Chartered Accountant Finance: [aaykarbhavan] Judgments and other details

As part of its drive against fake Permanent Account Number,the Income-Tax Department is considering making proof of

date-of-birth mandatoryfor issuance of PAN card."The Department might ask for proof of date-of-birth for issuing

a PAN card. Ration cards and rent receipts might no longer be accepted as proofs of identity and address for issuance of a

PAN card," sources in the finance ministrysaid.According to officials, in most cases of fraud, people have

furnished fake ration cards and rent receipts to get PAN card. As of now, depository account statement, bank account

statement /passbook, ration card, passport, voter identity card, driving licence, property tax assessment order and

certain other documents are accepted as proof of identity as well as address.

"We will soon prescribe a format for PAN verification to make the system foolproof and robust," sources said.

The sources further said that a notification regarding streamlining process of PAN verification will be issued soon and

it will apply onlyto fresh applicants.

Recently, the I-T department has found a number of individuals possessing fake PAN cards as identity proof.

According to the official data, 170 million people in India have PAN cards, while only 30 million of them file income-tax

returns. Many people who do not file tax returns get PAN card as it works as identity proof at many places.

The finance ministry had last year brought out a new PAN application form—49A for use of Indian citizens, companies

and entities incorporated in the country which allows an applicant to mention his or her Aadhaar number. (PTI)

IT: Life insurance premiums, even if paid out of loan funds and not out of income chargeable to tax, are eligible for deduction under section 80C

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[2013] 34 taxmann.com 17 (Cochin - Trib.)

IN THE ITAT COCHIN BENCH

Goutham Reddy

Income-tax Officer, Ward -2, Kottayam*

N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NO. 418 (COCH.) OF 2010
[ASSESSMENT YEAR 2006-07]

APRIL 5, 2013

Section 80C of the Income-tax Act, 1961 - Deductions - Life insurance premia, contribution to provident fund etc. [Contribution out of loan funds] - Assessment year 2006-07 - Whether, life insurance premium paid out of loan funds, and not out of income chargeable to tax are eligible for deduction under section 80C - Held, yes - Whether, therefore, where assessee paid insurance premium out of funds loaned by his grandfather, duly debited to account of assessee in books of proprietary concern of his grandfather, deduction under section 80C was allowable - Held, yes [Para 15] [In favour of assessee]

FACTS

■		The assessee, receiving salary income from M/s 'S', claimed deduction under section 80C for making payments towards LIC premium in his return. The Assessing Officer observed that the premium amounts were paid by assessee's grandfather who was the proprietor of M/s 'V'. Therefore, he disallowed the deduction on ground that assessee was not in receipt of any gift or loan from his grandfather for paying premiums and benefit of deduction was available only to the person who actually made the payment.
■		On appeal, the assessee claimed that the premium amounts had been duly debited to the account of the assessee in the books of the proprietary concern of his grandfather and since the assessee did not maintain books of account, he could not pass a corresponding credit entry. However, the Commissioner (Appeals) upheld the order of the Assessing Officer.
■		On second appeal:

HELD

■		Admittedly the assessee did not maintain any books of account. Admittedly, the payments of LIC premiums were reflected in the books of account of M/s. 'V', the proprietary concern of the grandfather of the assessee. The Assessing Officer stated that the payments relating to LIC premiums were made by M/s. 'V' to M/s 'S', where the assessee was working, meaning thereby that the grandfather of the assessee only provided the funds for making payment of LIC premiums. Hence, it cannot be said that the LIC premiums were paid directly by the grandfather of the assessee. Accordingly, under these set of facts, it can be said that the assessee has availed loan from his grandfather for making LIC premium payments. [Para 9]
■		The question that arises is whether the LIC premium amounts paid out of loan funds are eligible for deduction under section 80C. The department placed reliance on the decision of the jurisdictional High Court in the case of CIT v. Abraham George [2000] 242 ITR 171, in which the decision was rendered in the context of old provisions of section 80C which prescribed the condition that the eligible payments should have been made out of income chargeable to tax. There is no dispute that the present provisions of section 80C do not contain the words 'out of income chargeable to tax'. [Para 10]
■		The next question that arises is whether the presence or absence of the words 'out of income chargeable to tax' make any difference. In the case ofS. Inder Singh Gill v. CIT [1963] 47 ITR 284, it was held by the Bombay High Court that the absence of the words 'out of income chargeable to tax' do not make any difference. The Bombay High Court considered the words 'tax shall not be payable' and held that the said language signify that sources of making payment of LIC premiums should be liable to tax and in that case only the tax shall not be payable if the same is used for making LIC premium payments. [Para 11]
■		Thus, the old provisions of section 80C clearly specified the condition that the payments listed out in that section should be paid out of income chargeable to tax. [Para 12]
■		However the provisions of section 80C, as applicable to the year under consideration, do not specify the condition that the LIC premium payments should be paid out of income chargeable to tax. Further, section 80C is included in Part-B of Chapter VI-A, which provides for deduction in respect of certain payments. Only Part-C of Chapter VI-A provides for deduction in respect of certain incomes. A plain reading of the above said provisions show that the deduction under section 80C shall be made if the sums specified in sub-section (2) is paid or deposited in the previous year. It does not place any condition about the source for making the payments or deposit. Further the deduction is given while computing the total income, i.e., out of gross total income. This is in total contrast to the provisions of section 15 of the 1922 Act, which used the language that that 'tax shall not be payable'. [Para 13]
■		Within the sections included in Part-B of Chapter VI-A, the Parliament has prescribed the condition that the payments should have been made out of income chargeable to tax only in certain sections, meaning thereby, that the Parliament has consciously omitted the above said condition in certain sections. No such condition is prescribed in section 80C. It is a well settled proposition of law that one cannot supplement or add words to a section, which are not intended to be included by the Parliament. [Para 14]
■		In view of the foregoing discussions, the payment of LIC premiums made during the previous year out of loan funds are also eligible for deduction under section 80C. Accordingly, the order of the Commissioner (Appeals) is set aside and the Assessing Officer is directed to allow the deduction under section 80C claimed by the assessee. [Para 15]

CASES REFERRED TO

CIT v. Abraham George [2000] 242 ITR 171 (Ker.) (para 6), S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (para 8) and CIT v. Dr. Usharani Panda [1995] 212 ITR 119/82 Taxman 26 (Ori.) (para 12).

R. Krishnan for the Appellant. Smt. S. Vijayaprabha and M. Anil Kumar for the Respondent.

ORDER

B.R. Baskaran, Accountant Member - The appeal filed by the assessee is directed against the order dated 05-04-2010 passed by Ld CIT(A)-IV, Kochi and it relates to the assessment year 2006-07. This appeal was originally disposed of by the SMC bench of the Tribunal on 31.10.2011. Thereafter, the assessee moved a miscellaneous application seeking recall of the order and upon finding merits in the said petition, the Tribunal recalled its order referred above and thereafter the appeal was heard by this division bench.

2. The solitary issue urged in this appeal is whether the Ld CIT(A) was justified in holding that the assessee is not entitled for deduction u/s 80C of the Act on the LIC premium paid in respect of his LIC policies.

3. The facts relating to the issue are stated in brief. The assessee derives salary income from a concern named M/s Seematti, Ernakulam. He filed his return of income by claiming deduction of Rs.1.00 lakh u/s 80C of the Act. The assessing officer noticed that the premium amounts were paid by the Grand father of the assessee named Shri V.Thiruvenkitam, who was the proprietor of M/s S. Veeraiah Reddiar, Kottayam and the concerned LIC accounts were shown as assets in the books of accounts of M/s S.Veeriah Reddiar. The assessing officer held that the assessee was not in receipt of any amount as gift or loan from Mr. Thiruvenkitam for making payments towards LIC premiums. Accordingly, he rejected the claim of deduction u/s 80C of the Act.

4. The assessee carried the matter in appeal before Ld CIT(A). The first appellate authority also did not accept the claim of the assessee that the LIC premiums were paid by him by taking loan from his grandfather. The Ld CIT(A) held that the premium amounts were paid by the grand father of the assessee only. He further held that the benefit of deduction u/s 80C of the Act shall be available only to the person who actually made the payment and not to the beneficiary of such payment. By placing reliance on the circular No. 3-P dated 11.10.1965, the Ld CIT(A) held that the object of section 80C is encouragement of thrift and savings by an assessee, meaning thereby the contribution should be made out of funds belonging to the assessee. Accordingly, the Ld CIT(A) dismissed the appeal of the assessee. Aggrieved by the order of the first appellate authority, the assessee has filed this appeal before us.

5. The Ld Counsel for the assessee submitted that the assessee herein derives income from salary and income from other sources. Hence there was no necessity for him to maintain books of accounts. He further submitted that the LIC premium amounts were paid by the grand father of the assessee and they were duly debited to the account of the assessee in the books of the proprietary concern of his grand father. He submitted that the assessee could not pass corresponding credit entry, since he did not maintain books of account. Accordingly he contended that the non-maintenance of books would not alter a loan transaction into some thing else. He further submitted that the provisions of sec. 80C of the Act, as applicable to the year under consideration, do not specify any condition that the contribution towards LIC premiums should be made out of income chargeable to tax. He further submitted that the old provisions of sec. 80C of the Act, which existed prior to the introduction of rebate u/s 88 of the Act, was having a condition that the LIC premium amounts should be paid out of income chargeable to tax. Accordingly he submitted that the impugned LIC premium payments have been made by the assessee out of the loan availed from his grand father and hence the assessee is eligible for deduction u/s 80C of the Act.

6. On the contrary, the Ld D.R submitted that the impugned LIC payments have been shown as an asset in the books of accounts of the proprietary concern of the grand father of the assessee and hence it cannot be said that the assessee has availed loan to pay the LIC premiums. The Ld D.R further submitted that the payments specified in sec. 80C of the Act should be paid out of income chargeable to tax, since the object of the provisions of sec. 80C of the Act is to encourage thrift and savings. He further submitted that the absence of the words the words "out of income chargeable to tax" in the newly introduced provisions of sec. 80C, which are applicable to the year under consideration, does not do away the condition that the said payments should be paid out of income chargeable to tax. In this regard, the Ld D.R placed reliance on the decision of the Hon'ble jurisdictional Kerala High Court in the case of CIT v. Abraham George [2000] 242 ITR 171.

7. In the rejoinder, the Ld A.R submitted that the provisions of income tax should be interpreted strictly without supplementing or deleting any words to the relevant provisions. He submitted that Chapter - VIA of the Act prescribes the "Deductions to be made in computing Total income" and it has been divided in four parts as given below:-

(a)		"Part A" prescribes certain conditions for availing deductions specified in Chapter -VIA of the Act.
(b)		"Part B" lists out the "Deductions in respect of certain payments"
(c)		"Part C" lists out the "Deductions in respect of certain income".
(d)		"Part D" lists out "Other deductions".

He submitted that the deductions relating to certain income is listed out only in Part C. Deduction u/s 80C of the Act is included in "Part B" and the deductions listed out in Part B are related to deductions in respect of certain payments made by an assessee during a year. He submitted that the deductions specified in sec. 80C to sec. 80CGC are included in Part B. He submitted that the words "out of income chargeable to tax" finds place only in sections 80CCA, 80CCB, 80CCD, 80D and 80E of the Act. The said words do not find place in sections 80C, 80CCD, 80CCF, 80DD, 80G, 80GG, 80GGA, 80GGB and 80GGC of the Act. Accordingly he submitted that the parliament has consciously included the words "out of income chargeable to tax" only in those sections, where it was felt necessary that the concerned payment should be made out income chargeable to tax. Since the provisions of sec. 80C of the Act, as applicable to the year under consideration, does not contain the words "out of income chargeable to tax", they cannot be supplemented while interpreting the said provision.

8. With regard to the decision rendered by the Hon'ble jurisdictional High Court in the case of Abraham George (supra), the Ld A.R submitted that the said decision was related to the assessment year 1989-90 and at the relevant point of time, then existing provisions of sec. 80C of the Act contained the words "out of income chargeable to tax". He submitted that the Hon'ble Kerala High Court did make a reference to the decision rendered by the Hon'ble Bombay High Court in the case of S. Inder Singh Gill v. CIT [1963] 47 ITR 284. The Hon'ble Bombay High Court had rendered its decision in the context of sec. 15 of the erstwhile Income tax Act, 1922 (hereinafter 1922 Act). Under the provisions of sec. 16(1)(a) of the 1922 Act, the sums exempted under the section 15 of the Act are to be included in the "Total income". Further the provisions of sec. 15 was couched with the words "Tax shall not be payable". The Bombay High Court held that the above said language postulates that the sum exempted under sub-section (1) of section 15 would have been chargeable to tax but for the exemptions provided by the Act. Further the deduction specified in sec. 15 is necessarily to be included in the total income as per the provisions of sec. 16(1)(a) of the 1922 Act. Hence, on the combined reading of sec. 15 and sec. 16 of the 1922 Act, the Bombay High Court held that the absence of the words "out of income chargeable to tax" does not make any difference and the payments eligible for deduction u/s 15 of the 1922 Act should be paid out of income chargeable to tax.

9. We have heard the rival contentions and perused the record. Admittedly the assessee did not maintain any books of account. Admittedly, the payments of LIC premiums were reflected in the books of account of M/s Veeriah Reddiar, the proprietary concern of the grand father of the assessee. The assessing officer has stated that the payments relating to LIC premiums were made M/s Veeriah Reddiar to M/s Seematti, Kottayam, where the assessee is working, meaning thereby that the grand father of the assessee has only provided the funds for making payment of LIC premiums. Hence, it cannot be said that the LIC premiums were paid directly by the grand father of the assessee. Accordingly, under these set of facts, it can be said that the assessee has availed loan from his grand father for making LIC premium payments.

10. Now the question that arises is whether the LIC premium amounts paid out of loan funds are eligible for deduction u/s 80C of the Act? The department heavily placed reliance on the decision of Hon'ble jurisdictional High Court in the case of Abraham George (supra). Admittedly, the said decision was rendered in the context of old provisions of sec. 80C which prescribed the condition that the eligible payments should have been made out of income chargeable to tax. There is no dispute that the present provisions of sec. 80C do not contain the words "out of income chargeable to tax".

11. The next question that arises is whether the presence or absence of the words "out of income chargeable to tax" does make any difference? The Ld D.R submitted that the jurisdictional High Court in the case of Abraham George (supra) made a reference to the observations made by the Hon'ble Bombay High Court in the case of S. Inder Singh Gill (supra), wherein the Hon'ble Bombay High Court held that the absence of the words "out of income chargeable to tax" does not make any difference. We have carefully gone through the decision of Ho'ble Bombay High Court, referred above. As submitted by Ld A.R, the said decision was rendered in the context of sec. 15(1) of the Indian Income tax, 1922. Section 15 of the said read as under:-

"15(1) The tax shall not be payable in respect of any sums paid by an assessee to effect an insurance on the life of the assessee or on the life of a wife or husband of the assessee or in respect of a contract for a deferred annuity on the life of the assessee or on the life of a wife or husband of the assessee, or, as a contribution to any provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies"

The Bombay High Court considered the words "Tax shall not be payable" and held that the said language signify that sources of making payment of LIC premiums should be liable to tax and in that case only the tax shall not be payable if the same is used for making LIC premium payments. The Bombay High Court also considered the provisions of sec. 16(1)(a) of the 1922 Act which provided that the sums exempted from taxation under section 15 are to be included in the "total income". The relevant observations made by the Hon'ble Bombay High Court are extracted below for the sake of convenience:-

"Sub-section 1(a) of section 16, inter alia, provides that the sums exempted under section 15 are to be included in the total income of the assessee. These provisions of sub-section (1)(a) of section 16 which say that the sums exempted from taxation under section 15 are to be included in the total income show that the sums exempted have the character and quality of being included in the total income of the assessee as the tax payable is determined with reference to the total income of an assessee. It would, therefore, logically follow that, when an exemption or relief is claimed under section 15(1) in respect of any sum it must be shown that the said sum bears the character and quality of being included in the total income of the assessee, with reference to which the tax is levied."

In view of the specific provisions of sec.16(1)(a) and the language used in sec. 15(1) viz., "Tax shall not be payable", the Bombay High Court held that the absence of the words "out of income chargeable to tax" does not make any difference in implementing the provisions of sec. 15 of the Act.

12. The Hon'ble Jurisdictional High Court was interpreting the provisions of sec. 80C relating to the assessment year 1989-90 which contained the words "any sum paid in the previous year by the assessee out of his income chargeable to tax". Thus the old provisions of sec. 80C of the Act clearly specified the condition that the payments listed out in that section should be paid out of income chargeable to tax. The Hon'ble Kerala High Court also referred to the decision rendered by the Hon'ble Orissa High Court in the case of CIT v. Dr. Usharani Panda [1995] 212 ITR 119/82 Taxman 26, where in the Hon'ble Orissa High Court, by placing reliance on the words "out of income chargeable to tax" found in the old section 80C of the Act. Thus, the Hon'ble Kerala High Court has only interpreted the provisions of sec. 80C of the Act that was applicable to the assessment year before it and in that context, it made a reference to the decisions of Hon'ble Bombay High Court and the Hon'ble Orissa High Court.

13. However the provisions of sec. 80C, as applicable to the year under consideration, do not specify the condition that the LIC premium payments should be paid out of income chargeable to tax. Further, as stated earlier, section 80C is included in Part-B of Chapter VI-A of the Act which provides for deduction in respect of certain payments. Only Part-C of Chapter VI-A provides for deduction in respect of certain incomes. The sub. sec. (1) of sec. 80C reads as under:-

"80C(1) In computing the total income of an assessee, being an individual or a Hindu Undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed one lakh rupees."

A plain reading of the above said provisions show that the deduction under sec. 80C shall be made if the sums specified in sub-section (2) is paid or deposited in the previous year. It does not place any condition about the source for making the payments or deposit. Further the deduction is given while computing the total income, i.e., out of gross total income. This is in total contrast to the provisions of sec. 15 of the 1922 Act, which used the language that that "Tax shall not be payable".

14. The Ld A.R also pointed out that only certain sections included in Part-B of Chapter VI-A contain the words "out of income chargeable to tax" and certain sections do not contain the above said words, i.e., within the sections included in Par-B of Chapter VI-A of the Act, the parliament has prescribed the condition that the payments should have been made out of income chargeable to tax only in certain sections, meaning thereby, the parliament has consciously omitted the above said condition in certain sections. As stated earlier, no such condition is prescribed in sec. 80C of the Act. It is a well settled proposition of law that one cannot supplement or add words to a section, which are not intended to be included by the parliament.

15. In view of the foregoing discussions, in our view, the payment of LIC premiums made during the previous year out of loan funds are also eligible for deduction u/s 80C of the Act. Accordingly we set aside the order of Ld CIT(A) and direct the assessing officer to allow the deduction u/s 80C of the Act claimed by the assessee.

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

2008-TIOL-481-HC-DEL-IT

IN THE HIGH COURT OF DELHI

ITA 1143/2008

COMMISSIONER OF INCOME TAX, DELHI (CENTRAL) - II

TOSHA INTERNATIONAL LTD

Badar Durrez Ahmed And Rajiv Shakdher JJ.,

Dated: September 23, 2008

Appellant rep by: Mr R. D. Jolly

Income Tax - Sec 41(1) - Assessee manufactures black and white picture tubes - runs into huge losses and bacomes sick - goes to BIFR - banks waive off interest and settles for 60% of principal amount - AO treats the principal amount directed credited to the capital reserve account as income of the assessee - CIT(A) does not consider it as income either under Sec 41(1) or Sec 28(iv) or Sec 2(24) - Tribunal dismisses the Revenue's appeal on the ground that the same could have been treated as income provided the assessee would have claimed deduction or benefit or allowance in relation to loss, expenditure or trading liability by way of cessation of liability; since nothing of this sort happens in this case, the appeal is not sustainable - HC finds no reason to interfere with the Tribunal's decision - Revenue's appeal dismissed

JUDGEMENT

Per: Badar Durrez Ahmed J.:

1. This appeal by the revenue is directed against the order dated 31.07.2007passed by the Income Tax Appellate Tribunal in ITA 4922/Del/2005 in respect ofthe assessment year 2001-2002.

2. The assessee was engaged in the manufacturing of black and white picture tubes. The assessee company ran into huge losses and it ultimately became a sick company and registered with the BIFR. Under the one time settlement scheme, the financial institutions and banks required the assessee to pay 60% of the amount due towards principal and waived the entire interest payment. There is no dispute with regard to the waiver of interest payment. The only objection raised by the Assessing Officer is with regard to the waiver of the principal amount to the extent of Rs 10,47,93,857/- which the assessee had directly credited to the Capital Reserve Account. According to the Assessing Officer the assessee had derived benefit on the basis of either depreciation or utilizing the working capital which would have formed part of the earlier years income. According to the Assessing Officer since the loans ceased to exist, this amounted to cessation of liability and, therefore, it has to be treated as an income. Consequently, the Assessing Officer added the said sum of Rs 10.47crores in the income of the assessee. The Commissioner of Income Tax (Appeals) deleted the addition by observing that the remission of the principal amount of loan did not amount to income under Section 41 (1) nor under Section 28 (iv) nor under Section 2(24) of the Income Tax Act, 1961 (hereinafter referred to as thesaid Act).

3. The revenue went in appeal before the Tribunal against the order of the Commissioner of Income Tax (Appeals) with regard to the deletion of the said sum of Rs 10.47 crores. We note that the Tribunal has examined the case in detail and particularly from the standpoint of the provisions of Section 41 (1) of the said Act. The Tribunal has observed as under:-

As per our considered view, for attracting the provisions of Section 41 (1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. The remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. In Mahindra and Mahindra Ltd. Vs. CIT, Honble High Court of Bombay 261 ITR 501, held that no allowance or deduction having been allowed in respect of loan taken by assessee for purchase of capital assets, Section 41(1) was not attracted to remission of principal amount of loan. In the instant case, the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the balance sheet and not in the P & L account, and also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous year. So far as waiver of interest is concerned, the assessee company itself has treated the same either as income or has not claimed the same as expenditure in the computation of income filed before the lower authorities.

4. We see no reason to interfere with the conclusions of the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra and Mahindra Limited v. CIT: 261 ITR 501(Bom) are fully applicable and we see no reason to take a different view.

5. Consequently, no substantial question of law arises for our consideration.The appeal is dismissed.

T-Assessee to be informed beforehand by revenue before adjustment of its refund with the pending demand

IT: Where there is no intimation in writing to assessee before making an adjustment of refund, impugned order is to be set aside

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[2013] 34 taxmann.com 204 (Madras)

HIGH COURT OF MADRAS

Cognizant Technology Solutions India (P.) Ltd.

Deputy Commissioner of Income-tax, Large Taxpayer Unit*

V. DHANAPALAN, J.

W.P. No. 8571 of 2013
M.P. No. 1 of 2013

APRIL 30, 2013

Section 245 of the Income-tax Act, 1961 - Refunds - Set off against tax payable [Condition precedent] - Assessment year 2008-09 - Respondent made adjustment of refund payable to assessee against sum payable/outstanding by assessee without giving any intimation in writing to petitioner before making such adjustment of refund - Whether since respondent had not followed procedures prescribed under provisions of Act, impugned order would be vitiated in law and was liable to be set aside - Held, yes [Para 21] [In favour of assessee]

Circulars and Notifications : Circular No. 1/2013 dated 17-1-2013; Instruction No. 1952, dated 14-8-1998;Instruction No. 1969, dated 20-8-1999; Instruction No. 1989, dated 20-10-2010 and Letter dated 28-4-2010

FACTS

■		The petitioner called in question the order of the Dy. Commissioner for Assessment year 2008-09 in so far as it sought to adjust the refund of Rs. 103.10 crore as against the alleged demand outstanding for Assessment year 2009-10, seeking to quash the same and consequently directed the respondent to refund the aforesaid sum under section 240 together with interest thereon as may be payable under section 244/244A.
■		The petitioner's case was that the impugned action of the respondent is contrary to the instruction of the Central Board of Direct Taxes (CBDT) in Instruction No. 1952, dated 14-8-1998, Instruction No. 1969, dated 20-8-1999, Instruction No. 1989, dated 20-10-2010 and Board's letter dated 28-4-2010, wherein, CBDT gave instructions to the Revenue Officers that the provisions of section 245 must be followed and written intimation must be sent to the assessee before adjusting refund of the outstanding demand and any lapse in this regard shall be viewed seriously.

HELD

■		From a reading of section 245, it is crystal clear that the Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals) or Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set-off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under the Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under that section. [Para 20]
■		On a perusal of the entire material documents including the impugned order, it is clearly evident that there is no intimation in writing to the petitioner assessee before making such an adjustment of refund. No doubt, the respondent is empowered to make the adjustment of refund, but the same can be done only in the manner as contemplated under the provisions of the Act. It is conspicuous from the records that there is no intimation in writing to the petitioner before making such adjustment of refund. As the respondent has not followed the procedures prescribed under the provisions of the Act while adjusting the refund amount with the outstanding amount, the impugned order is vitiated in law and is liable to be set aside. [Para 21]
■		For the foregoing reasonings, the impugned order is set aside. The Writ Petition is allowed and the matter is remanded back to the respondent for compliance of section 245 and thereafter, the respondent is at liberty to adjust the refund amount payable to the petitioner with the amount payable for the respective assessment year.[Para 22]

Arvind P. Datar and Sandeep Bagmar for the Petitioner. T. Pramod Kumar Chopda for the Respondent.

ORDER

1. By consent of the learned counsel appearing for the parties, the Writ Petition is taken up for disposal.

2. This Court heard the learned counsel appearing for the parties exhaustively on 29.4.2013 and the Writ Petition was posted "for orders" today (30.4.2013) and accordingly, it is disposed of by this order.

3. Heard Mr. Arvind P. Datar, learned Senior Counsel assisted by Mr. Sandeep Bagmar. R, learned counsel for the petitioner and Mr. T. Pramod Kumar Chopda, learned Senior Standing Counsel appearing for the respondent-Income Tax Department.

4. The petitioner calls in question the order made in PAN AAACD3312M, dated 22.3.2013 passed by the respondent herein for Assessment Year 2008-09 in so far as it seeks to adjust the refund of Rs. 103,09,77,260/- as against the alleged demand outstanding for Assessment Year 2009-10, seeking to quash the same and consequently direct the respondent herein to refund the aforesaid sum of Rs. 103,09,77,260/- under Section 240 of the Income Tax Act, 1961 (for short, 'the Act') together with interest thereon as may be payable under Section 244/244-A of the Act.

5. The case of the petitioner is as follows:

(a)		The petitioner is a Private Limited Company incorporated under the Companies Act, 1956 and engaged in the business of development of computer software and related services and its export and provides various software solutions to variety of industries. The petitioner carries out its business activities through various units set up in Software Technology Parks (STPs) and Special Economic Zones (SEZs) and claims deduction under Section 10-A and 10-AA of the Act.
(b)		For the assessment year 2008-09, the petitioner filed their Return of income on 29.9.2008, which was processed under Section 143(1) of the Act on 8.3.2010. The petitioner's case was selected for scrutiny by the Assistant Commissioner of Income Tax under Section 143(2) of the Act on 12.8.2009 and details were called for by the respondent under Section 142(1) of the Act on 26.8.2011, for which, detailed submissions were made by the petitioner before the respondent from time to time.
(c)		The petitioner's case was referred to the Transfer Pricing Officer for necessary verification under Section 92-CA of the Act, as the petitioner has international transactions with their group companies abroad. The Transfer Pricing Officer, vide order dated 11.10.2011, accepted the arm's length price of the transactions of the petitioner-Company with that of their group companies abroad. Consequently, no transfer pricing adjustments were made by the respondent.
(d)		The respondent passed the assessment order under Section 143(3) read with Section 92-CA of the Act for the assessment year 2008-09 in the petitioner's case on 30.12.2011, by which the following items had been disallowed:

(i)		Disallowance of excess claim of deduction under Section 10-A/10-AA of the Act;
(ii)		Disallowance of Exchange Fluctuation Gain on EEFC Account for the purpose of computation of deduction under Section 10-A/10-AA of the Act;
(iii)		Exclusion of Expenditure in Foreign Currency from export turnover, but not from total turnover for computation of deduction under Section 10-A/10-AA of the Act;
(iv)		Exclusion of telecommunication expenditure from export turnover, but not from total turnover for computation of deduction under Section 10-A/10-AA of the Act;
(v)		Disallowance of provisions made on contingent liabilities;
(vi)		Disallowance of loss pertaining to the 10-A/10-AA units for computation of total income of the assessment year 2008-09;
(vii)		Disallowance under Section 14-A of the Act;
(viii)		Disallowance of expenditure incurred for selecting employees and
(ix)		Disallowance under Section 40(a)(i) towards payments made to non-residents on account of non-deduction of taxes at sources.

		After making disallowances and adjustments on the above grounds, the respondent assessed the income of the petitioner at Rs.716,33,79,150/- as against the returned income of Rs.93,54,87,072/- and consequently, a demand of Rs.181,37,25,560/- was raised, vide demand notice, dated 31.12.2011 under Section 156 of the Act.
(e)		Pursuant to the said demand notice, the petitioner filed a stay petition before the respondent under Section 220(6) of the Act and the respondent, vide order dated 6.7.2012, stayed the demand to the extent of Rs.71,55,83,993/- pending disposal of the appeal before the Commissioner of Income Tax (Appeals) (i.e. for short, 'CIT(A)') or until 31.12.2012 whichever is earlier. The petitioner remitted Rs.25,22,00,000/- on 24.2.2012 and the respondent adjusted income tax refund of Rs.71,47,53,133/- relating to various assessment years on various dates only with express consent of the petitioner given during the hearing while completing the assessment, and thereafter, on 17.12.2012, the petitioner requested for extension of stay of demand till the disposal of appeal by CIT(A).
(f)		The petitioner filed an appeal against the said assessment order, dated 30.12.2011, for assessment year 2008-09 on 30.1.2012 and the same was decided in favour of the petitioner on 25.2.2013. The CIT(A) allowed the appeal except on one issue pertaining to disallowance under Section 14-A of the Act.
(g)		The petitioner's case for the assessment year 2009-10 was selected for scrutiny by the respondent under Section 143(2), vide notice dated 23.8.2011. The respondent, vide order dated 22.8.2012, transferred the case of the petitioner for the assessment year 2009-10 to the Additional Commissioner of Income Tax, LTU, Chennai. The assessment for the assessment year 2009-10 was completed by the Addl. C.I.T. on 5.3.2013 and the income of the petitioner was assessed at Rs.1473,42,53,550/- (as per normal provisions of the Act) as against the returned income of Rs.2229,73,15,902/- (under Section 115-JB of the Act) and consequently, a demand of Rs.362,38,85,090/- was raised, vide notice dated 7.3.2013 under Section 156 of the Act, which was received by the petitioner on 11.3.2013, which provided for 30 days' time for payment of the said demand and the said period of 30 days expired on 10.4.2013.
(h)		By virtue of the order passed by the C.I.T (Appeals) on 25.2.2013, the petitioner became entitled to refund of Rs.103,09,77,260/-. The respondent has to refund the amount to the assessee automatically in terms of Section 240 of the Act. As against the refund of Rs.103,09,77,260/-, the respondent set-off the said refund to the demand of Rs.362,38,85,090/-.
(i)		The respondent instead of issuing the refund to the petitioner, adjusted the said refund of Rs.103,09,77,260/- against the demand made for the assessment year 2009-10 without intimating the petitioner and the said adjustment was made by the impugned order, dated 22.3.2013, even before the expiry of 30 days from the date of demand notice for the assessment year 2009-10. Under Section 245 of the Act, the respondent can set-off the amount of refund against any sum payable by an assessee which is due, only after giving intimation in writing to such assessee of the action proposed to be taken.
(j)		The issues involved in the assessment order for the assessment year 2009-10 including the significant disallowance of tax holiday benefit on certain income and with the exception of three very minor issues (i.e. disallowance for MAT computation purpose of market-do-market foreign exchange loss and Section 14-A adjustment and disallowance for normal computation purpose of an amount under Section 40(a)(i) with respect to non-with-holding of taxes for payments made for purchase of software licence), are similar to that of the one made in assessment year 2008-09, which was eventually decided in favour of the petitioner by CIT(A) and many of the issues being similar, were already decided in favour of the petitioner for the assessment year 2005-06 and 2007-08 by the Income Tax Appellate Tribunal, Chennai, by order dated 23.1.2013 in I.T.A. Nos.114 and 2100 (Mds) of 2011 and I.T.A. No. 90 (Mds) of 2011. Thus, the demand made by the Additional C.I.T. for the assessment year 2009-10, is untenable.
(k)		Even assuming without admitting that the three new and minor issues as stated above, are decided against the petitioner, the total sum of income tax demand payable will only be approximately to an extent of Rs.6,00,00,000/- as against the untenable demand made at Rs.362,38,85,090/-.
(l)		Where the demand made is substantially greater than the Returned income, the recovery proceedings are liable to be stayed and where the demand arises out of the issues which have been decided in favour of the assessee in the earlier years by an appellate authority, the same ought to be stayed and such an assessee cannot be treated as being in default in respect of the amount attributable to such disputed amount.

6. The petitioner challenges the impugned order on the ground that it is without jurisdiction and contrary to Sections 240 and 245 of the Act, as the same has been passed by the respondent without intimating in writing to the petitioner. The order of adjustment of refund made by the respondent is bad in law, as the jurisdiction to make adjustment or set-off vests only with the assessing officer who has made the assessment and the consequent demand under Section 156 of the Act and the respondent is not the assessing officer and is not competent to make the order of adjustment of refund and pass the impugned order, which amounts to treating the petitioner as an assessee in default or in arrears when the time limit for payment of the demand for the assessment year 2009-10 has not yet expired. The petitioner assails the impugned order also on the ground that the petitioner is entitled to move a stay petition under Section 220(6) of the Act against the notice of demand made in the assessment year 2009-10 within 30 days from the date of receipt of the notice under Section 156 of the Act; however, by the action of the respondent, the legal remedy available to the petitioner has been taken away, resulting in recovery of tax demand even without waiting for completion of 30 days' period as provided for in the notice of demand issued to the petitioner under Section 156 of the Act. According to the petitioner, the impugned action of the respondent amounts to violation of fundamental right available to the petitioner under Article 19(1)(g) of the Constitution of India. It is further alleged that the action of the respondent is contrary to the law laid down by Courts holding that before an adjustment of refund due against the sum payable is made, a prior intimation to the assessee is mandatory and only thereafter, the Revenue has jurisdiction to make the set-off and such refund is to be set-off only against any amount found payable by such assessee. The impugned action of the respondent is also contrary to the instruction of the Central Board of Direct Taxes (CBDT) in Instruction No.1952, dated 14.8.1998, Instruction No.1969, dated 20.8.1999, Instruction No.1989, dated 20.10.2010 and Board's letter dated 28.4.2010, wherein, CBDT gave instructions to the Revenue Officers that the provisions of Section 245 of the Act must be followed and written intimation must be sent to the assessee before adjusting refund of the outstanding demand and any lapse in this regard shall be viewed seriously. The petitioner claims balance of convenience in their favour and alleges that prima-facie case is made out and states that grave prejudice and irreparable loss will be caused if the impugned order is allowed to be acted upon.

7. The respondent has filed counter affidavit, inter-alia stating as follows:

(a)		The respondent objects to the usage of the term "alleged demand" by the petitioner, as the demand for the assessment year 2009-10 was raised under the provisions of the Act and is very much existing on record and the demand for Rs. 362,38,85,090/- raised in the assessment year 2009-10 is a legally enforceable demand as on date, as demand notice was issued along with the assessment order, and the said notice was served on the assessee on 11.3.2013. The averment of the petitioner that the income tax refund of Rs.71,47,53,133/- relating to various assessment years were adjusted against the demand of the assessment year 2008-09 only with the express consent of the petitioner given during the hearing while completing the assessments, is not correct. The refunds due to an assessee can be adjusted against the demands due to the same assessee, as per the provisions of Section 245 of the Act.
(b)		While disposing of the assessee's petition for stay of demand raised in assessment year 2008-09, the assessing officer issued order under Section 220(6) of the Act on 6.7.2012, wherein stay was granted for demand of Rs.87,55,83,993/- (Rs.16,00,00,000/- + Rs.71,55,83,993/-) till the disposal of appeal before CIT(Appeal) or 31.12.2012, whichever is earlier. However, it is clearly mentioned in that order that any refund arising to the assessee shall be appropriated against the pending demands without prejudice to that order. Section 220(6) of the Act gives discretionary power to the assessing officer to dispose of a stay petition filed by the assessee and further empowers him to impose such conditions as he may think fit for granting stay of demand.
(c)		The respondent does not deny that consequent to the appellate order, the petitioner is entitled to refund of Rs.103,09,77,260/- in the assessment year 2008-09 and as soon as the appellate order for assessment year 2008-09 was received in the office of the respondent on 22.3.2013, effect was immediately given to the said order on the same day and a refund of Rs.103,09,77,260/- was determined. The said refund of Rs.103,09,77,260/- determined in the assessee's case in assessment year 2008-09, was adjusted against the demand pending in the assessee's case in the assessment year 2009-10, which was intimated to the assessee in the order giving effect to the appellate order.
(d)		While the order dated 22.3.2013 containing refund details and intimation regarding adjustment of refund against demand, was sent to the assessee by post, the adjustment of refund was simultaneously carried out on 26.3.2013 in 'Online Tax Accounting System'. Section 245 of the Act requires that the assessee need to be intimated about the adjustment of refund. Though the adjustment of refund against the demand made on 26.3.2013 was intimated to the assessee along with the order dated 22.3.2013 to give effect to the appellate order, it is verified from records that the said intimation was sent by post on 30.3.2013. In the month of March, the assessing officer was under tremendous pressure of completing time barring scrutiny assessments and also to give effect to various appellate orders and collection of demands. The delay in dispatching the intimation about the adjustment of refund, is genuinely regretted, which is only a procedural delay and the act of adjustment of refund against the demand payable, is well within the framework of law.
(e)		The averment of the petitioner that the refund due to the petitioner in assessment year 2008-09 was adjusted against the demand raised in assessment year 2009-10 even before the same becoming due, is not acceptable. The demand raised under the Act becomes payable the moment the demand notice is served on the assessee (petitioner). As per Section 220(1) of the Act, the assessee is required to pay the demand specified in demand notice under Section 156 of the Act within 30 days from the date of service of the demand notice and the period of 30 days can further be reduced by the assessing officer if he has any reason to believe that it will be detrimental to the Revenue, if the full period of 30 days is allowed. If the demand is not paid within the period of 30 days, the assessee is liable to pay simple interest @ 1% for every month of default under Section 220(2) of the Act. Hence, the demand raised under the Act is to be paid within 30 days from the date of service of demand notice and the petitioner's contention that the same becomes due for payment only on 10.4.2013, i.e. after the lapse of 30 days from the date of service of demand notice on 11.3.2013, is not correct. If the demand is not paid within the stipulated period of 30 days, the petitioner is liable for penalty under Section 221(1) of the Act. Further, steps for recovery can be initiated as provided in Sections 222 and 226 of the Act. When the petitioner is duty bound to make payment of demand within 30 days, there is nothing wrong on the part of the Department to collect the demand by adjustment of refund within the stipulated period of 30 days. In fact, by adjusting the refund against the demand within the period of 30 days from the date of service of demand notice, the liability of the petitioner to pay interest under Section 220(2) of the Act is reduced to that extent.
(f)		The main issue, viz., disallowance of tax holiday benefit on receipt towards software maintenance, was dealt in a different manner in assessment year 2009-10 from the one dealt in assessment year 2008-09. In the appellate order for assessment year 2008-09, the CIT(A) relied on the recent circular issued by the CBDT in Circular No.1/2013 in F.No.178/84/2012-ITA.1, dated 17.1.2013 and held that software maintenance activity is also eligible for tax holiday under Section 10-A/10-AA of the Act. However, in the assessment order completed for the assessment year 2009-10, when this Circular of CBDT, dated 17.1.2013 was pointed out by the petitioner-assessee, it was specifically brought out by the assessing officer that the assessee-Company has not complied with the requirement specified in the Circular.
(g)		As per the Circular, it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit. However, the petitioner-Company could produce only an MoU entered into between the principal holding company, viz., Cognizant Inc. USA and there is no agreement with the client or the final site of maintenance. Based on these and after elaborate analysis of the facts, the tax holiday claimed on overseas software maintenance was denied in the assessment order, which resulted in substantial reduction in tax holiday under Section 10-A/10-AA of the Act, i.e. from Rs.2163,35,14,860/- claimed by the assessee-Company to Rs.1004,40,71,894/-. Based on the findings made in the assessment year 2009-10, the order of CIT (Appeals) granting relief to the assessee on the issue of tax holiday on overseas software maintenance was not accepted and it is proposed to file further appeal by the Department before the I.T.A.T.
(h)		With regard to the decisions of the appellate authorities in the earlier assessment years, the assessing officer has not accepted these decisions and proposals had already been submitted to the Commissioner for further contesting these appellate decisions in the earlier assessment years to the next higher appellate forum. The order of CIT (A) in assessment year 2008-09 is proposed to be contested before the ITAT and orders of ITAT for assessment years 2005-06 and 2007-08 are proposed to be appealed before this Court under Section 260-A of the Act. The time limit for filing such appeals has not barred and the same will be filed in an appropriate manner after compliance of legal formalities. Thus, the receipt of appellate order in favour of the assessee in the earlier year, would not make demand raised in subsequent year, viz., 2009-10 on similar issues as an untenable one.
(i)		As per Instruction No.1914 issued by the CBDT, the assessing officer may grant stay for such demands arising out of issues which were decided in assessee's favour in earlier years. Section 220(6) of the Act empowers the Assessing Officer to impose such conditions as he may think fit before granting stay against collection of demand. Accordingly, while disposing of assessee's stay petition in assessment year 2008-09, it was clearly stated in the order dated 6.7.2012 that any refund arising to the assessee will be adjusted against the demand irrespective of the stay granted. The stay orders granted by the office of the respondent under Section 220(6) of the Act, invariably contains a clause that refund arising to the assessee shall be adjusted against demand irrespective of the stay order. On similar lines, even if the demand raised in assessment year 2009-10, were to be stayed by the assessing officer, then the refund determined in assessment year 2008-09 would have been adjusted against the demand payable in assessment year 2009-10. The demand raised in assessment year 2009-10 to the tune of Rs.362 crores, was very much existing on record and no appellate order has been received against that order. In such case, the assessee cannot expect the Income Tax Department to issue refund arising in assessment year 2008-09 directly to the assessee without adjusting against the existing demand.
(j)		The contention of the assessee that the respondent has no jurisdiction to make adjustment of refund, is not correct. The respondent is the assessing officer of the petitioner for income tax purpose and has jurisdiction to make adjustment of refund against demand in the petitioner's case. Only for completing the assessment proceedings of assessment year 2009-10 under Section 143(3) of the Act, the Commissioner of Income Tax, Large Taxpayer Unit, Chennai, vide order in F.No.1/Notifications & Orders/12-13, dated 22.8.2012, transferred the case of the petitioner to the Additional Commissioner of Income Tax, Large Taxpayer Unit, Chennai. In the said Notification, it is clearly stated that after completion of assessment proceedings under Section 143(3) of the Act for assessment year 2009-10, the Additional Commissioner of Income Tax (LTU) shall return the files to the Deputy Commissioner of Income Tax, Large Taxpayer Unit, Chennai, i.e. the respondent. Thus, after completing the assessment proceedings under Section 143(3) of the Act in assessment year 2009-10, vide order dated 7.3.2013, the Additional CIT, LTU has returned the relevant records to the assessing officer, viz., Deputy CIT, LTU and thereafter, refund determined in assessment year 2008-09 was adjusted against the demand raised in assessment year 2009-10.
(k)		It is for the assessee to file a stay petition under Section 220(6) of the Act as and when a demand notice is served on them. The Department need not anticipate for any stay petition to be filed by the petitioner. At the time of determination of refund in assessment year 2008-09, no stay petition has been filed by the petitioner against notice of demand in assessment year 2009-10. Hence, the refund determined in assessment year 2008-09 was rightfully adjusted against the demand of assessment year 2009-10.
(l)		The demand raised under the provisions of the Act is required to be paid within 30 days from the date of service of notice. It does not mean that no collection can be made till 30th day. In fact, after the lapse of 30 days, the assessee shall be treated to be in default of taxes and is liable for interest under Section 220(2) and penal provisions under Section 221(1) and other recovery proceedings under Section 222 and 226 of the Act. Hence, there is no violation of fundamental rights of the petitioner by collection of demand by adjusting refund determined in the petitioner's case.
(m)		Though the assessee relied on various decisions of the Courts, in the instant case, the demand of assessment year 2009-10 is a correct demand raised after completion of assessment proceedings under Section 143(3) of the Act, which is not disputed even by the petitioner. Along with the adjustment of refund through Online, the intimation regarding adjustment was conveyed in the order giving effect to the appellate order in assessment year 2008-09. The delay of a few days in despatching the intimation to the assessee, arising due to the workload of time barring assessments at the end of March 2013, is regretted. However, the refund has been adjusted against a valid demand.
(n)		The demand raised in assessment year 2009-10 is not on similar lines as raised in assessment year 2008-09 and hence, the appellate order of CIT (Appeals) in assessment year 2008-09 cannot equally be applied to the assessment year 2009-10 and the demand raised in assessment year 2009-10 is a tenable one and the assessee can file appeal before the CIT (Appeals) against the order of assessment in assessment year 2009-10.
(o)		If there is any relief given to the assessee, then any tax collected will be refunded along with interest under Section 244-A of the Act. Similar action was taken in assessment year 2008-09, wherein, pending disposal of appeal proceedings and pending stay order issued by the assessing officer, substantial demands were collected by way of refund adjustment. As soon as the receipt of appellate order, the entire tax collected in excess was determined as refundable to the assessee, which was eventually adjusted against the demand pending in assessment year 2009-10.
(p)		Since act of adjustment of refund of assessment year 2008-09 against the demand of assessment year 2009-10, has already been completed on 26.3.2013 and no further action is pending, the question of granting stay of the impugned order does not arise.
(q)		The order dated 22.3.2013 was passed to give effect to the order of CIT (Appeals) for assessment year 2008-09, whereby, refund of Rs.103,09,77,260/- was determined. If this order is quashed, no refund can be issued. Even if the order dated 22.3.2013 is quashed, then a fresh order of refund is to be passed in assessment year 2008-09. In such circumstances, as per provisions of Section 245 of the Act, the demand pending in assessment year 2009-10 needs to be adjusted against the refund, which will be a repetition of what was already done by the Department, which does not serve any purpose. According to the respondent, the Writ Petition is not maintainable and is devoid of merits and hence, the respondent prayed to dismiss the Writ Petition.

8. The respondent has also filed an affidavit, dated 18.4.2013, stating as follows:

(i)		A demand of Rs.362,38,85,090/- was raised, vide assessment order, dated 7.3.2013 issued under Section 143(3) of the Act in the petitioner's case relating to the assessment year 2009-10.
(ii)		The appellate order of CIT (Appeals), Large Taxpayer Unit, Chennai, relating to the assessment year 2008-09, was received by the respondent's office on 22.3.2013 and that appellate order was given effect to and a refund of Rs.103,09,77,260/- was determined in the petitioner's case, vide order made in PAN: AAACD3312M, dated 22.3.2013.
(iii)		The refund of Rs.103,09,77,260/- determined in the assessment year 2008-09, was adjusted against the tax demand relating to the assessment year 2009-10 as per the provisions of Section 245 of the Act and the adjustment of refund against the tax demanded, was done Online on 26.3.2013 and intimation regarding the same was sent to the petitioner thereafter by post.
(iv)		Section 245 of the Act stipulates that the assessing officer may adjust the refund against the demand after giving an intimation to the assessee. There is no provision for cancellation of the refund adjustment and the amount adjusted has already been remitted into Government Account and therefore, no refund can be issued once again in assessment year 2008-09.
(v)		If the adjustment of refund is cancelled, then it will result in refunding the collection made in assessment year 2009-10, i.e. an amount of Rs.103.09 crores collected out of demand of Rs.362.38 crores may have to be refunded in assessment year 2009-10, if the order of adjustment is cancelled, which will result in refunding of the amount pending subsisting demand.
(vi)		The delay in giving intimation under Section 245 of the Act may be condoned and the order of adjustment of refund against the demand, may be upheld in the interest of the Revenue.

9. The learned Senior Counsel appearing for the petitioner vehemently contended that under Section 245 of the Act, the assessing officer may, in lieu of payment of refund, set-off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under the Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under that Section.

10. The learned Senior Counsel appearing for the petitioner pointed out the Circular of the Central Board of Direct Taxes (for short, 'the CBDT'), issued in Instruction Nos.1952, dated 14.8.1998 and Instruction No.1969, dated 20.8.1999, stating that written intimation must invariably be sent to assessee before adjusting his refund with outstanding demand in compliance to provisions of Section 245 of the Act. As there were certain lapses on the part of the Department in some cases, the CBDT reiterated the position in the subsequent circulars also. Therefore, the learned Senior Counsel appearing for the petitioner submitted that there is non-compliance of the provisions of Section 245 of the Act, as there was no intimation sent to the petitioner-assessee before the impugned adjustment of refund is made by the respondent.

11. On the other hand, the learned Senior Standing Counsel appearing for the respondent-Revenue submitted that it is only to give effect to the order of the Commissioner of Income Tax (Appeals), LTU, Chennai in I.T.A.No.108/11-12/LTU(A), dated 25.2.2013 and the assessment order under Section 143(3) of the Act, dated 30.12.2011 read with rectification order, dated 23.1.2013, the impugned order dated 22.3.2013 has been passed and therefore, the amount due to be paid by the petitioner-assessee has been adjusted towards the demand outstanding for the assessment year 2009-10 and accordingly, Rs.103,09,77,260/- had been adjusted, which was duly intimated to the petitioner-assessee and ultimately, it is the adjustment made towards the due to the Department.

12. I have heard the learned counsel appearing for the parties and perused the material documents available on record.

13. It is seen that the petitioner-Company is an assessee in PAN.No.AAACD3312M and they are engaged in the business of development of computer software and related services and its export and they provide various software solutions to variety of industries. The petitioner carries out their business activities through various units set up in Software Technology Parks (STPs) and Special Economic Zones (SEZs) and claims deduction under Section 10-A and 10-AA of the Act. It is the case of the petitioner that for the assessment year 2008-09, the petitioner filed their Return of income on 29.9.2008 and the same was processed under Section 143(1) of the Act on 8.3.2010. The petitioner's case was selected for scrutiny by the Assistant Commissioner of Income Tax under Section 143(2) of the Act on 12.8.2009 and the details were called for by the respondent under Section 142(1) of the Act on 26.8.2011 and the petitioner claims that detailed submissions were made by the petitioner before the respondent from time to time.

14. The petitioner's case was referred to the Transfer Pricing Officer for necessary verification under Section 92-CA of the Act, as the petitioner has international transactions with their group companies abroad. The Transfer Pricing Officer, vide letter dated 11.10.2011, accepted the arm's length price of the transactions of the petitioner-Company with that of their group companies abroad and consequently, no transfer pricing adjustments were made by the respondent.

15. While so, the respondent passed the assessment order under Section 143(3) read with Section 92-CA of the Act for the assessment year 2008-09 in the petitioner's case on 30.12.2011, by which, the respondent inter-alia disallowed various items, as quoted above. After making disallowances and adjustments, the respondent assessed the income of the petitioner at Rs.716,33,29,150/- as against the Returned income of Rs.93,54,87,072/- and consequently, demand of Rs.181,37,25,560/- was raised by demand notice, dated 31.12.2011 issued under Section 156 of the Act. The petitioner filed a stay petition before the respondent under Section 220(6) of the Act and the respondent, vide order dated 6.7.2012, stayed the demand to the extent of Rs.87,55,83,993/- (Rs.16,00,00,000/- + Rs.71,55,83,993/-) pending disposal of the appeal before the Commissioner of Income Tax (Appeals) or until 31.12.2012, whichever is earlier. The petitioner remitted an amount of Rs. 25,22,00,000/- on 24.2.2012 and the respondent adjusted income tax refund of Rs. 71,47,53,133/- relating to various assessment years on various dates only with express consent of the petitioner given during the hearing while completing the assessments. Thereafter, the petitioner on 17.12.2012, requested for extension of stay of demand till the disposal of the appeal by CIT(A).

16. The petitioner filed an appeal against the said assessment order dated 30.12.2011 for the assessment year 2008-09 on 30.1.2012 and the same was decided in favour of the petitioner on 25.2.2013. The CIT(A) allowed the appeal except on one issue pertaining to disallowance under Section 14-A of the Act. The assessment for the assessment year 2009-10 was completed by the Additional C.I.T. on 5.3.2013 and the income of the petitioner was assessed at Rs.1473,42,53,550/- as against the Returned income of Rs.2229,73,15,902/- under Section 115-JB of the Act, and consequently, a demand of Rs.362,38,85,090/- was raised, vide notice dated 7.3.2013 under Section 156 of the Act, which was received by the petitioner-assessee on 11.3.2013, which provided for a period of 30 days' time for payment of the said demand.

17. By virtue of the order passed by the CIT(A) on 25.2.2013, the petitioner became entitled to refund of Rs.103,09,77,260/- and as per the contention of the petitioner, the respondent has to refund the said amount to the assessee automatically in terms of Sections 240 of the Act and that under Section 245 of the Act, the respondent can set-off the same only after giving intimation in writing to the petitioner; but, by the impugned order dated 22.3.2013, the respondent set-off the said refund amount of Rs.103,09,77,260/- in respect of the demand of Rs.362,38,85,090/- made for the assessment year 2009-10. The respondent ultimately passed the impugned order, dated 22.3.2013 by giving effect to the order of the CIT (Appeals), LTU, Chennai, in I.T.A.No.108/11-12/LTU(A), dated 25.2.2013 and modifying the assessment order under Section 143(3), dated 30.12.2011 read with rectification order, dated 23.1.2013, and challenging the said order, dated 22.3.2013, the Writ Petition is filed by the petitioner.

18. The only question that arises for consideration is as to whether the respondent is empowered to adjust the refund amount automatically without complying with the provisions of Section 245 of the Act.

19. In this connection, it is worthwhile to extract Section 245 of the Act, as follows:

Section 245: Set off of refunds against tax remaining payable:

Where under any of the provisions of this Act, a refund is found to be due to any person, the Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals) or Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section."

20. From a reading of the above Section, it is crystal clear that the Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals) or Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set-off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under the Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under that Section. (Emphasis supplied).

21. On a perusal of the entire material documents including the impugned order, it is clearly evident that there is no intimation in writing to the petitioner-assessee before making such an adjustment of refund. No doubt, the respondent is empowered to make the adjustment of refund, but the same can be done only in the manner as contemplated under the provisions of the Act. It is conspicuous from the records that there is no intimation in writing to the petitioner before making such adjustment of refund. As the respondent has not followed the procedures prescribed under the provisions of the Act while adjusting the refund amount with the outstanding amount, the impugned order is vitiated in law and is liable to be set aside.

22. For the foregoing reaasonings, the impugned order is set aside. The Writ Petition is allowed and the matter is remanded back to the respondent for compliance of Section 245 of the Act, and thereafter, the respondent is at liberty to adjust the refund amount payable to the petitioner with the amount payable for the respective assessment year, in accordance with law. Such an exercise shall be completed by the respondent within a period of four weeks from the date of receipt of a copy of this order. No costs. The Miscellaneous Petition is closed.

*In favour of assessee.

IT-Issue of unreasonableness or excessiveness of an exp. under sec. 40A(2) is a question of fact

IT : Issue of expenses being excessive or not in terms of section 40A(2) is not a question of law but is a question of fact

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[2013] 34 taxmann.com 171 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax

Shiv Kumar*

BADAR DURREZ AHMED AND R.V.EASWAR, JJ.

IT Appeal No. 696 of 2012†

APRIL 8, 2013

Section 40A(2), read with section 260A, of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments [Question of fact] - Assessment year 2007-08 - Assessing Officer made addition under section 40A(2) on account of excessive interest having been paid by assessee to his relatives - Commissioner (Appeals) and Tribunal deleted addition - Apex Court in case of Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 had observed that question whether a particular expenditure or loan was excessive or unreasonable was essentially a question of fact and did not involve any issue of law - Whether in view of above authoritative pronouncement by Apex Court question raised by revenue was a question of fact which had been determined finally by virtue of impugned order of Tribunal, thus no interference could be called for - Held, yes [Paras 6 & 7] [In favour of assessee]

CASE REVIEW

Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC) (para 7) followed.

CASES REFERRED TO

CIT v. Oriental Structural Engg (P.) Ltd. [2010] 195 Taxman 362 (Delhi) (para 6), CIT v. R.N. Goel [2008] 177 Taxman 374 (Delhi) (para 6) and Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC) (para 6).

N.P. Sahni for the Appellant. Salil Kapoor, Vikas Jain and Rakesh Kumar for the Respondent.

JUDGMENT

1. This appeal is directed against the order dated 20.01.2012 passed by the Income Tax Appellate Tribunal, New Delhi in ITA 3247/Del/2010 in respect of the assessment year 2007-08.

2. By virtue of our order dated 02.01.2013, we had directed issuance of notice limited to the question of disallowance of interest under Section 40A(2) of the Income Tax Act (hereinafter referred to as ''the said Act''. We have heard the learned counsel for the parties after notice.

3. The Assessing Officer had made an addition of Rs. 18,57,189/- under Section 40A(2) of the said Act on account of excessive interest having been paid by the respondent / assessee to his relatives. There is no dispute that the loans were taken from persons who fell within the description of relative? of the assessee as employed in Section 40A(2)(b)(i) of the said Act. The only issue that is sought to be raised by the revenue is that the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal have erred in deleting the addition of Rs. 18,57,189/- made by the Assessing Officer.

4. The plea of the revenue is that the Assessing Officer had rightly contended and concluded that the rate of interest in excess of 12%, which had been paid to the relatives of the assessee, was excessive and, therefore, the Assessing Officer was well within his rights to have added the amount of Rs. 18,57,189/- by way of the difference in excess of the rate of interest of 12%.

5. On the other hand, the learned counsel for the respondent /assessee contended that these loans, which had been taken by the assessee from the relatives, were unsecured loans. He submitted that by the very nature, such loans entail a much higher rate of interest. He submitted that banks would not lend money without security and if unsecured loans are raised in the market, the rate of interest would be much higher than 18%. It is only because the loans were taken from the relatives that lower rates of interest ranging from 15% to 18% were agreed upon.

6. The learned counsel for the respondent / assessee also drew our attention to a decision of this Court in the case of CIT v. Oriental Structural Engg (P.) Ltd: [2010] 195 Taxman 362 (Delhi), wherein this Court held that whether expenses claimed by an assessee were excessive or not under the provisions of Section 40A(1) of the said Act, was essentially a question of fact. This Court had placed reliance on an earlier decision in the case of CIT v. R. N. Goel: [2008] 177 Taxman 374 (Delhi).Reliance had been placed in that decision on an earlier Supreme Court decision in the case of Upper India Publishing House (P.) Ltd v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC). In Upper India Publishing House (P) Limited (supra), the Supreme Court observed that the question whether a particular expenditure or loan was excessive and unreasonable, was essentially a question of fact and did not involve any issue of law.

7. In view of the authoritative pronouncement by the Supreme Court on the issue of expenses being excessive or not in terms of Section 40A(2) of the said Act, we feel that the present question sought to be raised by the revenue is not a question of law but is a question of fact which has been determined finally by the Tribunal by virtue of its impugned order.

8. Consequently, no interference is called for. The appeal is dismissed. There shall be no order as to costs.

Lata

*In favour of assessee.

†Arising out of ITAT, New Delhi in IT Appeal No. 3247 (Delhi) of 2010, dated 20-1-2012.

ST-Adjudication order without disposing off the request for cross examination of witness is quashed

ST: In case of application by assessee for cross-examination of witnesses, adjudicating authority must first dispose of such application and, thereafter, proceed with adjudication in accordance with law

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[2013] 34 taxmann.com 232 (Gujarat)

HIGH COURT OF GUJARAT

Mahek Glazes (P.) Ltd.

Union of India*

AKIL KURESHI AND MS. SONIA GOKANI, JJ.

Special Civil Application No. 2358 of 2013

APRIL 10, 2013

Section Article 226 of the Constitution of India - Writ petition - Alternative remedy - Assessee requested adjudicating authority to allow cross-examination of witnesses and also supply certain documents - Adjudicating authority confirmed demand against assessee and rejected assessee's request in final order itself without passing a separate order in that behalf - Assessee challenged such adjudication order by way of writ petition - HELD : Though assessee had an alternative remedy by way of appeal before Tribunal, but, present writ petition was admissible on ground of breach of principles of natural justice by adjudicating authority - Without dealing with and disposing of assessee's application for cross examination by way of separate order, adjudicating authority could not have finally adjudicated issues - If adjudicating authority was of opinion that request for cross examination was not tenable, he should have, by giving reasons, rejected it and then proceeded with adjudication proceedings - Merely because assessee had made such a request belatedly, adjudicating authority cannot be allowed to deal with such an application only in final order itself - Hence, without commenting on merits of assessee's right to seek cross examination, adjudication order was set aside and adjudicating authority was directed to, first, pass a separate order on assessee's application/request letter for granting cross examination and proceed thereafter in accordance with law [Paras 6 to 9] [In favour of assessee]

Devan Parikh and Nirav P. Shah for the Petitioner. R.J. Oza for the Respondent.

ORDER

Akil Kureshi, J. - Heard learned advocates for the parties for final disposal of the petition.

2. Petitioners have challenged an order dated 29th January, 2013, passed by the Commissioner of Customs & Central Excise, Surat-II [as Annexure-G to the petition] by which he was pleased to confirm various excise duty demands alongwith interest and penalties.

3. Conscious that against such order, statutory appeal before the Central Excise, Customs & Service Tax Appellate Tribunal is available, we had, by recording brief reasons in our Order dated 28th February, 2013, issued notice to the respondents. We are prompted to entertain writ petition directly on the ground that the petitioners had prima facie made out a case of breach of principles of natural justice at the hands of the adjudicating authority. Short grievance of the petitioners is that the impugned order was passed without disposing of the petitioners' request for cross examination of certain witnesses. We notice that in the said order itself, the adjudicating authority dealt with such a request and found that in the facts of the case, cross examination was not required to be granted. However, the petitioners had, been through their legal representative, taking a firm stand that only after cross examination be permitted, the petitioners would be in a position to participate in the adjudication proceedings. The petitioners have so also raised demand for supplying certain documents, which according to them were though relevant, were not supplied.

4. In the impugned order, the Commissioner himself recorded such stand of the petitioners in the following manner:-

"Finally on 17-01-2013, Shri R.S Dinkar attending for the Noticee stated that some relied upon legible documents and English translation of statements sought vide their letter dated 01-05-2010 has not been supplied to them; that they had filed preliminary reply and sought cross examination of the buyers; that the calculation has been done wrongly as benefit of cum-duty has not been given to them; that the calculations should be done correctly, notwithstanding the fact that they are disputing the whole demand; that the estimation done on the basis of gas consumption is patently wrong; that they would present their case further after cross examination and translation."

5. He, however, proceeded to deal with the petitioners' request for cross examination in paragraph 14.1 of the order and rejected such a request. He thereupon proceeded to examine the issues at length and ultimately passed the final order; as noted above, confirming various duty demands with interest and penalties.

6. Having heard learned counsel for the parties, we are inclined to interfere on the short ground of serious breach of principles of natural justice in the process of passing final order of adjudication. We say so because the adjudicating authority, though categorically informed by the representative of the petitioners that the petitioners are serious about exercise of their right to cross examination and further that any meaningful participation in the adjudicating proceedings can take place only after such cross examination is granted, the authority proceeded to decide such request only alongwith the final order of adjudication. Whether the petitioners had a right to seek cross examination in the facts of the present case, is not our brief at the moment. We, therefore, refuse to comment on the petitioners' insistence for cross examination or authority's reluctance to grant it. What we, however, find is that the petitioners had atleast a right to be told whether such application is being granted or refused before final order was passed. When the petitioners prayed for cross examination and reasonably expected that the same would be granted, they cannot be expected to participate in the adjudicating proceedings upto the final stage. In other words, without dealing with and disposing of the petitioners' application for cross examination, the adjudicating authority could not have finally adjudicated the issues. If he was of the opinion that the request for cross examination was not tenable, by giving reasons, he could have rejected it. We wonder what would have happened, if he was inclined to accept such a request. In such a situation, he himself could not have finally disposed of the show-cause notice proceedings. In either case, the petitioners had a right to know the outcome of their application.

7. Merely because the Commissioner was of the opinion that the petitioners had made such a request somewhat belatedly, would not permit him to, in the facts of the present case, deal with such an application only in the final order itself. Sum total of this discussion is that we are inclined to set-aside the impugned order and request the adjudicating authority to pass a separate order on the petitioners' application/request letter for granting cross examination of the named witnesses. We are conscious that the Commissioner has already decided such an issue, however, since we are quashing the order, this part of the order would also not survive and hence, the requirement of a fresh order. We are informed that the same officer continues to hold the office of the Commissioner of Customs & Central Excise, Surat-II. It would therefore, be not necessary to separately hear the petition once again before passing any such order. This would, however, not preclude the Commissioner from requiring the petitioners to show relevance for seeking cross examination of the witnesses.

8. Once such order is passed, the Commissioner shall issue a notice to the petitioners for further hearing of the show-cause notice and proceed thereafter in accordance with law.

9. Before closing, we may touch on one remaining aspect. We notice that the petitioners had also been asking for certain documents. The Commissioner shall also examine this aspect of the matter before finally proceeding with the adjudication.

Vineet

[2013] 33 taxmann.com 66 (Article) - SRINIVASAN ANAND G. - PROPERTY SELLERS – BEWARE OF SECTION 153C

[2013] 33 taxmann.com 66 (Article)

Property Sellers - Beware of section 153C

Srinivasan Anand G.

Introduction

1. Section 153C of the Act pertains to assessment of income of any person other than the person searched.

Section 153C 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 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 the Assessing Officer shall proceed against each such other person issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.
♦		Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person."

It may so happen that sale deeds executed by seller of properties in favour of buyer-builder and agreements with tenants by seller before sale to get properties vacated by paying money to tenants are recovered during search u/s 132 in buyer's premises. Can these documents be said to belong to the seller (i.e. a person other than the person searched) within the meaning of section 153C? Can action be initiated against the seller on the basis of these documents? This issue fell for consideration before the Gujarat High Court in Kamleshbhai Dharamshibhai Patel v. CIT [2013] 31 taxmann.com 50.

Facts of the case

2. The facts of the case were as under:

♦		Petitioners (individuals being family members) sold their properties to company engaged in construction business (buyer).
♦		Buyer-company wanted vacant possession of properties sold
♦		Sellers paid moneys to tenants entered into formal agreements with them to vacate properties and got them vacated
♦		During a search under section 132 on buyer-company, the sale deeds executed by seller in favour of buyer company and agreements with erstwhile tenants of properties were recovered
♦		Based on such documents, ACIT initiated assessment proceedings by issuing notice dated 25-9-2012 under section 153C against petitioners-sellers
♦		Petitioners challenged the notices issued under section 153C in instant writ petitions before the Gujarat High Court

3. Petitioner's contentions

♦		Under section 153C of the Act action can be taken only if any money, bullion, jewellery or other valuable articles or things or books of account or documents seized or requisitioned belong to a person other than the person searched.
♦		When the lands in question were already sold under the sale dated 18-9-2010, these documents in question cannot be stated to belong to the petitioners.
♦		Once the title in the land vested in the purchases, none of the documents could be stated to belong to the petitioners.

Held

4. The Gujarat High Court held as under:

♦		The petitioners required vacant possession of the land to be able to pass on the title and vacant possession.
♦		To be able to do so, the petitioners entered into agreements with the tenants.
♦		Such documents thus are documents which definitely belong to the petitioners.
♦		Simply because on subsequent date, the land was sold, may have a bearing on the title of such land, the same would not in any manner alter the nature of the document concerned.
♦		Such documents belong to the petitioners and continue to so belong, irrespective of the transfer of the title of the land.
♦		One cannot see how the petitioners can contend that simply because at a subsequent point of time they disposed of the property and transferred the title to the purchasers, the documents since to belong to them.
♦		Term "belong" is not defined and does not have legally technical connotation and therefore, we once again fall back on the dictionary meaning of the same.
♦		The term "belong to" has not been defined in the Act.
♦		In the Webster's Third New International Dictionary, the word, "belong" is described as, "to have relation or reference to a person or thing".
♦		In Advanced Law Lexicon by P. Ramanatha Aiyar [3rd Edition], the term, "belong" in context of section 400 IPC means, "implied something more than the idea of casual association; it involves a notion of continuity and indicates a more or less intimate connection with a body of persons extending over a period of time sufficiently long to warrant the inference that the person affected was identified himself with a band, the common purpose of which is the habitual commission of dacoity."
♦		The document executed between the erstwhile tenants of the petitioners regarding eviction of the tenants upon acceptance of sizeable payment by the petitioners definitely thus belong to the petitioners.
♦		It may be that as an evidence of passing on vacant and peaceful possession of the property, the petitioners handed over such documents to the purchasers to protect the interest of the purchasers against any action that may be initiated by the erstwhile tenants.
♦		The nature of the document or the fact that it belongs to the petitioners would not in any manner change.
♦		Likewise, the documents of sale also can be stated to belong to the petitioners.
♦		It is not in dispute that the petitioners were the sellers of the lands.
♦		They do not either doubt or dispute the documents of sale, or their respective signatures thereon.
♦		We need to ascertain if such document can be stated to "have relation or reference to" to the petitioners.
♦		As noted, the petitioners were as sellers of the land, parties to the documents. They had admittedly executed such sale deeds.
♦		It cannot be stated that the sale deeds do not belong to them.
♦		Likewise, the receipts of payments also are documents belonging to the petitioners.
♦		They are alleged to have received various payments in cash from the purchasers.
♦		If there are documents evidencing such particulars and if such documents are also signed by the petitioners, it can certainly be stated that such documents do belong to the petitioners.
♦		Under the circumstances, the action initiated under section 153C of the Act cannot be quashed. Petitions are therefore dismissed.

Conclusion

5. Documents recovered during search under section 132 on buyer's premises are deemed to belong to the seller of properties within the meaning of section 153C, if documents recovered include sale deeds and agreements entered into for vacation of property between sellers and tenant before conclusion of such sale. Such documents give jurisdiction to AO under section 153C to initiate an action against "such other person" (i.e., person other than the person whose premises are searched).

■■

• DT - Secs. 132, 132A, 153A & 153C

Thanks & Regards,

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

Member,ICAI Committee For DIRECT TAXES 2011-12

Member,ICAI Committee Capacity Building of CA Firms 2010-11

1 1 5, Chappel Street, Meerut Cantt, UP, INDIA.

Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2.

Moderator of 25000 CA Group http://in.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CAFOLLOW http://twitter.com/caamresh ADD http://www.facebook.com/amresh.vashisht

[2013] 33 taxmann.com 66 (Article) - SRINIVASAN ANAND G. - PROPERTY SELLERS – BEWARE OF SECTION 153C

[2013] 33 taxmann.com 66 (Article)

Property Sellers - Beware of section 153C

Srinivasan Anand G.

Introduction

1. Section 153C of the Act pertains to assessment of income of any person other than the person searched.

Section 153C 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 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 the Assessing Officer shall proceed against each such other person issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.
♦		Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person."

Facts of the case

2. The facts of the case were as under:

♦		Petitioners (individuals being family members) sold their properties to company engaged in construction business (buyer).
♦		Buyer-company wanted vacant possession of properties sold
♦		Sellers paid moneys to tenants entered into formal agreements with them to vacate properties and got them vacated
♦		During a search under section 132 on buyer-company, the sale deeds executed by seller in favour of buyer company and agreements with erstwhile tenants of properties were recovered
♦		Based on such documents, ACIT initiated assessment proceedings by issuing notice dated 25-9-2012 under section 153C against petitioners-sellers
♦		Petitioners challenged the notices issued under section 153C in instant writ petitions before the Gujarat High Court

3. Petitioner's contentions

♦		Under section 153C of the Act action can be taken only if any money, bullion, jewellery or other valuable articles or things or books of account or documents seized or requisitioned belong to a person other than the person searched.
♦		When the lands in question were already sold under the sale dated 18-9-2010, these documents in question cannot be stated to belong to the petitioners.
♦		Once the title in the land vested in the purchases, none of the documents could be stated to belong to the petitioners.

Held

4. The Gujarat High Court held as under:

♦		The petitioners required vacant possession of the land to be able to pass on the title and vacant possession.
♦		To be able to do so, the petitioners entered into agreements with the tenants.
♦		Such documents thus are documents which definitely belong to the petitioners.
♦		Simply because on subsequent date, the land was sold, may have a bearing on the title of such land, the same would not in any manner alter the nature of the document concerned.
♦		Such documents belong to the petitioners and continue to so belong, irrespective of the transfer of the title of the land.
♦		One cannot see how the petitioners can contend that simply because at a subsequent point of time they disposed of the property and transferred the title to the purchasers, the documents since to belong to them.
♦		Term "belong" is not defined and does not have legally technical connotation and therefore, we once again fall back on the dictionary meaning of the same.
♦		The term "belong to" has not been defined in the Act.
♦		In the Webster's Third New International Dictionary, the word, "belong" is described as, "to have relation or reference to a person or thing".
♦		In Advanced Law Lexicon by P. Ramanatha Aiyar [3rd Edition], the term, "belong" in context of section 400 IPC means, "implied something more than the idea of casual association; it involves a notion of continuity and indicates a more or less intimate connection with a body of persons extending over a period of time sufficiently long to warrant the inference that the person affected was identified himself with a band, the common purpose of which is the habitual commission of dacoity."
♦		The document executed between the erstwhile tenants of the petitioners regarding eviction of the tenants upon acceptance of sizeable payment by the petitioners definitely thus belong to the petitioners.
♦		It may be that as an evidence of passing on vacant and peaceful possession of the property, the petitioners handed over such documents to the purchasers to protect the interest of the purchasers against any action that may be initiated by the erstwhile tenants.
♦		The nature of the document or the fact that it belongs to the petitioners would not in any manner change.
♦		Likewise, the documents of sale also can be stated to belong to the petitioners.
♦		It is not in dispute that the petitioners were the sellers of the lands.
♦		They do not either doubt or dispute the documents of sale, or their respective signatures thereon.
♦		We need to ascertain if such document can be stated to "have relation or reference to" to the petitioners.
♦		As noted, the petitioners were as sellers of the land, parties to the documents. They had admittedly executed such sale deeds.
♦		It cannot be stated that the sale deeds do not belong to them.
♦		Likewise, the receipts of payments also are documents belonging to the petitioners.
♦		They are alleged to have received various payments in cash from the purchasers.
♦		If there are documents evidencing such particulars and if such documents are also signed by the petitioners, it can certainly be stated that such documents do belong to the petitioners.
♦		Under the circumstances, the action initiated under section 153C of the Act cannot be quashed. Petitions are therefore dismissed.

Conclusion

■■

• DT - Secs. 132, 132A, 153A & 153C

Thanks & Regards,

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

Member,ICAI Committee For DIRECT TAXES 2011-12

Member,ICAI Committee Capacity Building of CA Firms 2010-11

1 1 5, Chappel Street, Meerut Cantt, UP, INDIA.

Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2.

Moderator of 25000 CA Group http://in.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CAFOLLOW http://twitter.com/caamresh ADD http://www.facebook.com/amresh.vashisht

SERVICE TAX AMNESTY SCHEME-FAQ

Can a person file form VCES 1 by declaring NIL tax dues?

‐ No, a person cannot file form VCES 1 by declaring NIL tax dues. As per the provisions of the scheme, if a person has not paid the tax dues till 01^st March, 2013 then he can apply for the scheme. However, if he has already paid the tax dues before 1^stMarch, 2013 then he cannot apply for the scheme.

2. Is Service Recipient eligible to take CENVAT credit of the tax paid under VCES scheme?

‐ Yes, Service Recipient is eligible to avail CENVAT Credit of the tax paid under VCES scheme because no restriction has been imposed for availing CENVAT credit for the tax paid under the VCES scheme. Thus, CENVAT Credit can be availed.

3. If the acknowledgement of declaration is issued within a period of seven working days from the date of receipt of declaration in terms of provisions of Rule 5 of STVCER, 2013, can such declaration be rejected for any reason after such acknowledgement if given?

‐ Yes, even after receiving the acknowledgement the declaration made by the declarant can be rejected. As it is not provided anywhere that once the acknowledgement is issued, the declaration shall be construed as accepted. It is merely an intimation received from department that it has received the declaration.

4. Range officer had written a letter to submit a balance sheet and profit and loss account on 01-10-2009 which is submitted by assessee on 10-10-2009. This letter of range officer did not mention any section or rule under which such letter was issued seeking balance sheets and profit and loss account. Thereafter there is no communication from the range officer or any other officer of the service tax department. If the ass essee wants to file a declaration under VCES can it be accepted?

‐ Yes, the declaration shall be accepted. According to Circular No. 169/4/20 13- ST dated 13.05.2013 Section 106 (2) (a)(iii) of Finance Act, 2013 provides for rejection of declaration if such declaration is made by a person against whom an inquiry or investigation in respect of service tax not levied or not paid or short levied or short- paid has been initiated by way of requiring production of accounts, documents or other evidence under the chapter or the rules made thereunder and such inquiry or investigation is pending as on the 1^stday of March, 2013. No other communication from the department would attract provisions of section 106(2)(a)(iii) and thus would not lead to rejection of the declaration.,

5. Can CENVAT credit be utilized for the payment of tax dues under VCES scheme?

‐ Sub rule (2) of Rule 6 of Service Tax Voluntary Compliance Encouragement Rules, 2013 prohibits the utilization of CENVAT credit for payment of tax dues under the Scheme.

6. Does the CENVAT credit be adjusted at the time of making the declaration? For instance if the assessee have Rs. 3 lacs to pay as service tax and he has also not availed CENVAT credit of Rs. 1 lakh for input services received during the period. Whether he can adjust it and make the declaration of tax due of Rs. 2 lakh or not?

‐ Yes,

‐ As per the definition of "tax dues" provided under the scheme, tax due means the Service Tax due or payable under the chapter or any other amount due or payable under Section 73A. Further, it is pertinent to mention here that service tax due/payable shall be determined after claiming the CENVAT Credit as available with the assessee for the period for which the declaration has been made. Therefore, while making the declaration you can adjust the CENVAT credit as available with the assessee for the relevant period.

‐ Further, CENVAT Credit for that period, if had been expensed off by the Assessee, the same may also be corrected by the assessee.

7. A proprietorship concern wrongly taken the CENVAT credit of Rs. 5 lacs in 2010 and filed the service tax return accordingly. Now, if it wants to declare and pay the same under VCES – can it do so?

‐ As per Amnesty Scheme, following persons can take the benefit of this scheme-

> Stop filers

> Non Filers

> Non registrant

> Service provider who have not disclosed true liability in the returns filed by them.

In the instant case, assessee has not shown the service tax liability correctly as assessee has wrongly utilized the CENVAT not available to him. Thus, this clearly amounts to not disclosing true service tax liability and accordingly assessee can avail the aforestated scheme.

8. ABC Ltd. has there different premises in Ahmadabad, Rajkot and Jamnagar respectively. ABC Ltd. is providing services from each office and such offices are separately registered with respective service tax range. Further, it has received a show -cause notice dated 25-02-2013 in respect of some alleged short payment of service tax for Ahmadabad office but has not received any such notice or any communication for Rajkot or Jamnagar offices. Can Rajkot and Jamnagar branch take benefit under VCES for any tax dues relating to those places?

‐ No, Rajkot and Jamna Nagar Branch cannot take the benefit of the scheme. Under service tax the registration is PAN based i.e. PAN no. of the person is followed by the service tax code. Even if the branches of an entity are registered separately, the person shall remain the same and the branches will be considered as inter-linked. Therefore, even if the default is made by one branch the person shall be debarred from taking the benefit of this scheme.

9. If the person has NIL service tax liability as he has not provided services from last 5 years. The person has not filed any return on the belief the return is not required to be filed if there is no service tax liability. Then do he is eligible to go for the scheme?

‐ No, the person is not eligible for the scheme. However, according to third proviso [inserted vide Notification No. 4/2008 dated 01.03.2008 with effect from 01.03.2008] to Rule 7C of Service Tax Rules, 1994 where the gross amount of service tax payable is nil, the Central Excise Office may, on being satisfied that there is sufficient reason for not filing the return, reduce or waive the penalty. Therefore by foregoing proviso to Rule 7C, the assessee can save himself.

10. Audit of the assessee was conducted on 27-28 February, 2013 and NIL audit report dated 05-03-2013 is issued to this assessee. This assessee wants to pay service tax for the period 01-04-2008 to 31-12-2012 which was not paid by it and the audit party could not unearth such non-payment or short payment of service tax. Can this assessee get benefit of VCES?

- No, the assessee shall not get the benefit under the scheme. As per the provisions of Section 106(2) of the Act, if an audit of a particular assessee is initiated and the same is pending as on 01.03.2013, then declaration filed by such assessee shall be rejected. As a result,, in the instant case, as the audit was not concluded as on 01.03.2013 (audit report was pending), assessee shall not be eligible to avail the benefit of the scheme.

‐ As assessee is not eligible to avail the scheme, therefore it is advisable to pay service tax along with interest and file intimation under Section 73(3) of Finance Act, 1994. Consequently, no show cause notice can be issued to the assessee in respect of the same.

11. Can amount payable under Rule 3(5), Rule 3(5A) and under Rule 6(3) of CCR be treated as 'tax dues' for the purpose of VCES? If yes, can benefit of waiver of penalty u/r 15 of CCR be availed under VCES?

‐ Rule 3(5), Rule 3(5A) and Rule 6(3) is having no nexus with the VCES. Tax dues have been specifically defined in the scheme.

12. If some amount is paid in excess under this scheme then as per Sec 109 of the Finance Act, 2013 any amount paid in pursuance of a declaration made shall not be refundable. Can the amount paid in excess be adjusted against the future liability?

‐ In terms of Article 265 of Constitution, of India no taxes shall be collected except by authority of law. Thus, it is clear that amount paid in excess in pursuance of the scheme due to some technological error can be adjusted. For example, if a declarant has declared service tax amounting to Rs. 110. However, due to some technological error, declarant has paid service tax amounting to Rs. 1100. In the instant case, the same shall be adjusted against its future liability.

13. If a person has tax dues for the period 01-10-2007 to 31-12-2012 but he declares tax dues only for the period 01-10-2008 to 31-12-2012 by a declaration dated 26-10-2013. Since the period of five years from relevant date for demand for period up to 30-09-2008 is over on 25-10-2013, he did not declare or pay any service tax for the period 01-10-2007 to 30-09-2008. Can his declaration be treated as substantially false and can recovery be made by commissioner in terms of powers conferred by section 111 of the Finance Act, 2013?

‐ At the outset, we would like to advert to definition of Tax due as provided under Section 105(1)(e) of Finance Act, 2013. The same is reproduced as under:

"(e) "tax dues" means the service tax due or payable under the Chapter or any other amount due or payable under section 73A thereof, for the period beginning from the 1st day of October, 2007 and ending on the 31st day of December, 2012 including a cess leviable thereon under any other Act for the time being in force, but not paid as on the 1st day of March, 2013."

As per aforestated definition tax due means service tax payable or due under the chapter or any other amount due or payable under Section 73 A of the Act.

Payment under the Chapter

As per the provisions of the chapter contained in the Finance Act, show cause notice for recovery of service tax due or payable can be issued upto 5 years by virtue of Section 73 of the Act. In other words, as on 10.05.20 13, service tax payable for the period 01.10.2007 to 31.03.2008 can not be recovered or demanded from the assessee. Thus, the same is not due or payable by the assessee thereby not falling under the definition of "tax dues" as reproduced above. In view of above, it can be easily inferred that tax due for the period 01.10.2007 to 31.3.2008 need not be declared under aforestated declaration.

However, service tax due or payable for the period 01.04.2008 to 30.09.2008 should be declared. If tax dues for such period are not declared, Commissioner might reject such declaration on account of declaration being substantially false in pursuance of Section 111(1) of Finance Act, 2013.

Any amount payable or due under Section 73A of the Finance Act, 1994

Further, as per the provisions of the Section 73A of the Act, Show Cause Notice for the recovery of tax due can be issued for any period. In other words, as on 10.05.2013, service tax due or payable for any period can be recovered from the assessee. Thus, entire tax dues for the period 01.10.2007 to 31.12.2012 shall constitute the "tax dues" as reproduced above. Thus, assessee needs to declare the tax dues for the entire period starting from 01.10.2007 to 3 1. 12.2012.

14. Mr. A has paid tax by challan on 09.05.2013 before the VCES comes into action. He filed application on 12.06.2013 and the payment made by him on 09.05.2013 is treated as payment against this declaration date d12.06.2013. Can he do so? Is there any requirement that the payment against tax dues need to be made on or after 10.05.2013 or on or after filing declaration.

‐ The only requirement under this scheme is tax should be due on 01^st March, 2013. If the tax is paid after 01^st March, 2013 the same shall be eligible to be adjusted against this scheme.

15. Mr. A has filed a declaration declaring tax dues of Rs. 5 lakhs and pays the same on 12-06-2013. Later on he realizes that the actual dues were Rs. 6 lakhs and wants to pay additional Rs. 1lakh by filing another declaration. Can he do so?

‐ No, another declaration cannot be filed.

Further, it is pertinent to mention here that another declaration might lead to the conclusion that declaration filed earlier is false and might amount to the rejection of the same.

16. Can this declaration be filed through ACES website?

‐ No, presently there is no such facility available. Currently, you need to file it manually.

17. The assessee has paid service tax dues and filed return late. A demand letter was issued to assessee for the late filing penalty & interest. Can assessee go for VCES?

‐ No the assessee cannot go for VCES. As the person have no tax dues pending to be paid. The penalty and interest standing due on part of assessee is not covered under tax dues.

18. If someone has deposited service tax amounting Rs. 5 lacs and filed NIL return now the time period for revision has lapsed. Whether he can avail benefit of this scheme?

‐ If the tax is deposited after 01^st March, 2013 then he can apply for the scheme otherwise not.

19. If a person have paid service tax for the financial year 2012-13 but not paid for the year financial year 2011-12. Can he go for the scheme for the year 2011-12?

‐ Yes, he can go for the part of period between 01^st October, 2007 to 31^st December, 2012.

20. The assessee has undergone SIV investigation for the FY 2008-09 to 2011-12. Whether he can apply for the scheme for FY 2012-13.

‐ An assessee can not go for the scheme for F.Y. 20 12-13 if service tax payable is in respect of the same issue on which investigation was initiated earlier in the period 2008-09 to 2011-12. Looking from another perspective, the assessee can go for VCES for 2012-13 in respect of a new issue which was not investigated by Department in earlier years.

21. Can assessee on whom search was initiated on 01.04.2013 take benefit of this scheme?

‐ Yes, he can avail the benefit under the scheme.

22. One of the clients (a banking institution) had deposited tax regularly in one of the branch code but now it has taken his own branch registration so can this scheme be available for rectifying this error by filing return.

- There is no need to go for the scheme. Assessee can file an intimation to the department with respect to payment of service tax payable in another branch code.

23. Where to file VCES 1, because I have get Service tax registration at Chennai and now residing in Udaipur than where to file this form.

- You need to file the form to the designated authority of the jurisdiction where you have taken registration.

24. Whether assessee is required to take registration before going for this scheme.

- Yes, if the assessee is not registered under service tax then he is required to take registration first and then apply for the scheme.

25. If the assessee died then does his legal heirs can go for this scheme.

- Yes

26. If notice from service tax audit team received in April, 13 for the period covered under VCES scheme, in such case whether shall he is eligible to go for VCES or not.

- Yes

27. Since return is not filed, after filing of VCES – 1, do the assessee need to file the return.

- No, assessee is not required to file the return for the period concerned after making declaration in form VCES – 1. He is only required to pay the tax dues declared by him.

28. What the status of Tax Liability is for the period from 01.01.2013 till the date of application in forms VCES – 1? Can department issue show cause for this period. Should the assessee discharge his Tax of this period first and then for the earlier period.

- The period beginning from 01.01.2013 is not covered under the scheme and therefore department can issue notice for this period. It is advisable to clear your dues whether it is for any period. Once, you make declaration under this scheme it is might possible that department will keep an eye on you. So, it's better to clear all the sins.

29. Whether rejection of application is quasi judicial function. Whether principles of natural justice will be followed. Whether such rejection is appealable.

- Yes, it is appealable on account of principles of natural justice.

30. How to apply for VCES – 3 i.e. how to inform department about payment of Service Tax?

- On every payment of the amount declared by you need to present VCES 1 before the designated authority. The designated authority will acknowledge the payment made by you every time. So, when you dispose off the entire amount the department will get to know.

31. If I paid all the dues before 30th June, 2014. Do the Designated Authority will issue acknowledgement of discharge immediately?

- No, the acknowledgement of discharge i.e. VCES 3 shall be issued within 7 working days from the date of furnishing of details of tax dues.

32. Will Designated Authority do scrutiny before issuing VCES 3?

- Yes, it might be possible. Because once VCES 3 is issued the ball will be out of the court of department. On issuance of acknowledgment of discharge, no matter shall be re-opened thereafter in any proceedings before any authority or court relating to the period covered by such declaration, subject to the provision of section 111 of the Finance act, 1994.

33. Can the assessee deposit the 50% of tax dues in monthly installment?

- Yes, the assessee can pay his/her tax dues in the monthly installment. The only condition needs to be fulfilled is that 50% of tax dues are required to be paid by 31^st December, 2013 and rest 50% shall be paid by 30^th June, 2014 without any interest, penalty or prosecution. However, even if the assessee misses the deadline of 30^th June, 2014 he can pay the tax due along with interest by 31^st December, 2014. After 31^st December, 2014 i.e. from 01^st January 2015 department shall invoke Section 110 of the Act and issue a letter of recovery under Section 87 of the Act.

34. How can one identify/differentiate a routine enquiry and an enquiry for anti-evasion?

-It depends on facts and circumstances of each case. This issue is subject to dispute.

35. An assessee has export turnover of Rs. 60, 00,000/- Is he liable to get registration? If yes, can he now take registration and file returns for past years under VCES without penalties and interest? He has no local business at all.

‐ Yes he is liable to take registration. However, he cannot go for this scheme as no tax dues are standing on his part. However, he can be saved from penalties and prosecution by referring clause 6 of circular 9 7/8/2007.

36. Department has issued a notice to my client by speed post in which the name of the company is wrong. Moreover, the address is somewhat different. Can I go for VCES?

‐ Yes, assessee can for the scheme as the above stated notice shall not be considered as proper notice issued by the department.

37. Till date no notice is issued, but if the service provider has not filed declaration and before December, 2013 department issued some notice or audit is conducted, still can he file this declaration now.

‐ Yes you can.

38. How can give tax calculation details with VCES – 1?

- Calculation sheet is required to be furnish separately, For the purposes of calculation of tax dues the manner of calculation as prescribed in S. No. 3F (I), or as the case may be the Part B of form ST 3 as existed during relevant period may be used and calculation of tax dues may be furnished tax return period wise.

39. Should we need to file the working of the Service Tax Payable along with VCES 1?

- Yes

40. Assessee has made declaration but later realized that he is not liable to pay. So he did not pay the taxes can department invoke section 87?

- Yes, the department can invoke section 87 by virtue of Section 110 of Finance Act, 2013,

41. Service Tax partly paid for period covered by amnesty scheme and service tax is partly pending for a certain period as on 01/03/2013. Can the assessee go for the scheme?

- Yes he can go for the period for which service tax is not paid.

42. What if the 50% of the tax due which is required to be paid by 31st December 2013 is not paid?

- The assessee shall be out of the scheme as the assessee has not followed the required procedure.

43. Whether Service Receiver under reverse charge can go for VCES?

- Yes, if there are some tax dues on his part. He can go for amnesty scheme.

44. If the notice is issued before 01.03.2013 and is served upon the assessee after 01.03.2013 then does that person can apply under VCES?

- The words written under scheme are – "Person to whom notice or order of determination has been issued in respect of any period on any issue".

Therefore, even the notice is served after 01^st March, 2013 it will be construed as valid.

45. Whether declaration in respect of CENVAT credit wrongly availed can be made under amnesty scheme?

‐ As per Amnesty Scheme, following persons can take the benefit of this scheme-

> Stop filers

> Non Filers

> Non registrant

> Service provider who have not disclosed true liability in the returns filed by them.

46. What rate will be applicable for payment of tax?

‐ The rate applicable as in the relevant period shall apply.

47. Whether any penalty or interest is imposable or not on the service tax payers who had intentionally evaded service tax but now they are opting for this scheme?

‐ This scheme is specially structured for these type of people. Yes, they can avail the benefit of this scheme.

48. Assessee has paid all his service tax dues on time. But his ST 3 returns are not traceable in the system. Can he take the advantage of VCES for the same so as to avoid any penalty?

‐ No, as no service tax is payable as on 01.03.2013.

49. Can a person take input credit of the service tax paid under VCES?

‐ Yes

IT-Sum received by assessee on sale of agricultural land as per his father's will won't be chargeable to tax

IT : Sale consideration received by assessee from sale of agricultural land in accordance with direction given by her late father in his will could not be treated as income of assessee

■■■

[2013] 34 taxmann.com 185 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax - VII

Neera Bhandari*

BADAR DURREZ AHMED AND R.V.EASWAR, JJ.

IT Appeal No. 162 of 2013†
CM No. 4947 of 2013

MARCH 22, 2013

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as [Inherited sum] - Assessment year 2006-07 - Whether sale proceeds of agricultural land received by assessee from her brother in accordance with direction given by her late father in his will could be treated as income of assessee - Held, no [Para 5] [In favour of assessee]

FACTS

■		The assessee received certain sum from her brother in accordance with the direction given by her late father in his will.
■		In the will, it was stated that in case the agricultural land was sold under any circumstances by brother of the assessee, 30 per cent of the sale consideration would be given to the assessee.
■		The Assessing Officer treated the sale consideration as short term capital gains and added it to the total income of the assessee.
■		The Commissioner (Appeals) deleted the deletion.
■		The Tribunal confirmed the deletion.

HELD

■		It is apparent that the assessee received the said sum as inheritance from her father. This would become clear from the fact that her father had clearly indicated in his Will that in case the property is sold, 30 per cent of the sale proceeds would be given to the assessee. The fact that the property was agreed to be sold during the lifetime of the father and some part consideration had been received during the lifetime would only imply that the condition upon which the assessee was to receive the said 30 per cent of the sale consideration had already been satisfied during his lifetime. In other words, the assessee's share out of the said consideration became payable to her directly under the will on the death of the father.
■		Even if one look at the matter in this perspective the receipt in the hands of the assessee cannot be regarded as income. However, the Tribunal has taken a different approach by holding that even if it is regarded as income the assessee would be entitled to the benefit of income under section 56(2)(v). Either way one look at the issue the answer is the same.
■		Therefore, insofar as this aspect of the matter is concerned no interference with the order of the Tribunal is called for. [Para 5]

Sanjeev Rajpal for the Appellant. Satyen Sethi for the Respondent.

JUDGMENT

CM 4947/2013

Badar Durrez Ahmed, J. - The delay in refiling the appeal is condoned.

1.1 The application is disposed of.

ITA 162/2013

1.2 This appeal is directed against the order dated 19.07.2012 passed by the Income Tax Appellate Tribunal in ITA No.3773/Del/2009 pertaining to the assessment year 2006-07.

2. The revenue was in appeal before the Appellate Tribunal on the following grounds: -

"1.		The Ld. CIT (A) erred in law and on facts in deleting the addition of Rs. 1,07,25,000/- made by the Assessing Officer on account of short term capital gains.
2.		The Ld. CIT (A) erred in law and on facts in deleting the addition of Rs. 6,72,910/- made by the Assessing Officer on account of Income from House Property."

Additional grounds had also been taken, which were in any event related to ground No. 1. The additional grounds were as under: -

"(i)

The CIT(A) has erred in law and on the facts of the case in holding that the sale of the property relates back to date on which the assessee's father, Sh. A.P. Bajaj was alive and that consequently the will executed by the said Sh. A.P. Bajaj is of no consequence, when as per the assessee's own submission (reproduced at Para 5.5 of the CIT(A)'s order, there was no formal agreement of sale in this case and a mere receipt of the initial advance of Rs.7.5 lakhs cannot be treated as an agreement for sale, particularly when the sale deed executed by the son of Sh. A.P. Bajaj on 08.11.2005 (after the death of Sh. Bajaj) does not make any mention of any earlier agreement of sale and when there is no evidence/indication of the date, if any, on which possession of the land was given to the buyers in pursuance of any agreement of sale executed during the life time of Sh. A.P. Bajaj.

(i)

The Ld. CIT(A) has erred in law and on facts in treating the amount of Rs.1,05,00,000/- received by the assessee from her brother as a gift within the meaning of Sec. 56(2)(v) of the I.T. Act, 1961 and not as a part of the sale consideration received in pursuance of the will of Sh. A.P. Bajaj."

Insofar as the first ground and the additional grounds are concerned the issue is with regard to the addition of Rs.1,07,25,000/- made by the assessing officer as short term capital gains. That has been deleted by the Tribunal. The facts are that the assessee received a sum of Rs.1,05,00,000/- from her brother Pramod Kumar Bajaj (Rs.72 lakhs during assessment year 2005-06 and a further sum of Rs.33 lakhs during assessment year 2006-07). This receipt was in accordance with the direction given by her late father Sh. A P Bajaj in his will. In the will it was stated that in case the agricultural land at village Badshahpur, Distt. Gurgaon, Haryana is sold under any circumstance by said Pramod Kumar Bajaj, 30% of the sale consideration would be given to the assessee (Smt. Neera Bhandari). It is in these circumstances that the assessee received the above sums of money from her brother which was equal to 30% of the sale proceeds of the land. The said sum was received in its entirety after the demise of the father (late Sh. A P Bajaj). The assessing officer treated the sale consideration as short term capital gains and added it to the total income of the assessee. The assessing officer also denied the claim of exemption under Section 54EC to the extent of Rs.35,25,000/- made by the assessee.

3. The Commissioner of Income Tax (Appeals) deleted the addition of Rs.1,07,25,000/-. The Tribunal on different reasons has confirmed the deletion.

4. The learned counsel for the appellant submitted before us that the Tribunal had erred in law inasmuch as the receipt of the said sum of Rs.1,05,00,000/- by the assessee from her brother had been received by the brother, in part, during the lifetime of the father in November, 2004. It is only thereafter, that the assessee's father late Sh. A P Bajaj passed away on 24.11.2004.

5. We feel that even if we accept the position as advanced by the learned counsel for the appellant, it is apparent that the assessee received the said sum of Rs.1,05,00,000/- as inheritance from her father. This would become clear from the fact that late Sh. A P Bajaj had clearly indicated in his Will that in case the property is sold, 30% of the sale proceeds would be given to the assessee. The fact that the property was agreed to be sold during the lifetime of the father and some part consideration had been received during the lifetime would only imply that the condition upon which the assessee was to receive the said 30% of the sale consideration had already been satisfied during his lifetime. In other words, the assessee's share out of the said consideration became payable to her directly under the will on the death of the father. Even if we look at the matter in this perspective the receipt in the hands of the assessee cannot be regarded as income. However, the Tribunal has taken a different approach by holding that even if it is regarded as income the assessee would be entitled to the benefit of income under Section 56(2)(v) of the Income Tax Act, 1961.Either way we look at the issue, the answer is the same. Therefore, insofar as this aspect of the matter is concerned no interference with the order of the Tribunal is called for.

6. As regards the second gound raised before the Tribunal with regard to the addition of Rs.6,72,910/-, that issue was decided in favour of the assessee in respect of the assessment year 2005-06 by the CIT (Appeals) and it has not been questioned by the revenue before the Tribunal. Therefore, following the said decision, the Tribunal confirmed the view taken by the CIT (Appeals). Even on that aspect, no interference is called for.

7. No substantial question of law arises for our consideration.

The appeal is dismissed.

Lata

*In favour of assessee.

†Arising out of order of ITAT in IT Appeal No. 3773/Delhi/2009, dated 19-7-2012.

Clarification Regarding Applicability of SA 700 on Tax Audit Report under Section 44AB of The Income-Tax Act, 1961. - (05-07-2013)

As the members are aware that all audit reports in respect of audits of financial statements for period beginning on or after 1st April 2012 are to be issued in accordance with the requirements of SA 700(Revised) - Forming an Opinion and Reporting on Financial Statements. In this regard, ICAI has been receiving mails seeking clarification regarding applicability of SA 700 on tax audit reports, i.e. Form No. 3CA/3CB.

Considering the fact that all tax audit reports are now mandatorily required to be filed online and that the format of tax audit report is prescribed by the Central Government, the Council in its 325th meeting held from 1st June to 3rd June, 2013 decided to defer the applicability of SA-700 (Revised) on the tax audit report under section 44AB of the Income-tax Act,1961 by one year i.e. the requirements of SA-700(Revised) are not applicable for tax audit reports filed up to 31st March, 2014.

ICAI is further taking up the matter with the appropriate authorities so that suitable changes can be brought in the forms relating to tax audit.

- OFFENCES AND PROSECUTIONS

OFFENCES AND PROSECUTIONS UNDER INCOME TAX

Section	Nature of default	Punishment (rigorous imprisonment)	Fine
(1)	(2)	(3)	(4)
275A	Contravention of order made under section 132(1) (Second Proviso) or 132(3) in case of search and seizure	Up to 2 years	No limit
275B	Failure to afford necessary facility to authorised officer to inspect books of account or other documents as required under section 132(1)(iib)	Up to 2 years	No limit
276	Removal, concealment, transfer or delivery of property to thwart tax recovery	Up to 2 years	No limit
276A	Failure to comply with provisions of section 178(1) and (3) re : company in liquidation	6 months to 2 years	—
276AB	Failure to comply with provisions of sections 269UC, 269UE and 269UL re : purchase of properties by Government¹	6 months to 2 years	No limit
276B	Failure to pay to credit of Central Government (i) tax deducted at source under Chapter XVII-B (non-cognizable offence under section 279A), or (ii) tax payable u/s 115-O(2) or second proviso to section 194B	3 months to 7 years	No limit
276BB	Failure to pay the tax collected under the provisions of section 206C	3 months to 7 years	No limit
276C(1)	Wilful attempt to evade tax, penalty or interest (non-cognizable offence under section 279A)—
	(a) where tax sought to be evaded exceeds Rs. 1 lakh (Rs. 25 lakh w.e.f. 1-7-2012)	6 months to 7 years	No limit
	(b) in other cases	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
276C(2)	Wilful attempt to evade payment of any tax, penalty or interest (non-cognizable offence under section 279A)	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
276CC	Wilful failure to furnish returns of fringe benefits under section 115WD/115WH or return of income under section 139(1) or in response to notice under section 142(1)(i) or section 148 or section 153A (non-cognizable offence under section 279A)—
	(a) where tax sought to be evaded exceeds Rs. 1 lakh (Rs. 25 lakh w.e.f. 1-7-2012)	6 months to 7 years	No limit
	(b) in other cases	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
276CCC	Wilful failure to furnish in due time return of total income required to be furnished by notice u/s 158BC(a)	3 months to 3 years	No limit
276D	Wilful failure to produce accounts and documents under section 142(1) or to comply with a notice under section 142(2A)	Up to 1 year	Rs. 4 to Rs. 10 for every day of default
277	False statement in verification or delivery of false account, etc. (non-cognizable offence under section 279A)
	(a) where tax sought to be evaded exceeds Rs. 1 lakh (Rs. 25 lakh w.e.f. 1-7-2012)	6 months to 7 years	No limit
	(b) in other cases	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
277A	Falsification of books of account or document, etc., to enable any other person to evade any tax, penalty or interest chargeable/leviable under the Act	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
278	Abetment of false return, account, statement or declaration relating to any income or fringe benefits chargeable to tax (non-cognizable offence under section 279A)
	(a) where tax, penalty or interest sought to be evaded exceeds Rs. 1 lakh (Rs. 25 lakh w.e.f. 1-7-2012)	6 months to 7 years	No limit
	(b) in other cases	3 months to 3 years (2 years w.e.f. 1-7-2012)	No limit
278A	Second and subsequent offences under section 276B, 276C(1), 276CC, 277 or 278	6 months to 7 years	No limit
280(1)	Disclosure of particulars by public servants in contravention of section 138(2) [Prosecution to be instituted with previous sanction of Central Government under section 280(2)]	Up to 6 months (simple/rigorous)	No limit

Notes :

1. No person is punishable for any failure under section 276A, 276AB or 276B if he proves that there was reasonable cause for such failure (vide section 278AA).

2. (a) Prosecution for offences under section 275A, section 275B, section 276, section 276A, section 276B, section 276BB, section 276C, section 276CC, section 276D, section 277, section 277A and section 278 to be instituted with previous sanction of Director General/Chief Commissioner/Commissioner, except where prosecution is at the instance of the Commissioner (Appeals) or the appropriate authority (videsection 279).

(b) The offences under Chapter XXII can be compounded (either before or after the institution of proceedings) by Director General or Chief Commissioner.

3. Where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprison¬ment and fine, then, such company shall be punished with fine and every person, referred to in sub-section (1) of section 278B, or the director, manager, secretary or other officer of the company referred to in sub-section (2) of section 278B shall be liable to be proceeded against and punished in accordance with the provi¬sions of this Act.

4. With effect from 1-4-2008 under section 278AB a person may apply to the Commissioner for granting immunity from prosecution, if he has applied for settlement under section 245C and the proceedings have abated under section 245HA. The application shall not be made after institution of prosecution proceedings after abatement.

ST-Stay can't be granted merely by establishing a prima facie case

ST: Stay cannot be granted merely by establishing a prima facie case; stay can be granted only where it appears that demand imposed has no legs to stand or it would be undesirable to ask assessee to pay full or part of demand

■■■

[2013] 34 taxmann.com 233 (Madras)

HIGH COURT OF MADRAS

Foxteq Services India Ltd.

Commissioner of Service Tax*

MRS. R. BANUMATHI AND K. RAVICHANDRABAABU, JJ.

C.M.A No. 907 of 2013
M.P. No. 1 of 2013

APRIL 3, 2013

Section 83 of the Finance Act, 1994 read with section 35F of the Central Excise Act, 1944 - Application of certain provisions of Excise Act - Deposit, pending appeal, of duty demanded or penalty levied - Pre-deposit is mandatory while dispensing with same is discretionary power of appellate authorities - Twin tests of 'undue hardship' and 'safeguarding interest of Revenue' are to be applied to each and every case where waiver of pre-deposit is sought for - Under hardship, being a matter within special knowledge of applicant, has to be established by him with specific averments of facts and figures to establish undue hardship - While granting waiver of pre-deposit, appellate authority must consider imposition of condition to safeguard realization - Interim order should not be passed, merely by establishing a prima facie case and only where it appears that demand imposed has no legs to stand or it would be undesirable to ask assessee to pay full or part of demand, appellate authority can dispense with same - Appellate authority need not consider each and every ground raised and answer same for disposing of application for waiver of pre-deposit; for that purpose, only prima facie case is to be considered - When assessee had not established a prima facie case of undue hardship, it should be directed to make pre-deposit [Paras 15, 16, 19, 21 to 23, 26, 27 & 30] [Partly in favour of assessee]

FACTS

Facts

■		The assessee was engaged in trading of computer parts and peripherals and had a contract with M/s. Hewlett Packard (HP) for sale of computer parts and accessories.
■		M/s. HP had entered into a contract with another company viz., Redington India for rendition of warranty/after sales service.
■		Under the contract entered into with M/s. HP, assessee was obliged to sell the spares, components and accessories to the M/s. HP and hand over the same to the other company viz., Redington India on the instructions of HP.
■		It was the obligation of Redington India to undertake the warranty/after sales service by utilising the components sold by the assessee to HP.
■		For rendering the services provided by the assessee to HP, they were paid an agreed amount for every sale of computer, which covered their service charges.
■		The Revenue argued that the operations performed by the assessee on behalf of their buyer viz., HP fell under section 65(19)(iv) as 'procurement of goods or service on behalf of the client' under "Business Auxiliary Service" and the charges so collected were liable to service tax.
■		The assessee argued that entire consideration received by them from M/s. HP was a consideration for sale of goods and was already charged to VAT; therefore, no part of it could be subjected to service tax.
■		The Tribunal passed an order directing payment of 50% pre-deposit.

Issue Involved

■

Whether the assessee was liable to make any pre-deposit?

HELD

Pre-deposit is mandatory and waiver thereof is discretionary :

■		Section 35F of the Central Excise Act contemplates deposit of the duty demanded or the penalty levied pending the appeal filed before the Commissioner (Appeals) or the Appellate Tribunal. The word "shall" appearing under Section 35F makes it clear that such pre-deposit is mandatory. However, the first proviso to Section 35F grants a discretionary power to the appellate authorities to dispense with such deposit subject to such conditions so as to safeguard the interest of the Revenue, if in its opinion, the deposit of duty demanded or penalty levied would cause undue hardship to the appellant. [Para 15]
■		It is pertinent to note at this juncture that only a discretion is vested on the appellate authorities as it is apparent from the word "may" appearing in the first proviso. Thus, a overall reading of Section 35F with first proviso would make it clear that making pre-deposit is mandatory and dispensing with the same is discretionary. [Para 16]

Tests of undue hardship and safeguarding interest of Revenue to be applied:

■		The twin tests viz., the undue hardship and safeguarding the interest of the Revenue are to be applied to each and every case where waiver of pre-deposit is sought for. Under hardship is a matter within the special knowledge of the applicant for waiver and has to be established by him. Equally, the Tribunal has to bring into focus about the other aspect relating to imposition of condition to safeguard the realisation. [Para 19]
■		Interim order of dispensation of deposit should not be passed, merely by establishing a prima facie case and only where it appears that the demand imposed has no legs to stand or it would be undesirable to ask the appellant to pay the full or part of the demand, the Appellate Tribunal can dispense with the condition of pre-deposit of penalty. The Courts will have to keep in view the interest of the revenue of the State/Government Exchequer, while considering the applications for dispensation with pre-deposit. [Para 21]

All grounds need not be considering while disposing stay application:

■		Appellate Tribunal need not consider each and every ground raised and answer the same for the purpose of disposing of the interim application for waiver of the pre-deposit. In fact, Section 35F requires the Appellate Tribunal to find out as to whether the complaint of the appellant to deposit the duty demanded or the penalty levied would cause undue hardship and for that purpose, only the prima facie case is to be considered. [Para 22]
■		When the assessee had not established a prima facie case of undue hardship, necessarily they should be directed to make pre-deposit. There is no via media in such cases. [Para 23]

Tribunal order was not erroneous:

■		In stay petition before Tribunal, the assessee argued that it would be put to irreparable loss and undue hardship, if the original order is not stayed. It is also stated that the assessee would be exposed to a too serious financial difficulty as the amount involved is huge on the one hand and the resource crunch gripping the assessee on the other. The said averments were too general in nature without there being any specific averments of the facts and figures to establish the undue hardship. The final accounts showing loss incurred for the year ended March 31, 2012 were presented before High Court, but, never presented before the Tribunal. Therefore, Tribunal order could not be regarded erroneous; more so, because by passing the very order directing the appellant to deposit only 50% of the tax amount, the Tribunal had considered the undue hardship also. [Para 26]
■		Tribunal had given a prima facie finding and also granted 50% waiver, therefore, there was no non-application of mind on relevant factors by Tribunal and Tribunal order had no manifest error. [Para 27]

Assessee was liable to make pre-deposit but pre-deposit reduced to 25%:

■

The assessee had suffered loss during the financial year 2011 -2012. Even though the said material was not placed before the Tribunal, instead of remitting the matter for that purpose and in order to render substantial justice, assessee was directed to deposit 25% of the total tax demanded instead of 50% so that the appeal can be taken up for hearing on merits without loss of further time. [Para 30]

CASE REVIEW

Monotosh Saha v. Special Director, Enforcement Directorate [Civil Appeal No. 5188 of 2008, dated 21-8-2008] (para 18); Benara Valves Ltd. v. CST [2007] 6 STT 13 (SC) (para 20); Fayshaw Apparels v. ATFE 2011 (270) ELT 519 (Mad.) (para 21); IndusInd Bank Ltd. v. CST [C.M.A. No. 1613 of 2011, dated 24-6-2011] (para 22); CC&CE v. Visaka Industries Ltd. [W.A. No. 419 of 2012, dated 17-7-2012] (para 23); Indian Railway Construction Co. Ltd. v. Ajay Kumar [2003] 4 SCC 579 (para 27) and Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) (para 27).

CASES REFERRED TO

Indian Railway Construction Co. Ltd. v. Ajay Kumar [2003] 4 SCC 579 (para 9), Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) (para 9), Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC) (para 9), Imagic Creative (P). Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC) (para 9), Benara Valves v. CCE [2007] 6 STT 13 (SC) (para 10), IndusInd Bank Ltd. v. CST [C.M.A. No. 1613 of 2011, dated 24-6-2011] (para 10), CC&CE v. Visaka Industries Ltd. [W.A. No. 419 of 2012, dated 17-7-2012] (para 10), Monotosh Saha v. Special Director-Enforcement Directorate [Civil Appeal No. 5188 of 2008, dated 21-8-2008] and Fayshaw Apparels v. ATFE 2011 (270) ELT 519 (Mad.) (para 21).

Md. Shaffiq for the Appellant. V. Sundareswaran for the Respondent.

JUDGMENT

K. Ravichandrabaabu, J. - The above appeal is filed by the assessee against the Miscellaneous Order passed by the CESTAT whereby the appellant was directed to make pre-deposit of 50% of the tax amount.

2. The short facts, as projected by the appellant, are as follows:-

The appellant is a company engaged in the trading of computer parts and peripherals. They have entered into a contract with a multi national company viz., Hewlett Packard (HP) for sale of computer parts and accessories. The said MNC (HP) had also entered into a contract with another company viz., Redington India for rendition of warranty/after sales service. As far as the contract entered into with the MNC (HP) is concerned, there is an obligation on the part of the appellant to sell the spares, components and accessories to the said MNC (HP) and hand over the same to the other company viz., Redington India on the instructions of HP. It is the obligation of Redington India to undertake the warranty/after sales service by utilising the components sold by the appellant to HP. For rendering the services provided by the appellant to HP, they were paid an agreed amount for every sale of computer, which covered their service charges.

3. It is the case of the Revenue that the operations performed by the appellant on behalf of their buyer viz., HP are liable to be classified under sub-clause (iv) of Clause (19) of Section 65 of the Finance Act 1994 under the category of procurement of goods or service on behalf of the client under Business Auxiliary Service and the charges so collected are liable to service tax.

4. Accordingly, the Revenue issued two show cause notices dated 23.4.2008 and 20.3.2009 to the appellant demanding an amount of Rs. 2,03,97,252/- and 50,47,451/- respectively towards the service tax, Education Cess etc., for two different periods. The appellant filed a detailed reply and denied their liability. Consequently, the respondents herein passed the Order-in-original No. 59/2009 dated 22.10.2009 and No. 04/2010 dated 25.3.2010, whereby the proposals made in the show cause notices were confirmed.

5. Challenging the same, the appellant filed appeals before the CESTAT and also miscellaneous petitions seeking for waiver of pre-deposit of the tax demanded.

6. The CESTAT by its order dated 24.1.2013 directed the appellant to make pre-deposit of 50% of the tax amount as confirmed in the order in original. Aggrieved against the same, the present appeal is preferred by the appellant by raising the following substantial questions of law:-

1.		Whether the order of the Tribunal fails to see that levy of sales tax and service tax are mutually exclusive and thus a strong prima facie case is made out by the appellants inasmuch as the receipt/consideration on which service tax is levied has been subjected to levy of sales tax by the State and thus levy of service tax falls outside the legislative competence of the Union to treat the same as service liable to service tax, much less an authority of the Union to levy service tax thereon warranting dispensing with the condition of pre-deposit ?
2.		Whether the order of the Tribunal inasmuch as it proceeds on the premise that the value of the goods has been excluded while levying service tax suffers from non-application of mind inasmuch as the Adjudicating authority has proceeded tol evy tax on the entire consideration/receipt from the customer and no deduction is given in respect of the value of the goods sold if the value of the goods sold were deducted then there can be no levy of service tax inasmuch as the entire consideration/receipt from the customer has been treated as value of goods sold and subject to sales tax/ VAT?
3.		Whether the Tribunal ought to have seen that the adjudicating authority has erred in denying the appellants the benefit of Notification No.12 of 2003 which excludes the value of goods sold from levy of service tax on the erroneous premise that the appellants charge their customers a fixed sum and does not fix the value of the goods sold completely overlooking the fact that the fixed sum constitutes the value of goods sold and Section 9 of "Sale of Goods Act" leaves the manner of fixing the price to the discretion of the contracting parties ?
4.		Whether the order of the Tribunal inasmuch as it has not even considered nor rendered any finding on the existence or otherwise of "undue hardship" while exercising its power to dispense with predeposit under Section 35F of the Central excise Act suffers from non-consideration of relevant aspect/statutory condition stands vitiated and the Tribunal ought to have seen that any condition directing pre-deposit would cause "Undue hardship" inasmuch the petitioner has not collected any service tax on the bonafide belief that the levy of service tax is impermissible ?
5.		Whether the order of the Tribunal directing a pre-deposit of 50% of the disputed taxes stands vitiated inasmuch as it fails to see that the condition imposed is such which for all intent and purport takes away the appellants vested right of appeal and works as a deterrent or disables and impedes access to a forum viz., CESTAT which is meant for redressal of the grievance of an assessee suffering an adverse order, and results in rendering the statutory remedy of appeal illusory?

7. As the appeal itself is against the miscellaneous order passed by the CESTAT directing 50% payment of pre-deposit , the main appeal itself is taken up for final disposal with the consent of both the parties.

8. The learned counsel appearing for the appellant submitted that the Tribunal proceeded to direct the appellant to make the pre-deposit based on the premise that the value of the goods sold has been deducted while arriving at the value of taxable service. The above presumption is contrary to the facts on record as the adjudicating authority has not deducted the value of the goods sold. Therefore, the learned counsel submitted that the discretion exercised by the Tribunal under Section 35F of the Central Excise Act was based on non-existent facts. He also submitted that the Tribunal failed to see that the entire consideration received by the appellant had suffered VAT/Sales Tax and once the transaction had suffered such levy, the service tax ought to be levied after excluding the value in view of notification No. 12/2003. He also submitted that the payment of sales tax by itself makes a strong prima facie case, which is a relevant factor while exercising discretion under Section 35F of the Central Excise Act. He further submitted that the Tribunal had not rendered any finding on "undue hardship" as the appellant had not collected any service tax on the bonafide belief that the transactions are transactions of sale and thus not liable to service tax. He further submitted that the appellant had incurred a loss of Rs.6.53 lakhs for the year ended March 31st, 2012 and under such circumstances the impugned order of the Tribunal directing the appellant to make a pre-deposit of 50% of the tax demanded would result in the appeal becoming illusory.

9. In support of his submissions, the learned counsel appearing for the appellant relied on the decisions in Indian Railway Construction Co. Ltd. v. Ajay Kumar [2003] 4 SCC 579; Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC); Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC); Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC).

10. Per contra, the learned Senior Central Government Standing Counsel appearing for the Revenue submitted that under Section 35F of the Central Excise Act 1944, the payment of deposit is mandatory and the order of the Tribunal directing the appellant to make pre-deposit of 50% of the tax demanded is perfectly in accordance with Section 35F and the provision made therein. He also submitted that the Tribunal only after specifically finding that the appellant failed to make out a prima facie case for waiver of pre-deposit of the entire amount of tax, interest and penalty had directed payment of 50% of the tax, which shows that the Tribunal had considered "undue hardship" pleaded by the appellant as well. Therefore, the learned counsel submitted that the said order passed by the Tribunal does not warrant any interference, as the said order has taken care of the interest of the Revenue as well as the undue hardship pleaded by the appellant. In support of his submissions, the learned Counsel appearing for the Revenue relied on the decision of the Apex Court in Benara Valves Ltd. v. CCE [2007] 6 STT 13 and two unreported decisions passed by the Division Bench of this Court in C.M.A.No. 1613 of 2011 dated 24.6.2011 (IndusInd Bank Ltd., v. CST) and W.A. No. 419 of 2012 dated 17.7.2012 (CE&CE v. Visaka Industries Ltd.,) and the order of the Hon'ble Supreme Court made in SLA (Civil) No. 24321 of 2012 on 27.8.2012.

11. Heard the learned counsel appearing for either side.

12. The present appeal filed before this Court is against an interim order passed by the Tribunal in the miscellaneous application filed for waiver of pre-deposit under Section 35F of the said Act.

13. The appellant filed appeal before the Tribunal aggrieved against the order passed by the original authority demanding service tax by treating the appellant's transaction as the one under Business Auxiliary Services. It is the case of the appellant that the commercial transaction entered into with the HP by the appellant does not attach service obligation and on the other hand it is only in the nature of selling goods. It is their contention that a pure and simple sale/purchase transaction cannot be mis-construed as a service contract under Section 65(19)(iv) of the Finance Act, 1974. Consequently, it is pleaded that the order passed by the Tribunal directing pre-deposit of 50% of the tax demand is without considering the above said facts.

14. Whether the appellant's transaction with HP is to be classified under clause (4) of Section 65(19) of the Finance Act 1974 so as to make them liable to pay the service tax is the core issue to be gone into and adjudicated upon by the Tribunal, taking into consideration of all the facts and circumstances of the case with which we are not called upon at this stage to express any view on merits. What is now urged before us is against the pre-deposit order passed by the Tribunal.

15. Before considering the correctness or otherwise of the order passed by the Tribunal, let us consider the scope of Section 35F of the Central Excise Act. Section 35F of the Central Excise Act contemplates deposit of the duty demanded or the penalty levied pending the appeal filed before the Commissioner (Appeals) or the Appellate Tribunal. The word "shall" appearing under Section 35F makes it clear that such pre-deposit is mandatory. However, the first proviso to Section 35F grants a discretionary power to the appellate authorities to dispense with such deposit subject to such conditions so as to safeguard the interest of the Revenue, if in its opinion, the deposit of duty demanded or penalty levied would cause undue hardship to the appellant.

16. It is pertinent to note at this juncture that only a discretion is vested on the appellate authorities as it is apparent from the word "may" appearing in the first proviso. Thus, a overall reading of Section 35F with first proviso would make it clear that making pre-deposit is mandatory and dispensing with the same is discretionary. Keeping this in mind, let us consider the matter further.

17. The Tribunal pointed out at paragraph 4 of its order that from the perusal of the agreement, prima facie it found force in the submission of the learned counsel appearing for the Revenue and that the appellant failed to make out a prima facie case for waiver of predeposit of the entire amount of tax, interest and penalty. Consequently, the Tribunal directed 50% of the pre-deposit.

18. It is relevant to note at this juncture the decision of the Hon'ble Supreme Court reported in Monotosh Saha v. Special Director, Enforcement Directorate [Civil Appeal No. 5188 of 2008, dated 21-8-2008] as follows:-

11. Two significant expressions used in the provisions are "undue hardship to such person " and "safeguard the realisation of penalty". Therefore, while dealing with the application twin requirements of considerations i.e. Consideration of undue hardship aspect and imposition of conditions to safeguard the realisation of penalty have to be kept in view."

19. Even though the said decision was made while dealing with the order of pre-deposit contemplated under Foreign Exchange Management Act, 1999, still the analogy made therein can be applied to Section 35F of the Central Excise Act also. Thus, from the reading of the above decision of the Apex Court, the twin test viz., the undue hardship and safeguarding the interest of the Revenue are to be applied to each and every case where waiver of pre-deposit is sought for. In the very same decision, it is also observed by the Apex Court that undue hardship is a matter within the special knowledge of the applicant for waiver and has to be established by him. Equally, it is also observed that the Tribunal has to bring into focus about the other aspect relating to imposition of condition to safeguard the realisation of penalty and the relevant paragraphs 12 to 16 are extracted hereunder:-

"12. As noted above there are two important expressions in Section 19(1). One is undue hardship. This is a matter within the special knowledge of the applicant for waiver and has to be established by him. A mere assertion about undue hardship would not be sufficient. It was noted by this Court in S. Vasudeva v. State of Karnataka and Others (AIR 1994 SC 923) that under Indian conditions expression "Undue hardship" is normally related to economic hardship. "Undue" which means something which is not merited by the conduct of the claimant or is very much disproportionate to it. Undue hardship is caused when the hardship is not warranted by the circumstances.

13. For a hardship to be 'undue', it must be shown that the particular burden to have to observe or perform the requirement is out of proportion to the nature of the requirement itself, and the benefit which the applicant would derive from compliance with it.

14. The word "undue" adds something more than just hardship. It means an excessive hardship or a hardship greater than the circumstances warrant.

15. The other aspect relates to imposition of condition to safeguard the realisation of penalty. This is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to safeguard the realisation of penalty. Therefore, the Tribunal while dealing with the application has to consider materials to be placed by the assessee relating to undue hardship and also to stipulate conditions as required to safeguard the realisation of penalty.

16. The above position was highlighted in Benara Valves Ltd., and Others v. Commissioner of Central Excise and Another (2006 (13) SCC 347). The decision was rendered in relation to Section 35F of the Central Excise Act, 1944 where also identical stipulations exist."

20. The very same view was expressed by the Apex Court in another decision relied on by the Revenue reported in Benara Valves Ltd. (supra).

21. By following the above decision of the Apex Court, a Division Bench of our High Court in the decision reported in Fayshaw Apparels v. ATFE 2011 (270) ELT 519 (Mad.) wherein one of us (R. Banumathi, J.) was a party, held that interim order of dispensation of deposit should not be passed, merely by establishing a prima facie case and only where it appears that the penalty imposed has no legs to stand or it would be undesirable to ask the appellant to pay the full or part of the penalty, the Appellate Tribunal can dispense with the condition of pre-deposit of penalty. It is also observed therein that the courts will have to keep in view the interest of the revenue of the State/Government Exchequer, while considering the applications for dispensation with pre-deposit.

22. Likewise, another Division Bench of this Court in an unreported decision made in C.M.A. No. 1613 of 2011 dated 24.6.2011 IndusInd Bank Ltd. (supra) has observed that the Appellate Tribunal need not consider each and every ground raised and answer the same for the purpose of disposing of the interim application for waiver of the pre-deposit and in fact Section 35F requires the appellate Tribunal to find out as to whether the complaint of the appellant to deposit the duty demanded or the penalty levied would cause undue hardship and for that purpose only the prima facie case is to be considered.

23. In another unreported decision made in W.A.No. 419 of 2012 dated 17.7.2012 Visaka Industries Ltd. (supra), the Division Bench of this Court found that when the assessee had not established a prima facie case of undue hardship necessarily they should be directed to make pre-deposit. There is no via media in such cases.

24. It is also seen that the order passed in W.A.No. 419 of 2012 dated 17.7.2012 Visaka Industries Ltd. (supra) has been confirmed by the Apex Court by dismissing SLA (Civil) No. 24321 of 2012 on 27.8.2012.

25. Going by all these decisions, what emerges is that the appellant is not only required to plead undue hardship but also to establish the same before the Tribunal. We have already pointed out that the liability of the appellant to pay the Service tax has to be decided only in the main appeal before the Tribunal.

26. No doubt the appellant had raised several grounds on merits in the appeal before the Tribunal. Certainly, the Tribunal would consider all those grounds at the time of hearing the main appeal. Therefore, the only question that has to be seen here is as to whether the appellant had established the plea of undue hardship before the Tribunal. When we see the application filed before the Tribunal seeking for waiver of pre-deposit, it is stated by the appellant in the affidavit filed before the Tribunal that the petitioners would be put to irreparable loss and undue hardship, if the original order is not stayed. It is also stated that the petitioners would be exposed to a too serious financial difficulty as the amount involved is huge on the one hand and the resource crunch gripping the appellant on the other. In our considered view, these averments made in the affidavit are too general in nature without there being any specific averments of the facts and figures to establish the undue hardship. However, now before this court, the learned counsel appearing for the appellant placed the balance sheet as on March 31, 2012 and the statement of Profit and Loss for the year ended March 31, 2012 to show the loss suffered by the appellant. Admittedly, these documents were not placed before the Tribunal, which is a fact finding authority. It is also not specifically pleaded in the affidavit filed before the Tribunal about these facts. Therefore, we cannot find fault with the Tribunal in passing the impugned order. On the other hand, though the Tribunal has not specifically stated in so many words about "undue hardship", yet by passing the very order directing the appellant to deposit only 50% of the tax amount, it could be seen that the Tribunal had considered the undue hardship also.

27. Learned counsel for the appellant relied on the decisions as stated supra only to show that non-consideration or non-application of mind on relevant factors will be regarded as manifest error. As we found that the Tribunal had given a prima facie finding and also granted 50% waiver, the decisions reported in Indian Railway Construction Co. Ltd. (supra), Omar Salay Mohamed. Sait (supra) are factually distinguishable.

28. Likewise in so far as the other decisions viz., Bharat Sanchar Nigam Ltd. (supra), Imagic Creative (P.) Ltd. (supra) are concerned, they are in respect of merits of the appeal which is pending before the Tribunal. As we have already pointed out that it is for the Tribunal to decide on merits about the liability of the appellant, the above said two decisions cannot be pressed into service at this stage by the appellant.

29. Learned counsel for the appellant at the conclusion of the submissions had pleaded that any further reduction in the percentage of the pre-deposit may be considered by this court, by taking note of the inability of the appellant due to the loss in business.

30. It is seen from the materials placed before this court that the appellant had suffered loss during the financial year 2011 -2012. Even though the said material was not placed before the Tribunal, instead of remitting the matter for that purpose and in order to render substantial justice, we deem it fit that the appellant can be directed to deposit 25% of the total tax demanded instead of 50% so that the appeal shall be taken up for hearing on merits without loss of further time.

31. Accordingly, the order of the Tribunal is modified by directing the appellant to deposit 25% of the tax demanded as pre-deposit within a period of eight weeks from the date of receipt of copy of this order. The Civil Miscellaneous Appeal is disposed of accordingly. Consequently, the connected M.P. is closed. No costs.

Vineet

*Partly in favour of assessee.

IT : Where all material facts were disclosed and assessee's claim was accepted after proper examination, irregularities noticed in subsequent assessment year would not be sufficient for re-opening of assessment

■■■

[2013] 34 taxmann.com 199 (Gujarat)

HIGH COURT OF GUJARAT

Jivraj Tea Ltd.

Assistant Commissioner of Income-tax*

AKIL KURESHI AND MS. SONIA GOKANI, JJ.

SPECIAL CIVIL APPLICATION NO. 2107 OF 2013

APRIL 8, 2013

Section 147, read with section 80-IA, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To disallow deduction under section 80-IA] - Assessment year 2006-07 - Whether, where there was no failure on part of assessee to disclose fully and truly all material facts and claim made by assessee in assessment year under consideration was accepted after proper examination, irregularities noticed in claim while framing assessment for subsequent assessment year could not be held as sufficient reason for re-opening of assessment beyond period of four years - Held, yes [Paras 9 & 10] [In favour of assessee]

FACTS

■		The assessee was allowed deduction under section 80-IA in the relevant assessment year.
■		However, the Assessing Officer while framing the assessment for subsequent assessment year, held that the depreciation claimed by the assessee in earlier years was required to be set off against the eligible profit under section 80-IA of the relevant assessment year. Since this was not done, deduction was irregularly allowed in the year under consideration. He accordingly, issued notice under section 147 for reopening of assessment.
■		The assessee contended that, the notice for re-opening was issued beyond the period of 4 years from the end of relevant assessment year and there was no failure on its part to disclose truly and fully all material facts necessary for the assessment.
■		It further contended that in the scrutiny assessment, the Assessing Officer had examined the claim for deduction under section 80-IA and had raised various queries and only on detailed replies given, the claim was accepted.

HELD

■		Question that calls for consideration is whether in facts of the case, notice for reopening can be stated to be validly issued. The issue must be decided bearing in mind the fact that such notice had been issued beyond the period of four years from the end of relevant assessment year. Prime consideration, therefore, would be whether, before the Assessing Officer could assume jurisdiction, important requirement of proviso to Section 147 namely the income chargeable to tax had escaped assessment due to the failure of the assessee to disclose truly and fully all material facts necessary for assessment, could be stated to have been satisfied. [Para 7]
■		In this context, it is recalled that no such allegations have been made in the reasons recorded by the Assessing Officer. Secondly, the reasons itself record that "on verification of the case records, it is also observed that………" [Para 8]
■		Thus, the observations of the Assessing Officer found in the reasons recorded are based on the assessment records of the year under consideration. It is not even the case for the Revenue that full details pertaining to the assessee's claim for deduction under section 80-IA were not furnished. It is not in dispute that the assessee along with the return filed statutory declarations including the audited accounts. The assessment records of the earlier years were very much available to the Assessing Officer. It is not even the case of the Revenue that in such return, necessary details were not supplied. Merely because while framing assessment for the subsequent year the Assessing Officer noticed certain irregularity in the claim by itself would not be sufficient to satisfy the requirements of the proviso to section 147. [Para 9]
■		In addition to above conclusions, that there was no failure on the part of the assessee to disclose truly and fully all material facts, it is also found that during the original assessment proceedings, the Assessing Officer had examined the claim in detail. Various queries were raised which were duly answered by the assessee. May be that the specific angle of the depreciation earlier claimed to be set off against the income of the current year of the eligible business may not have been in the mind of the Assessing Officer. Nevertheless, the entire claim of the assessee for deduction under section 80-IA was before the Assessing Officer and such claim was also processed. [Para 10]
■		Such being the facts, it is opined that the notice for reopening issued beyond four years cannot be sustained. [Para 11]

CASES REFERRED TO

Asstt. CIT v. Goldmine Shares and Finance (P.) Ltd. [2008] 113 ITD 209 (Ahd.) (SB) (para 3) and CIT v. Emerald Jewel Industry (P.) Ltd.[2011] 53 DTR 262 (Mad.) (para 5).

B.S. Soparkar for the Petitioner. Sudhir M. Mehta for the Respondent.

ORDER

Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition. Petitioner has challenged a notice dated 15.03.2012 as at Annexure A to the petition under Section 148 of the Income Tax Act, 1961 ('the Act' for short). Under such notice, the Assessing Officer seeks to reopen assessment of the petitioner for the assessment year 2006-07 which was framed after scrutiny. At the request of the petitioner, the Assessing Officer also supplied reasons recorded for issuing such notice. Such reasons read as under:

"In the assessee's case, the wind mill was commissioned in A.Y. 2002-03 and the assessee company started claiming deduction u/s. 80IA from A.Y. 2004-05. As per specific provisions of section 80IA(5), profit from eligible business for the purpose of determination for quantum of deduction u/s. 80IA be computed as if such eligible business was the only source of income of the assessee during the previous year relevant to initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made. Thus, before allowing deduction u/s. 80IA, the depreciation claimed on wind mill in A.Y. 2002-03 and 2004-05 of Rs. 4,50,00,000/- was required to be set off against the profit of wind mill only. However, the same was not done during the assessment proceedings. Thus, deduction of Rs. 1,41,93,759/- u/s. 80IA was irregularly allowed to the assessee company.

During the year under consideration, the assessee is engaged in the business of trading of tea. On verification of the case records, it is also observed that the assessee company is also carrying out the business of generation of electricity through windmills and has claimed deduction u/s. 80IA of Rs. 1,41,93,759/-. In the subsequent year i.e. A.Y. 2007-08, this issue was examined and it was found that the assessee is not eligible for deduction u/s. 80IA and accordingly the deduction was withdrawn in view of the decision in case of Goldmine Shares and Finance (P.) Ltd. v. ACIT[2008] 113 ITD (Ahd.) (SB), wherein it was held that profit from eligible business for purpose of determination of quantum of deduction u/s. 80IA has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed to be set off against other income in earlier years. As the assessee is not eligible for deduction u/s. 80IA in the subsequent year the assessee cannot be eligible in the preceding year also. Thus, there is an escapement of income to the extent of deduction claimed u/s. 80IA of Rs. 1,41,93,759/-?"

2. Petitioner thereupon raised objections to the notice for reopening under a communication dated 29.10.2012. Such objections were, however, rejected by an order dated 28.01.2013. The petitioner has, therefore, approached this Court in the present petition.

3. From the reasons recorded by the Assessing Officer for issuing notice for reopening, we gather that his objection was to the effect that the assessee had commissioned a windmill in the year 2002-03 and had started claiming deduction under Section 80IA of the Act w.e.f. assessment year 2004-05. Such deduction was required to be computed as if the eligible business was the only source of income of the assessee during the previous year relevant to the initial and subsequent assessment years. According to the Assessing Officer, therefore, before allowing deduction under Section 80IA of the Act, the depreciation claimed for windmill in the assessment years 2002-03 and 2004-05 of Rs. 4.50 crores was required to be set off against the profit of the windmill only. Since this was not done, according to the Assessing Officer, the assessee received deduction of Rs. 1.41 crore (rounded off) irregularly during the year under consideration.

The reasons further record that during the year under consideration, the assessee was also engaged in the business of trading in tea. It is also further recorded that "on verification of the case records, it is also observed that the assessee-company is also carrying out the business of generation of electricity through windmills and has claimed deduction under Section 80IA of Rs. 1,41,93,759/-". While examining the issue in the subsequent year 2007-08, it was found that the assessee is not eligible for deduction under Section 80IA of the Act and, accordingly, such deduction was withdrawn in view of the decision of the Special Bench of the Tribunal in case of Asstt.CIT v. Goldmine Shares and Finance (P.) Ltd. [2008] 113 ITD 209 (Ahd.) (SB).

4. Learned counsel for the petitioner, taking us through the record, raised following contentions:

1.		That there was no failure on part of the assessee to disclose truly and fully all material facts necessary for the assessment. The notice for reopening having been issued beyond the period of 4 years from the end of relevant assessment year, this issue would be crucial.
2.		In the scrutiny assessment, the Assessing Officer had examined the claim of the assessee for deduction under Section 80IA of the Act and raised various queries. Detailed replies were given by the petitioner; only thereupon the claim was accepted and in the final order of assessment, no disallowance was made under this head.

5. Counsel also contended that the issue itself has been decided in favour of the assessee by various decisions particularly by that of the Madras High Court in case of CIT v. Emerald Jewel Industry (P.) Ltd. [2011] 53 DTR 262.

6. On the other hand, learned counsel Mr. Sudhir Mehta for the Revenue opposed the petition contending that the assessee had received deduction of Rs. 1.41 crores irregularly during the said assessment year. This was due to the fact that the business of the assessee eligible for deduction under Section 80IA of the Act had to be treated as its only source of income. This was not done in the earlier assessment years 2002-03 and 2004-05. Assessee claimed depreciation on such windmills to the extent of Rs. 4.05 crores. This was required to be set off against the profit of windmill only. He submitted that these facts emerged only during the assessment of the subsequent year 2007-08. Notice for reopening issued is, therefore, valid. Counsel relied on several decisions to contend that on merits, the issue has been decided in favour of the revenue.

7. Having heard learned counsel for the parties, short question that calls for consideration is whether in facts of the case, notice for reopening can be stated to be validly issued. We must decided this issue bearing in mind the fact that such notice has been issued beyond the period of four years from the end of relevant assessment year. Our prime consideration, therefore, would be whether, before the Assessing Officer could assume jurisdiction, important requirement of proviso to Section 147 of the Act namely the income chargeable to tax had escaped assessment due to the failure of the assessee to disclose truly and fully all material facts necessary for assessment, could be stated to have been satisfied.

8. In this context, we may recall that no such allegations have been made in the reasons recorded by the Assessing Officer. Secondly, the reasons itself record that

"on verification of the case records, it is also observed that ...".

9. Thus, the observations of the Assessing Officer found in the reasons recorded are based on the assessment records of the year under consideration. It is not even the case for the Revenue that full details pertaining to the assessee's claim for deduction under Section 80IA were not furnished. It is not in dispute that the petitioner along with the return filed statutory declarations including the audited accounts. The assessment records of the earlier years 2002-03 and 2004-05 were very much available to the Assessing Officer. It is not even the case of the Revenue that in such return, necessary details were not supplied. Merely because while framing assessment for the subsequent year 2007-08 the Assessing Officer noticed certain irregularity in the claim by itself would not be sufficient to satisfy the requirements of the proviso to Section 147 of the Act.

10. In addition to above conclusions, that there was no failure on the part of the assessee to disclose truly and fully all material facts, we also find that during the original assessment proceedings, the Assessing Officer had examined the claim in detail. Various queries were raised which were duly answered by the petitioner- assessee. May be that the specific angle of the depreciation earlier claimed to be set off against the income of the current year of the eligible business may not have been in the mind of the Assessing Officer. Nevertheless, the entire claim of the assessee for deduction under Section 80IA of the Act was before the Assessing Officer and such claim was also processed.

11. Such being the facts, in our opinion, the notice for reopening issued beyond four years cannot be sustained. In that view of the matter, we do not find it necessary to examine the rival contentions with respect to the validity or otherwise of being petitioner's claim for deduction.

12. In the result, petition is allowed. Impugned notice at Annexure A is quashed.

ESHA

*In favour of assessee.

IT : To re-open an assessment beyond prescribed time-limit, section 153 requires that income which is excluded from total income of one person must be held to be income of another person and such other person should be given an opportunity of being heard

■■■

[2013] 34 taxmann.com 197 (Delhi)

HIGH COURT OF DELHI

Rural Electrification Corporation Ltd.

Commissioner of Income-tax - (LTU)*

BADAR DURREZ AHMED AND VIBHU BAKHRU, JJ.

W.P. (C) NOS. 7944 TO 7947 OF 2011

APRIL 23, 2013

Section 153, read with sections 149 and 150, of the Income-tax Act, 1961 - Income escaping assessment - Time-limit for completion of [Explanation 3] - Assessment years 1999-2000 to 2002-03 - Whether to re-open an assessment beyond prescribed time-limit, section 153 requires that income to be excluded from total income of one person must be held to be income of another person and such other person should be given an opportunity of being heard - Held, yes - Assessee, a public financial institution, advanced a sum to a co-operative society - Said society had created a special corpus fund and earned interest income - Tribunal in assessment of society held that interest income was taxable in hands of assessee and not in hands of society - On basis of said order, assessment of assessee was sought to be re-opened beyond period of six years - Assessee raised plea that reassessment was time-barred under section 149 and since it was not provided with opportunity of being heard, section 153 would not apply - Whether in absence of opportunity of hearing given to assessee, deeming provision provided in Explanation 3 to section 153 did not get attracted and, thus, bar of limitation prescribed under section 149 would not be lifted - Held, yes - Whether since section 149 restricts time period for reopening to a maximum of six years from end of relevant assessment year, notices for reopening were time-barred - Held, yes [Para 17] [In favour of assessee]

FACTS

■		The assessee was a public financial institution engaged in business of providing finance for rural electrifications. It had advanced loans to a Co-operative Electrical Supply Society which created a special corpus fund. The said society earned interest on the special fund.
■		The Tribunal, in case of said society, had passed a consolidated order pertaining to assessment years 1999-2000 to 2006-07 that the interest income was not taxable in the hands of the society but it was taxable in the hands of the assessee.
■		On that basis, the Assessing Officer issued the notices dated 23-3-2011 under section 148 seeking to reopen the assessments for the assessment years 1999-2000 to 2002-03 of the assessee.
■		The assessee challenged said re-opening and submitted that all the notices under section 148 had been issued beyond the period of six years as stipulated in section 149 and the bar of limitation prescribed in section 149 would be applicable and that the provisions of section 150 read withExplanation 3 in section 153 would not apply as an opportunity of hearing had not been given to the before it the Tribunal passed the said order.

HELD

■		Before a notice under section 148 can be issued beyond the time limits prescribed under section 149, the ingredients of Explanation 3 to section 153 have to be satisfied. Those ingredients require that there must be a finding that income which is excluded from the total income of one person must be held to be income of another person. The second ingredient being that before such a finding is recorded, such other person should be given an opportunity of being heard. In the context of the present case, when the Tribunal held in favour of the said society by concluding that the interest income was not taxable in its hands and held against the petitioner by concluding that the said interest income ought to have been taxed in the hands of the petitioner, an opportunity of hearing ought to have been given to the petitioner. The fact that such an opportunity was not given, has been recognized by the revenue in the order disposing of the objections dated 20-10-2011, where it has been observed that there was no need to have afforded an opportunity to the petitioner. Even in the counter affidavit, the revenue has taken the stand that it was not at all necessary for the Tribunal to have allowed an opportunity of hearing to the petitioner because that was in respect of the assessment proceedings pertaining to the said society. [Para 14]
■		From the above, it is clear that no opportunity of hearing was given to the petitioner prior to the passing of the order dated 13-1-2010 by Tribunal, in the cases of the said society. As such, one essential ingredient of Explanation 3 was missing and, therefore, the deeming clause would not get triggered. That being the position, section 150 would not apply and, therefore, the bar of limitation prescribed by section 149 is not lifted. [Para 15]
■		The revenue submitted that an opportunity of hearing could not be given to the petitioner because at the stage when the Tribunal was hearing the appeal pertaining to the said society, there was no way to ascertain as to whether the decision would go in favour of the said society or not. In particular, revenue submitted that the question as to whether the interest income could be taxed at the hands of the petitioner would only come to be decided after the Tribunal came to the conclusion that it was not to be taxed in the hands of the society and, till that stage, there was no question of granting any opportunity of hearing to the petitioner. Be that as it may, the specific condition for attracting the deeming provision of Explanation 3to section 153 requires that the person ought to be given an opportunity of being heard before an order is passed whereunder any income is excluded from the total income of one person and held to be the income of another person. It is not as if the revenue is being faulted or the Tribunal is being faulted for not granting an opportunity of hearing to the petitioner. The placing of a blame is not the issue. What is relevant is whether the petitioner had been given an opportunity of hearing before the Tribunal concluded that the interest income was taxable in its hands and not in the hands of the society. It is obvious that this flows from the general principle that no prejudice should be caused to anybody without that person having been heard. [Para 16]
■		In view of the fact that the deeming provision provided in Explanation 3 to section 153 does not get attracted because an opportunity of hearing had not been given to assessee and the provisions of section 150 would also not be attracted, the normal provisions of limitation prescribed under section 149 would apply. Those provisions restrict the time period for re-opening to a maximum of six years from the end of the relevant assessment year. In the present writ petitions, the notices section 148 had all been issued beyond the said period of six years. Therefore, the said notices are time-barred. [Para 17]

CASES REFERRED TO

ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) (para 9) and A.B. Parikh v. ITO [1993] 203 ITR 186 (Guj). (para 13).

M.S. Syali, Satyen Sethi, Mayank Nagi and Arta Trana Panda for the Appellant. Kiran Babu for the Respondent.

JUDGMENT

Badar Durrez Ahmed, J. - These writ petitions pertain to the assessment years 1999-2000, 2000-2001, 2001-2002 and 2002-2003. In these petitions the common issue relates to the initiation of reassessment proceedings by issuance of notices under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the said Act'). All the four notices were issued on 23.03.2011.

2. The purported reasons for believing that income had escaped assessment have been disclosed as under:-

"11. Reasons for the belief that income has escaped assessment.

1. In this case assessment under section 147/148 was completed on 17.2.2005 at an income of Rs. 249,38,81,974/-. The assessee company is a public financial institution engaged in business of providing finance for rural electrifications.

2. Information was received from Addl. CIT, Karimnagar Range, Karimnagar vide his letter No. Addl. CIT/KNR/Appeals/2010-11 dated 1.11.2010 that the assessee company had advanced a loan to M/s. The Cooperative Electrical Supply Society Ltd., Siricilla. This Society has created a corpus of special fund amounting to Rs.10 crores. The society earned interest on this special fund but did not disclose it in its return for the reason that the money belonged to M/s. REC i.e. Assessee Company and any income earned was also on behalf of Assessee Company. The ITAT, Hyderabad in its consolidated order in ITA Nos. 1112 to 1115 & 1198 to 1199 of 2005, 1635 of 2008 and 570 of 2009 dated 13.01.2010 for assessment years 1999-00 to 2006-07 had held that this income was not taxable in the hands of the society but ought to be taxed in the hands of the assessee company. The ACIT-Cir-1, Karimnagar vide his letter No.F.No. CESS/ACIT/Knr. has forwarded the details or such income at Rs.73,50,000/- on account of interest on REC Bonds & Rs.9,80,877/- on account of interest from commercial banks for the relevant assessment year.

3. Therefore, I have reasons to believe that income of Rs.83,30,877/- has escaped assessment within the meaning of section 147 which warrants issue of notice under section 148 r.w.s. 150 of the Income tax Act, 1961."

3. We may point out at this stage that subsequent to the reasons being supplied to the petitioner, objections were filed and the same had been rejected by virtue of order dated 20.10.2011. Shortly thereafter these writ petitions were filed before this court. At the initial stage, this court had directed that the proceedings may go on pertaining to the said notices under Section 148 of the said Act and orders may also be passed but the same shall not be given effect to. Subsequently, the Assessing Officer had passed assessment orders in respect of each of the years. Although those orders were served on the petitioner, we had, by virtue of an order dated 01.02.2012, indicated that those orders would be of no effect.

4. Coming back to the purported reasons indicated by the Assessing Officer, which we have extracted above, we find that the assessments are sought to be reopened on the ground that the Income Tax Appellate Tribunal, Hyderabad had passed a consolidated order dated 13.01.2010 pertaining to assessment years 1999-2000 to 2006-2007 and held that the interest income was not taxable in the hands of the Co-operative Electrical Supply Society Ltd., Siricilla but, was taxable in the hands of the petitioner. As can be seen from the purported reasons, the petitioner had advanced loans to the said Co-operative Electrical Supply Society Ltd. which created a special corpus fund. The said society earned interest on the special fund but did not disclose it in its returns of incomes on the ground that the money, as mentioned in the purported reasons, actually belonged to the petitioner and that any income earned thereon was on behalf of the petitioner. The Tribunal agreed with the submissions of the said Co-operative Electrical Supply Society Ltd. and held that the said interest income was not taxable in the hands of the society but ought to be taxed in the hands of the petitioner.

5. The learned counsel for the petitioner pointed out that though the Tribunal had returned a finding that the said interest income was not taxable in the hands of the said society, there was no specific or clear finding that the same should be taxed in the hands of the petitioner. The exact findings returned by the Tribunal are as under:-

"… Applying the aforesaid tests to the facts of the case before us, it is clear that there is no diversion of income by overriding title by M/s. REC in favour of the assessee-society. The income by way of interest, etc. has accrued to M/s. REC in its own right. The amount so collected was retained by M/s. REC and was available with it for use and application as per its directions. The income in this case never reached the assessee by virtue of any overriding title. A reading of various clauses of the Revised Rules on the Constitution and Administration of Special Fund dated 30.1.1997 makes it clear that the first charge on the Special Fund Account shall be of M/s. REC and that it shall be the outstanding loan against the assessee and the assessee is merely a custodian of the amount in the Special Fund created as per instructions and rules framed by M/s. REC. In these facts of the case, we hold that there is no diversion of income at source by overriding title by M/s. REC in favour of the assessee society and the ownership of the special fund remains with M/s REC and therefore, the income from the special fund amount does not accrue to the assessee. In this view of the matter, we hold that the interest accrued on the special fund amount including the FDs made there from does not accrue to the assessee society and the assessee is accordingly not liable to pay tax thereon. Accordingly, the grounds of appeal taken by the assessee in its appeals are allowed."

It is, therefore, apparent that the Tribunal had come to the clear conclusion that the interest income was not to be taxed in the hands of the said society but was taxable in the hands of the petitioner. It is on this basis that the Assessing Officer issued the impugned notices under Section 148 seeking to reopen the assessments for the assessment years 1999-2000 to 2002-2003.

6. Mr. Syali, senior advocate, appearing on behalf of the petitioner submitted that all the notices under Section 148 had been issued beyond the period of six years stipulated in Section 149 of the said Act. He submitted that the bar of limitation prescribed in Section 149 would be applicable unless the revenue was able to establish that the present cases fell within Section 150 of the said Act read with Explanation 3 to Section 153.

7. The relevant provisions need to be referred to at this juncture. They are as under:-

"150. Provision for cases where assessment is in pursuance of an order on appeal, etc. - (1) Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

(2) The provisions of sub-section (1) shall not apply in any case where any such assessment, reassessment or recomputation as is referred to in that sub-section relates to an assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject-matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken."

"153. Time limit for completion of assessments and reassessments. -

(3) The provisions of sub-sections (1), (1A), (1B) and (2) shall not apply to the following classes of assessments, reassessments and recomputations which may, subject to the provisions of sub- section (2A), be completed at any time—

(i)**

(ii) where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 250, 254, 260, 262, 263, or 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act;

(iii) where, in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under section 147.

Explanation 2.- Where, by an order referred to in clause (ii) of sub-section (3), any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order.

Explanation 3.- Where, by an order referred to in clause (ii) of sub-section (3), any income is excluded from the total income of one person and held to be the income of another person, then, an assessment of such income on such other person shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, provided such other person was given an opportunity of being heard before the said order was passed." [Emphasis supplied]

8. After reading the said provisions, Mr Syali submitted that Section 150 could be invoked only if the reassessment was sought to be done as a consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the said Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

9. Referring to the specific provisions of Section 150(1) of the said Act, Mr Syali submitted that these provisions were in pari materia to the second proviso to Section 34(3) of the Income Tax Act, 1922 which had been interpreted by the Supreme Court in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC). For the sake of convenience the provisions of Section 34(3) of the 1922 Act are reproduced below:-

"(3) No order of assessment or reassessment, other than an order of assessment under Section 23 to which clause (c) of sub-section (1) of Section 28 applies or an order of assessment or reassessment in cases falling within clause (a) of sub-section (1) or sub-section (1) of this section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable:

Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if at the time of the assessment or re-assessment the four years aforesaid have already elapsed:

Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made shall apply to a re-assessment made under Section 27 or to an assessment or re- assessment made on the assessee or any person in consequence of or to given effect to any finding or direction contained in an order under Section 31, Section 33, Section 33-A, Section 33-B, Section 66 or Section 66-A." [Emphasis supplied]

The said decision was that of a Constitution Bench in which the Supreme Court took the view that the said proviso was applicable in respect of an order passed against the person whose assessment was sought to be reopened and only to such other persons who were intimately connected such as a partner or member of the HUF. The Supreme Court held as under:-

"We would, therefore, hold that the expression "any person" in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal."

10. As mentioned above, an illustration of such a category of 'intimately connected' persons, the Supreme Court referred to a partner or partners of a firm and a member of a Hindu Undivided Family. The Supreme Court observed that in such cases though the persons may not have been parties by name to the appeal, their assessments would depend on the assessments of the partnership firm or the Hindu Undivided Family. It is obvious that it would not include the assessment of any other person who was not intimately connected with the person in whose case the order had been passed. The Supreme Court also held that the said proviso to Section 34(3) of the 1922 Act would not save the time limit prescribed under Section 34(1) of the 1922 Act in respect of an escaped assessment of a year other than that which was the subject-matter of the appeal or the revision, as the case may be.

11. When the Income Tax Act, 1961 was enacted, Section 153 did not contain the Explanations 2 and 3. Those Explanations were introduced subsequently in 1964 after the Supreme Court decision in Murlidhar Bhagwan Das (supra). It is therefore, apparent that the two Explanations were added so as to supersede the view taken by the Supreme Court in respect of the 1922 Act. Explanation 2 in Section 153 makes it clear that even where any income is excluded from the total income of the assessee from a particular assessment year, then an assessment of such income for another assessment year shall, for the purpose of Section 150 as also of Section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. In other words, a finding in respect of a different year can also be used for the purposes of invoking the provisions of Section 150 of the said Act, by virtue of the deeming provision contained in Explanation 2 in Section 153 of the said Act. This would otherwise not have been available in view of the decision of the Supreme Court in Murlidhar Bhagwan Das (Supra). Similarly, Explanation 3 stipulates that where, by an order inter-alia passed by the Tribunal in an appeal, any income is excluded from the total income of one person and held to be the income of another person, then, assessment of such income on such other person shall, for the purposes of Section 150 as also Section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. However, this deeming provision is subject to a proviso that such other person ought to be given an opportunity of being heard before such an order is passed.

12. Coming back to the factual matrix of the present case, Mr Syali submitted that the provisions of Section 150 read with Explanation 3 in section 153 would apply only if an opportunity of hearing had been given to the petitioner herein, before the Tribunal passed the order dated 13.01.2010 in the case of the said society wherein the Tribunal held that the interest income was not taxable in the hands of the said society but ought to have been taxed in the hands of the petitioner herein. Mr Syali submitted that this was a condition precedent before the deeming clause could be invoked and thereby the provisions of Section 150 could be attracted so as to lift the bar of limitation prescribed under Section 149 of the said Act.

13. Mr Syali placed reliance on the decision of the Gujarat High Court in the case of A.B. Parikh v. ITO [1993] 203 ITR 186 (Guj). In particular, he placed reliance on the following observations of the said High Court:

"Section 149 lays down the time limits for issuance of notice under section 148. Section 150(1) forms an exception to it and provides that a notice under section 148 could be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to, any finding or direction contained in an order in appeal, reference or revision under the Act. Similarly, section 153(3)(ii) using the same language as could be seen from the extract made above, provides that no time limit applies for completion of assessment which is made in consequence of, or to give effect to, any such finding or direction. Exclusion of time limit will depend on the same contingencies in both the cases. Explanations 2 and 3 to section 153 deem certain assessments to have been made in consequence of, or to give effect to, a finding or direction. We need not advert to Explanation 2, since it concerns the very assessee covered by the order in question. Explanation 3 referring to "another person" is relevant for our case, and the fiction enacted therein applies for the purposes of both section 150 and section 153. This is evident from the user therein of the set of expressions "for the purposes of section 150 and this section."

There is no gainsaying that this specific reference gives no room for exclusion of the application of the fiction set forth in Explanation 3 to section 153 even in respect of section 150. The result is for the purpose of section 150, so as to enable the authority to issue the notice under section 148 at any time without being curtailed by the time limit prescribed under section 149, there must be satisfaction of the ingredients under Explanation 3 to section 153. The endeavour of Mr. M.R. Bhatt, learned counsel for the respondent, was to bring the matter within the ambit of Explanation 3 to section 153."

"We must point out that there is no discussion in the pronouncement of the implications of Explanation 3 to section 153. Even otherwise, we are unable to spell out any parity between the facts of the case dealt with by the High Court of Patna and the facts of the present case. There the parties were very much in the picture from the inception putting forth the stand with reference to status and, in that view, it was held that they were vitally interested in the firm in which they were partners and in that context Explanation 3 to section 153 would come to the rescue of the Revenue and against the assessee. Our analysis of the implications of the provisions of the Act relevant for the purpose of our case, as done above, has left us with no other alternative but to allow this special civil application. Since we have sustained the first point relating to bar of limitation and that has served the cause of the petitioner, we have not gone to the second point. Accordingly, we allow this special civil application and the impugned show cause notice as per annexure A is quashed. We make no order as to costs."

14. It is apparent from the said decision that before a notice under Section 148 can be issued beyond the time limits prescribed under Section 149, the ingredients of Explanation 3 to Section 153 have to be satisfied. Those ingredients require that there must be a finding that income which is excluded from the total income of one person must be held to be income of another person. The second ingredient being that before such a finding is recorded, such other person should be given an opportunity of being heard. In the context of the present case, when the Tribunal held in favour of the said society by concluding that the interest income was not taxable in its hands and held against the petitioner by concluding that the said interest income ought to have been taxed in the hands of the petitioner, an opportunity of hearing ought to have been given to the petitioner. The fact that such an opportunity was not given, has been recognized by the revenue in the order disposing of the objections dated 20.10.2011, where it has been observed that there was no need to have afforded an opportunity to the petitioner. Even in the counter affidavit, the revenue has taken the stand that it was not at all necessary for the Income Tax Appellate Tribunal to have allowed an opportunity of hearing to the petitioner because that was in respect of the assessment proceedings pertaining to the said society.

15. From the above, it is clear that no opportunity of hearing was given to the petitioner prior to the passing of the order dated 13.01.2010 by the Income Tax Appellate Tribunal, Hyderabad in the cases of the said society. As such, one essential ingredient of Explanation 3 was missing and, therefore, the deeming clause would not get triggered. That being the position, Section 150 would not apply and, therefore, the bar of limitation prescribed by Section 149 is not lifted.

16. The learned counsel for the revenue submitted that an opportunity of hearing could not be given to the petitioner because at the stage when the Tribunal at Hyderabad was hearing the appeal pertaining to the said society, there was no way to ascertain as to whether the decision would go in favour of the said society or not. In particular, the learned counsel for the respondent / revenue submitted that the question as to whether the interest income could be taxed at the hands of the petitioner would only come to be decided after the Tribunal came to the conclusion that it was not to be taxed in the hands of the society and, till that stage, there was no question of granting any opportunity of hearing to the petitioner. Be that as it may, the specific condition for attracting the deeming provision of Explanation 3 to Section 153 requires that the person ought to be given an opportunity of being heard before an order is passed whereunder any income is excluded from the total income of one person and held to be the income of another person. It is not as if the revenue is being faulted or the Tribunal is being faulted for not granting an opportunity of hearing to the petitioner. The placing of a blame is not the issue. What is relevant is whether the petitioner had been given an opportunity of hearing before the Tribunal concluded that the interest income was taxable in its hands and not in the hands of the society. It is obvious that this flows from the general principle that no prejudice should be caused to anybody without that person having been heard.

17. In view of the fact that the deeming provision provided in Explanation 3 to Section 153 does not get attracted in the present case because an opportunity of hearing had not been given to the petitioner, the provisions of Section 150 would also not be attracted. In such a situation, the normal provisions of limitation prescribed under Section 149 of the said Act would apply. Those provisions restrict the time period for reopening to a maximum of six years from the end of the relevant assessment year. In the present writ petitions, the notices under Section 148 have all been issued beyond the said period of six years. Therefore, we are of the view that the said notices are time barred.

18. Consequently, the writ petitions are allowed. The impugned notices under Section 148 of the said Act are set aside and so, too, are all the proceedings pursuant thereto, including the assessment orders that have been passed. There shall be no order as to costs.

POOJA

The idea of filing income tax would give many of us nightmares. With the last date for filing income tax soon approaching, most of us would have already begun the process of filing our returns. The due date for filing personal income-tax returns for the financial year 2012-13 is July 31, 2013.

Generally, many of us who are employed will get a Form 16 from our employer and we usually refer to details in that form to file our returns. However, there are few other heads of income which we should report (taxable or non-taxable) while filing our tax returns.

Employers would give us our Form 16 based on the declaration and proofs we submit. Most of us would declare and submit proofs for house rent allowance (HRA), leave travel allowance (LTA) and our savings under sections 80C (PPF, EPF, insurance, etc.)

There are a few more sources of income which one must disclose. The disclosure can be done either to our employer (so that they are taken care of in Form 16) or while filing our returns.

Some of them are:

1. Interest earned from savings bank account: This interest is tax free up to Rs. 10,000. Any interest earned above that is taxable and should be declared.

2. Interest earned from fixed deposits: This is taxable as per one's income tax slab. Most of the time banks deduct 10 per cent TDS when the interest accrued is more than Rs. 10,000 (unless one submits Form 15 G/H). However, the actual tax liability will be more or less, depending upon the tax bracket one falls under after all incomes and deductions are claimed.

3. Interest earned from recurring deposits: This interest is taxable as per one's income tax slab. Banks do not cut any TDS on interest earned on recurring deposits and, hence, it becomes even more important to declare this source of income.

4. Cash gifts: Cash gifts of over Rs. 50,000 should be declared as they are taxable (unless for specific occasions like marriage)

5. Capital gains/losses: Any capital gains/losses made from trading equities, selling mutual funds, gold, etc. should be declared even though they may be non-taxable (e.g. for equities, long-term capital tax is nil). Similarly, any losses should be declared as these help in offsetting gains for subsequent years.

6. Exempt income: Exempt income (e.g. interest earned on PPF/EPF accounts) should be declared for auditing purposes only. This is a tax-free income.

7. Dividend income: Dividend income is tax free in the hands of the investor. However, this should be declared while filing income tax returns.

IT: Where assessee disclosed certain income in its regular return filed within prescribed time for assessment year 1999-2000, amount so disclosed could not be added to assessee's undisclosed income computed in pursuance of block assessment proceedings initiated for block period 1-4-1989 to 11-5-1999

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[2013] 34 taxmann.com 200 (Karnataka)

HIGH COURT OF KARNATAKA

Commissioner of Income-tax

K.S. Puttaswamy (HUF)*

N. KUMAR AND B. MANOHAR, JJ.

IT APPEAL NO. 39 OF 2007†

APRIL 1, 2013

Section 158BA of the Income-tax Act, 1961 - Block assessment in search cases - Assessment of undisclosed income [Amount disclosed in regular return] - Block period 1-4-1989 to 11-5-1999 - Pursuant to search proceedings, Assessing Officer passed a block assessment order wherein certain addition was made on account of undisclosed income - Appellate authority reappreciated entire material on record and held that time limit for filing of return for assessment year 1999-2000 was not over - Since assessee had disclosed income in question in return for assessment year 1999-2000, addition made by Assessing Officer was deleted - Tribunal confirmed order of appellate authority holding that assessee had already disclosed income in regular return filed by him within time - Whether since two fact finding authorities had deleted impugned addition on proper appreciation of material on record, impugned order passed by said authorities was to be upheld - Held, yes [Para 6] [In favour of assessee]

M. Thirumalesh for the Appellant. S. Parthasarathi for the Respondent.

JUDGMENT

N. Kumar, J. - The Revenue has preferred this appeal against the order passed by the Tribunal, which has upheld the order of the appellate authority holding that the additions cannot be treated as undisclosed income within the meaning of Chapter XIV B of the Income Tax Act.

2. A search was conducted at the residence assessee. Some documents were seized by them under Section 158 BD of the Act. The Assessment Officer made an addition of Rs. 1,05,600 on account of rent, Rs.3,95,262 for capital gains of Tumkur property and interest of Rs.33,333 on fixed deposits, for the block period.

3. Aggrieved by the said order, the assessee preferred an appeal to the appellate authority. The appellate authority on reappreciation of the entire material on record held that the time limit for filing of the returns for the assessment year 1999-2000 was not over. The assessee has disclosed the income in the return for the assessment year 1999-2000 filed on 29.06.2001. There is nothing on record factually to indicate that there is any undisclosed income as the income of all the years up to 31st March, 1998 was well within the taxable limit. Therefore he set aside the order passed by the Assessing Authority.

4. Aggrieved by the same, the Revenue preferred an appeal to the Tribunal. The Tribunal held that the assessee had already disclosed the aforesaid income in regular return filed by him within time. There was no taxable income during the block period. In those circumstances, the order passed by the First Appellate Authority is valid and legal and do not suffer from any infirmity. Therefore the Tribunal dismissed the appeal.

5. The appeal was admitted on 01.10.2007 to consider the following substantial question of law:

"Whether the Appellate Authorities were correct in holding that the income detected in the course of search cannot be brought to tax as the undisclosed income for the block period despite this income not being disclosed in the normal books of accounts maintained as per Section 158BA(3) read with Section 158B(b) and that the return of income for the first time was filed for the assessment year 1999-2000 after the expiry of the period prescribed under Section 139(1) of the Act and no advance tax on the said amount was paid."

6. The facts are not in dispute. The dispute pertains to a sum of Rs.54,666 income on interest on fixed deposits, a sum of Rs.8,35,522 income under the head of capital gains and Rs.7,19,358 addition on account of rental income. The assessee has filed its return for the assessment year 1999-2000 on 29.06.2001 disclosing the aforesaid income. That is the income for the relevant assessment year for the block period, though the assessee had incurred, it was well within the taxable limit. It is by adding 10 years income, it was made to appear as if, he is evading tax. Two fact finding authorities on proper appreciation of the material on record have exposed this mistake committed by the Assessing Authority.

In that view of the matter, we do not find any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the revenue.

SUNIL

IT : A gift through a loan is not a genuine gift

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[2013] 34 taxmann.com 95 (Amritsar - Trib.)

IN THE ITAT AMRITSAR BENCH

Sat Pal John

Income-tax Officer, Nakodar*

H.S. SIDHU, JUDICIAL MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER

IT APPEAL NO. 92 (ASR.) OF 2011
[ASSESSMENT YEAR 2006-07]

APRIL 30, 2013

Section 68 of the Income-tax Act, 1961 - Cash credit [Gift] - Assessment year 2006-07 - Whether in case of a gift, it is necessary not only to establish identity of donor, but also creditworthiness of donor to show that money belongs to donor - Held, yes - Assessee had received gift of two sums from his brother's wife 'A' settled in UK - Statement of 'A' revealed that she was not a person of means or knowledge about her financial affairs and her finances were managed by her husband - Facts revealed that she had no independent source of income and money was not given from her own bank account or her sources, but stated to have been given out of a loan - Whether on facts, creditworthiness of donor was not proved and, therefore, amounts of gift would be added to assessee's income under section 68 - Held, yes [Para 6] [In favour of revenue]

FACTS

■		During relevant assessment year, the assessee received two gifts of Rs. 2,34,000 and Rs. 2,35,000 from his sister-in-law 'A' (Brother's wife) who along with his brother settled in UK. One of said two gifts came from A's NRE account in Indian bank and other from UK branch of Indian bank.
■		In the assessment proceedings, the assessee, to prove creditworthiness of 'A', submitted that his brother was doing barber business in UK and his sister-in-law was assisting him in his business; and that she had received 2241 pounds as allowance from the UK Government.
■		The Assessing Officer asked the assessee to give details of the bank account of 'A' from where the remittances were made but the same were not submitted. The assessee stated before the Assessing Officer that a sum of 6000 pounds was advanced by one 'J', cousin of assessee, to 'A' and thereafter 'A' made the gifts to the assessee.
■		The Assessing Officer noted that 'A' had received only Rs. 1,74,085 from the UK Government during relevant period and she had no other independent source of income. He was, therefore, not satisfied of the creditworthiness of 'A', more so since the utilization of the money received from UK Government was not submitted. He also noted that though 'A' claimed to have operated her bank accounts herself, she was not aware of the bank deposits in her bank account and expressed her inability to state the nature of the money she had given to the assessee: whether it was a loan or a gift. She was also not aware that the money given to the assessee had been received back or not. No gift deed in respect of amounts advanced to assessee by her was executed either in India or in the UK. The Assessing Officer, therefore, held that the assessee was not able to discharge his onus of proving the capacity and creditworthiness of the donor, and the source from where the funds were alleged to have been gifted was not clarified. He held the gift to be not genuine and made addition to the assessee's income.
■		The Commissioner (Appeals) confirmed the action of the Assessing Officer.
■		On second appeal:

HELD

■		The facts clearly show that the money stated to have been gifted by 'A' to the assessee was not her own, even if the loan from 'J' is accepted to be genuine. This is a significant factor as far as the genuineness of the gift is concerned. A gift normally connotes a transaction where a person parts his own property to another without consideration and for love and affection. It is rare to come across a person who makes a gift of money to another out of the borrowed funds. Moreover, 'A' was not a person of substantial means. The assistance from the Government of UK which is stated to have been received by her is on account of child tax credit amounting to 2241.10 pounds vide intimation dated 30-1-2006 (after the gifts were remitted) and she admits that she had no other independent source of income. Since she had no other independent source of income, it is not clear as to how she proposed to repay the loan of 6000 pounds taken from 'J'. More importantly, it is not clear as to why the "gift" was made out of the borrowed funds.
■		It is claimed that the money was received by the assessee so as to remove the other partners from his partnership firm and to bring his brother and his sister-in-law 'A' into the same partnership firm. If it is so, the claim of "gift" does not appear to be genuine. Quid pro quo is apparently involved in the entire transaction. In case the money has genuinely come from 'A, it would imply a consideration for taking a share in the partnership firm. Nevertheless the important point is that the creditworthiness of 'A' is certainly not proved since she had no independent source of income and she certainly did not have enough money of her own to advance a gift to the assessee. Both the remittances sent to the assessee through banking channels were transactions entered into by the assessee's brother by purchase of drafts and the only source of the same is stated to be a loan taken in cash from 'J', which being a late claim as also being in cash, is not verifiable and is quite doubtful. A gift through a loan is apparently not a genuine gift. There is no immediate occasion for giving the gift and the stated purpose for the gift appears to be a business consideration.
■		The statement of 'A' reveals that she was certainly not a person of means or knowledgeable about her financial affairs and her finances were being managed by her husband. Initially, she denied having given any gift to the assessee in cash, but later on stated that some gift was given, but again, she was unable to tell the amount or date or mode of gift.
■		Her statement, coupled with the fact that she had no independent source of income, and the fact that the money was not given from her own bank account or her sources, but stated to have been given out of a loan, leads to uphold the Assessing Officer's conclusion that the creditworthiness of the donor is not proved. In the case of a gift, it is necessary not only to establish the identity of the donor, but the creditworthiness of the donor also needs to be established to show that the money belongs to the donor.
■		Merely because a gift has come through banking channels and from identifiable sources would not be sufficient to discharge the burden of the assessee in respect of cash credit shown to be a gift, unless inter alia, the creditworthiness of the donor was also proven.
■		In the instant case, the alleged donor, 'A, is certainly not shown to be creditworthy since she had no independent sources of income and even the allowance received from the UK Government was not sufficient to cover the alleged gifts. The claim of taking a loan from 'J' is doubtful since the transaction was admittedly in cash and the claim has also been made at a very late stage. The transaction is also not verifiable. Further, the claim of making gift out of the borrowed money is against normal human probability.
■		The contention that the assessee had no other source of income is not relevant as far as addition under section 68 is concerned, since this is a deeming provision which treats unexplained cash credit as the assessee's income. [Para 6]
■		In the facts and circumstances of the case, there is no infirmity in the order of the Commissioner (Appeals), who has rightly confirmed the action of the Assessing Officer. [Para 7]

CASE REVIEW

Tirath Ram Gupta v. CIT [2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj. & Har.); Yash Pal Goel v. CIT (Appeals) [2009] 310 ITR 75/181 Taxman 175 (Punj. & Har.) and Subhash Chand Verma v. CIT [2009] 311 ITR 239/[2007] 164 Taxman 401 (Punj. & Har.) (para 6) followed.

CASES REFERED TO

Ram Lal Agarwal v. CIT [2006] 280 ITR 547/[2005] 149 Taxman 342 (All.)(para 2) CIT v. Kamdhenu Steel & Alloys Ltd. [2012] 206 Taxman 254/19 taxmann.com 26 (Delhi) (para 2), Tirath Ram Gupta v. CIT [2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj & Har.) (para 6), Yash Pal Goel v. CIT (Appeals) [2009] 310 ITR 75/181 Taxman 175 (Punj & Har.) (para 6) and Subhash Chand Verma v. CIT [2009] 311 ITR 239/ [2007] 164 Taxman 401 (Punj & Har.) (para 6).

Parveen Jain for the Appellant. Tarsem Lal for the Respondent.

ORDER

1. This appeal of the assessee arises from the order of the CIT(A), Jalandhar, dated 18.01.2011 for the assessment year 2006-07. The assessee has raised following grounds of appeal:

"1.		That the CIT(A) erred in confirming the addition of Rs.4,69,000/- by treating the gifts received as income from undisclosed sources, without considering that gifts were received through NRE account and moreover the Assessing Officer has not brought any material on record to show that it was the assessees income from undisclosed sources.
2.		Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in confirming the whole addition of Rs. 4,69,000/- by doubting the credit worthiness of donor and genuineness of transaction, without considering that there were ample funds at the disposal of the donor.
3.		That the addition confirmed by the Hon'ble CIT(A) is arbitrary, illegal, illogical and unwarranted without considering the facts and circumstances of the case.
4.		That the appellant craves to leave or amend grounds of appeal till the appeal remains undisposed off."

2. The brief facts in the grounds of appeal of the assessee are that the assessee had received gifts of various sums during the relevant previous year including a sum of Rs.2,34,000/- on 10.10.2005 and Rs.2,35,000/- on 03.11.2005, which were stated to be gifts from his sister in law Smt. Amarjit Kaur, who was settled alongwith his brother Ram Gopal in the UK. The assessee's brother Sh. Ram Gopal had also gifted sums of Rs.1,93,800/-, Rs.1,97,242/- and Rs.1,97,242/- of different dates in the month of March, 2006 to him. The gifts from Sh. Ram Gopal had been given from Sh. Ram Gopal's bank account No.13539 in Bank of India whereas the gifs from Smt. Amarjit had come from Canara Bank, Nakodar Branch NRE A/c No.40439 and Bank of Baroda, Birmingham, UK Branch respectively. In the assessment in the case of M/s. Gupta Brothers, where the assessee is a partner, these gifts totaling Rs.4,69,000/- received from Mrs. Amarjit were credited to his capital account were added on protective basis as the AO was of the opinion that these gifts were not genuine. Since the AO was of the opinion that the addition should be made primarily in the hands of the assessee and not of the firm. The assessment of the assessee was reopened u/s 147. In the assessment proceedings, the assessee submitted that his brother Sh. Ram Gopal was doing barber business in the UK and his sister-in-law was assisting him in his business. The income tax computation sheet of Sh. Ram Gopal in the UK showing income of Rs.17003/- pounds was submitted and it was also contended that Smt. Amarjit Kaur had received 2241 pounds as allowance from the UK government. The sum of Rs.2,35,000/- stated to be gift from Smt. Amarjit was stated to be given from her NRE Account/Cheque No.289801 in Canara Bank, Nakodar and the source of this sum was stated to be remittance by draft by Sh. Ram Gopal in UK. The other gift of Rs.2,34,000/- was also stated to be a cheque purchased by his brother Sh. Ram Gopal. Copies of the cheques were submitted before the AO as also the confirmation of all the gifts filed during the assessment proceedings. It was pointed out that Smt. Amarjit Kaur had also appeared before the AO and had admitted that these gifts were made by her. It was stated that she did not give the amount of gift or date in reply to a question during the statement since she was illiterate, but the same was reflected in her bank pass book.. Further, the A.O. asked the assessee to give the bank account of Smt. Amarjit Kaur from where the remittances were made but the same were not submitted. The assessee stated before the AO that a sum of 6000 pounds was advanced by Sh. Jatinder Kumar Sidhu, cousin of Sh. Satpal John on 06.10.2005 to Smt. Amarjit Kaur and thereafter Smt. Amarjit Kaur made the gifts to the assessee. The assessee also furnished a copy of bank account of Sh. Jatinder Kumar Sidhu with Barclays Bank alongwith his confirmation for advancing 6000 pounds.

2.1 The AO also noted that Smt. Amarjit Kaur had received only Rs.1,74,085/- from the UK Govt. between 06.04.2005 to 05.04.2006 and she had no other independent source of income. He was, therefore, not satisfied of the credit-worthiness of Smt. Amarjit Kaur, more so since the utilization of the money received from UK Govt. was not submitted. The AO noted that in the statement of Smt. Amarjit Kaur recorded during the assessment proceedings in the case of M/s. Gupta Bros, she could not give details of the bank account in which she had bank account at Nakodar or the amount deposited in the bank. She admitted that she had never given any type of gift whether in cash or kind to her parental relatives who were doing labour job in the village. Though she claimed to have operated her bank accounts herself, she was not aware of the bank deposits in her bank account. She expressed her inability to state the nature of the money she had given to the assessee: whether it was a loan or a gift and further admitted that all the transactions were between her husband and the assessee. She was also not aware that the money given to the assessee had been received back or not. No gift deed in respect of amounts advanced to assessee by her was executed either in India or in the UK. The AO, therefore, held that the assessee was not able to discharge his onus of proving the capacity and creditworthiness of the donor, and the sources from where the funds were alleged to have been gifted was not clarified. He noted that the occasion for making a gift was not established and no other instance of reciprocal gifts given by the assessee to his relatives or to the donor were informed. He also noted that the gifts were stated to be made out of funds of Sh. Ram Gopal and not of the donor Smt. Amarjit Kaur. He noted that during the assessment proceedings in the case of M/s. Gupta Bros; it was contended by Smt. Amarjit Kaur that she had given the gift from her own sources whereas a different stand was taken now that the money was taken from Sh. Jatinder Kumar Sidhu to give the gifts. He held that this was an after-thought and just to prove the genuineness of the gift. The AO held the gifts to be not genuine. He relied on the decision in the case of Ram Lal Agarwal v. CIT [2006] 280 ITR 547/[2005] 149 Taxman 342 (All.) and the judgment of the Hon'ble Delhi Court inCIT v. Kamdhenu Steel & Alloys Ltd. [2012] 206 Taxman 254/19 taxmann.com 26 (Delhi).

3. The Ld. CIT(A) confirmed the action of the Assessing Officer.

4. The Ld. counsel for the assessee, Mr. Parveen Jain, Advocate reiterated the submissions as made before the ld. CIT(A) by the Ld. AR before him.

5. The Ld. DR, on the other hand, relied upon the orders of both the authorities below.

6. We have heard the rival contentions and perused the facts of the case. The assessee has received two amounts of Rs.2,35,000/- on 03.11.2005 and Rs.2,34,000/- on 10.10.2005. We find no infirmity in the order of the ld. CIT(A), who has given the findings against the assessee in para 4.1 to 6 of his order that the sum of Rs.2,34,000/- was draft issued by Birmingham UK Branch whereas the sum of Rs.2,35,000/- is stated to be issued from NRE account of Canara Bank, Nakodar Branch by Smt. Amarjit Kaur. Sh. Ram Gopl is brother of the assessee and Smt. Amarjit Kaur is the wife of Sh. Ram Gopal. However, the source of both the remittances is not shown to be from Smt. Amarjit Kaur's bank accounts in the UK. In fact, no copy of her bank account in the UK has been submitted. It was contended before the AO in the assessment proceedings in the case of M/s. Gupta Bros. that since the money came from abroad and Smt. Amarjit Kaur had admitted having gifted these amounts to the assessee, the onus of the assessee was discharged in respect of the cash credits. Even during the assessment proceedings in the case of the assessee, the same contention was raised on 20th October, 2009. It is only on 7th December, 2009 that the assessee claimed that the sources of the funds gifted to the assessee was the money advanced by Sh. Jatinder Kumar Sidhu to the assessee after the AO asked for the production of bank statement of Smt. Amarjit Kaur. The copy of the bank account of Sh. Jatinder Kumar Sidhu shows a cash withdrawal of 6000 pounds in October, 2005, which is stated to have been given to Smt. Amarjit Kaur. Sh. Jatinder Kumar Sidhu is claimed to be a cousin of the assessee. These facts clearly show hat the money stated to have been gifted by Smt. Amarjit Kaur to the assessee was not her own, even if the loan from Sh. Jatinder Kumar Sidhu is accepted to be genuine. This is a significant factor as far as the genuineness of the gift is concerned. A gift normally connotes a transaction where a person parts his own property to another without consideration and for love and affection. It is rare to come across a person who makes a gift of money to another out of the borrowed funds. Moreover, Smt. Amarjit Kaur as not a person of substantial means. The assistance from the Govt. of UK which is stated to have been received by her is on account of child tax credit amounting to Rs.2241.10 pounds vide intimation dated 30.01.2006 (after the gifts were remitted) and she admits that she had no other independent source of income. Since she had no other independent source of income, it is not clear as to how she proposed to repay the loan of 6000 pounds taken from Sh. Jatinder Kumar Sidhu. More importantly, it is not clear as to why the "gift" was made out of the borrowed funds. It is claimed that the money was received by the assessee so as to remove the other partners from the partnership firm M/s. Gupta Bros. and to bring his brother Sh. Ram Gopal and his sister-in-law Smt. Amarjit Kaur into the same partnership firm. If it is so, the claim of "gift" does not appear to be genuine. Quid pro quo is apparently involved in the entire transaction. In case the money has genuinely come from Smt. Amarjit Kaur, it would imply a consideration for taking a share in the partnership firm. Nevertheless the important point is that the credit-worthiness of Smt. Amarjit Kaur is certainly not proved since she had no independent source of income and she certainly did not have enough money of her own to advance a gift to the assessee. Both the remittances sent to the assessee through banking channels were transactions entered into by Sh. Ram Gopal by purchase of drafts and the only source of the same is stated to be a loan taken in cash from Sh. Jatinder Kumar Sidhu, which being a late claim as also being in cash, is not verifiable and is quite doubtful. A gift through a loan is apparently not a genuine gift. There is no immediate occasion for giving the gift and the stated purpose for the gift appears to be a business consideration. A perusal of the statement of Smt. Amarjit Kaur recorded by the AO on 20^th August, 2008 in the presence of the assessee's Chartered Accountant is also quite revealing. She admitted that she was uneducated and could not read or write any language and spoke in Punjabi only. Her brothers were stated to be doing labour job in India. She stated that she had no independent source of income and she only helped her husband in his business who was running a barber shop. She had 3 children, out of which one was married about 4 years ago and the rest were school/college going. She stated that she received some allowance from the UK Govt. and did not remember the exact details. The allowance was stated to have been remitted to her bank account directly and withdrawn when she visited India. She stated that she operated her own bank account herself. She stated that she had not extended any help to her brothers or their children for her marriage. In response to question no.13, she stated she never gifted any amount to any of her in-laws in the past, though some gifts in the nature of cloth, telephone or domestic use were given. She confronted that she had not made any gift in cash either to Sh. Sat Pal or any family member. Though she was aware of bank account in UK, she did not know the amount deposited therein. She was also aware of the bank account in Nakodar but did not remember the name of the bank or the amount deposited in the said bank account. In reply to question no.18 she stated that she had given some money to Sh. Sat Pal many times but did not remember the amount or the number of times the money was given, or whether it was a gift or a loan. When informed that Sh. Sat Pal had claimed to have received Rs.2,34,000/- and Rs.2,35,000/- from her and asked to confirm and give evidence for the same.She stated that she did not know the exact date and year of gift and had no evidence with her at that time. The aforesaid statement reveals that Smt. Amarjit Kaur was certainly not a person of means or knowledgeable about her financial affairs and her finances were being managed by Sh. Ram Gopal. Initially she denied having given any gift to the assessee in cash, but later on stated that some gift was given, but again, she was unable to tell the amount or date or mode of gift. Her statement, coupled with the fact that she had no independent source of income; the fact that the money was not given from her own bank account or her sources, but stated to have been given out of a loan, leads to uphold the AO's conclusion that the creditworthiness of the donor is not proved. In the case of a gift, it is necessary not only to establish the identity of the donor, but also the creditworthiness of the donor also needs to be established to show that the money belongs to the donor. In the case of Tirath Ram Gupta v. CIT[2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj & Har.) the Hon'ble High Court have held that a gift could not be accepted as such to be genuine merely because the amount had been given by way of cheque or draft through banking channels, unless the identity of the donor, his creditworthiness, relationship with the donee and the occasion was proved. It was further held by the Hon'ble Court that unless the receipts were proved to be genuine, the same could very well be treated to be an accommodation entry of the assessee's own money which was not disclosed for the purposes of taxation. It was further held that the above considerations for testing the genuineness of the gift were not exhaustive as there may be other reasons also which should be appropriate for considering the genuineness of the gift. In the case of Yash Pal Goel v. CIT (Appeals) [2009] 310 ITR 75/181 Taxman 175 (Punj & Har) the Hon'ble High Court held that the onus was on the assessee not only to establish the identity of the person making the gift, but his capacity to give gift and that it had actually been received as a gift from the donor. In the case of Subhash Chand Verma v. CIT [2009] 311 ITR 239 [2007] 164 Taxman 401 (Punj & Har) the Hon'ble High Court noted that there was no occasion for the donor to make gift and the assessee had failed to establish the financial capacity of the alleged gifts as unexplained cash credits was upheld. The aforesaid decisions by the Hon'ble Jurisdictional High Court clearly convey that merely because a gift has come through banking channels and from identifiable sources would not be sufficient to discharge the burden of the assessee in respect of cash credit shown to be a gift, unless inter-alia, the credit-worthiness of the donor was also proven. In the present case, the alleged donor, Smt. Amarjit Kaur, is certainly not shown to be credit worthy since she had no indepdent sources of income and even the allowance received from the UK Govt. was not sufficient to cover the alleged gifts. The claim of taking a loan from Sh. Jatinder Kumar Sidhu is doubtful since the transaction was admittedly in cash and the claim has also been made at a very late stage. The transaction is also not verifiable. Further, as noted earlier, the claim of making gift out of the borrowed money is against normal human probability. The contention that the assessee had no other source of income is not relevant as far as addition u/s 68 of the Act is concernd, since this is a deeming provision which treats unexplained cash credit as the assessee's income.

7. In the facts and circumstances of the case and in view of the decisions of Hon'ble Punjab & Haryana High Court mentioned hereinabove, we find no infirmity in the order of the Ld. CIT(A), who has rightly confirmed the action of the Assessing Officer. Accordingly, the appeal of the assessee is dismissed.

8. In the result, the appeal of the assessee in ITA No.92(Asr)/2011 is dismissed.

IT : Once penalty itself had been set aside by Commissioner (Appeals), provisions of section 263 could not be invoked by revenue to impose penalty

■■■

[2013] 34 taxmann.com 226 (Punjab & Haryana)

HIGH COURT OF PUNJAB AND HARYANA

Commissioner of Income-tax-I, Ludhiana

Trident Ltd.*

HEMANT GUPTA AND MS. RITU BAHRI, JJ.

IT APPEAL NO.138 OF 2012†

MARCH 13, 2013

Section 271(1)(c), read with section 263, of the Income-tax Act, 1961 - Penalty - For concealment of income [Doctrine of merger] - Assessment year 2006-07 - Assessee claimed sales tax subsidy receipt as capital receipt - Assessing Officer treated said receipt as a revenue receipt and also levied penalty under section 271(1)(c) - On appeal, Commissioner (Appeals) deleted penalty - Thereafter, Commissioner passed an order under section 263 whereby penalty was quantified for reason that in original order of Assessing Officer, same was omitted - Whether once penalty itself had been set aside by Commissioner (Appeals), provisions of section 263 could not be invoked by revenue to impose penalty - Held, yes [Para 4] [In favour of assessee]

Rajesh Katoch for the Appellant.

ORDER

Hemant Gupta, J. - The Revenue is in appeal against the order dated 27.12.2011 under Section 260A of the Income Tax Act, 1961 passed by the Income Tax Appellate Tribunal, Chandigarh (for short 'the Tribunal') relating to the Assessment Year 2006-07. The revenue has claimed the following substantial questions of law:

"(i)		Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal erred in quashing the order u/s 263 of the Income Tax, 1961 passed by CIT-I, Ludhiana wherein he only quantified the amount of penalty to be levied u/s 271(i)(c) on the issue of Sales Tax Subsidy which was omitted to be levied by the A.O. And did not challenge the decision of the Ld. CIT(A) to delete the penalty u/s 271(1)(c) on merits and, hence, the order of ITAT is perverse?"
(ii)		Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was correct in mentioning in the paragraph 4 of the impugned order that it had carefully perused the relevant records, whereas neither the records (file u/s 263) was called nor it was correct to say that it had known the facts, as it omitted to notice that in the penalty order body, the A.O. had levied the penalty but had not levied penalty while calculating thereby mocking the facts by stating perversely that the CIT(A) had decided the issue and this may be called a complete denial of the facts available on the record?"

2. The assessee has received sales tax subsidy during the assessment year in question. The assessee claimed the said amount as a capital receipt but added a note that though the High Court has decided the matter holding that such amount is revenue receipt but an appeal against the order passed in pending before the Supreme Court, therefore, the same is reflected as capital receipt. The Assessing Officer rejected the contention of the assessee and treated the receipt of sales tax subsidy as a revenue receipt and initiated penalty proceedings. In appeal against the order passed by the Assessing Officer, the Commissioner of Income Tax (Appeals) returned the following findings:

"A. Levy of penalty on disallowance of Sales tax subsidy amounting to Rs.7,84,56,517/- treated as revenue receipt. The AO has levied penalty u/s 271(1)(c) on assessee's claim that sales tax subsidy should be treated as capital receipt. In this regard the assessee has submitted that though the issue has been decided against the assessee by the Hon'ble Punjab & Haryana High Court but the fact of the matter is that the SLP against the above order stands admitted before there Lordships of Supreme Court. Otherwise also the fact that assessee company had availed sales tax subsidy of Rs.7,84,56,517/- during the year under consideration has been given in the note to the computation to the total income which is as under:

"1. The Company has availed sales tax subsidy of Rs.7,84,56,517/- during the year under consideration. In view of the decision of PB and Haryana High Court in the case of assessee company the same have been treated as revenue receipt, however the company has filed an appeal before the hon'ble Supreme Court of India to consider the same as capital receipt. Thus the sales tax subsidy may please be treated as capital receipt at the time of framing of assessment."

3. After the said order was passed, the Commissioner Income Tax passed an order on 15.04.2011 under Section 263 of the Income Tax Act, 1961 whereby the penalty was quantified for the reason that in the original order of the Assessing Officer, the same was omitted. It is the said order passed by the Commissioner of Income Tax, which has been set aside by the Tribunal holding that once the penalty itself has been set aside by the Commissioner of Income Tax (Appeals), the provisions of Section 263 of the Act could not be invoked by the Revenue.

4. We find that the Commissioner of Income Tax has exercised jurisdiction under Section 263 of the Act in utter violation of not only of judicial proprietary also against the provisions of law. Once the penalty proceedings have been set aside in appeal, the Commissioner of Income Tax could not impose penalty on the basis of an order, which has since been set aside by the Commissioner of Income Tax (Appeals).

5. In view of the said fact, we do not find that any question of law arises for consideration out of an order passed by the Tribunal. Consequently, the appeal is dismissed.

VARSHA

*In favour of assessee.

†Arising out of order of ITAT, Chandigarh, dated 27-12-2011

CIT vs. Nalin P. Shah (HUF) (Bombay High Court)

No s. 271(1)(c) penalty even for unsustainable/ non-debatable claims if there is disclosure in the return

Though the income from the transfer of units of a mutual fund is exempt u/s 10(33), the assessee claimed a deduction for the loss of Rs. 3.08 crores suffered by him on transfer of US 64 units. The AO disallowed the loss on the ground that the exemption in s. 10(33) applied to a loss as well and imposed penalty u/s 271(1)(c). The CIT(A) confirmed the penalty. On appeal by the assessee, the Tribunal allowed the appeal on the ground that as the assessee had disclosed the details with the return, he had not filed inaccurate particulars of his income and that the making of a wrong claim / incorrect claim did not attract penalty u/s 271(1)(c). On appeal by the department to the High Court, HELD dismissing the appeal:

As the assessee had disclosed all details in the return of income, at the highest it can be said that the claim of the assessee was not sustainable in law. But as there was no furnishing of inaccurate particulars or concealment of income on the part of the assessee. penalty u/s 271(1)(c) could not be levied (Reliance Petroproducts 322 ITR 158 (SC) referred).

Income tax Assessment Procedure in Nutshell – PART I

Posted In Income Tax | Articles | 5 Comments »

Income tax assessment is estimation for an amount assessed while payingIncome Tax by assessee himself or by income taxofficer. Following types of assessment are carried out under Income tax act. We will discuss each type of assessment in detailed in this article.

Self assessment u/s 140A.
Summary Assessment u/s 143(1)
Scrutiny assessment u/s 143(3).
Best judgment assessment u/s 144.
Protective Assessment.
Income escaping assessment u/s 147.
Assessment in case of search u/s 153A

For making assessment under these various provisions of the act, some compliance is mandatory to assessing officer:

Particulars	Mandatory Requirements
Self assessment u/s 140A.	-
Scrutiny assessment u/s 143(3).	Section 143(2) Notice
Best judgment assessment u/s 144.	Show cause notice u/s 144
Protective Assessment	-
Income escaping assessment u/s 147.	Section 148 Notice
Assessment in case of search u/s 153A	Section 153A

Self Assessment u/s 140A

Before submitting returns assessee is supposed to find whether he is liable for any tax or interest. For this purpose this section has been introduced in Income tax act.

Where any tax is payable on the basis of any return required to be furnished under section 139 or section 142 or section 148 or section 153A, after deducting:

Advance tax Paid, if any
TDS/TCS
Relief under section 90, 91 & 90A
MAT credit under 115JAA or 115JD

Then assessee shall pay tax & interest before furnishing return and proof of such payment will be accompanied with return of income.

Self assessment calculation Summary:

	Particulars	Amount
	Income tax + Edu. Cess +Surcharge if any	Xxx
Add	Interest u/s 234A, 234B, 234C	Xxx
Less	TDS/TCS	Xxx
Less	Advance tax Paid, if any	Xxx
Less	Relief under section 90, 91 & 90A	Xxx
Less	MAT credit under 115JAA or 115JD	Xxx
	Amount Payable by way of Self Assessment u/s 140A	xxx

If any amount is payable under section 140A then amount so paid shall be adjusted against interest payable first and then balance amount to be adjusted toward tax payable.

Summary Assessment u/s 143(1)

"Summary Assessment", it is not an actual assessment. Under this section, the Return of Income filed by assessee will not be scrutinized, however whatever, is claimed by assessee in his ROI will be accepted by assessing officer after only confirming arithmetical accuracy.

1. the total income or loss shall be computed after making the following adjustments, namely:—

(i) any arithmetical error in the return; or

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

2 .the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

3. the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest;

4. an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

5. the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Scrutiny assessment u/s 143(3).

Scrutiny assessments are popularly known as regular assessment.

On the day specified in the notice of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment.

What if Analysis of Section 143(2) and 143(3)?

What if -	Answer
What if assessee has not filed Return of Income?	Notice under section 143(2) can not issue therefore assessment under 143(3) not possible.
What if notice under section 143(2) not issued?	Assessment is Void
Assessment carried out after 6 month of servicing notice	Assessment is Void
What if, Assessing officer reduce income below returned income?	Yes AO can reduced below returned income, as per CBDT clarification
What if assessee claims certaindeduction through letter to Assessing officer during assessment?	No request will be entertain unless return has been revised

Best judgment assessment u/s 144.

If any person—

(a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section], or

(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

Then Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment.

Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :

it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section 144.

What if Analysis of Section 144 –

What if -	Answer
What if Assessing Officer has not provided opportunity of being heard by servicing notice?	Assessment is Void
What if Assessing Officer has not provided opportunity of being heard by servicing notice but notice under 142(1) (i) is already issued?	Assessment is Valid
What if, Assessing officer (AO) reduces income below returned income?	AO can not reduce income.
What if, assessment is done in an arbitrary manner?	Assessment is Void. Assessment should be based on material which AO collects.
What if, assessment carried out after 2 years of completion of assessment year	Assessment is Void

Protective Assessment.

There appears to be no provision in the Act providing for the manner in which a protective assessment has to be done. But traditionally wherever the department has been in doubt on account of a pending litigation as to how exactly an assessment had been framed against the assessee, the Assessing Officer has been making an assessment in a manner in which he thought the assessment should be done and apprehending that such assessment may be set aside in the pending litigation, he would make another assessment as per the stand of the assessee for the purpose of protecting the interest of the revenue. There is no provision anywhere in the Act stipulating that such protective assessment has also to be made along with the original assessment – Bhatia Motor Stores v. CIT [2006] 152 Taxman 89 (MP). Certain case laws based on protective assessments are Supreme Court in Lalji Haridas v. ITO, (43 ITR 387) also G. Topi Saheb vs Commissioner of Income-Tax (170 ITR 181 AP).

(1) It was held in CIT vs. Gujrati Samaj (2012) 349 ITR 559 (MP) and CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj.) that earlier year deficit can be adjusted against shortfall in a succeeding year. Also circular dated 24.01.1973 88 ITR (St.) 66 can be referred to.

(2) In Dawat Institute of Dawoodi Bohra Community vs. ITO 22 SOT 359 (Mum), it was held that though a trust would be entitled to claim carry forward of excess expenditure, yet it would not be allowed to accumulate 15% of total income first and then claim excess expenditure for its carry forward to subsequent years.

FAQ's on Service Tax Amnesty Scheme (VCES)

Posted In Service Tax | Articles | 2 Comments »

1. Can a person file form VCES 1 by declaring NIL tax dues?

2. Is Service Recipient eligible to take CENVAT credit of the tax paid under VCES scheme?

3. If the acknowledgement of declaration is issued within a period of seven working days from the date of receipt of declaration in terms of provisions of Rule 5 of STVCER, 2013, can such declaration be rejected for any reason after such acknowledgement if given?

4. Range officer had written a letter to submit a balance sheet and profit and loss account on 01-10-2009 which is submitted by assessee on 10-10-2009. This letter of range officer did not mention any section or rule under which such letter was issued seeking balance sheets and profit and loss account. Thereafter there is no communication from the range officer or any other officer of the service tax department. If the ass essee wants to file a declaration under VCES can it be accepted?

5. Can CENVAT credit be utilized for the payment of tax dues under VCES scheme?

‐ Sub rule (2) of Rule 6 of Service Tax Voluntary Compliance Encouragement Rules, 2013 prohibits the utilization of CENVAT credit for payment of tax dues under the Scheme.

6. Does the CENVAT credit be adjusted at the time of making the declaration? For instance if the assessee have Rs. 3 lacs to pay as service tax and he has also not availed CENVAT credit of Rs. 1 lakh for input services received during the period. Whether he can adjust it and make the declaration of tax due of Rs. 2 lakh or not?

‐ Yes,

‐ As per the definition of "tax dues" provided under the scheme, tax due means the Service Tax due or payable under the chapter or any other amount due or payable under Section 73A. Further, it is pertinent to mention here that service tax due/payable shall be determined after claiming the CENVAT Credit as available with the assessee for the period for which the declaration has been made. Therefore, while making the declaration you can adjust the CENVAT credit as available with the assessee for the relevant period.

‐ Further, CENVAT Credit for that period, if had been expensed off by the Assessee, the same may also be corrected by the assessee.

7. A proprietorship concern wrongly taken the CENVAT credit of Rs. 5 lacs in 2010 and filed the service tax return accordingly. Now, if it wants to declare and pay the same under VCES – can it do so?

‐ As per Amnesty Scheme, following persons can take the benefit of this scheme-

> Stop filers

> Non Filers

> Non registrant

> Service provider who have not disclosed true liability in the returns filed by them.

8. ABC Ltd. has there different premises in Ahmadabad, Rajkot and Jamnagar respectively. ABC Ltd. is providing services from each office and such offices are separately registered with respective service tax range. Further, it has received a show -cause notice dated 25-02-2013 in respect of some alleged short payment of service tax for Ahmadabad office but has not received any such notice or any communication for Rajkot or Jamnagar offices. Can Rajkot and Jamnagar branch take benefit under VCES for any tax dues relating to those places?

‐ No, Rajkot and Jamna Nagar Branch cannot take the benefit of the scheme. Under service tax theregistration is PAN based i.e. PAN no. of the person is followed by the service tax code. Even if thebranches of an entity are registered separately, the person shall remain the same and the brancheswill be considered as inter-linked. Therefore, even if the default is made by one branch the person shall be debarred from taking the benefit of this scheme.

9. If the person has NIL service tax liability as he has not provided services from last 5 years. The person has not filed any return on the belief the return is not required to be filed if there is no service tax liability. Then do he is eligible to go for the scheme?

‐ As assessee is not eligible to avail the scheme, therefore it is advisable to pay service tax along with interest and file intimation under Section 73(3) of Finance Act, 1994. Consequently, no showcause notice can be issued to the assessee in respect of the same.

11. Can amount payable under Rule 3(5), Rule 3(5A) and under Rule 6(3) of CCR be treated as 'tax dues' for the purpose of VCES? If yes, can benefit of waiver of penalty u/r 15 of CCR be availed under VCES?

‐ Rule 3(5), Rule 3(5A) and Rule 6(3) is having no nexus with the VCES. Tax dues have been specifically defined in the scheme.

12. If some amount is paid in excess under this scheme then as per Sec 109 of the Finance Act, 2013 any amount paid in pursuance of a declaration made shall not be refundable. Can the amount paid in excess be adjusted against the future liability?

13. If a person has tax dues for the period 01-10-2007 to 31-12-2012 but he declares tax dues only for the period 01-10-2008 to 31-12-2012 by a declaration dated 26-10-2013. Since the period of five years from relevant date for demand for period up to 30-09-2008 is over on 25-10-2013, he did not declare or pay any service tax for the period 01-10-2007 to 30-09-2008. Can his declaration be treated as substantially false and can recovery be made bycommissioner in terms of powers conferred by section 111 of the Finance Act, 2013?

‐ At the outset, we would like to advert to definition of Tax due as provided under Section 105(1)(e) of Finance Act, 2013. The same is reproduced as under:

As per aforestated definition tax due means service tax payable or due under the chapter or any other amount due or payable under Section 73 A of the Act.

Payment under the Chapter

Any amount payable or due under Section 73A of the Finance Act, 1994

‐ The only requirement under this scheme is tax should be due on 01^st March, 2013. If the tax is paid after 01^st March, 2013 the same shall be eligible to be adjusted against this scheme.

15. Mr. A has filed a declaration declaring tax dues of Rs. 5 lakhs and pays the same on 12-06-2013. Later on he realizes that the actual dues were Rs. 6 lakhs and wants to pay additional Rs. 1lakh by filing another declaration. Can he do so?

‐ No, another declaration cannot be filed.

Further, it is pertinent to mention here that another declaration might lead to the conclusion that declaration filed earlier is false and might amount to the rejection of the same.

16. Can this declaration be filed through ACES website?

‐ No, presently there is no such facility available. Currently, you need to file it manually.

17. The assessee has paid service tax dues and filed return late. A demand letter was issued to assessee for the late filing penalty & interest. Can assessee go for VCES?

‐ No the assessee cannot go for VCES. As the person have no tax dues pending to be paid. The penalty and interest standing due on part of assessee is not covered under tax dues.

18. If someone has deposited service tax amounting Rs. 5 lacs and filed NIL return now the time period for revision has lapsed. Whether he can avail benefit of this scheme?

‐ If the tax is deposited after 01^st March, 2013 then he can apply for the scheme otherwise not.

19. If a person have paid service tax for the financial year 2012-13 but not paid for the year financial year 2011-12. Can he go for the scheme for the year 2011-12?

‐ Yes, he can go for the part of period between 01^st October, 2007 to 31^st December, 2012.

20. The assessee has undergone SIV investigation for the FY 2008-09 to 2011-12. Whether he can apply for the scheme for FY 2012-13.

21. Can assessee on whom search was initiated on 01.04.2013 take benefit of this scheme?

‐ Yes, he can avail the benefit under the scheme.

22. One of the clients (a banking institution) had deposited tax regularly in one of the branch code but now it has taken his own branch registration so can this scheme be available for rectifying this error by filing return.

- There is no need to go for the scheme. Assessee can file an intimation to the department with respect to payment of service tax payable in another branch code.

23. Where to file VCES 1, because I have get Service tax registration at Chennai and now residing in Udaipur than where to file this form.

- You need to file the form to the designated authority of the jurisdiction where you have taken registration.

24. Whether assessee is required to take registration before going for this scheme.

- Yes, if the assessee is not registered under service tax then he is required to take registration first and then apply for the scheme.

25. If the assessee died then does his legal heirs can go for this scheme.

- Yes

26. If notice from service tax audit team received in April, 13 for the period covered under VCES scheme, in such case whether shall he is eligible to go for VCES or not.

- Yes

27. Since return is not filed, after filing of VCES – 1, do the assessee need to file the return.

- No, assessee is not required to file the return for the period concerned after making declaration in form VCES – 1. He is only required to pay the tax dues declared by him.

28. What the status of Tax Liability is for the period from 01.01.2013 till the date of application in forms VCES – 1? Can department issue show cause for this period. Should the assessee discharge his Tax of this period first and then for the earlier period.

29. Whether rejection of application is quasi judicial function. Whether principles of natural justice will be followed. Whether such rejection is appealable.

- Yes, it is appealable on account of principles of natural justice.

30. How to apply for VCES – 3 i.e. how to inform department about payment of Service Tax?

31. If I paid all the dues before 30th June, 2014. Do the Designated Authority will issue acknowledgement of discharge immediately?

- No, the acknowledgement of discharge i.e. VCES 3 shall be issued within 7 working days from the date of furnishing of details of tax dues.

32. Will Designated Authority do scrutiny before issuing VCES 3?

33. Can the assessee deposit the 50% of tax dues in monthly installment?

34. How can one identify/differentiate a routine enquiry and an enquiry for anti-evasion?

-It depends on facts and circumstances of each case. This issue is subject to dispute.

36. Department has issued a notice to my client by speed post in which the name of the company is wrong. Moreover, the address is somewhat different. Can I go for VCES?

‐ Yes, assessee can for the scheme as the above stated notice shall not be considered as proper notice issued by the department.

37. Till date no notice is issued, but if the service provider has not filed declaration and before December, 2013 department issued some notice or audit is conducted, still can he file this declaration now.

‐ Yes you can.

38. How can give tax calculation details with VCES – 1?

39. Should we need to file the working of the Service Tax Payable along with VCES 1?

- Yes

40. Assessee has made declaration but later realized that he is not liable to pay. So he did not pay the taxes can department invoke section 87?

- Yes, the department can invoke section 87 by virtue of Section 110 of Finance Act, 2013,

41. Service Tax partly paid for period covered by amnesty scheme and service tax is partly pending for a certain period as on 01/03/2013. Can the assessee go for the scheme?

- Yes he can go for the period for which service tax is not paid.

42. What if the 50% of the tax due which is required to be paid by 31st December 2013 is not paid?

- The assessee shall be out of the scheme as the assessee has not followed the required procedure.

43. Whether Service Receiver under reverse charge can go for VCES?

- Yes, if there are some tax dues on his part. He can go for amnesty scheme.

44. If the notice is issued before 01.03.2013 and is served upon the assessee after 01.03.2013 then does that person can apply under VCES?

- The words written under scheme are – "Person to whom notice or order of determination has been issued in respect of any period on any issue".

Therefore, even the notice is served after 01^st March, 2013 it will be construed as valid.

45. Whether declaration in respect of CENVAT credit wrongly availed can be made under amnesty scheme?

‐ As per Amnesty Scheme, following persons can take the benefit of this scheme-

> Stop filers

> Non Filers

> Non registrant

> Service provider who have not disclosed true liability in the returns filed by them.

46. What rate will be applicable for payment of tax?

‐ The rate applicable as in the relevant period shall apply.

47. Whether any penalty or interest is imposable or not on the service tax payers who had intentionally evaded service tax but now they are opting for this scheme?

‐ This scheme is specially structured for these type of people. Yes, they can avail the benefit of this scheme.

48. Assessee has paid all his service tax dues on time. But his ST 3 returns are nottraceable in the system. Can he take the advantage of VCES for the same so as to avoid any penalty?

‐ No, as no service tax is payable as on 01.03.2013.

49. Can a person take input credit of the service tax paid under VCES?

‐ Yes

2013-TIOL-484-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMEDABAD

ITA No.1212/Ahd/2010
Assessment Years: 2004-05

ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, SURAT

M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
PAN NO:AAAFY2524R

ITA No.4421/Ahd/2007
Assessment Years: 2004-05

M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009

ASSTT COMMISSIONER OF INCOME TAX
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

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).

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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Chartered Accountant Finance

Monday, July 8, 2013

[aaykarbhavan] Judgments and other details

T-Assessee to be informed beforehand by revenue before adjustment of its refund with the pending demand

IT-Issue of unreasonableness or excessiveness of an exp. under sec. 40A(2) is a question of fact

ST-Adjudication order without disposing off the request for cross examination of witness is quashed

[2013] 33 taxmann.com 66 (Article) - SRINIVASAN ANAND G. - PROPERTY SELLERS – BEWARE OF SECTION 153C

[2013] 33 taxmann.com 66 (Article) - SRINIVASAN ANAND G. - PROPERTY SELLERS – BEWARE OF SECTION 153C

IT-Sum received by assessee on sale of agricultural land as per his father's will won't be chargeable to tax

ST-Stay can't be granted merely by establishing a prima facie case

CIT vs. Nalin P. Shah (HUF) (Bombay High Court)

Income tax Assessment Procedure in Nutshell – PART I

Self Assessment u/s 140A

Summary Assessment u/s 143(1)

Scrutiny assessment u/s 143(3).

Best judgment assessment u/s 144.

Protective Assessment.

FAQ's on Service Tax Amnesty Scheme (VCES)

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