd. The details of the documents belonging to M/s DSL. Properties Pvt. Ltd. are as follows:-
| Sl. No. | Annexure | Pages | Explanation |
| 1. | LP-6 | 87 & 88 | Page 87 is the Profit & Loss account and page No. 88 is the Balance Sheet of the aforesaid company for the period ending March, 2004 |
| 2. | 65 & 66 | Balance sheet of the aforesaid company for the AY 2003-04. |
I am satisfied that the above documents belong to M/s DSL Properties Pvt. Ltd and thus its case is being taken up for assessment under section 153C of the Income Tax Act 1961.
SKJ IT : Activity of blending of tea does not amount to either 'manufacture' or 'production' and, therefore, such industrial undertaking is not entitled for deduction either under section 80-IA or 80-IB
■■■
[2013] 33 taxmann.com 468 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'B'
Deputy Commissioner of Income-tax, Circle - 2, Kolhapur
v.
Sunrise Tea Processing (P.) Ltd.*
G.S. PANNU, ACCOUNTANT MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
IT APPEAL NOS. 9 TO 11, 130, 131 & 222 (PUNE) OF 2008,
1023 (PUNE) OF 2009 AND 987 (PUNE) OF 2010
CO. NOS. 12 & 13 (PUNE) OF 2009
[ASSESSMENT YEARS 1999-2000 TO 2002-03 AND 2004-05 TO 2007-08]
1023 (PUNE) OF 2009 AND 987 (PUNE) OF 2010
CO. NOS. 12 & 13 (PUNE) OF 2009
[ASSESSMENT YEARS 1999-2000 TO 2002-03 AND 2004-05 TO 2007-08]
OCTOBER 31, 2012
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings [Manufacture] - Assessment year 1999-2000 - Whether activity of blending of tea does not amount to either 'manufacture' or 'production' and, therefore, such industrial undertaking is not entitled for deduction under section 80-IA - Held, yes [Para 12][In favour of revenue]
FACTS
| ■ | The assessee-company, engaged in the activity of blending, processing and packaging of tea, claimed deduction under sections 80-IA and 80-IB. | |
| ■ | The Assessing Officer disallowed deduction on the ground that the activity undertaken by the assessee did not amount to 'manufacture' or 'production' of any article or thing within meaning of section 80-IA(2)(iii). | |
| ■ | The Commissioner (Appeals) allowed the claim of the assessee observing that the assessee was engaged in an activity of processing, therefore, its industrial undertaking fell within the scope of section 80-IA and, accordingly, the profits thereon were eligible for deduction under section 80-IA as it stood for assessment year 1999-2000. | |
| ■ | On second appeal: |
HELD
| ■ | Sub-section (2) of section 80-IA clearly prescribes that the section shall apply to any industrial undertaking which fulfils all the conditions prescribed therein, viz., the conditions contained in clauses (i) to (v) thereof. Once such condition contained in clause (iii) of sub-section (2) of section 80-IA mandates that the industrial undertaking should 'manufacture' or 'produce' any article or thing. Therefore, in terms of clause (iii) of sub-section (2) of section 80-IA an industrial undertaking ought to manufacture or produce any article or thing in order to qualify for deduction under section 80-IA. Ostensibly, the activity of blending of tea undertaken by the assessee-industrial undertaking does not amount to manufacture or production and, therefore, assessee's industrial undertaking violates the condition prescribed in clause (iii) of sub-section (2) of section 80-IA. [Para 11] | |
| ■ | Therefore, in order to claim exemption under section 80-IA it is not enough that the unit should fall in the expression 'industrial undertaking' for the purposes of sub-section (1) of section 80-IA alone, rather section 80-IA(1) itself prescribes that the exemption is available to an industrial undertaking, 'to which this section applies' which reflects the import of the fulfilment of condition prescribed in sub-section (2) of section 80-IA. In this background, the conditions prescribed in sub-section (2) of section 80-IA has to be read harmoniously and, therefore, in the present case, clause (iii) of sub-section (2) of section 80-IA cannot be ignored while examining the assessee's claim of deduction under section 80-IA. On a clear interpretation of section 80-IA, as it stood for the assessment year 1999-2000, the assessee's activity amounts to processing only and it does not amount to either manufacture or production and since the term 'processing' has not been included in section 80-IA on account of clause (iii) of sub-section (2) of section 80-IA, the assessee is not entitled for deduction under section 80-IA. The Commissioner (Appeals) clearly fell in error while allowing assessee's claim for deduction under section 80-IA for assessment year 1999-2000. [Para 12] |
CASE REVIEW
Madhu Jayanti International Ltd. v. Dy. CIT [2012] 137 ITD 377/23 taxmann.com 297 (Kol.) (SB) (para 7) distinguished.
CASES REFERRED TO
Madhu Jayanti International Ltd. v. Dy. CIT [2012] 137 ITD 377/23 taxmann.com 297 (Kol.) (SB) (para 6), CIT v. Tara Agencies [2007] 292 ITR 444/162 Taxman 337 (SC) (para 6), Girnar Industries v. CIT [2011] 338 ITR 277/[2010] 187 Taxman 136 (Ker. ) (para 6), Tata Tea Ltd. v.Asstt. CIT [2011] 338 ITR 285/[2010] 189 Taxman 303 (Ker) ) (para 6) and Indivest (P.) Ltd. v. Addl. CIT [2013] 350 ITR 120/[2012] 206 Taxman 351/19 taxmann.com 216 (Bom.) (para 17).
Ms. Ann Kapthuama and Mukesh Verma for the Appellant. S.N. Inamdar and C.H. Naniwadekar for the Respondent.
ORDER
1. The captioned proceedings relate to the same assessee and involve certain common issues and therefore, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
2. ITA No. 130/PN/2008 pertaining to assessment year 1999-00, arising out of order of the CIT(A), Kolhapur dated 16-10-2007, which in turn arises out of order dated 27-12-2006 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short "the Act"), was heard as a lead case, in deference to the submissions of the parties. In this appeal of the Revenue pertaining to the A.Y. 1999-00, solitary issue relates to assessee's claim for deduction u/s 80-IA of the Act amounting to Rs. 4,51,283/-. The Respondent-assessee is a Company incorporated under the provisions of Indian Companies Act, 1956 and is engaged in the activity of blending, processing and packaging of tea in its small scale industrial undertaking located at Kolhapur (Maharashtra). With respect to the profits of such industrial undertaking, assessee claimed deduction u/s 80-IA of the Act amounting to Rs. 4,51,283/-. In an assessment finalized u/s 143(3) of the Act, dated 27-12-2006, the claim has been denied on the ground that assessee does not fulfill the condition prescribed u/s 80IA(2)(iii) of the Act.
3. The CIT(A) however, allowed the claim of the assessee for A.Y. 1999-00. As per the CIT(A) for the purposes of sec. 80IA as it stood in the A.Y. 1999-00, assessee was an 'industrial undertaking' as per the meaning prescribed in section 80-IA(12)(b) read with the Explanation to sec. 33B of the Act, which inter alia, included an undertaking engaged in processing of goods apart from an undertaking engaged in manufacture of goods. As per the CIT(A), the assessee was engaged in an activity of processing, therefore, its industrial undertaking fell within the scope of section 80-IA of the Act and accordingly, the profits thereon were eligible for deduction u/s 80IA of the Act as it stood for A.Y. 1999-00. Against such a decision of the CIT(A), the Revenue is in appeal before us.
4. Before us, the learned DR appearing for the Revenue has primarily referred to the assessment order wherein it has been brought out that the activity undertaken by the assessee does not amount to 'manufacture' or 'production' of any article or thing within the meaning of sec. 80IA(2)(iii) of the Act. The learned DR submitted that the CIT(A) erred in ignoring the fact that the assessee not being engaged in the activity of 'manufacturing' or 'producing' any article or thing was not eligible in terms of sec. 80IA(2)(iii) of the Act, and he misdirected himself in allowing the claim of the assessee for deduction u/s 80-IA for A.Y. 1999-00 merely on the ground that it was an industrial undertaking as per sec. 80-IA(12)(b) read with Explanation to sec. 33B of the Act.
5. On the other hand, learned Representative for the respondent-assessee at the outset pointed out that sec. 80-IA(1), as it stood in the initial year i.e. A.Y. 1999-00, provided for deduction of profits and gains derived from any business of an industrial undertaking. The learned counsel for the assessee pointed out that in terms of sec. 80IA(12)(b) of the Act the meaning of expression "industrial undertaking" as given in Explanation given to sec. 33B has to be adopted. In terms of the said definition, an industrial undertaking involved in processing of goods is expressly included and in this manner, assessee's undertaking falls within the scope of sec. 80IA(1) of the Act. It was therefore, contended that when the expression "industrial undertaking" used in sub-section (1) of sec. 80-IA covers the assessee, no additional condition can be fastened with regard to the assessee's claim of deduction u/s 80-IA based on sub-section (2) of sec. 80-IA of the Act. It has been submitted that by giving due importance to the adoption of definition of an 'industrial undertaking' as given in the Explanation to section 33B of the Act, which included a unit involved in processing of goods and reconciling the words used in sub-sections (1) and (2) of sec. 80-IA of the Act, an inescapable conclusion is that undertakings involved in processing of goods were also eligible for deduction u/s 80-IA as it stood for the A.Y. 1999-00.
6. Apart from the aforesaid, it has been submitted on behalf of the assessee that the case is fully supported by the decision of Special Bench of the Tribunal in the case of Madhu Jayanti International Ltd. v. Dy. CIT [2012] 137 ITD 377/23 taxmann.com 297 (Kol), inasmuch as the activity carried on by the assessee of blending of various teas is admittedly an activity of processing. In support, it was also pointed out that Hon'ble Supreme Court in the case of CIT v. Tara Agencies [2007] 292 ITR 444/162 Taxman 337 has also affirmed that blending of tea amounts to processing. At this point, the learned counsel has also referred to the following two judgments of Hon'ble Kerala High Court in the case of Girnar Industries v. CIT [2011] 338 ITR 277/[2010] 187 Taxman 736 and Tata Tea Ltd. v. Asstt. CIT [2011] 338 ITR 285/[2010] 189 Taxman 303 (Ker) which have been followed by the Special Bench of the Tribunal in the case of Madhu Jayanti International Ltd. (supra) and as per the assessee, the ratio of the aforesaid judgments squarely applies to the case of the assessee.
7. We have carefully considered the rival submissions. The assessee set up a small scale industrial undertaking at Kolhapur for blending, processing and packing of tea. The activity of the assessee comprised of purchase of tea of different qualities, blending the same by mixing one type with another to give desired quality of tea under various brands. The assessee claimed that blending brings out a change in quality, taste and aroma of tea and ultimately a new product emerges in the form of, "blended tea", which amounts to 'manufacturing' or 'processing'. This position was not accepted by the Assessing Officer but as per the CIT(A) the activity carried out by the assessee amounts to 'processing' and impliedly accepted the stand of the Assessing Officer that the activity does not amount to 'manufacture' or 'production'. On this aspect, in our considered opinion, the plea of the Revenue that the activity undertaken by the assessee does not amount to manufacturing or production, is justified, having regard to the judgment of Hon'ble Supreme Court in the case ofTara Agencies (supra). The process undertaken by the assessee in its industrial undertaking is similar to that what was considered by the Hon'ble Supreme Court in the case of Tara Agencies (supra) wherein it has been held that such activity does not fall within the ambit of 'production' or 'manufacture'. The respondent-assessee has referred to the decision of the Special Bench of the Tribunal in the case of Madhu Jayanti International Ltd (supra) wherein it has been held that the business of blending and packaging of tea and export thereof amounts to 'manufacturer' or 'production' of the tea. The reliance placed by the assessee on the decision of the Special Bench of the Tribunal in the case of Madhu Jayanti International Ltd.(supra) is quite mis-placed, inasmuch as, the point before the Special Bench was whether for the purpose of sec. 10A/10B of the Act, the assessee engaged in business of blending, processing of tea and export thereof can be said to be manufacturer or producer of tea. To emphasize again, we may state that the issue before the Special Bench was to examine whether business of blending and processing of tea amounted to be manufacturing or producing of tea for the purposes of sec. 10A/10B of the Act. The Special Bench held that for the purposes of sec. 10A/10B of the Act, expression "manufacture" included processing, blending and packaging of tea while under the common parlance such type of activity did not amount to 'manufacture' or 'production'. In coming to such a conclusion it followed the judgments of Hon'ble Kerala High Court in the case of Girnar Industries (supra) andTata Tea Ltd (supra). The penultimate para of the decision of the Special Bench which reads as under,
"We, in view of the above, hold that when the products for which the assessee's unit is recognised as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of section 10A, 10AA and 10B, we have to consider the definition of the word "manufacture" as defined in sec. 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order 2003, etc. We also find that the definition of 'manufacture' as per sec. 2(r) of the SEZ Act, 2005 is incorporated in sec. 10AA of the Income-tax Act with effect from 10-2-2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in sec. 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food adulteration Rules and Tea (Marketing) Control Act is much wider than what is the meaning of the term "manufacture' under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the cases of Girnar Industries (supra) and Tata Tea Ltd (supra), we hold that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under sec. 10A of the Act."
brings out the clarity. Quite clearly, the pronouncement in the case of Madhu Jayanti International Ltd (supra) based on the judgment of Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Ltd. (supra), is applicable only in the context of sections 10A, 10AA and 10B of the Act for the reasons stated therein. In fact, the Special Bench itself noted that the same does not change the meaning of the terms 'manufacture or 'production' in the context of impugned processing of blending of tea, in the common parlance. In the present case, the issue is not in the context of sections 10A, 10AA or 10B of the Act, which was the case before the Special bench. The decision of the Special bench of the Tribunal in the case of Madhu Jayanti International Ltd. (supra) does not help the case of the assessee.
8. Now, we may refer to the stand of the CIT(A) which, is to the effect that the activity undertaken by the assessee's industrial undertaking amounts to 'processing' and therefore, the assessee is eligible for deduction u/s 80-IA of the Act. No doubt, the stand of the assessee to the effect that the impugned activity i.e. blending of tea amounts to 'processing' is quite justified, inasmuch as the same is also in line with the pronouncement of the Hon'ble Supreme Court in the case of Tara Agencies (supra) wherein similar activity has been held to be amounting to 'processing' and not 'production' or 'manufacture'. So however, the moot question is as to whether the same would entitle the assessee for deduction u/s 80-IA of the Act as it stood for A.Y. 1999-00, which is the first year of assessee's claim, as it is the year in which the industrial undertaking of the assessee has been set up. In this context, we may refer to sec. 80IA as it stood for A.Y. 1999-00, which reads as under:
"80-IA. Deduction in respect of profits and gains from industrial undertakings, etc. in certain cases - (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship or developing, maintaining and operating any infrastructure facility or scientific and industrial research and development or providing telecommunication services whether basic or cellular including radio paging, domestic satellite service or network of trunking and electronic data interchange services or construction and development of housing projects or operating an industrial park of commercial production or refining of mineral oil in the North Eastern Region or in any part of India on or after the 1st day of April 1997 (such business being hereinafter referred to as the eligible business), to which this section applies, there shall in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6)."
9. Sub-section (1) of sec. 80-IA is the main provision which prescribes for deduction of profits and gains derived by the assessee from any business of an industrial undertaking as defined in sec. 80-IA(12)(b) of the Act. Section 80-IA(12)(b) prescribes that for the purposes of section 80-IA, the expression "industrial undertaking" shall have the meaning assigned to it in the Explanation to sec. 33B of the Act. The said Explanation reads as under:
"Explanation - In this section, "industrial undertaking" means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining."
10. Now, the case set up by the assessee is that it being an undertaking involved in 'processing' of goods it is an industrial undertaking as understood for the purpose of sub-section (1) of sec. 80-IA read with clause (b) of sub-section (12) of sec. 8-IA of the Act. Therefore, according to the assessee, the profit and gains of such industrial undertaking fall within the purview of sub-section (1) of sec. 80-IA and it is eligible for the prescribed deduction.
11. At this stage, we may refer to sub-section (2) of sec. 80-IA which contains clauses (i) to (v), inter-alia containing conditions which are required to be fulfilled by an industrial undertaking so as to seek deduction u/s 80-IA of the Act. Sub-section (2) of sec. 80-IA clearly prescribes that the section shall apply to any industrial undertaking which fulfills all the conditions prescribed therein viz. the conditions contained in clauses(i) to (v) thereof. One such condition contained in clause (iii) of sub-section (2) of sec. 80IA mandates that the industrial undertaking should 'manufacture' or 'produce' any article or thing. Therefore, in terms of clause (iii) of sub-section (2) of section 80-IA an industrial undertaking ought to manufacture or produce any article or thing in order to qualify for deduction u/s 80-IA of the Act. Ostensibly, as noticed earlier, the activity of blending of tea undertaken by the assessee-industrial undertaking does not amount to manufacture or production and therefore, assessee's industrial undertaking violates the condition prescribed in clause (iii) of sub-section (2) of sec. 80-IA of the Act. On this aspect, the plea raised by the assessee is that as it qualifies to be an 'industrial undertaking' referred to in sub-section (1) of sec. 80-IA read with clause (b) of sub-section (12) of sec. 80-IA, it should be held entitled for deduction u/s 80-IA of the Act. According to the assessee, the function of sub-section (2) of sec. 80-IA is not to whittle down the effect of sub-section (1) but is merely to define the period of exemption depending on the commencement of production and to ensure that the undertaking is new and not formed by splitting up or re-construction of the existing business and that it does not produce articles specified in Eleventh schedule. It is sought to be made out that the words "manufactures or produces" used in clause (iii) of sub-section (2) of sec. 80-IA is only in the above context. It is further sought to be made out that if the intention of the legislature was to restrict deduction only to such industrial undertaking which manufactures or produces article or thing, the same would have been provided in sub-section (1) of sec. 80-IA itself.
12. We have carefully pondered over the plea set up by the assessee. In our considered opinion, sub-section (2) of section 80IA lays down the conditions which are to be fulfilled by an industrial undertaking so as to claim the benefit of deduction envisaged in sec. 80-IA. Clauses (i) to (v) thereof contain conditions, viz. that it is not formed by splitting up or re-construction; that it is not formed by the transfer of plant and machinery previously used; that it manufactures or produces any article or thing not being an article specified in Eleventh Schedule unless it is a small scale industrial undertaking, etc. The point to be noted that such conditions are necessarily to be complied with by an 'industrial undertaking' so as to take the benefit of section 80-IA of the Act. In the present case, assessee's claim is violative of clause (iii) of sec. 80-IA(2) of the Act. The plea of the assessee is that it qualifies to be an 'industrial undertaking' as referred to in sec. 80-IA(1) of the Act and therefore, sub-section (2) of sec. 80-IA of the Act cannot impose a further condition so as to defeat its claim for exemption. In our considered opinion, sub-section (1) of sec. 80-IA of the Act itself contains expression "……to which this section applies……..". The aforesaid expression qualifies the presence of the expression "………and business of an industrial undertaking………" contained in sub-section (1) of sec. 80-IA of the Act. Therefore, in order to claim exemption u/s 80-IA of the Act it is not enough that the unit should fall in the expression "industrial undertaking" for the purposes of sub-section (1) of sec. 80-IA of the Act alone, rather sec. 80-IA(1) itself prescribes that the exemption is available to an industrial undertaking, 'to which this section applies' which reflects the import of the fulfillment of condition prescribed in sub-section (2) of section 80-IA of the Act. In this background, the conditions prescribed in sub-section (2) of sec. 80-IA of the Act has to be read harmoniously and therefore, in the present case, clause (iii) of subsection (2) of sec. 80-IA cannot be ignored while examining the assessee's claim of deduction u/s 80-IA of the Act. On a clear interpretation of sec. 80-IA of the Act, as it stood for the A.Y. 1999-00, the assessee's activity amounts to processing only and it does not amount to either manufacture or production and since the term 'processing' has not been included in sec. 80-IA on account of clause (iii) of sub-section (2) of sec. 80-IA of the Act, the assessee is not entitled for deduction u/s 80-IA of the Act. The CIT(A), in our view, clearly fell in error while allowing assessee's claim for deduction u/s 80-IA of the Act for A.Y. 1999-00.
13. Accordingly, we reverse the order of the CIT(A) and restore that of the Assessing Officer, denying the deduction u/s 80-IB of the Act to the assessee. Accordingly, the appeal of the Revenue in ITA No. 130/PN/2008 for A.Y. 1999-00 is allowed.
14. Coming to the appeal of the Revenue in ITA NO. 131/PN/2008 for A.Y. 2000-01, facts are identical to those for A.Y. 1999-00. Following the parity of reasoning given in preceding paragraphs while dealing with the appeal for A.Y. 1999-00, we reverse the order of the CIT(A) and restore that of the Assessing Officer, denying the deduction u/s 80-IB of the Act to the assessee.
15. Now, we may take C.O. No. 12/PN/2009 preferred by the assessee in relation to the order of the CIT(A) dated 16-10-2007 pertaining to A.Y. 1999-00. In its C.O the only plea raised by the assessee is with regard to the validity of reopening of assessment by the Assessing Officer by invoking sec. 147/148 of the Act.
16. On this aspect, assessee had contended before the CIT(A) that the Assessing Officer was not justified in reopening the assessment by invoking sec. 147/148 of the Act on the ground that the assessment for A.Y. 2003-04 was completed by the Assessing Officer after fully satisfying himself about the assessee's eligibility for deduction u/s 80-IA/80-IB of the Act and based on same facts and circumstances and without any different material coming to his possession, the Assessing Officer was not justified in invoking sec. 147/148 of the Act for the year under consideration. The plea of the assessee was that under these circumstances, reopening of assessment amounted to "change of opinion" which was impermissible. The CIT(A) noticed that the return of income for the year under consideration was processed u/s 143(1) and also noticed that in so far as the assessment year 2003-04 was considered, the assessment made u/s 143(3) of the Act was taken up for revision by the Commissioner of Income-tax-II Kolhapur (in short Commissioner") by invoking sec. 263 of the Act and in this background, there was justifiable information with the Assessing Officer to reopen the assessment for the impugned assessment year. The relevant discussion by the CIT(A) in this regard is contained in para 18 of the impugned order which reads as under:
"I have considered the submissions. According to the existing provisions, all the returns have to be processed u/s 143(1) and if any tax or interest is due, an intimation is sent specifying the tax demand or if any refund is due it is granted to the assessee. It is further provided that the acknowledgement of the return shall be deemed to be an intimation u/s 143(1) if neither any sum is payable nor refundable. Only in cases where the OAO has reasons to believe that there is a wrong claim made in the return, he may resort to assessment of the income u/s 143(3). In the case, the time limit for issue of notice u/s 143(2) has already expired, the AO can resort to a notice u/s 148 to assess or reassess the income It is important to note that sec. 148 mentions the word "assess' as well as 'reassess' or 're-computation' of income. In the present case the return as accepted u/s 143(1) in good faith. While accepting the returns u/s 143(1) the law does not allow the AO to make any change or adjustment to the claims made by the assessee. It therefore, cannot be said that processing of a return u/s 143(1) shows an implicit acceptance of the claims made in the return. The contention of the appellant that there was 'change of opinion' in issuing notice u/s 148 is misplaced. The other contention is that since similar deduction had been allowed in the later year i.e. 2003-04 in an assessment made u/s 143(3), the AO was obliged to follow his own decision taken for an earlier year. There is no such obligation since each year has to be viewed separately. It is also found that the assessment made u/s 143(3) for A.Y. 2003-04 was taken up for revision u/s 263 by the ld. CIT-II Kolhapur. This could constitute information for the AO to re-examine the claim made by the appellant in the earlier years."
17. Not being satisfied with the order of the CIT(A) the learned counsel for the assessee submitted before us that there were no fresh facts and details which came to the notice of the Assessing Officer so as to justify the invoking of sec. 147 of the Act in the instant year. It was pointed out that prior to issuance of notice u/s 148 of the Act for the impugned assessment year, the claim of the assessee for deduction u/s 80-IA/80-IB of the Act was subject matter of consideration in A.Y. 2003-04 and under these circumstances, invoking of sec. 147 of the Act in the instant year amounted to 'change of opinion'. As per the learned counsel there was no justifiable material or irrational plea so as to require the Assessing Officer to invoke sec. 147 of the Act. In this context, reliance was placed on the judgment of Hon'ble Bombay High Court in the case of Indivest (P.) Ltd. v. Addl. DIT [2013] 350 ITR 120/[2012] 206 Taxman 351/19 taxmann.com 216.
18. On the other hand, learned DR appearing for the Revenue has relied upon the orders of the lower authorities.
19. We have considered the rival submissions carefully. In the context of the assumption of jurisdiction by issuance of notice u/s 148 of the Act, the sum and substance of the arguments raised before us is that there was no fresh material or a rational belief that certain income had escaped assessment on account of allowance of deduction u/s 80-IA of the Act. At the time of hearing, reliance has been placed on the judgment of Hon'ble Bombay High Court in the case of Indivest (P.) Ltd. (supra), to point out that in the absence of tangible material or a rational belief, assessment could not be reopened u/s 147/148 of the Act. It was put across to the learned counsel in the course of hearing that the aforesaid proposition could be examined only on perusal of the reasons recorded by the Assessing Officer pursuant to sec. 147 of the Act, a copy of which was not on record. However, the point sought to be made was that prior to issuance of notice u/s 148 of the Act dated 30-3-2006 for the instant assessment year, the assessment for A.Y. 2003-04 was completed by the Assessing Officer wherein the claim of the assessee for deduction u/s 80-IB was upheld. There was no material with the Assessing Officer to entertain a belief for the instant assessment year that any income had escaped assessment on account of wrong allowance of deduction u/s 80-IA of the Act. In this context, we find that the CIT(A) records that the assessment made u/s 143(3) for the A.Y. 2003-04 was taken up for revision u/s 263 by the CIT-II, Kolhapur, and therefore, it would constitute information for Assessing Officer to re-visit the claim made by the assessee u/s 80-IA for earlier years. It is for this reason that the CIT(A) has negated the proposition challenging the assumption of jurisdiction u/s 147. In our considered opinion, the objection taken by the assessee has not been dealt with by the CIT(A) in its proper perspective. Ostensibly, the revisionary proceedings for A.Y. 2003-04 u/s 263 has been initiated by the CIT-II Kolhapur on 15-11-2006 whereas the notice u/s 148 of the Act in the instant assessment year was issued on 30-3-2006. Therefore, the CIT(A) misdirected himself in observing that the revisionary proceedings u/s 263 of the Act by the Commissioner for the A.Y. 2003-04 would constitute 'information' for the Assessing Officer in the instant assessment year.
20. If the test of whether there existed any tangible material with the Assessing Officer on the date of recording of reasons u/s 147 of the Act, is to be examined, it would be in the fitness of things that due reference be made to the reasons so recorded and other contemporaneous record available with the Assessing Officer. Clearly such an approach is conspicuous by absence in the order of the CIT(A). Therefore, in the interest of justice, we deem it fit and proper to set aside the order of CIT(A) Kolhapur on this aspect and restore the matter back to his file to re-visit the objection of the assessee against assumption of jurisdiction by the Assessing Officer by issuance of notice u/s 148 dated 30-3-2006. Needless to say, the CIT(A) shall allow an opportunity of being heard to the assessee and then adjudicate on this aspect afresh in accordance with law.
21. In the result, the Cross Objection of the assessee is allowed for statistical purposes.
22. Similar issue has been raised by the assessee in its Cross Objection No. 13/PN/2009 pertaining to A.Y. 2000-01. Following the reasons given while dealing with CO No. 12/PN/2009, the same is allowed for statistical purposes.
23. In the captioned appeals for the A.Y. 2001-02, 2002-03, 2004-05, 2005-06, 2006-07 and 2007-08 filed by the assessee, the issue relates to assessee's claim of deduction u/s 80-IB of the Act in relation to the profits from business of industrial undertaking engaged in the activity of blending, processing and packaging of tea in its small scale industrial undertaking. The conditions in terms of which, assessee has been found to be ineligible for deduction u/s 80-IA of the Act for A.Y. 1999-00 in preceding paragraphs also holds good in the context of claim made u/s 80-IB of the Act for the captioned assessment years. Following the parity of reasoning in ITA No. 130/PN/2008 for A.Y. 1999-00 we hold that the assessee is not entitled for deduction u/s 80-IB of the Act, for the years under consideration.
24. In the result, the appeals of the Revenue are allowed while the appeals of the assessee are dismissed and the cross objections filed by the assessee are partly allowed for statistical purposes.
USP IT : Mere moving of application for approval under section 80-IA(4)(iii) cannot confer benefit to assessee, when Industrial Park Scheme under which original application was made, was not in operation
IT : In absence of clear cut nexus between amount advanced to sister concerns and interest incurred on borrowings, notional interest cannot be disallowed on ground of non-utilization for purpose of business
IT : Where assessee, a property developer, entered into agreement for purchase of property for setting up corporate office, gain on relinquishment of right in such property was taxable as capital gain and not as business income
■■■
[2013] 33 taxmann.com 447 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'A'
SSPDL Ltd.
v.
Deputy Commissioner of Income-tax, Circle-3(2), Hyderabad*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NO. 976 (HYD.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
APRIL 5, 2013
I. Section 80-IA of the Income-tax Act, 1961 read with rule 18C of the Income-tax Rules, 1962 - Deductions - Profits and gains from infrastructure undertakings [Industrial Park Scheme] - Assessment year 2008-09 - Whether, where assessee had applied for approval required under section 80-IA(4)(iii), under Industrial Park Scheme which had lapsed and application under new scheme was still pending, it was not eligible for deduction under section 80-IA - Held, yes [Para 8] [In favour of revenue]
II. Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to exempt income - Disallowance of interest - Assessment year 2008-09 - Whether in absence of establishment of clear cut nexus between amount advanced to sister concerns and interest incurred on borrowed amounts, disallowance of notional interest on ground of non-utilization for purpose of business is not justified - Held, yes [Para 12] [In favour of assessee]
III. Section 2(14), read with sections 2(47) and 45, of the Income-tax Act, 1961 - Capital gains - Capital asset [Business undertaking] - Assessment year 2008-09 - Whether, right over a property, which is part and parcel of business undertaking of assessee, constitutes capital asset as per section 2(14), and relinquishment of right over such property is transfer of capital asset under section 2(47) - Held, yes - Whether, therefore, where assessee, engaged in property development, had entered into agreement for purchase of property for setting up corporate office, gain on relinquishment of right in such property was taxable as capital gain and not as business income - Held, yes [Para 34] [In favour of assessee]
FACTS-I
| ■ | The assessee company, whose premises were registered as a Software Technology Park, claimed deduction under section 80-IA. The assessee had applied to the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry on 8-1-2007, for approval of Industrial Park under the Industrial Park Policy, 2002, as required under section 80-IA. | |
| ■ | On 8-1-2008, the CBDT notified the Industrial Policy Scheme, 2008 applicable to IT Parks set up on or after 1-4-2006. The DIPP, after a delay of 2 years, returned the application of the assessee, stating that the Industrial Park Scheme, 2002 had ended on 31-3-2006. The assessee then submitted its application for approval of IT Park to CBDT on 5-3-2009. | |
| ■ | The Assessing Officer disallowed deduction under section 80-IA as application submitted by assessee to CBDT had not yet been approved. On appeal, the Commissioner (Appeals) confirmed the disallowance. | |
| ■ | On second appeal: |
HELD-I
| ■ | It is seen from the conditions laid down in the provisions of section 80-IA(4)(iii), read with rule 18C that approval from the Ministry of Commerce and Industry under the Industrial Park Scheme and subsequent notification in this regard by the CBDT is a sine qua non for claiming any deduction under the said section. Undisputedly, such approval or notification had not been received by the assessee. Under the circumstances, the revenue authorities cannot be said to be incorrect in not allowing the claim of deduction under section 80-IA. In this case, admittedly, the assessee applied for approval under Industrial Policy, 2002, vide application dated 8-1-2007 under Non-automatic approval scheme. Under this scheme, the Empowered Committee could reject the application of the assessee after giving opportunity to the assessee and order of rejection could be passed within 12 weeks from date of receipt of application. [Para 6] | |
| ■ | The assessee made a plea that since the Ministry of Commerce received the application of the assessee on 10-1-2007, the period of 12 weeks expired on 10-4-2007 and there was no communication until 15-1-2009 and only on 15-1-2009 it was informed to the assessee that the application of the assessee could not be considered under Industrial Policy Scheme, 2002 and it was advised to apply to the CBDT under the Industrial Policy Scheme, 2008. The assessee claimed that the Ministry of Commerce having acted upon the application, it should be granted with the approval under Industrial Policy, 2002. [Para 7] | |
| ■ | The assessee also made application in response to the advice of Ministry of Commerce and Industries to the CBDT vide their application dated 5-3-2009. However, in the present case on the date of application made by the assessee, there was no scheme in operation under Industrial Park Policy, 2002. The 2002 Scheme had lapsed as it was effective, notified and applicable up to 31-3-2006. The 2002 Scheme was no longer in operation. It is not possible to agree with the contention of the assessee that scheme 2002 was substituted with new scheme 2008. At the time of making initial application by the assessee to DIPP, there was no scheme under Industrial Policy Scheme, 2002. A new scheme was framed and gazetted only on 8-1-2008 and this scheme had been implemented with effect from 1-4-2006. Being so, it cannot be held that the 2002 scheme continued to be in operation till 8-1-2008. Being so, the assessee cannot take advantage or benefit under section 80-IA(4)(iii). A new scheme was framed on 8-1-2008 and made applicable with effect from 1-4-2006. In view of the above, the assessee is not duly approved by the competent authority for availing benefit of deduction under section 80-IA(4) which is mandatory in nature. Mere moving an application to the Central Government for being notified under clause (iii) of section 80-IA(4) on 8-1-2007 to the Secretary, DIP & P, Ministry of Commerce and Industry, New Delhi cannot confer the benefit when the 2002 scheme was not in operation and not applicable. The benefit under section 80-IA(4)(iii) could be availed by the assessee only after the approval by the DIPP under the scheme. Accordingly, the assessee cannot claim deduction under section 80-IA(4). This view is also fortified by the judgment of Delhi High Court dated 24-1-2012 in the case of Regency Soraj Infrastructures v. Union of India [2012] 205 Taxman 62/18 taxmann.com 14. Thus, the claim of the assessee is rejected. [Para 8] |
FACTS-II
| ■ | The assessee company made investment in subsidiaries and some bank shares, but did not offer any income from the investments. However the assessee incurred interest liability in respect of borrowed funds. | |
| ■ | The Assessing Officer disallowed notional interest under section 14A on amounts advanced to sister concerns on ground that interest bearing borrowed funds were used by assessee for non-business purposes. He also opined that the assessee could have cleared the existing loans and saved the interest amount instead of making investment in sister concerns. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the disallowance. | |
| ■ | On second appeal: |
HELD-II
| ■ | It was brought to notice that out of the above investments, investment in shares other than of subsidiary companies was not in the assessment year under consideration. It was made long back in the earlier assessment years. [Para 11] | |
| ■ | The revenue submitted that the assessee, instead of making investment in sister concerns, could have very well cleared the existing loans and could have saved the interest amount. More so, no income was coming from the sister concerns. There was no necessity for using the borrowed funds for investment in sister concerns. However, there is no finding that any investments in sister concerns were made in current assessment year out of borrowed funds on which interest is payable by the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) gave any finding that actually borrowed funds had been diverted to the sister concerns free of interest. Rule 8D(2)(ii) deals with the case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular of income or receipt, so that the lower authorities were expected to examine whether the interest paid in the assessment year is or is not directly attributable to any particular of income or receipt. Unless there is a finding that interest is directly related to the diverted funds to the sister concerns, it cannot be held that interest incurred by the assessee is for non-business purposes. Therefore, the provisions contained in rule 8D(2)(ii) cannot be made applicable. Before disallowance of notional interest incurred for earning exempted income, it is incumbent upon the lower authorities to establish the nexus between interest paid as it is related to amount diverted. In the absence of establishing clear-cut nexus between the amount diverted and interest incurred, the disallowance of notional interest is not possible. The Tribunal again and again holding that if the assessee diverted any interest bearing funds to the sister concern then it is business taken by the assessee to make such an investment and even if it is resulted no income to the interest, notional interest cannot be disallowed on the reason that the assessee should have used its non-interest bearing funds for the purpose of its own business purposes instead of using borrowed funds for its business. The Assessing Officer cannot sit in the armchair of a businessman and decide what the assessee has to do to maximize his profits. In view of this, the ground taken by the assessee is allowed. [Para 12] |
FACTS-III
| ■ | The assessee carrying on business of property development, entered into a MoU with owner of property for its purchase and paid advance for same. Later, assessee entered into an agreement of sale, wherein it agreed to relinquish its rights over the property and received a sum out of the sale consideration payable to the owner of the property. The assessee offered income from this transaction as long-term capital gain. | |
| ■ | The Assessing Officer treated the same as income from business. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. |
HELD-III
| ■ | The main issue is with regard to relinquishing of right over the property by the assessee. According to the Department, this relinquishment of right was business transaction and income from such transaction was to be treated as business income. The expression 'property' has not been defined in the Act. The expression 'property' is a term of wide connotation. It is not only the thing which is subject matter of ownership but includes also the dominium or the right to ownership. The expression is indicative and descriptive of several possible interests which a person can have. It embraces within its purview both corporeal and non-corporeal right. It can also be extended to those well recognized sites of interest which have insignia or characteristics of 'proprietary rights'. It signifies every possible interest which a person clearly holds or enjoys. The word 'property' would comprise of a bundle of rights and interest which a person may conceivably hold and enjoy or such rights which a person exercises to the exclusion of others or which he is entitled to use and enjoy as he pleases, provided he does not infringe any law of the State. The expression 'property' would take in both tangible and intangible assets according to the concept of 'property' in relation to the definition of capital asset under section 2(14). The assessee had right over the property and the property herein was nothing but a capital asset being the part and parcel of business undertaking of the assessee. [Para 31] | |
| ■ | The intention of the assessee at the time of acquiring the asset is to be seen. The intention of the assessee herein was to construct a building for setting up of its corporate office and it was always a fixed asset and not a stock-in-trade. Even if the assessee was in the business of real estate, the property acquired by the assessee for the purpose of setting up of a corporate office could not be construed as a trading asset. The profit realized by sale of current assets in the line of trading is income from business. On the other hand, if the assessee sells a capital asset as an investor, it is income from capital gain. The dominant or even the sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof of trading. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. Profit made by sale of capital asset is always income from capital gain. [Para 32] | |
| ■ | The transfer of right or relinquishment of part and parcel of business undertaking of the assessee is nothing but transfer of capital asset within the meaning of section 2(14). Any profit arising from the transfer of capital asset must be chargeable under the head 'capital gain'. The word 'transfer' has been defined in section 2(47). [Para 33] | |
| ■ | From the definition under section 2(47), it is clear that the word 'transfer' is inclusive of definition, which inter alia provides 6 situations under which there can be transfer in relation to the capital asset. Relinquishment of any rights in the capital asset is one of the situation enumerated in section 2(47). The word 'relinquishment' denotes that relinquishment should be only in the case of capital asset with reference to which the word 'transfer' has been defined. The right of the assessee over the landed property which was part and parcel of the business undertaking of the assessee is a capital asset. The moment assessee losses the right attached to a part of the business undertaking of the assessee, there is relinquishment of right over the said property. The relinquishment of assets or extinguishment of any right in it which may not amount to a sale can also be considered as a transfer. Therefore, the findings of the Commissioner (Appeals) are not acceptable that there is no transfer under section 45 and the assessee has done only business transaction. Accordingly, the findings of the Commissioner (Appeals) on this issue are reversed and it is held that the income accrued to the assessee out of relinquishment of right over the property is to be chargeable under section 45 and computation of capital gain has to be done in accordance with section 48. Accordingly, the Assessing Officer is directed to compute the income under the head capital gain on relinquishment of right over the impugned landed property. [Para 34] | |
| ■ | In the result, assessee's appeal is partly allowed. [Para 35] |
CASE REVIEW
S A Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) (para 12) and Sri Krishna Drugs Ltd. [IT Appeal No. 174 (Hyd.) of 2006 and 45, 487 & 537 (Hyd.) of 2007, dated 30-92010] (para 12) followed.
CASES REFERRED TO
CIT v. V.I. Baby & Co. [2002] 254 ITR 248/123 Taxman 894 (Ker.) (para 10), Munjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43 (SC) (para 12), CIT v. Abhishek Industries [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.) (para 12), S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) (para 12), Sri Krishna Drugs Ltd. [IT Appeal No. 174 (Hyd.) of 2006 & 45, 487 & 537 (Hyd.) of 2007, dated 30-9-2010] (para 12), CIT v. Tata Services Ltd. [1980] 122 ITR 594/[1979] 1 Taxman 427 (Bom.) (para 15), Bafna Charitable Trust v. CIT [1998] 230 ITR 864/101 Taxman 294 (Bom.) (para 16) K.R. Srinadh v. Asstt. CIT [2004] 268 ITR 436/141 Taxman 268 (Mad.) (para 17), CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) (para 19), Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR - New Delhi) (para 19), Suraj Lamp & Inds. (P.) Ltd. v. State of Haryana [2012] 340 ITR 1/[2011] 202 Taxman 607/14 taxmann.com 103 (SC) (para 21), B. Ramakrishnaiah v. ITO [2010] 39 SOT 379 (Hyd.) (para 23), M.A.C. Khaleeli v. Dy. CIT [1994] 48 ITD 191 (Mad.) (para 23),CIT v. Gopal Purohit [2010] 336 ITR 287/188 Taxman 140 (Bom.) (para 23), Fifth ITO v. RMB Aradhya [1994] 49 ITD 14 (Bang.) (para 25), IRCv. Livingston [1926] 11 TC 538 (para 25), CIT v. Rai Bahadur Jayram Valji [1959] 35 ITR 148 (SC) (para 26), CIT v. New Delhi Hotels Ltd.[2012] 23 taxmann.com 456/208 Taxman 280 (Delhi) (para 27), ITO v. Information Technology Park Ltd. [2012] 17 taxmann.com 208/49 SOT 491 (Bang.) (para 28), Global Tech Park (P.) Ltd. v. Asstt. CIT [2009] 28 SOT 45 (Bang.) (URO) (para 28), and CIT v. Thiruvengadam Investments (P.) Ltd. [2010] 320 ITR 345 (Mad.) (para 30).
T. Chaitanya Kumar for the Appellant. M. Ravindra Sai for the Respondent.
ORDER
Chandra Poojari, Accountant Member - This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 30.3.2012 for assessment year 2008-09.
2. The first ground in this appeal is with regard to non-granting of deduction u/s. 80IA stating that the approval from Ministry of Commerce & Industry under the Industrial Park Scheme and subsequent notification in this regard by CBDT has not been received by the assessee.
3. Brief facts of the issue are that the assessee company is carrying in the business of property development. During the year, it had claimed deduction of Rs. 9,90,34,561 u/s. 80IA of the Act. Substantiating the said claim, the representative of the assessee, vide his letter dated 8.11.2010, submitted before the Assessing Officer as under:
"The assessee company has developed ALPHA CITY Industrial IT Park for IT and ITES service providers at survey No. 65/ IA2, 65/2A2B, 65/2C1B2, 65/1B, 65/2A3, 65/2B3, 65/2C1CPt, Navalur Village, Old Mahabalipuram Road, Kancheepuram, Chennai, Tamil Nadu. The said premises is also registered with Software Technology Park of India vide their letter dtd. 22nd December, 2006.
The assessee has also made an application under non-automatic route to the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry on 8th January, 2007 for approval of Industrial Park under the Industrial Park Policy, 2002, as required under section 80IA of the Income-tax Act, 1961".
4. The assessee had claimed deduction u/s. 80IA of the Act at Rs. 9,90,32,551. According to the assessee company, the assessee has developed Alpha City Industrial IT Park for IT and ITES service provider at Sy. No. 65/IA2, 65/2A, 65/2B, 65/2C1B2, 65/1B, 65/2A3, 65/2B3, 65/2C1CPt, Navalur village, Old Mahabalipuram road, Kancheepuram, Chennai, Tamil Nadu. The said premises is also registered with the Software Technology Parks of India vide their approval letter 22nd December, 2006. The assessee also made an application under non-automatic route to the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry on 8th January, 2007 for approval of Industrial Park under the Industrial Park Policy, 2002, as required u/s. 80IA of the Income-tax Act, 1961. In response to its application made by the company, the Directorate of Industries, Kancheepuram had addressed a letter to the Jt. Director of Industries, Guindy, wherein it was mentioned that the said application was for approval under the Industrial Park Policy, 2002. The assessee company therein had also required the concerned Jt. Director to physically verify the project constructed by it and to furnish a report in the format of the questionnaire sent by the DIPP. It was also submitted that the report asked for had been duly completed after the concerned Officials visited the site, and had been forwarded to the Development Commissioner for further forwarding to DIPP. The assessee company also came to know from the Official Website of the DIPP that the State Government report had been received. It was contended that the Dept of Industrial Policy and Promotion, after an undue delay of 2 years, returned the application of the assessee, stating that the Industrial Park Scheme, 2002, which was being administered by the DIPP ended on 31.3.2006 and that it had initiated the process for notification of new scheme in consultation with the CBDT well in advance. Finally, on 8.1.2008, the CBDT notified the Industrial Policy Scheme, 2008 applicable to the IT Parks set up on or after 1.4.2006, but not later than 31.3.2009. The assessee submitted that the department continued to receive application during the interim period from 1.4.2006 to 7.1.2008 for the Parks set up on or after 1.4.2006. Later, upon the notification issued by the CBDT on 8.1.2008, the department returned the applications, so that the same could be applied under the new scheme. It was submitted that the assessee has filed a Writ Petition before the Hon'ble High Court of Madras on 14.5.2009 against the delay made by the DIPP in responding to the application.
5. On a consideration of the assessee's submissions, the Assessing Officer noted that as per the provisions of sec. 80 IA(4)(iii) of IT Act, 1961, r.w. rule 18C of the IT Rules, 1962, any assessee claiming deduction u/s. 80IA inter alia requires the approval from the Central Board of Direct Taxes. He noted that the assessee had made its application for such approval on 8.1.2007, i.e. during the period in which the scheme of granting of Industrial Parks by the CBDT was not in existence. Admittedly, the assessee's application had been returned stating that the same could be applied afresh under the new scheme, which came into existence w.e.f. 1.4.2006. It had also been accepted that finally the assessee had submitted its application for approval of the IT Park to the CBDT only on 5.3.2009. The Assessing Officer, therefore, concluded that mere submission of application could not entitle the assessee for deduction u/s. 80IA. Accordingly, the entire claim of deduction of Rs. 9,90,32,561 was disallowed. During the course of appellate proceedings, the representative of the assessee reiterated the contentions raised before the Assessing Officer. The assessee contended that the application made by the assessee was not rejected by the concerned authorities, and the pendency of application was on account of procedural delays of the Government authorities, which was beyond the control of the assessee. Though, initially he requested to keep the issue in abeyance until the writ petition filed by the assessee is disposed of by the Hon'ble High Court, later it was submitted that this may take substantial time. Accordingly, there was no approval of assessee's Industrial Park by the Ministry of Commerce & Industry under the Industrial Park Policy, 2002 as required u/s. 80IA of the IT Act and the claim of the assessee u/s. 80IA of the Act was denied by the Assessing Officer. On appeal, the CIT(A) confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before us.
6. We have heard both the parties and perused the material on record. It is seen from the conditions laid down in the provisions of section 80IA(4)(iii) of the IT Act read with Rule 18C of the IT Rules, 1962 that approval from the Ministry of Commerce and Industry under the Industrial Park Scheme and subsequent notification in this regard by the CBDT is a sine qua non for claiming any deduction under the said section. Undisputedly, such approval or notification had not been received by the assessee. Under the circumstances, the Revenue authorities cannot be said to be incorrect in not allowing the claim of deduction u/s. 80IA. The contention of the assessee counsel is that the assessee got approval from the Ministry of Commerce and Industry vide their letter dated 22.12.2006 for setting up of infrastructure facility for STP unit under the STP Scheme at AlPHA CITY Industrial IT Park at Navalur Village, Old Mahabalipuram road, Kancheepuram, Chennai so as to grant deduction u/s. 80IA of the Act. According to the assessee, the assessee fulfilled the conditions laid down u/s. 80IA(4)(iii) of the Act and it is entitled for deduction u/s. 80IA of the Act. In this case admittedly the assessee applied for approval under Industrial Policy 2002 vide application dated 8.1.2007 under Non-automatic approval scheme. Under this scheme, the Empowered Committee could reject the application of the assessee after giving opportunity to the assessee and order of rejection shall be passed within 12 weeks from date of receipt of application.
7. The assessee made a plea before us that since the Ministry of Commerce received the application of the assessee on 10.1.2007, the period of 12 weeks expired on 10.4.2007 and there was no communication until 15th January, 2009 and only on 15th January, 2009 it was informed to the assessee that the application of the assessee could not be considered under Industrial Policy Scheme 2002 and it was advised to apply to the CBDT under the Industrial Policy Scheme 2008. According to the assessee on 10.1.2007 when the application was made for approval, there was no such scheme and only scheme under which the assessee has to be considered is Industrial Policy 2002. The Ministry of Commerce having acted upon the application it should be granted with the approval under Industrial Policy, 2002.
8. He also brought to our notice that the Ministry of Commerce & Industries has granted approval under the IP Scheme, 1999 and 2002 to one assessee M/s. Haryana State Industrial and Infrastructure Development Corporation Ltd., Panchkula, Park at HSIIDC Ltd., Growth Centre, Bawal, NH-8, Dist. Rewari, Haryana vide their application No. 85/ SIA/IP/2008 dated 10.7.2008 approved on 17.3.2009. As such the assessee 's case has to be approved on similar lines. Further it was brought to our notice that the assessee also made application in response to the advice of Ministry of Commerce & Industries to the CBDT vide their application dated 5.3.2009. Further it was submitted that the assessee also filed a Writ Petition on 14.5.2009 before the Madras High Court against the delay made by the Department of Industrial Policy Promotion (DIPP), Ministry of Commerce & Industry which was pending. However, in the present case on the date of application made by the assessee, there was no scheme in operation under Industrial Park Policy, 2002. The 2002 scheme had lapsed as it was effective, notified and applicable up to 31st March, 2006. The 2002 scheme was no longer in operation. It is not possible to agree with the contention of the assessee that scheme 2002 was substituted with new scheme 2008. In our opinion, at the time of making initial application by the assessee to DIPP there was no scheme under Industrial Policy Scheme, 2002. A new scheme was framed and gazetted only on 8th January 2008 and this scheme has been implemented with effect from 1st April 2006. Being so, we cannot hold that the 2002 scheme continued to be in operation till 8th January, 2008. Being so, the assessee cannot take advantage or benefit u/s. 80IA(4)(iii) of the Act. A new scheme was framed on 8th January 2008 and made applicable with effect from 1st April, 2006. In view of the above, in our opinion, the assessee is not duly approved by the competent authority for availing benefit of deduction u/s. 80IA(4) of the Act, which is mandatory in nature. Mere moving an application to the Central Government for being notified under clause (iii) of section 80IA(4) on 8th January, 2007 to the Secretary, DIP & P, Ministry of Commerce & Industry, New Delhi cannot confer the benefit when the 2002 scheme was not in operation and not applicable. The benefit u/s. 80IA(4)(iii) could be availed by the assessee only after the approval by the DIPP under the scheme. Accordingly, the assessee cannot claim deduction u/s. 80IA(4) of the IT Act. This view of ours is also fortified by the judgement of Delhi High Court dated 24th January, 2012 in the case of Regency Soraj Infrastructures vs. Union of India & Ors., in WPC 13825/2009 and 7699/2010. Thus, the claim of the assessee in ground Nos. 2 to 7 is rejected.
9. The next ground in this appeal is with regard to disallowance of Rs. 22,65,906 towards interest expenditure incurred by the assessee company by invoking the provisions of section 14A of the Act. The assessee company made following investments in the subsidiary companies as noticed by the Assessing Officer:
| Sl. No. | Name of the company in which invested | Amount invested (Rs.) |
| 1. | SSPDL Properties P. Ltd. | 16,87,960 |
| 2. | Alphacity Chennai IT Projects | 99,800 |
| 3. | Andhra Bank | 5,06,790 |
| 4. | SSPDL Infrastructure Developers P. Ltd. | 1,63,80,000 |
| 5. | Northwood Constructions India P. Ltd. | 26,000 |
| 6. | Northwood Properties India P. Ltd. | 26,000 |
| 7. | Northwood India Realty P. Ltd. | 26,000 |
| 8. | Northwood Residential Ventures P. Ltd. | 26,000 |
| 9. | Northwood Township Projects P. Ltd. | 26,000 |
| 10. | SSPDL Northwood Homes P. Ltd. | 26,000 |
| 11. | SSPDL Northwood Residence P. Ltd. | 26,000 |
| 12. | SSPDL Northwood Vilas P. Ltd. | 26,000 |
| Total | 1,88,82,550 |
10. The assessee not offered any income from the above investments and the assessee has incurred interest liability of Rs. 3,91,11,098 in respect of borrowed funds. As such the Assessing Officer placed reliance on the judgment of Kerala High Court in the case of CIT v. V.I. Baby & Co. [2002] 254 ITR 248/123 Taxman 894 wherein their Lordships observed that proportionate interest paid by the assessee firm to the bank in respect of the interest free amount advanced by the assessee to its sister concerns was rightly disallowed. Accordingly, he disallowed the sum of Rs. 22,65,906 as it is relatable to investment of Rs. 1,88,82,550 as on 313.2008. On appeal, the CIT(A) confirmed the order of the Assessing Officer. Against this the assessee is in appeal before us.
11. We have heard both the parties and perused the material on record. The Revenue authorities disallowed the notional interest on the amounts advanced to sister concerns on the reason that interest bearing borrowed funds were used by the assessee for non-business purposes. However, the assessee made a plea before us that the it is having enough own funds in the form of share capital and reserves and funds were diverted to the sister concerns for the purpose of business expediency and the assessee enjoying controlling interest over the sister concerns. Being so, it cannot be considered that the assessee used the funds for non-business purposes. Further it is also brought to our notice that out of the above investments, investment in Andhra Bank shares was not in the assessment year under consideration. It was made long back in the earlier assessment years.
12. Against this argument of the assessee's counsel the learned DR submitted that the assessee instead of making investment in sister concerns, it could have very well cleared the existing loans and could have saved the interest amount. The AR also relied on the judgement of Supreme Court in the case ofMunjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43. The DR relied on the decision in the case of CIT v. Abhishek Industries [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.). More so, no income is coming from the sister concerns. There is no necessity for using the borrowed funds for investment in sister concerns. However, there is no finding that any investments in sister concerns have been made in this assessment year out of borrowed funds on which interest is payable by the assessee. Neither the Assessing Officer nor the learned CIT(A) given any finding that actually borrowed funds have been diverted to the sister concerns free of interest. Rule 8D(2)(ii) of Income-tax Rules, 1962 deals with the case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular of income or receipt, so that the lower authorities were expected to examine whether the interest paid in the assessment year is or is not directly attributable to any particular of income or receipt. Unless there is a finding that interest is directly related to the diverted funds to the sister concerns, we are not in a position to hold that interest incurred by the assessee is for non-business purposes. In other words, we cannot hold that interest incurred by the assessee is for non-business purposes. Therefore, the provisions contained in Rule 8D(2)(ii) cannot be made applicable. Before disallowance of notional interest incurred for earning exempted income it is incumbent upon the lower authorities to establish the nexus between interest paid as it is related to amount diverted. In the absence of establishing clear-cut nexus between the amount diverted and interest incurred, the disallowance of notional interest is not possible. The Tribunal again and again holding that if the assessee diverted any interest bearing funds to the sister concern then it is business taken by the assessee to make such an investment and even if it is resulted no income to the interest, notional interest cannot be disallowed on the reason that the assessee should have used its non-interest bearing funds for the purpose of its own business purposes instead of using borrowed funds for its business. The Assessing Officer cannot sit in the armchair of businessman and decide what the assessee has to do to maximise his profits. In our opinion, the judgement relied on by the assessee in the case of SA Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) supports the assessee's claim and similar view was taken by us in the case of Sri Krishna Drugs Ltd. in ITA No. 174/Hyd/2006 and 45/Hyd/2007, 487/Hyd/2007 and 537/Hyd/ 2007 vide order dated 30th September, 2010 which was relied on by the assessee. In view of this, we are inclined to allow the ground taken by the assessee.
13. The next ground is with regard to treating the income from relinquishment of right in the property amounting to Rs. 17,46,79,200 as business income of the assessee ignoring the fact that it was assessee's intention to hold the property as capital asset and not as a business asset and the resultant gain should have been taxed as long term capital gain as the asset was held by the assessee for more than 36 months.
14. Brief facts of the issue are that the assessee entered into a MOU on 12th December, 2003 with M/s. Balaji Fabricators Pvt. Ltd., for purchase of land admeasuring 2.5 acres and paid Rs. 1.13 crores as advance for purchase of the property. The vendor executed registered GPA in favour of the company to apply for necessary permission and licences. Later the assessee company have entered into an agreement of sale on 24th April, 2007 with M/s. Rattha Citadine OMR Apart Hotel Pvt. Ltd., wherein the assessee agreed to relinquish its rights over the property which was acquired vide agreement of sale dated 28th January, 2004 and received a sum of Rs. 18 crores out of sale consideration payable to owner of the property. The assessee offered income from this transaction as long term capital gain. The Assessing Officer not agreed with the contention of the assessee and treated the same as income from business. On appeal, the CIT(A) confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before us.
15. The learned AR submitted that u/s. 2(14) capital asset means 'property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock in trade, personal effects etc'. He averred that the word 'property' used therein is a word of the widest amplitude and the definition has reemphasized this by using the words "of any kind". Accordingly, he claimed that any 'right' which can be called 'property' gets included in the definition of 'capital asset'. He submitted that a contract for sale of land is capable of specific performance and the same is also assignable. Citing the decision in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594/[1979] 1 Taxman 427 (Bom.), the AR argued that a right to obtain conveyance of immovable property is clearly a property, as contemplated by sec. 2(14) of the IT Act.
16. The AR further submitted that capital asset has been defined in sec. 2(14) to mean property of any kind held by an assessee whether or not connected with business or profession, except those specifically excluded. He submitted that from the said definition it is clear that for the purpose of this clause, property is a word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. In this regard, the AR relied on the decision in the case of Bafna Charitable Trust v. CIT [1998] 230 ITR 864/101 Taxman 244 (Bom.).
17. The AR submitted that as per sec. 2(47) of the Act, transfer in relation to a capital asset includes the sale, exchange or relinquishment of the asset or extinguishment of any right therein, as held by the Hon'ble Madras High Court in the case of K.R. Srinadh v. Asstt. CIT [2004] 268 ITR 436/141 Taxman 268. Accordingly, it was prayed that the sale of relinquishment of right be treated as income from capital gains.
18. The AR further submitted that the above referred land has been purchased with an intention to build an IT Park thereon. It contended that the intention was to retain the said IT Park for the company itself and lease it to IT companies on long term basis, as the assessee was of the intention that a permanent rental income will help the company to meet recurring expenses. Besides, the asset would also be available for being given as a collateral security for further loans for other projects. The assessee submitted that for the said purpose, it had engaged the services of a real estate agency to assess the demand for IT space, as also the services of a Chartered Accountant firm to approach banks and secure loans. It was stated that the assessee could get a sanction from Andhra Bank, Somajiguda Branch, Hyderabad. However, it could not draw the loan as the terms thereof were not acceptable to the assessee. In the meanwhile, there was litigation amongst the sellers, which delayed the project. Having paid more than 50% of the land value as per the agreement, the assessee decided to sell its rights on the land. Copies of the IT Demand survey report, project report and a letter from Andhra Bank confirming non disbursement of the sanctioned term loan was also submitted.
19. The AR submitted that the Board's circular No. 4 of 2007 dated 15.6.2007, refers to the decision of the Hon'ble Supreme Court in the case of CITv. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, holding that "Whether a particular holding of shares is by way of investments or forms part of the stock in trade is a matter which is within the knowledge of the assessee". Besides, it also refers to the Ruling of the Authority for Advance Ruling as reported in Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR - New Delhi) opining that "Where the object of investment in shares of companies is to derive income by way of dividends etc., the transactions of purchase and sale of shares would yield capital gains and not business profits".
20. The AR further submitted that "Capital asset" means of property of any kind held by an assessee whether or not connected with his business or profession, but does not include (1) any stock in trade; consumable stores, or raw materials held for the purpose of business or profession; He submitted that sec. 2(47) describes that "transfer in relation to a capital asset" includes (1) the sale, exchange or relinquishment of the asset or (2) the extinguishment of any rights therein. He further stated that Chapter IV sec. D "Profits and gains of Business or Profession" sec. 28(vii) brings to tax as business income "any sum whether received or receivable, in cash or kind, on account of any capital asset (other than land) or goodwill or financial instrument being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction u/s. 35(ad). It was contended that a combined reading of the above provisions shows that the right acquired by entering into a sale agreement false under the definition of capital asset and as per the provisions of sec. 2(47), relinquishment and extinguishment of rights therein falls under the definition of 'transfer' attracting the provisions of sec. 45 of the Act. The representative contended that provisions of sec. 28(vii) provide for computation of profit and gains of business treating the sum received on transfer of an asset as business income, if the "whole of the expenditure" on such capital asset has been allowed as a deduction u] s. 35(ad).
21. The AR referred to the decision of the Hon'ble Supreme Court in the case of Suraj Lamp and Inds. (P.) Ltd. v. State of Haryana [2012] 340 ITR 1/[2011] 202 Taxman 607/14 taxmann.com 103 holding that "immovable property" can be legally and lawfully transferred or conveyed only by a registered deed of conveyance. It was argued that the assessee also had not become the owner of the land. It had agreed to purchase and only on completion of the conveyance deed and upon its registration, the assessee could have become the owner, so as to show the same in its records as fixed assets or stock in trade, according to its intention of dealing with it for its benefit. He submitted that in the instant case such an event did not take place and the assessee had only a right acquired by way of sale agreement, which he could enforce by asking for registering the sale deed. Before the registration of sale deed, however, such rights were relinquished to a third party, resulting in capital gain.
22. The AR reiterated that the assessee had expressed its interest of constructing a software park and earn rental income and the primary head under which the income falls pertained to capital gains. He averred that just because of higher tax, the transaction could not be treated as result in business income.
23. Further the AR submitted that the intention of the assessee has to be seen and the intention of the assessee company was always to construct a building for setting up of its corporate office and it was not the intention of the assessee to hold the assets as stock-in-trade. Because the assessee is in real estate business that itself does not disentitle the assessee company from investing in properties for its own use. There was no intention or mentioning in any agreement entered by the assessee that M/s. Balaji Fabricators Pvt. Ltd., to hold the property as stock-in-trade. The assessee's sole intention is to hold the property as a capital asset and relinquishment of right over this property is income from capital gain. The learned AR relied on the order of the co-ordinate Bench in the case of B. Ramakrishnaiah v. ITO [2010] 39 SOT 379 (Hyd.) wherein held that right to obtain conveyance of immovable property is clearly property contemplated by section 2(14) of the Act. Relinquishment or surrender of right in the asset is capital asset. In the case ofM.A.C. Khaleeli v. Dy. CIT [1994] 48 ITD 191 (Mad.) the Chennai Bench of this Tribunal granted deduction u/s. 54F to an assessee engaged in the construction business, depositing capital gain from transfer of building in the housing division of assessee's own construction business for the purpose of constructing new residential building. Further he relied on judgement in the case of CIT v. Gopal Purohit [2010] 336 ITR 287/188 Taxman 140 (Bom.)wherein it was observed that assessee could engage in two different portfolios - one in the field of capital and another in the field of business while dealing in shares and it has to be decided depending upon the intention of the assessee.
24. On the other hand, the learned DR submitted that it cannot be disputed that the assessee had entered into the MOU dated 12.12.2003 with Balaji Fabricators P. Ltd. for the purpose of developing the impugned land. The intention of developing is amply demonstrated from the stipulation on page 7 thereof, stating that the assessee was permitted to go ahead with surveying the land, clearing the site and even applying to CMDA/Corporation of Chennai/Panchayat/Local Authority for approval of plan sanctioned in its own name. Therefore, it is clear that the intention was not to purchase the said land for holding it as an 'investment' or 'capital asset', but to use the same for the commercial purposes of the development.
25. The DR submitted that the Bangalore Bench of the Tribunal in its decision in the case of Fifth ITO v. RMB Aradhya [1994] 49 ITD 14 had referred to the principle formulated in IRC v. Livingston [1926] 11 TC 538, Lord President Clyde as under:
"I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, 'in the nature of trade', is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made. If they are, I do not see why the venture should not be regarded as 'in the nature of trade', merely because it was a single venture which took only three months to complete".
26. The DR submitted that in the above referred decision, the Tribunal had also referred to the decision of the Hon'ble Supreme Court in the case of CITv. Rai Bahadur Jayram Valji [1959] 35 ITR 148, holding that the payment in settlement of right under the contract was an adjustment made by the parties in the ordinary course of business would constitute a trading account, as the assessee receiving such compensation had several trading activities and the compensation so received was only an adjustment in respect of such business.
27. The DR submitted that from above case laws, it is clear that the intention of the assessee in entering into the MOU with Balaji Fabricators P Ltd., has to be inferred in the light of the ordinary line of business of the assessee, which is indeed development and construction. In this regard he referred to judgement of Hon'ble Delhi High Court dated 22.3.2012, in the case of CIT v. New Delhi Hotels Ltd. [2012] 23 taxmann.com 456/208 Taxman 280 (Delhi) - Delhi High Court have opined that it is well settled that it is the intention of the assessee which would matter in deciding whether the property purchased were intended for carrying on business or to hold it as an investment, coupled with the line of business carried on by the assessee. Considering the fact that the present assessee is engaged in the business of development and construction only, and the fact that even the MOU categorically shows the intention of the acquisition of the impugned land being developed, it cannot be denied that the land acquired by it under the MOU as a business asset only and not as an investment.
28. The DR submitted that Even if it is contented that the assessee intended to develop IT park thereon for the purpose of retaining it and earning rental income over the years, it is clear that in the light of the decision of the Bangalore Bench of this Tribunal in the case of ITO v. Information Technology Park Ltd. [2012] 17 taxmann.com 208/49 SOT 491 (Bang.) as also their decision in the case of Global Tech Park (P.) Ltd. v. Asstt. CIT [2009] 28 SOT 45 (Bang.) (URO), the lease rental income arising from such complex commercial activity was to be treated as "income from business only". Accordingly, the land on which such IT park was at all intended to be built was to be acquired only as a 'business asset' and not as a 'capita asset'.
29. The DR further submitted that, even if the land under consideration was not got registered in the name of the assessee, it cannot be denied that the assessee had a right of specific performance in relation to the said property. Clearly such right did not relate to acquisition of any 'capital asset', but it related to a 'business asset'. Therefore, the compensation received or surrender of the right relating to such business asset was indeed to be charged to tax as 'business income' only in the hands of the assessee.
30. The DR further he relied on the judgement of CIT v. Thiruvengadam Investments (P.) Ltd. [2010] 320 ITR 345 (Mad.) wherein the High Court held that provisions of section 50C cannot be invoked on the income earned on sale of assets for which the payment made was shown as loans and advances in the balance sheet and not as a fixed asset. Further, he relied on the judgment of Tata Services Ltd. (supra).
31. We have heard both the parties and perused the material on record. In the present case the main issue is with regard to relinquishing of right over the property by the assessee to Rattha Citadine OMR Apart Hotel Pvt. Ltd. The assessee is having a right over this property vide MOU entered with M/s. Balaji Fabricators Pvt. Ltd., on 12th December, 2003. This was relinquished by the assessee vide sale agreement dated 28th January, 2004 to M/s. Rattha Citadine OMR Apart Hotel Pvt. Ltd. According to the Department, this relinquishment of right is business transaction and income from such transaction is to be treated as business. Income. The expression "property" has not been defined in the IT Act. The expression "property" is a term of wide connotation. It is not only the thing which is subject matter of ownership but includes also the dominium or the right to ownership. The expression which is indicative and descriptive of several possible interests which a person can have. It embraces within its purview both corporeal and non-corporeal right. It can also be extended to those well recognised sites of interest which have insignia or characteristics of "proprietary rights". It signifies every possible interest which a person clearly hold or enjoys. The word "property" would comprise of a bundle of rights and interest which a person may conceivably hold and enjoy or such rights which a person exercises to the exclusion of others or which is entitled to use and enjoy as he pleases, provided he does not infringe any law of the State. The expression "property" would take in both tangible and intangible assets. We find the concept of "property" in relation to the definition of capital asset u/s. 2(14) of the IT Act. In our opinion, the assessee having right over the property and the property herein is nothing but a capital asset being the part and parcel of business undertaking of the assessee.
32. We have to see the intention of the assessee at the time of acquiring the asset. The intention of he assessee herein is to construct a building for setting up of its corporate office and it was always a fixed asset and not a stock-in-trade. Even if the assessee is in the business of real estate, the property acquired by the assessee for the purpose of setting up of a corporate office cannot be construed as a trading asset. The profit realised by sale of current assets in the line of trading is income from business. On the other hand, if the assessee sells a capital asset as an investor it is income from capital gain. The dominant or even the sole intention to resell is a relevant factor and raises a strong presumption but by itself is not conclusive proof of trading. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. Profit made by sale of capital asset always income from capital gain. One has to see whether the asset held by the assessee as an investment or as a trading asset. Realisation of capital asset is always income from capital gain.
33. The transfer of right or relinquishment part and parcel of business undertaking of the assessee is nothing but transfer of capital asset within the meaning of section 2(14) of the IT Act. Any profit arising from the transfer of capital asset must be chargeable under the head "capital gain". The word "transfer" has been defined in section 2(47) of the Act which lays down as under:
"(47) transfer, in relation to a capital asset includes -
| (i) | the sale, exchange or relinquishment of the asset; or | |
| (ii) | the extinguishment of any rights therein; or | |
| (iii) | the compulsory acquisition thereof under any law; or | |
| (iv) | in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or | |
| (v) | any transaction involving the the allowing of the possession of any immovable property to be taken or retained in part of performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or | |
| (vi) | any transaction (whether by way of becoming a member of, or acquiring share in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property." |
34. From the above definition it is clear that the word "transfer" is inclusive of definition which inter alia provides 6 situations under which there can be transfer in relation to the capital asset. Relinquishment of any rights in the capital asset is one of the situation enumerated in section 2(47) of the Act. The word "relinquishment" denotes that relinquishment should be only in the case of capital asset with reference to the word "transfer" has been defined. The right of the assessee over the landed property which was part and parcel of the business undertaking of the assessee is a capital asset. The moment assessee losses the right attached to a part of the business undertaking of the assessee there is relinquishment of right over the said property. The relinquishment of assets or extinguishment of any right in it which may not amount to a sale can also be considered as a transfer. Therefore, on this we do not agree with the findings of the CIT(A) that there is no transfer u/s. 45 of the Act and the assessee has done only business transaction. Accordingly, we reverse the findings of the CIT(A) on this issue and hold that the income accrued to the assessee out of relinquishment of right over the property is to be chargeable u/s. 45 of the Act and computation of capital gain has to be done in accordance with section 48 of the IT Act. Accordingly, we direct the Assessing Officer to compute the income under the head capital gain on relinquishment of right over the impugned landed property.
35. In the result, assessee's appeal is partly allowed2013-TIOL-484-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMEDABAD
BENCH 'A' AHMEDABAD
ITA No.1212/Ahd/2010
Assessment Years: 2004-05
Assessment Years: 2004-05
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, SURAT
CIRCLE-3, SURAT
Vs
M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
PAN NO:AAAFY2524R
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
PAN NO:AAAFY2524R
ITA No.4421/Ahd/2007
Assessment Years: 2004-05
Assessment Years: 2004-05
M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, SURAT
CIRCLE-3, SURAT
D K Tyagi, JM and T R Meena, AM
Dated: April 19, 2013
Appellant Rep by: Shri Rahul Kumar, Sr. DR
Respondent Rep by: Shri Rajesh M Upadhyay, AR
Respondent Rep by: Shri Rajesh M Upadhyay, AR
Income tax – Sections 40(b), 40A(2), 69C, 133A, 145, 271(1)(c) – Whether when the assessee accepted unaccounted expenditure during survey, the accounts were rightly rejected by AO u/s 145 – Whether the assessee is entitled to claim deduction for expenses out of the income offered to cover up the unaccounted expenditure – Whether an expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s 40A(2)(b) of the Act as being excessive or unreasonable – Whether when the assessee accounted for the unaccounted income / expenditure in the books of account before filing of return of income, penalty is rightly deleted for the same as no particulars were concealed or inaccurate particulars were furnished.
A) Assessee a partnership is engaged in construction business and had a project of shopping complex. A survey u/s 133A was carried out in which two diaries were found wherein unaccounted withdrawals by partners and unaccounted expenses were found. A statement of partner of the firm was also recorded in which he declared additional income of Rs. 42 lacs. Assessee was following project completion method of accounting. AO rejected the books of account. CIT (A) confirmed the action of rejection of books u/s 145 by AO. Assessee contended that there was no defect pointed out by AO before applying section 145.
B) AO confirmed an addition on the basis of dairies found for unaccounted expenses. Assessee adjusted the amount against work-in-progress after crediting the additional income disclosed. AO made addition stating that during the course of survey, the books of account by the current assessment year were not found. No stock register was maintained by the assessee firm and no details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
CIT (A) confirmed the addition observing that the contention of assessee was that even though the expenses were not found accounted during survey, deduction should be allowed after survey, since the relevant entries were passed in the books of account. It is observed that assessee incurred unaccounted expenses to the extent of Rs. 22.35 lacs and also had unaccounted withdrawal of Rs. 19.60 lacs by partners. Such expenses and such withdrawals could be made only out of unaccounted income. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction.
Assessee contended that the expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. Unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure.
C) AO made disallowance for interest and remuneration paid to partners observing that the same was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. Before CIT (A), assessee contended that CIT (A) confirmed the addition stating that in cases where a payment is covered by Sec. 40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. The payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. An expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. AO observed that assessee had never claimed such huge interest and remuneration in earlier years. It is clear that the assessee claimed the huge amount to neutralize the additional burden due to unaccounted income disclosed. The sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum by way of excessive and unreasonable sum of interest and remuneration paid to the partners, thus AO correctly disallowed a sum under section 40A(2)(b).
Assessee contended that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction.
D) AO imposed penalty u/s 271(1)(C) on the basis of addition made by under the head "unaccounted expenses" as unreasonable and excessive interest and remuneration to the partners. CIT (A) deleted the penalty observing that the sums were out of unaccounted expenditure subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Though disallowance could have been made in assessment proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.
Assessee contended that the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee. The assessee declared its income including disclosure of Rs.42 lacs. Thus, penalty should be deleted. Further, interest as well as remuneration expenses u/s. 40(b) were incurred on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite penalty.
After hearing both the parties, the ITAT held that,
A) ++ the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, the said ground is dismissed;
B) ++ the appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income u/s 69C, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed;
C) ++ AO is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act;
D) ++ the assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, the penalty is correctly deleted by CIT (A).
A) Assessee a partnership is engaged in construction business and had a project of shopping complex. A survey u/s 133A was carried out in which two diaries were found wherein unaccounted withdrawals by partners and unaccounted expenses were found. A statement of partner of the firm was also recorded in which he declared additional income of Rs. 42 lacs. Assessee was following project completion method of accounting. AO rejected the books of account. CIT (A) confirmed the action of rejection of books u/s 145 by AO. Assessee contended that there was no defect pointed out by AO before applying section 145.
B) AO confirmed an addition on the basis of dairies found for unaccounted expenses. Assessee adjusted the amount against work-in-progress after crediting the additional income disclosed. AO made addition stating that during the course of survey, the books of account by the current assessment year were not found. No stock register was maintained by the assessee firm and no details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
CIT (A) confirmed the addition observing that the contention of assessee was that even though the expenses were not found accounted during survey, deduction should be allowed after survey, since the relevant entries were passed in the books of account. It is observed that assessee incurred unaccounted expenses to the extent of Rs. 22.35 lacs and also had unaccounted withdrawal of Rs. 19.60 lacs by partners. Such expenses and such withdrawals could be made only out of unaccounted income. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction.
Assessee contended that the expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. Unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure.
C) AO made disallowance for interest and remuneration paid to partners observing that the same was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. Before CIT (A), assessee contended that CIT (A) confirmed the addition stating that in cases where a payment is covered by Sec. 40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. The payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. An expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. AO observed that assessee had never claimed such huge interest and remuneration in earlier years. It is clear that the assessee claimed the huge amount to neutralize the additional burden due to unaccounted income disclosed. The sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum by way of excessive and unreasonable sum of interest and remuneration paid to the partners, thus AO correctly disallowed a sum under section 40A(2)(b).
Assessee contended that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction.
D) AO imposed penalty u/s 271(1)(C) on the basis of addition made by under the head "unaccounted expenses" as unreasonable and excessive interest and remuneration to the partners. CIT (A) deleted the penalty observing that the sums were out of unaccounted expenditure subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Though disallowance could have been made in assessment proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.
Assessee contended that the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee. The assessee declared its income including disclosure of Rs.42 lacs. Thus, penalty should be deleted. Further, interest as well as remuneration expenses u/s. 40(b) were incurred on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite penalty.
After hearing both the parties, the ITAT held that,
A) ++ the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, the said ground is dismissed;
B) ++ the appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income u/s 69C, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed;
C) ++ AO is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act;
D) ++ the assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, the penalty is correctly deleted by CIT (A).
Assessee's partly allowed
ORDER
Per: T R Meena:
These two appeals filed by the Assessed and Revenue, which have emanated from the orders of CIT(A)-II, Surat, dated 05-01-2010 for A.Y. 2004-2005 in both cases. These two appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First we take, ITA No.4421/Ahd/2007
Grounds of assessee's appeal are as under:
"(1) learned D.C.I.T. of I.T. has erred in law and on facts to invoke the provisions of the Act and to make additions to the returned income without pointing out any defects in the accounts maintained and produced before him and Accounting method consistently followed by the appellant. Learned CIT(Appls) has also erred in confirming I.T.O.'s action.(2) Addition Rs.22,35,685/- made solely on the basis of the statement of one of the partners and impounded dairies during the survey proceedings being contrary to Honourable CBDT's circular is not legal. Learned CIT(Appls) has also erred in confirming D.C. of IT's action.(3) After the amendment of assessing partners, sec.40(b) of I..Act, 1961 overides all other sections. Remuneration to the working partners if paid as per the specified limits, learned DCIT is not justified to disallow such claim made on the basis of books profit shown by the appellant. Learned DCIT and CIT(Appls) has erred in confirming disallowance of Rs.19,17,916/- on this score.(4) Learned D.C. and CIT(Appls) has erred to add an amount of Rs.22,35,685/- claimed against disclosed income and Rs.69,43,250/- amount credited under the head work in progress. There is no possibility to earn book profit of Rs.26,87,800/-. Thus additions made by DC of IT and confirmed by CIT(Appls) is not proper and just."
3. Originally, in this case, the ld. Co-ordinate 'D' Bench, Ahmadabad has dismissed the assessee's appeal by applying the CIT vs. Multiplan India (Pvt.) Ltd., 38 ITD 320 (Del) = (2003-TIOL-85-ITAT-DEL), which was recalled by the M.A. No. 05/Ahd/2011 by 'D' Bench, vide order dated 02.03.2012.
4. The first ground of assessee's appeal is against the appellant had challenged the rejection of books account u/s.145(3) of the IT Act. The assessee is a partnership firm engaged in the business of construction. The assessee had the project of construction of the shopping complex of Bhagvati Ashish-1 & Bhagwati Ashish-2, City Light road behind Petrol Pump, Surat. A survey u/s.133A of the IT Act was carried out on 11.09.2003. During the course of survey, the books of account as per Annexure-B and cash of Rs.15,400/- was found. During the course of survey, two diaries were found wherein the following unaccounted matters were found recorded. These two diaries were impounded u/s.133A(1)(ia) of the Act. During the course of survey, statement of Shri Dhansukhbhai Rajput, partner of the firm was recorded. In answer to question no.19, he had declared additional income of Rs.42,00,000/-.
| Red Narmada diary Bhagwati Ashish-1 | Green Darshna diary Bhagwati Ashish-2 | Total | |
| Unaccounted withdrawal by partners as per diary | Rs.18,20,000/- | Rs.1,40,000/- | Rs.19,60,000/- |
| Unaccounted expenses as per diary | Rs.15,63,111/- | Rs.6,72,574/- | Rs.22,35,685/- |
Total | Rs.34,83,111/- | Rs.8,12,574/- | Rs.41,95,685/- |
The appellant followed project completion method of accounting. The assessee had shown work in progress at Rs. 89,43,250/- and had claimed deduction of Rs.22,35,685/- as work in progress i.e. unaccounted expenses recorded in the diary for which no bill and vouchers were found during the course of survey. The ld. A.O. rejected the books of account u/s.145 of the IT Act, which has been confirmed by the ld. CIT(A). The ld. A.R. of the appellant submitted that there was no defect pointed out by the A.O. before applying the Section 145 of the IT Act. After considering the argument of the both parties, the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, we dismiss the ground no.1.
5. Ground no.2 of the assessee's appeal is against confirming the addition of Rs.22,35,685/-. During the survey, Red Narmada diary Bhagwati Ashish-1 & Green Darshna diary Bhagwati Ashish-2 were found and impounded in which unaccounted expenses were recorded by the assessee in total Rs.22,35,685/-. The A.O. gave reasonable opportunity of being heard on this issue, as the appellant has adjusted this amount against the work in progress, after crediting the additional income of disclosed, during the course of survey at Rs.42,00,000/-. The ld. A.O. after relying upon the Hon'ble Delhi High Court decision in case of Yadu Hari Dalmiya vs. CIT (1980) 126 ITR 48 (Delhi), he had disallowed the expenses. Further he has observed that during the course of survey, the books of account by the current assessment year were not found. It is also stated by A.O. that no stock register was maintained by the assessee firm. No details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
6. The assessee carried the matter before the CIT(A) who had confirmed the addition by observing as under:
"6. I have carefully considered both the position. The basic contention of the Assessee is that, even though the expenses to the extent of Rs.22,35,685/- were found not accounted for in course of the survey, yet, after the survey, since the relevant entries were passed in the books of account the same should be allowed as a deduction. In other words, even though the Assessee had made a disclosure of unaccounted income of Rs.22,35,685/- yet, unaccounted, expenses of Rs.42,00,000/- should have been allowed to be adjusted against such income and only the balance amount could be brought to tax. Such a proposition is simply not acceptable. In course of the survey, it was clearly found that the Assessee had incurred unaccounted expenses on the construction activity to the extent of Rs.22,35,685/-. At the same time, the partners of the assessee firm were found to have made unaccounted withdrawals of Rs.19,60,000/-. Quite obviously, such expenses could have been incurred and such withdrawals made only out of unaccounted income. It follows therefore, that the total sum of Rs.41,95,685/- (para-2) represented the unaccounted income of the Assessed for the year under consideration. It is for this reason that the Assessed had made a disclosure of Rs.42 lacs. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction. Thus, the claim of the AR that the unaccounted expenses should have been reduced from the unaccounted income, is without any logical basis. His further contention that a document has to be utilized as a whole and not in part, is also not relevant to the point dealt herein. The AO therefore, was fully justified in disallowing the claim of deduction. The addition of the sum of Rs.22,35,685/- is therefore, confirmed."
7. Now the assessee is before us. Ld. Counsel for the appellant submitted that there was a survey u/s.133A and the appellant had disclosed Rs.42 lacs during the course of survey, which has been credited in the p&l account of the A.Y. 04-05. The appellant had incurred expenses, which were unaccounted as per diary impounded by the department. He argued that this expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. He relied upon the following cases for claiming of these expenses:
i. CIT vs. P.D. Abrahm Alias Appachan and Others (2012) 252 CTR 407 = (2012-TIOL-356-HC-KERALA-IT) - In respect of unaccounted expenditure explanation to section 37(1) and proviso to section 69C cannot be made applicable.ii. Laxmanbhai R. Jalu vs. ITO, ITA No.1772/Ahd/2005 A.Y. 2002-03 - Condition to invoke provisions of section 69C cannot be made applicable.iii. CIT vs. Radhika Creation, ITA NO.692 of 2009 = (2010-TIOL-314-HC-DEL -IT) Jd. Dtd. 30.04.2010 - Weather expenses can be disallowed u/s 69C when there is assessee's admission that it was not in a position to produce vouchers or authenticate the genuineness of exp.iv. CIT vs. Lakshmi Hospital (2011) 245 CTR 0471 = (2011-TIOL-452-HC-KERALA-IT) - Against unaccofunted income disclosed in search, department is bound to give deduction of expenses, if proved, against such income.v. Dhanvarsha Builders & Developers P. Ltd. v. Dy. CIT (2007) 289 ITR (AT) 50 Pune = (2006-TIOL-239-ITAT-PUNE) - The expenditure around sum of Rs.40 lakhs became admissible to the assessee as cash expenditure in relation to cash receipts of the assessee.vi. CIT vs. Navsari Cotton Mills 135 ITR 546 (Guj.) – Conditions to claim expenses u/s 37 of I.T. Act.
Ld. Counsel contended that unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure. Therefore, these expenses are allowed. At the outset, ld. Sr. D.R. relied upon the orders of the lower authorities and requested to confirm the addition.
8. We have heard the rival contentions and perused the material on record. The appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. Therefore, case laws referred by the assessee is not squarely applicable. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income to the extent of Rs.22,35,685/- u/s.69C of the IT Act, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed.
9. The third ground of appeal is against not allowing the remuneration to the working partners u/s.40(b) of the I T Act. The A.O. observed that the appellant had claimed deduction of huge amount of interest and remuneration to partners as under:
| A.Y. 2004-05 | A.Y. 2003-04 | |
| Interest to partners | Rs.13,17,187/- | Rs.5,65,169/- |
| Remuneration to partners | Rs.6,00,729/- | Rs. Nil |
Total | Rs.19,17,916/- | Rs.5,65,169/- |
As per A.O., it was held that the interest and remuneration to the partner was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. The A.O. gave reasonable opportunity of being heard on this issue. After considering the assessee's reply and various case laws mentioned in paragraph nos. 14 to 19 held that the interest and remuneration paid to the partners compared to immediate preceding year was not reasonable. Thus, he made addition of Rs.19,17,916/-
10. The assessee carried the matter before the CIT(A) who had confirmed the addition which is reproduced as under:
"9.5 I have carefully considered the view taken by the AO as also the written submissions of AR. First of all, the ratio of the case of Yoganand Textiles (supra) does not apply to the facts of the Assessee's case. This is because, in that case, the Hon. Court was dealing with the scope of sec. 40(b) as it stood prior to its substitution by the Finance Act, 1992 with effect from 1.04.1993. The order of the Hon. Court is dated 20.9.1999. However, a close study of the text shows that as per the Hon. Court, the word 'any' in section 40(b) is a word of wide importance, which imposes an absolute embargo against deduction in respect of any payment made by a firm to any partner of the firm. There was nothing in the provisions to indicate that any category of salary, remuneration etc. paid to a partner could fall outside the scope of such provisions. The Hon. Court further held that the prohibition against the deduction of the amounts of the nature covered under clause (b) of Sec.40 is not dependent on whether or not such payment is made for the purpose of earning profit or whether it is made out of the profit and, if any such distinction is to be read in clause (b) of sec. 40, it would be unreal. The Hon. Court then went on to observe that the provisions of sec. 40A have effect notwithstanding anything contained to the contrary in any of the provisions of the Act relating to the computation of income under the head of "Profits and gains of business or profession". Sub. Sec.2(a) and (b) inter-alia, provide that, where the Assessee incurs an expenditure in respect of which payment was made or is to be made to any person including a partner of the firm, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable, so much of the expenditure as is considered excessive or unreasonable shall not be allowable as a deduction under the provisions of sub sec (2) of Sec.40-A. It is clear that the payments made to a partner which covered by sec. 40A(2) are of the nature other than those which are prohibited by clause (b) of Sec. 40. In other words, it is in cases where payments other than those which are covered by clause (b) of Sec. 40 are made to the partner, that the question of excessiveness or unreasonable has of the payments may arise, which would be governed by the provisions of Sec.40A(2).10.1 A perusal of the view recorded by the Hon. Court clearly shows that the case of Yoganand Textiles (supra) is of no help to the Assessee, and in fact supports the position taken by the AO. Therefore, there is no merit in the contention of the AR that in cases where a payment is covered by Sec.40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. These are contained in sub-clauses (i) to (v) r.w. the proviso, as also the Explanation below the said section. As per the decision for the Hon. Gujarat High Court, the payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. It goes without saying that once a payment made by the firm is not allowable as a deduction u/s. 40(b) of the IT Act, there remains no scope for such payment to be considered under Sec. 40A(2)(b) of the Act. On the other hand, an expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. Therefore, it is fallacious on the part of the AR to contend that since, the interest and remuneration paid to the partners was covered by Sec. 40(b), the provisions of Sec. 40A(2)(b) would not apply. Therefore, the AR's submissions regarding the partners being actively engaged in the day to-day conduct of the business etc. is also of no relevance at all.10.2 On the other hand, the AO noted that the Assessee had never claimed such huge interest and remuneration to the partners in the earlier years, even though, it has been claimed by the AR that, in the year relevant to the AY 2001-02, a total remuneration of Rs.5,99,842 had been paid to the partners. Whatever may have been the terms and conditions laid down in the partnership deed yet, in the year under consideration, it was absolutely clear that the Assessee had claimed the payment of interest totalling Rs.19,17,916 simply to neutralise the additional burden of tax that had arisen due to the unaccounted income disclosed in course of the survey. Moreover, as correctly pointed out by the AO, in the case of M/s. Whiteline Chemicals (supra) the Hon. ITAT has clearly held that the income which is disclosed in course of a survey would have to be shown in the return of income in addition to the normal current year's profit. This meant that the Assessee could not have credited the disclosed some to the profit and loss account and could not have claimed any expenditure against the same. Apart from the principle of accounting of disclosure laid down by the Hon. ITAT, what has to be appreciated is that, the sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum after the disclosure is made. Since, the Assessee had incorrectly credited the disclosed sum of Rs.42,00,000/- in the P & L A/c. and had debited expenses against the same, which included the excessive and unreasonable sum of Rs. 19,17,916 as interest and remuneration paid to the partners, the AO was fully justified in disallowing the same under the provisions of section 40A(2)(b) of the Act. The action of the AO was justified in view of the case-laws relied upon by him, as also in view of the decision of the Gujarat High Court in the case of Yoganand Textiles (supra) which ironically has been relied upon by the AR. The action of the AO is therefore sustained, and the disallowance of Rs.19,17,916 is confirmed."
11. Now the assessee is before us. The ld. A.R. of the appellant submitted that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. He further argued that Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction. He relied upon following cases:
i. Munjal Sales Corp. vs. CIT & Anr. (2008) 298 ITR 298 (SC) = (2008-TIOL-26-SC-IT) - Conditions for claiming deduction u/s. 40(b)(iv) i.e. partner's capital interest vis-à-vis interest allowable u/s.36(iii) of IT Act.ii. CIT vs. Yoganand Textiles 202 ITR 869 (Guj.) - Section 40A is not applicable to payments covered by section 40(b).iii. DCIT Circle-6, Surat vs. Om Terrace, ITA No. 440/Ahd./2012 - Deduction u/s.40(b), in accordance with partnership deed, is allowable from undisclosed income declared in survey/search.iv. Gist of severat judgments - Deduction u/s 40(b)(iv) and 40(b)(v) allowable against undisclosed income.v. CIT & Anr. Vs. S.K. Srigiri & Bros. 298 ITR 13 (Karn-HC) - Deduction u/s 40(b)(iv) and 40(b)(v) allowable against income disclosed in survey.vi. Kathiawadi Hotel vs. ITO, Valsad, ITA No. 827/Ahd/2007 - Deduction u/s. 40(b)(iv) and 40(b)(v) allowable against disclosure of stock in survey.vii. S.K. Engineering v. Jt. CIT 14(II) ITCL 51 (Bang.Trib) - Without giving finding as to what was the excessive or unreasonable portion in total expenses, expenses could not be disallowed on the ground that in earlier year it was paid at lower rate was not justified.viii. Chhaged Steel Corporation vs. ACIT 77 ITD 0419 - Section 40A(2)(b) will not be applied for computing deduction u/s.40(b).
At the outset, ld. Sr. D.R. relied upon the orders of CIT(A) & A.O. and requested to confirm the order of the CIT(A).
12. We have perused the orders and gone through the case laws referred by the A.R. The appellant heavily relied in case of CIT vs. Yoganand Textiles 202 ITR 869 (Guj.) for A.Y. 1976-77, order dated 20th September, 1991, wherein it was held that any amount paid by way of the salary, bonus, commission or remuneration to the partners – scope of Section 40(b) – Provision is very wide and imposes absolute embargo – Section 40(b) does not envisage splitting up capacities in which a partner works – Section 40A is not applicable to payments covered by Section 40(b) of the Income Tax Act. The ld. CIT(A) had interpreted words 'any' Section 40(b) and held that disallowance u/s.40A can be made on the basis of excessive and reasonableness of the expenses from the interest payment and remuneration to the partner by the firm. The Co-ordinate 'D' Bench in case of DCIT Circle-6, Surat vs. Om Terrace, ITA No. 440/Ahd./2012, held by following the Ahmadabad 'D' Bench decision in case of M/s. Arihant Enterprise vs. DCIT, Cir-3, Surat, as under:
"6. Since our coordinate Benches had decided the issue of granting deduction in respect of salary worked out as per the provisions of Section 40(b) of the Act and in accordance with the partnership deed from the undisclosed income disclosed during the course of survey considering the same as business income as cited in the decisions supra, we do not have any hesitation to uphold the decision of the learned CIT(A) in this case before us because the facts are identical. It is ordered accordingly."
After considering the Co-ordinate 'D' Bench decision dated 11.05.2012, in case of DCIT Circle-6, Surat vs. Om Terrace (supra), the A.O. is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act. This ground of appeal is set aside.
13. Ground no.4 of assessee's appeal is not pressed by the ld. A.R. Accordingly, it is dismissed as not pressed.
14. In the result, assessee's appeal is partly allowed.
15. Now, we take ITA No.1212/Ahd/2010
Ground of Revenue's appeal is as under:
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting penalty levied by the AO of Rs.14,53,760/- for concealment of income."
16. Revenue's appeal is against deleting the penalty by the CIT(A) at Rs.14,53,760/-. The A.O. imposed penalty u/s. 271(1)(C) vide penalty order dated 27.03.2009 for A.Y. 04-05 (wrongly mentioned A.Y. 05-06 by both the authorities) on the basis of addition made by the A.O. under the head "unaccounted expenses" of Rs.22,35,685/- as unreasonable and excessive interest and remuneration to the partners at Rs.19,17,916/-. This penalty was imposed by the A.O. on the basis of ld. CIT(A)-II, Surat had dismissed the assessee's appeal in quantum case.
17. The assessee carried the penalty matter before the CIT(A) who had deleted the penalty by observing as under:
"6. I have carefully considered the view taken by the AO as also the written submission of the AR. First of all, it must be accepted that the unaccounted expenses of Rs.22,35,685/- was included in the total disclosure of Rs.42 lacs made during the survey. The break-up of this sum has been shown by the AO in para-4 of the penalty order, according to which this sum included Rs.15,63,111 on the basis of a diary pertaining to the Bhagwati Ashish-1 project, and Rs.6,72,574/- as recorded in a diary pertaining to the Bhagwati Ashish-2 project. These sums were subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Even though the disallowance of the said sums would have been justified in asst. proceedings yet, there was no ground to treat such disallowance as representing the furnishing of inaccurate particulars of income or even the concealment of income.6.1 The next disallowance made by the AO was of interest and remuneration paid to the partners, totaling Rs.19,17,916, the details of which have been shown by the AO in para-6 of the penalty order. Once again, even though such disallowance could have been made in asst. proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.6.2 Given such facts and circumstances of the case, it is held that there was no basis for the AO to levy any penalty u/s.271(1)(C) of the IT Act. The penalty of Rs.14,53,760/- will therefore have to be deleted."
18. Now, the revenue is before us. Ld. Sr. D.R. requested to restore back the order of the A.O. as he rightly imposed the penalty u/s.271(1)(C) on claiming unaccounted expenses as well as unreasonable and excessive interest and remuneration to the partner. At the outset, ld. Counsel for the appellant has submitted that both items of addition made by the A.O., had been disclosed in the regular books of account. Nothing has been concealed by him. He further relied in case of Rayala Corporation (P) Ltd. Vs. UOI & Ors. (2007) 15 (I) ITCL 476,CIT vs. Manu Engineering Works (1980) 122 ITR 306 (Guj), ITAT, Ahmadabad decision inNavinbhai M. Patel vs. ITO (1988) 27 ITD 411, Hon'ble Apex Court decision in case of UOI vs. Dharmendra Textile Processors [2008] 306 ITR 277 (SC) = (2008-TIOL-192-SC-CX-LB), CIT vs. Atul Mohan Bindal [2009] 317 ITR 1 = (2009-TIOL-97-SC-IT), Dilip N. Shroff v. JCIT [2007] 291 ITR 519= (2007-TIOL-96-SC-IT), CIT vs. Ram Commercial Enterprise Ltd. v. CIT [2000] 246 ITR 568 (Delhi) = (2003-TIOL-69-HC-DEL-IT), T. Ashok Pai v. CIT [2007 292 ITR 11 (SC) = (2007-TIOL-98-SC-IT),CIT vs. SAS Pharmaceuticals & CIT vs. Reliance Petro Product Pvt. Ltd. and claimed that during the course of survey whatever discrepancy was found had been disclosed by the assessee by offering the addition of amount of Rs.42 lacs. Since, the survey was conducted on 11.09.2003 in F.Y. 03-04, for that assessment year, the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee on 01.11.2004. The assessee declared its income of Rs.7,67,840/- including disclosure of Rs.42 lacs. Therefore, he requested to confirm the order of the CIT(A). The assessee has claimed interest as well as remuneration expenses u/s. 40(b) on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite the penalty u/s.271(1)(C).
19. We have heard the rival contentions and perused the material on record. The assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, we confirm the order of the CIT(A).
20. In the result, the revenue's appeal is dismissed.
21. In the combined result, Assessee's appeal is partly allowed and Revenue's appeal is dismissed.
(These Orders pronounced in open Court on 19.4.2013)
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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