IT : Notices of demand under section 156 cannot reduce normal period of recovery from 30 days on apprehension that assessee would be exploring legal options to delay and obstruct recovery and put in tax avoidance scheme
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[2013] 34 taxmann.com 10 (Delhi)
HIGH COURT OF DELHI
Nokia India (P.) Ltd.
v.
Union of India*
BADAR DURREZ AHMED AND R.V.EASWAR, JJ.
W.P.(C) NOS. 2004, 2009 TO 2012 & 2027 OF 2013
CAV NO. 280 OF 2013
CM NOS. 3811 OF 2013 & OTHERS
CAV NO. 280 OF 2013
CM NOS. 3811 OF 2013 & OTHERS
MARCH 22, 2013
Section 156, read with section 220, of the Income-tax Act, 1961 - Notice of Demand [Time limit] - Assessment years 2007-08 to 2012-13 - Petitioner-assessee received notices of demand under section 156 - Revenue reduced time for payment from normal period of 30 days to a period of 5 days in some notices on apprehension that assessee would be exploring legal options to delay and obstruct recovery and put in tax avoidance scheme - Whether, revenue should not take any coercive measures for recovery of demands which were subject matter of impugned notices, till next date of hearing - Held, yes [Partly in favour of assessee]
FACTS
| ■ | The petitioner-assessee received notices of demand under Section 156. In some of the notices, revenue reduced the time for payment from the normal period of 30 days to a period of 5 days. The apprehension of revenue was that the assessee would be exploring legal options to delay and obstruct recovery and that it would put in place a 'tax avoidance scheme' so as to avoid payment of tax. | |
| ■ | The petitioner filed the instant writ petition questioning the shorter period as indicated in some notices of demand. |
HELD
| ■ | A plain reading of section 220(1) and in particular its proviso would make it clear that normally the period, during which the person to whom the notice of demand under section 156 is issued, is required to make the payment, is 30 days from the service of the notice. However, the proviso permits the Assessing Officer, if he has reason to believe that it would be detrimental to the revenue if the full period of 30 days is allowed, to require the person to whom the notice is issued, to make the payment within a period less than 30 days, subject, however, to the previous approval of the Joint Commissioner. [Para 6] | |
| ■ | It is apparent that the only apprehension is that the petitioner would be exploring legal options to delay and obstruct recovery and that it would put in place a 'tax avoidance scheme' so as to avoid payment of tax. Certain e-mail communications to personnel within the petitioner company were also referred to, to indicate that the petitioner was contemplating transfer of huge cash balances from India to out of India. [Para 8] | |
| ■ | In response, the petitioner submitted that there was no such move afoot. He submitted that obviously the petitioner would be taking advice with regard to the legal remedies available to it against the notice of demand. But that by itself does not enable the respondents to reduce the normal period of 30 days to 5 days. [Para 9] | |
| ■ | The petitioner assured the Court, that no remittances would be made out of India other than in the normal course of business, there was no intention of the petitioner to evade any taxes in India. Since the liberty is already granted to them to do so by way of separate proceedings inasmuch as the present writ petitions have been restricted only to the question of the shorter period indicated in the notices of demand. [Para 10] | |
| ■ | Taking a prima facie view of the matter, the respondents may file their counter-affidavits and the respondents shall not take any coercive measures till the next date of hearing for the recovery. [Para 11] |
CASE REVIEW
Sony India Ltd. v. CIT [2005] 276 ITR 278/146 Taxman 98 (Delhi)followed.
Parag Tripathi, Vikas Srivastava and S.R. Patnaik for the Appellant. Malaya Chand, S.P. Mitra, H.S. Meena, Mohan Parasaran, Sanjeev Sabharwal, Puneet Gupta, Alok and Ms. Gayatri Verma for the Respondent.
JUDGMENT
CAV 280/2013 in WP(C) 2010/2013
1. The learned counsel for the respondent Nos. 2-3/ caveator is present.
2. The caveat stands discharged.
CM 3811/2013 in WP(C) 2004/2013, and CM 3821/2013 in WP(C) 2009/2013, CM 3824/2013 in WP(C) 2010/2013, and CM 3827/2013 in WP(C) 2011/2013, CM?3830/2013 in WP(C) 2012/2013, and CM 3862/2013 in WP(C) 2027/2013
3. Allowed subject to all just exceptions.
WP(C) 2004/2013 and CM 3809-10/2013, WP(C) 2009/2013 and CM 3819-20/2013, WP(C) 2010/2013 and CM 3822-23/2013, WP(C) 2011/2013 and CM 3825-26/2013 WP(C) 2012/2013 and CM?3828-29/2013, WP(C) 2027/2013 and CM 3860-61/2013
4. These writ petitions are directed against notices of demand under Section 156 of the Income Tax Act, 1961 issued on 15.03.2013 and had been received by the petitioner on 19/20.03.2013. The following table indicates the financial years, the writ petition numbers and the demands raised as well as the period during which demand has been said to be payable under the said notices.
| Financial Year | WP(C) No. | Total demand as per Order u/s 201/201(1A) r.w.s 195 of the Act | Demand payable (in days) |
| 2006-07 | 2012/2013 | 186,18,06,047 | 5 |
| 2007-08 | 2009/2013 | 379,55,31,796 | 30 |
| 2008-09 | 2011/2013 | 272,92,01,387 | 30 |
| 2009-10 | 2010/2013 | 316,21,07,628 | 5/30 |
| 2010-11 | 2004/2013 | 414,10,44,773 | 5 |
| 2011-12 | 2027/2013 | 510,96,37,670 | 5 |
| | 2079,93,29,301 | |
The only issue raised by Mr Parag Tripathi, the learned senior counsel appearing on behalf of the petitioner, is with regard to the reduction of the normal period of 30 days to a period of 5 days in respect of some of the notices, as indicated above. He submitted that he has filed a separate application seeking leave of this Court to raise the questions on merits with regard to the demands raised for which, he would be filing separate proceedings. At this stage itself, we state that we are granting the petitioner this liberty.
5. The learned counsel for the petitioner drew our attention to the decision of a Division Bench of this Court in Sony India Ltd. v. CIT [2005] 276 ITR 278/146 Taxman 98 (Delhi). In that decision, this Court examined the provisions of Section 220(1) as also the proviso thereto. Before we set out the observations of the Division Bench, it would be appropriate to set out the provisions of Section 220(1) as also the proviso to that sub-section. The same reads as under:-
"220. (1) Any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice :
Provided that, where the Assessing Officer has any reason to believe that it will be detrimental to revenue if the full period of thirty days aforesaid is allowed, he may, with the previous approval of the Joint Commissioner, direct that the sum specified in the notice of demand shall be paid within such period being a period less than the period of thirty days aforesaid, as may be specified by him in the notice of demand."
6. A plain reading of the above provision and in particular the proviso would make it clear that normally the period, during which the person to whom the notice of demand under Section 156 is issued, is required to make the payment, is 30 days from the service of the notice. However, the proviso permits the Assessing Officer, if he has reason to believe, that it would be detrimental to the revenue if the full period of 30 days is allowed, to require the person to whom the notice is issued, to make the payment within a period less than 30 days, subject, however, to the previous approval of the Joint Commissioner. This proviso has been construed by the Division Bench in Sony India Ltd. (supra) in the following manner:-
"The proviso has the effect of divesting the assessee of a legitimate right, therefore, recourse to such provision has to be for good reasons and with caution. Mere apprehension that dues of the Revenue may not be recoverable without any material or information on the record of the AO to support such an apprehension, would, in our view be not permissible under the legislative scheme of this provision. We have already noticed that the consequence of default under the provisions of Section 220 are of a severe nature including imposition of interest and penalty. In the normal circumstances, an assessee would have 30 days? period to meet this demand and it is only after the expiry of such period that the assessee would entail the liabilities afore-referred. The assessee would still have the right to pray to the AO not to treat the assessee as an ?assessee in default? in respect of the demand entries under Section 226 of the Act. Where the assessee would be deprived of seeking recourse to such remedy on the one hand, there on the other, he would be exposed to liability of interest and penalty immediately on the expiry of the reduced period. Thus, an order of the AO under proviso to Section 220(1) vests the assessee with serious consequences. Once such are the serious consequences of the default in compliance to the direction for payment of tax in the reduced period, greater would be the obligation upon the AO to act fairly and judiciously. There has to be definite cause or reason before the AO capable of being understood by the person of common prudence that but for such an order there will be detriment to the Revenue. In other words, the recovery of the demand raised by the Revenue is likely to be defeated if the full prescribed period is granted to the assessee. Invocation of such provisions in a routine or a mechanical manner would not be permissible. The language of the Section does not suggest that legislature intended to arm the AO with powers carte blanche. Higher the power, greater is the obligation to act judiciously. Reason is the sole of any judicious order. The order supported by record should demonstrate existence of a proper cause as contemplated in the language of the law. Validly the reasons or cause should not be merely apprehensive or remote in their substance. To validly enforce its statutory discretion, the AO must have (a) Relevant and valid reasons for forming a belief and (b) The belief must have a direct nexus to the conclusion that grant of full period of 30 days to the assessee for payment of tax would be detrimental to the revenue. Both these ingredients are sine qua non for appropriate compliance to the relevant provisions and violation thereof would be causa sine qua non and would defeat the very basis of quasi-judicial exercise of power by the AO. Despite the fact that inbuilt balances and checks have been provided in the Section itself, compliance to basic rule of law would be mandatory to counter-balance the extent of discretion vested in the AO.
To discuss this aspect in some further elucidation, it may be appropriate to refer to certain illustrations whether (where) mischief would be covered under proviso to Section 220(1): (i) If an assessee is intending to leave the territorial jurisdiction with intention to evade payment of demand, (ii) A case where an assessee is liquidating his assets, except in due course of its business; again with the intention of evading to pay tax and defeat the demand raised under Section 156 of the Act, (iii) An assessee is intending to leave the country, (iv) Is doing such acts and deeds which would render it impossible for the Revenue to recover its dues on account of arrears or current demand, and (v) Closing of business by the assessee coupled with such other factors as may be deemed relevant by the AO to reach to a conclusion that in the interest of the Revenue, period should be curtailed."
7. The learned counsel for the petitioner submitted that the illustrations given in the above extract are of an entirely different nature than the factual position in the present cases. There is no apprehension that the petitioner would leave the territorial jurisdiction with the intention to evade payment of the tax nor is there any apprehension that the petitioner is liquidating its assets with the intention of evading payment of taxes and to defeat the demand raised under Section 156 of the said Act. He further submitted that nor is it the case that the petitioner was intending to wind up its business in India and leave the country. Therefore, none of the circumstances or circumstances similar to the one mentioned in the above extract exist in the present cases.
8. Mr Parasaran, the learned Solicitor General appearing on behalf of the respondents, drew our attention to the note of the Deputy Director of Income Tax, Circle-2(1) seeking approval under Section 220(1) proviso for issuing a notice of demand for a period less than 30 days. A copy of the said document was handed over to us and from which we discern that the purported reason for attracting a lesser period than 30 days was as under:-
"This is a case of a contumacious default that has been in place since January 2006. If allowed more time Ms NIPL will assuredly explore legal options to delay and obstruct recovery. It is also feared that tax avoidance scheme may be put in place to avoid payment of due tax as verified by the sample mail attached herewith.
In light of discussion above, this is a case where I have reason to believe that if the full period of 30 days is allowed it will be detrimental to revenue.
Permission may therefore be accorded u/s 220, first proviso thereunder to curtail the period of demand to 5 days only."
It is apparent from the above extract that the only apprehension is that the petitioner would be exploring legal options to delay and obstruct recovery and that it would put in place a "tax avoidance scheme" so as to avoid payment of tax. Certain e-mail communications to personnel within the petitioner company were also referred to, to indicate that the petitioner was contemplating transfer of huge cash balances from India to out of India.
9. In response, Mr Tripathi appearing on behalf of the petitioner, submitted that there was no such move afoot. He submitted that obviously the petitioner would be taking advice with regard to the legal remedies available to it against the notice of demand. But that by itself does not enable the respondents to reduce the normal period of 30 days to 5 days. He also submitted that the argument of the respondents was clearly illogical inasmuch as in respect of some of the years in question, the notice period has been indicated as 30 days, whereas in others, it has been indicated as 5 days. So, if the petitioner was considered good enough for the purposes of invoking the normal period of 30 days, there was absolutely no reason for invoking the shorter period of 5 days in respect of other years.
10. He assured this Court, on instructions, that no remittances would be made out of India other than in the normal course of business. He also stated that there was no intention of the petitioner to evade any taxes in India. It is only that they would take recourse to the legal remedies available to them for challenging the said notices of demand. We have already granted them the liberty to do so by way of separate proceedings inasmuch as the present writ petitions have been restricted only to the question of the shorter period indicated in the notices of demand.
11. Taking a prima facie view of the matter, we feel that while we are issuing notice to the respondents so that they may file their counter- affidavits, the respondents shall not take any coercive measures till the next date of hearing for the recovery of the said demands which are the subject matter of the impugned notices. Notice is accepted by the learned counsel appearing for the respondents. They shall file their counter-affidavits within one week and the rejoinder/ affidavit shall be filed within one week thereafter.
12. Renotify on 10.04.2013.
13. We, once again, record the statement made by Mr Tripathi, on instructions, that the petitioner shall not be transferring/remitting any funds outside India except in the normal course of business till the next date of hearing.
SB IT: Pending appeals, stay is to be granted on demand raised by making exhorbitant addition to income
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[2013] 34 taxmann.com 166 (Jodhpur - Trib.)
IN THE ITAT JODHPUR BENCH
J.R. Tantia Charitable Trust
v.
Assistant Commissioner of Income-tax, Central Circle, Bikaner*
HARI OM MARATHA, JUDICIAL MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
STAY APPLICATION NOS. 26 TO 28 (JODH.) OF 2013
[ASSESSMENT YEARS 2007-08 TO 2009-10]
[ASSESSMENT YEARS 2007-08 TO 2009-10]
MARCH 22, 2013
Section 260A of the Income-tax Act, 1961 - High Court - Appeals to [Stay order] - Assessment years 2007-08 to 2009-10 - Revenue made huge addition to returned income of assessee and raised demand - Assessee contended that it could not be treated in default as assessed income was double or more of returned income and demand raised could not be recovered till disposal of appeal - It was found that various other appeals of this group were still pending and it would be convenient to hear these appeals along with those appeals - Whether stay should be granted against outstanding demand - Held, yes [Para 4][In favour of assessee]
Circulars and Notifications: Circular Nos. 530, dated 6-3-1989 and 589, dated 16-1-1991
CASE REVIEW
Maharana Shri Bhagwat Singh Ji of Mewar v. ITAT [1997] 223 ITR 192 (Raj.) (para 4) followed.
CASES REFERRED TO
Maharana Shri Bhagwat Singh Ji of Mewar v. ITAT [1997] 223 ITR 192 (Raj.) (para 2).
Suresh Ojha for the Appellant. G.R. Kokani for the Respondent.
ORDER
Hari Om Maratha, Judicial Member - Through these applications, stay of the outstanding demands raised in the A.Ys 2007-08 and 2009-10 have been sought.
2. The assessee-applicant has lineated various reasons for grant of stay. Amongst others, it was argued that the assessed income is more than twice the returned income and, therefore, in view of the CBDT circular No. 530 dated 06.03.1989 and 589 dated 16.11.1991 and the decision of Hon'ble Rajasthan High Court rendered in the case of Maharana Shri Bhagwat Singh Ji of Mewar v ITAT [1997] 223 ITR 192 argued that the assessee cannot be treated in default if the assessed income is double or more of the returned income and the demand raised cannot be recovered till the disposal of the appeal. Apart from the above, it has been argued a good prima facie case is made out in favour of the applicant.
3. On the other hand ld. Sr. D.R. has supported the action of the revenue in making impugned addition(s) as well as its right to recover the pending demand and stated that the assessee had got installments from the CIT, Central Circle which he has been regularly paying.
4. After considering rival stands, we have found that stated decision of the jurisdictional High Court and the CBDT Circulars do support the case of the applicant in granting stay. We have noticed that there are various other appeals of this group which are posted on 4.4.2013 and therefore, it would be convenient to hear these appeals during that period alongwith those appeals. Therefore, keeping in view the entirety of the facts and circumstances of the case, we grant stay against the outstanding demand raised in all the three years till the disposal of the appeals in question. Registry is directed to fix these appeals, out of turn, for hearing on 4.4.2013. The Registry is directed accordingly.
5. In the result, the Stay Applications are allowed, as above.
SB IT : Where assessee entered into a joint business agreement to do diamond processing business and provided building and infrastructure such as machinery, security systems, canteen and house keeping etc., income received would be treated as business income; merely because such agreement envisaged assured return to assessee would not take away fact that assessee was engaged in business
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[2013] 34 taxmann.com 155 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax - II
v.
Tirupati Organisers (P.) Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NOS. 266, TO 268 OF 2013†
APRIL 4, 2013
Section 28(i), read with section 22, of the Income-tax Act, 1961 - Business income - Chargeable as [Business Income v. Income from house property] - Assessment year 2006-07 - Assessee-company entered into a joint business agreement to do diamond processing business and supplied various requirements of joint venture business such as building and infrastructure including machinery, security systems, canteen and house keeping etc. - Assessee also undertook responsibility of operation and maintenance of such services and also provided skilled work force for processing diamonds - In turn, agreement assured a minimum return to assessee - Assessing Officer held that income generated in process would be assessee's income from house property and not business income - He was of opinion that assessee was receiving guaranteed amount in nature of rent which would be revised from time to time and assessee was not entitled to any share in profit nor would bear any loss in business - Whether assessee had not only rented out property but had allowed its use thereof for purpose of joint venture business and in addition to space with proper infrastructural facilities, it also provided other facilities to be used for purpose of diamond processing, thus, it could not be said that assessee was not in business through joint venture of processing of diamonds - Held, yes - Whether merely because agreement envisaged assured return to assessee, in lieu of either profit or loss to be shared from joint venture would not take away fact that assessee was engaged in business - Held, yes [Para 7] [In favour of assessee]
FACTS
| ■ | The assessee-company entered into a joint business agreement with three other parties in which the assessee had to provide building and infrastructure including electrical installations, lifts, plant and machinery, security systems, canteen, house keeping etc. The assessee also undertook responsibility for operation and maintenance of such facilities and to provide skilled work force and manufacturing expertise for diamond processing. In turn, the assessee received a guaranteed monthly amount of Rs. 6 lakh or rupee one per inward carat of diamond. The assessee claimed the amount as 'Income from business'. | |
| ■ | The Assessing Officer, however, was of opinion that the income generated in the process would be income from house property. He was of opinion that the assessee-company was supplying building and such other infrastructural facilities for which purpose, the assessee could be receiving guaranteed amount in the nature of rent, which would be revised from time to time. The assessee was not entitled to any share in the profit nor would bear any loss in the business. On such basis, the Assessing Officer made the addition. | |
| ■ | The Commissioner (Appeals) held that income was to be assessed as income under the head 'business' and not income from 'house property'. | |
| ■ | The Tribunal dismissed the appeal of the revenue. |
HELD
| ■ | The Commissioner (Appeals) as well as the Tribunal have correctly appreciated the facts on record. The assessee did not supply solely the house property with or without furnishings. It supplied various requirements of the joint venture business. In turn, the agreement assured a minimum return. It, therefore, cannot be stated that the assessee was not in the business through joint venture of processing of the diamonds. | |
| ■ | Merely because such agreement envisaged assured return to the assessee, in lieu of either profit or loss to be shared from the joint venture, would not take away the fact that the assessee was engaged in the business. [Para 7] | |
| ■ | The Commissioner (Appeals) has noted salient features of the agreement in question. For example, he noted that the assessee received amounts under the agreement not only for the use of infrastructure but also for its operation and maintenance and for providing various other services. The assessee was carrying on activities in an organized manner and such purpose on daily basis, was employing a large number of workers. More significantly, the user had no right of occupancy. They had only limited access to the use of space for the purpose of business and that too in respect of certain activities. At all times, the premises remained fully under the control of the assessee. [Para 8] | |
| ■ | The assessee had not rented out property but had allowed its use thereof for the purpose of joint venture business. In addition to the space with proper infrastructural facilities, it also provides various other facilitates to be used for the purpose of diamond processing. [Para 12] | |
| ■ | In the result, appeal is to be dismissed. [Para 13] |
CASE REVIEW
Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70 (SC) (para 11) distinguished.
CASES REFERRED TO
Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70 (SC) (para 6).
Sudhir M. Mehta for the Appellant.
ORDER
Akil kureshi, J. - These Tax Appeals arise out of common background. We may notice facts as arising in Tax Appeal No. 266 of 2013.
2. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad ["Tribunal" for short] dated 21st September 2012, raising following substantial questions for our consideration :-
(A) "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal is right in deleting addition of Rs. 1,55,59,877/= made on account of business income treated by the Assessing Officer as income from house property and deleting addition of Rs. 13,46,107/= made on account of sale of canteen coupons ?"
(B) "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal is justified in ruling that the receipt on account of letting out of furnished premises is business income merely on the ground that the assessee has carried out modification to his premises to suit the requirement of tenant and no other activity has ever been carried out by the assessee ?"
(C) "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal is right in ruling that receipt on account of letting out of furnished premises is business income while the condition of agreement with the tenant abundantly indicate it to be actually a case of letting out of furnished premises for a fixed period and for defined amount ?
3. The main issue that the Revenue argued before us was with respect to addition of Rs. 1.55 Crores [rounded off] made by the Assessing Officer as income from house property.
4. For the Assessment Year 2006-07, the assessee had filed its return of income on 29th December 2006 which was taken in scrutiny. The Assessing Officer framed assessment on 7th October 2008 determining total income at Rs. 1.69 Crores [rounded off] . Out of such amount, a sum of Rs. 1.55 Crores represented what the Assessing Officer treated as the assessee's income from house property. The Assessing Officer found that the assessee company had entered into a joint business agreement ["JBA" for short] with three other parties in which the assessee had to provide infrastructure; including electrical installations, lifts, plant and machinery, security systems, canteen, house keeping, etc. Assessee also had undertaken responsibility for operation and maintenance of such facilities and to provide skilled work force and manufacturing expertise for diamond processing. In turn, the assessee would receive a guaranteed monthly amount of Rs. 6,00,000/= or rupee one per inward carat of diamond. The Assessing Officer was of the opinion that the income generated in the process would be the assessee's income from house property and not business income. He was of the opinion that the assessee company was supplying building and such other infrastructural facilities for which purpose, the assessee would be receiving guaranteed amount in the nature of rent, which would be revised from time to time. The assessee Company was not entitled to any share in the profit nor would bear any loss in the business. On such basis, the Assessing Officer made the addition. Assessee carried the matter in appeal. CIT (A) deleted the addition, making following observations :-
"I have considered the submissions as well as judicial pronouncements cited by the Assessing Officer and the appellant. On consideration of facts, I find that following facts have not been considered by the A.O while coming to conclusion that share of JBA received by the appellant was 'Income from House property' and not 'Income from Business'.
| (i) | The amount received under JBA was towards not only use of infrastructure but a maintenance and for providing host of utilities and services. | |
| (ii) | The appellant was carrying on the activity in an organized manner and on daily basis by employing a team of personnel. | |
| (iii) | The appellant was running number of operational departments on daily basis like any business house such as Canteen, support, security, etc. | |
| (iv) | The appellant made acquisition of 2 companies through Amalgamation and Merger for development of the infrastructure. | |
| (v) | It had developed the infrastructure keeping in mind the requirements of Diamond Trading Company [DTC] applicable to its site holders factories as well as all the labour law regulations. | |
| (vi) | Instead of having simple manner of deriving income, it entered into JBA to ensure that it can also get the rewards of business done jointly. | |
| (vii) | It is also seen that the user had no right of occupancy. They had only limited access to use the space for the purpose of business and that too in respect of certain activities; premises were fully in control of the applicant. | |
| (viii) | The appellant had also obtained registration under labour law and other applicable factory laws. |
All the above facts support the intention of the appellant of exploiting its infrastructure commercially which distinguishes it from a normal owner of property who had intention to earn rental income by letting it out. I have also gone through the judgments relied upon by the Assessing Officer and the appellant. The crucial test laid down by all the courts is that mere fact that the income is attached to immovable property, cannot be sole criteria for assessment of such income as income from House property. It is necessary to find out as to what is the primary object of the assessee while exploiting the property. It is necessary to find out as to what is the primary object of the assessee while exploiting the property. If it is found that the main intention is for simply letting out property or any portion thereof, the resultant income must be assessed held as income from house property. If, on the other hand, the main intention is found to be the exploitation of immovable property by way of commercial activities then the resultant income must be held as business income.
The Assessing Officer relied upon the case of Shambhu Investment Private Limited (Supra) wherein Hon'ble Court after laid down law that what was to be seen was the intention of the assessee. If the intention was to exploit property commercially, the resultant income must be assessed as business income. Thus, even applying ratio of Shambu Investment (Supra) the income of the appellant is to be assessed as Business Income since the intention of the appellant is to exploit property commercially. The facts of the appellant are quite different from that of the case of Shambu Investment and hence the findings to that extent are not applicable to case of appellant. Further, the case of the appellant is also covered by judgment of jurisdictional Hon'ble Gujarat High Court given in the case of Saptarashi Services (Supra) wherein the assessee had constructed a business centre and let out its different portions to different parties along with services like lift, receptionist, secretary, data processing, security, etc. The Hon'ble Tribunal held that the compensation received by assessee from the occupants was to be taxed as income from business.
In view of the above, I am of the considered opinion that the income of the appellant is to be assessed as Income under the head 'Business ' and not income from 'house property.
The similar addition had been deleted by the CIT (A) for A.Y 2007-08. The learned CIT (A)has followed his predecessor's orders for AYs 2005-06 and 2006-07 and allowed the appeal in favor of the assessee."
5. Revenue thereupon approached the Tribunal. Tribunal dismissed the Revenue's appeal principally relying on its own decision in case of ACIT v.Vardhman Infrastructure Private Limited.
6. Learned counsel for the Revenue submitted that the case of Vardhman Infrastructure Private Limited (Supra) was not carried in appeal in view low tax effect. In the present Tax Appeal, he contended that the Tribunal committed a serious error in confirming the decision of CIT (A). He relied on the decision of Apex Court in case of Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70 (SC).
7. We, however, find that the CIT (A) as well as the Tribunal have correctly appreciated the facts on record. The assessee did not supply solely the house property with or without furnishings. It supplied various requirements of the joint venture business; such as, infrastructure, machinery, security systems, canteen and house-keeping. The assessee also undertook the responsibility of operation and maintenance of such services and also to provide skilled work force for processing the diamonds. In turn, the agreement assured a minimum return of Rs. 6,00,000/= to the assessee, or return at the rate of rupee one per inward carat; whichever was higher. It, therefore, cannot be stated that the assessee was not in the business through joint venture of processing of the diamonds. Merely because such agreement envisaged assured return to the assessee, in lieu of either profit or loss to be shared from the joint venture, would not take away the fact that the assessee was engaged in the business.
8. CIT (A) has noted salient features of the agreement in question. For example, he noted that the assessee received amounts under the agreement not only for the use of infrastructure but also for its operation and maintenance and for providing various other services. The assessee was carrying on activities in an organized manner and such purpose on daily basis, was employing a large number of workers. More significantly, the user had no right of occupancy. They had only limited access to the use of space for the purpose of business and that too in respect of certain activities. At all times, the premises remained fully under the control of the assessee.
9. We notice that under some what similar background, when the Tribunal in case of Saptarishi Services had held the income to be his business income and not from the house property, this Court had dismissed the appeal holding that no question of law arises. In such case, the assessee had taken certain piece of land on lease and thereupon put up construction of a commercial building with an idea of having a business center. Different portions of the building were given on rent to third parties and the assessee treated the rent as service charges under the head, "income from business and profession". Assessee explained to the Assessing Officer that in addition to providing the premises, the assessee also provided several other facilitates; such as, services of lift, services of receptionists, secretarial services, data processing, conference room, etc. The Assessing Officer did not accept the contention and treated the income, derived from the house property. The Tribunal ultimately held in favour of the assessee and came to conclusion that,
", ..the director of M/s. Saptarashi Services (P) Limited are not related to the directors of M/s. Kohinoor Tabacco Products (P) Limited. The electricity charges from October 1, 1989 to March 31, 1990, were paid to M/s. Mohanlal Hargovandas who were one of the members of the service centre and M/s. Saptarshi Services (P) Limited reimbursed them later. The assessee is having EPABX machine which facilitates providing telephone services to the occupants of the service centre. Besides this, the assessee is providing various services to the occupants like services of lift, services of receptionists, secretarial services, data processing, conference room, etc. The object of the said complex is that facilities to be provided with the building. Thus the assessee is providing a working place along with the various facilities."
10. Against such decision, Revenue's appeal was dismissed by this Court.
11. The decision of Supreme Court in case of Sambhu Investment (P) Limited [Supra] was rendered in different facts-situation. In such case, the assessee was owner of immovable property. It occupied a portion thereof and let out the rest to be used as table space to occupants, with furniture and fixtures and lights and air-conditioners. For such purpose, tenants paid monthly rental; inclusive of charges. The High Court held that such income should be treated as "income from house property". The Apex Court upheld this judgment.
12. In the present case, the facts are vitally different. The assessee had not rented out property but had allowed its use thereof for the purpose of joint venture business. In addition to the space with proper infrastructural facilitates, it also provides various other facilitates to be used for the purpose of diamond processing.
13. In the result, Tax Appeals are dismissed.
IT : Interest on short-term deposit is not eligible for deduction under section 36(1)(viii)
IT : For deciding issue whether activities of lease and hire undertaken by assessee come within definition of long-term finance given in Explanation (e) to section 36(1)(viii), primary requirement is to see agreements based on which assessee has provided such facilities to its customers
■■■
[2013] 34 taxmann.com 158 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
Tamilnadu Power Finance & Infrastructure Development Corpn. Ltd.
v.
Assistant Commissioner of Income-tax, Company Circle - III(1)*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NOS. 101 TO 109, 225 TO 233, 1922 & 2034 (MDS.) OF 2011
[ASSESSMENT YEARS 1996-97 TO 2003-04, 2006-07 AND 2007-08]
[ASSESSMENT YEARS 1996-97 TO 2003-04, 2006-07 AND 2007-08]
MARCH 21, 2013
Section 36(1)(viii) of the Income-tax Act, 1961 - Financial corporation, reserve created by [Long-term finance] - Assessment year 2007-08 - Whether interest on deposits will never fall within definition of long-term finance given in Explanation (e) to section 36(1)(viii) and, therefore, is not eligible for deduction under section 36(1)(viii) - Held, yes [Para 14] [In favour of revenue]
Section 36(1)(viii) of the Income-tax Act, 1961 - Financial corporation, reserve created by [Long-term finance] - Assessment year 2007-08 - Assessee, a NBFC, claimed deduction under section 36(1)(viii) on its lease income and hire charges - Assessing Officer disallowed claim taking view that same were not income derived from long-term finance - Whether for deciding whether activities of lease and hire undertaken by assessee came within definition of Long-term finance given in Explanation (e) to section 36(1)(viii), primary requirement is to see agreements based on which assessee had provided such facilities to its customers - Held, yes [Para 13] [Matter remanded]
Section 234D of the Income-tax Act, 1961 - Refund - Interest on excess refund - Assessment years 1997-98 to 2006-07 - Whether where regular assessment was completed after 1-6-2003, i.e., after amendment of section 234D, penalty would be levied under section 234D - Held, yes [Para 15] [Matter remanded]
FACTS
Facts
| ■ | The assessee, a non-banking financial company owned by the Tamilnadu Government, claimed deduction under section 36(1)(viii) on its lease income, hire charges as well as interest received on deposits in addition to its claim for similar deduction on interest on long-term finance given by it to various concerns. The Assessing Officer declined to consider the claim of deduction under section 36(1)(viii) on its lease income, hire charges as well as interest received on deposits, taking a view these were not income derived from long-term finance. | |
| ■ | On appeal, the Tribunal remitted the issue with regard to the claim of the assessee for deduction under section 36(1)(viii) on items other than interest on direct long-term finance, back to the file of the Assessing Officer for consideration afresh. | |
| ■ | In fresh assessment proceedings, the assessee claimed that it was eligible for claiming deduction of those amounts since the funding, which gave rise to such income, fell within the definition of long-term finance given in Explanation (e) to section 36(1)(viii). The Assessing Officer again disallowed the deduction claimed holding that unless money was actually lent or advanced with a condition that it would be repaid along with interest and unless period of repayment was five years or more, a deduction claimed under section 36(1)(viii) could not be allowed. | |
| ■ | On appeal, the Commissioner (Appeals) held lease income to be not eligible for deduction under section 36(1)(viii) whereas hire charges were held as eligible for such deduction. |
Issue involved
| ■ | Whether a non-banking financial company is entitled to deduction under section 36(1)(viii) on its lease income, hire charges as well as interest received on deposits? |
HELD
Lease income and hire charges
| ■ | The direction of the Tribunal was to consider whether the income from leasing and hiring fell within the ambit of section 36(1)(viii) and also whether such activities came within the definition of long-term finance given in Explanation (e) to section 36(1)(viii). In other words, essentially, it was required to decide whether such activities of lease and hire undertaken by the assessee fell within the definition of long-term finance and if it were to be considered long-term finance whether income from such activities could be considered as derived from business of providing long-term finance. For deciding these issues, primary requirement is to see the agreements based on which assessee had provided such facilities to Tamilnadu Electricity Board or to any other customer, for that matter. Without going through terms of the hire agreement and terms of the lease agreement, if one was to come to a conclusion that it was a simple case of financing, it will be terra figmenta and not terra firma. The terms entered into between the parties will decide the nature of the transactions. Substance of such agreement will show whether the intention was only financing or the intention was leasing or hiring. There are also some contradictions between the findings of the Commissioner (Appeals) and the findings of the Assessing Officer. The Assessing Officer states in his order that assessee had claimed depreciation both for leased assets as well as hired assets, whereas the the Commissioner (Appeals) in his order says that the assessee had not claimed depreciation on assets hired out. Further, the Assessing Officer mentions in his order that hire purchase income was claimed by the assessee as exempt from interest tax, whereas the Commissioner (Appeals) says that the assessee had paid interest tax on hire receipts. However, none of the lower authorities went into the agreements entered by the assessee with its customers to find the true nature of the transactions. [Para 12] | |
| ■ | Nature of a hire and for lease have to be seen before coming to a conclusion whether these were mere operational or financial. No doubt, the Assessing Officer relied on the definition of 'Hire Purchase Agreement' under the Hire Purchase Act, 1972 and definition of 'lease' under Transfer of Property Act, 1882. These are definitions in the respective enactments and will have little relevance if the terms of agreements entered into by the parties show a different intention. Unless and until all the ingredients specified in Explanation (e) to section 36(1)(viii) are satisfied, the transaction will not fall within the reach of long-term finance. If the transactions are not considered as 'long term finance', there is no question of any deduction being given under section 36(1)(viii) since the claim gets ousted at the threshold. An interpretation often taken that in case of ambiguity or doubt, benefit always went to the assessee, no longer hold good in view of the judgment of the Apex Court in the case of CCE v. Harichand Shrigopal[2011] 1 SCC 236. The Court clearly held that a person, who claimed exemption or concession, is required to establish clearly that he was covered by the provision concerned and in the case of doubt or ambiguity, benefit would go to the State. Considering all these aspects, matter requires a fresh look by the Assessing Officer. The orders of the authorities below are set aside and the issues regarding claim of deduction under section 36(1)(viii) on lease income and hire purchase income are remitted back to the file of the Assessing Officer for consideration afresh in accordance with law. [Para 13] |
Interest on short-term deposit
| ■ | The finding of the Assessing Officer that interest on short-term deposits was not eligible for the deduction under section 36(1)(viii) , which was confirmed by the Commissioner (Appeals), is in accordance with law. Deposits can never be treated at par with loans or advances. Therefore, interest on deposits will never fall within the definition of long-term finance given in Explanation (e) to section 36(1)(viii). [Para 14] |
CASE REVIEW
CCE v. Hari Chand Shri Gopal [2011] 1 SCC 236 (para 13) followed.
CASES REFERRED TO
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC) (para 5), Sundaram Finance Ltd., v. State of Kerala AIR 1966 (SC) 1178, (para 7), Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India [2006] 154 Taxman 512 (SC) (para 7),Tourism Finance Corpn. of India Ltd. v. Jt. CIT [2010] 2 ITR (Trib) 1 (para 9), National Co-operative Development Corpn. v. Asstt. CIT [2011] 16 taxmann.com 251/[2012] 204 Taxman 6 (Delhi) (para 9), CIT v. Orissa State Warehousing Corpn. [1993] 201 ITR 729 (SC) (para 9), Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) (para 9), Power Finance Corpn. Ltd. v. Jt. CIT [2006] 10 SOT 190 (Delhi) (para 10), Rural Electrification Corpn. Ltd. v. Addl. CIT [2009] 34 SOT 159 (Delhi) (para 10), I.C.D.S Ltd. v. CIT [2013] 350 ITR 527/212 Taxman 550/29 taxmann.com 129 (SC) (para 13), Indus Ind Bank Ltd. v. Addl. CIT [2012] 135 ITD 165/19 taxmann.com 173 (Mum.) (para 13), CCE v.Harichand Shrigopal [2011] 1 SCC 236 (para 13), ITO v. Ekta Promoters (P.) Ltd. [2008] 113 ITD 719 (Delhi)(SB) (para 15), CIT v.Infrastructure Development Finance Co. Ltd. [2012] 340 ITR 580/21 taxmann.com 48 (Mad.) (para 15) and CIT v. Elgi Finance Ltd. [2007] 293 ITR 357 (Mad.) (para 20).
R. Vijayaraghavan for the Appellant. Dr. S. Moharana for the Respondent.
ORDER
1. These are cross-appeals of assessee and department respectively for the impugned Assessment Years.
2. One Common ground appears in all the appeals of the Revenue which is regarding treatment of hire purchase income. Assessing Officer had declined to allow the assessee, deduction claimed under section 36(1)(viii) of the Income Tax Act, 1961 (in short 'the Act'). However, on appeals of assessee, CIT(A) allowed the deduction.
3. As against this, one common ground taken by the assessee in all its appeals, is with respect to disallowance of its claim for deduction of lease income under section 36(1)(viii), which was confirmed by the CIT(A).
4. Facts apropos these two issues are that assessee, a Non-banking Financial Company owned by the Tamilnadu Government, had in its returns for the impugned years, claimed deduction under section 36(1)(viii) on its lease income, hire charges as well as interest received on deposits. These were in addition to its claim for similar deduction on interest on long term finance given by it to various concerns. Assessing Officer had declined to consider the former claim taking a view these were not income derived from Long term finance. Assessee had moved in appeal against the denial of deduction under section 36(1)(viii) of the Act, first before the CIT(A) and then before this Tribunal. This Tribunal had remitted the issue with regard to the claim of assessee for deduction under section 36(1)(viii) of the Act, on items other than interest on direct long term finance, back to the file of the Assessing Officer for consideration afresh. Such directions were given by the Tribunal for a reason that lower authorities had not gone into the aspect whether such deductions claimed assessee fell within the scope of Explanation (e) of the said section. This Tribunal noted that deduction under section 36(1)(viii) was available only to profits derived from a business of long term finance and since term 'long term finance' was defined in Explanation (e), it was necessary to see whether the claims of assessee fitted into the said definition.
5. Accordingly, the matter was once again, considered by the Assessing Officer. In such fresh proceedings, assessee was required to furnish documents justifying its eligibility for deduction under section 36(1)(viii) of the Act, with respect to its leasing income, hire purchase income and interest on deposits. Reply of the assessee was that it was a Non-banking Financial Corporation incorporated by the State in 1991, for providing long term finance for infrastructure development. As per the assessee, it was eligible for claiming deduction of these amounts since the funding which gave rise such income fell within the definition of long term finance given in Explanation(e) to section 36(1)(viii) of the Act. However, Assessing Officer was not impressed. According to him, assessee could not satisfy the conditions required under explanation (e) with regard income from leasing activity, hire purchase activity and interest on deposits. Assessing Officer held that unless money was actually lent or advanced with a condition that it was repaid along with interest and unless period of repayment was five years or more, a deduction claimed under section 36(1)(viii) could not be allowed. As for interest on deposits, Ld. A.O. relying on the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 took a view that interest on short term deposits made out of surplus funds fell under the head 'income from other sources' and assessee was not eligible for deduction under section 36(1)(viii) of the Act. Further, according to him, the immediate source of income alone was to be considered for application of section 36(1)(viii). Reliance was also placed on the CBDT Circular No.1 of 2001/F.No.225/186/2000-ITA-II, dated 9th February, 2001 wherein the reasons for amending section 36(1)(viii) through Finance Act, 1995 was explained. According to him, purpose of the amendment was to restrict the deduction to income derived from the business of providing long term finance.
6. Ld. Assessing Officer also considered the definition of a Hire Purchase agreement under Hire Purchase Act, 1972 as also definition of a lease under the Transfer of Property Act, 1882, for supporting his findings that there was no lending of money when goods were given on hire or lease. Assessing Officer also noted that assessee has claimed depreciation on leased assets, thereby showing that there was no element of financing in such leasing. Further as per the Assessing Officer, assessee had claimed exemption from Interest Tax Act on hiring income received for a reason that such income was not interest. Assessee had claimed depreciation on assets given on hire as well. Effectively, he denied the deduction claimed under section 36(1)(viii) to the assessee on its earnings from leasing, earnings from hiring and interest on deposits with bank. Its claim was allowed only in respect of interest on long term fiancé.
7. Assessee moved in appeal before the CIT(A) once again. Argument of the assessee was that its entire income was derived from long term finance, provided to Tamilnadu Electricity Board, whatever the classifications were. According to the assessee, long term finance included not only direct loans, but also indirect loans in the form of hire purchase, leasing and other advances. Argument of the assessee was that the agreements of hire purchase and lease were effectively only for financing the purchase of items mentioned therein and were not operating lease or hiring of goods simpliciter. Assessee also claimed that it had not availed depreciation on assets given under the hire purchase agreement. Reliance was placed on the decision of Hon'ble Apex Court in the case of Sundaram Finance Ltd., v. State of Kerala 1966 AIR (SC) 1178, and Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India [2006] 154 Taxman 512 (SC). Ld. CIT(A) was impressed with such argument in so far as it related to income from hire purchase. According to him, assessee was only financing the purchase of the assets by M/s. Tamilnadu Electricity Board. Assessee had also paid interest tax on the hire charges received from the Board. According to Ld. CIT(A), assessee had also not claimed any depreciation on assets given on hire. Balances were shown only as stock on hire, as a part of current assets. However, in so far as leasing income was concerned, CIT(A) was of the opinion that whatsoever was received was only lease rental and not interest. Further as per CIT(A), assessee had not paid any interest tax on the lease rental. According to him, lease rental stood on a different footing when compared to hire purchase transactions. He therefore, held that there was no element of interest in the lease rental received by the assessee. Accordingly, he held lease income to be not eligible for deduction under section 36(1)(viii) of the Act whereas hire charges were held as eligible for such deduction.
8. With regard to interest on deposit on which also Assessing Officer had denied the claim under section 36(1)(viii) of the Act, Ld. CIT(A) directed the Assessing Officer to verify the contention of the assessee that it had not in the first place claimed any deduction for such interest.
9. Now, before us, Ld. D.R strongly assailing the order of the CIT(A) in so far as it related to his direction that hire purchase income was eligible for deduction under section 36(1)(viii) and supporting his order in so far as it related to the confirmation of the treatment of lease income, submitted that conditions mentioned in section 36(1)(viii) of the Act were not satisfied with respect to such income. According to him, such deduction was provided in the statute, for encouraging investments in infrastructure facility, by providing long term finance. Long term Finance was clearly defined in Explanation (e) to the said section and neither hire purchase income nor the lease income fell under the definition. Further, according to him, what could be allowed was only income derived from a business of providing long term finance and nothing more. A direct nexus with the business of providing long term finance was to be shown and if such nexus was not there, the income will not be eligible for claiming deduction under section 36(1)(viii). According to him, Ld. CIT(A) fell in error when he attempted a distinction between hire finance income and lease rental income. Neither hire purchase income nor lease income had any direct connection with the business of providing long term finance. Reliance was placed on the decision of Co-ordinate Bench in ITA No.530 & 531/03, 1497/04, 1561 & 1562/06 dated 20th July, 2007 in assessee's own case in which it was held that word 'derive' used in Section 36(1)(viii) would not bring under its sweep, items of income which were not having immediate nexus with long term financing business. D.R. also placed reliance on the decision of Delhi bench of this Tribunal in the case of Tourism Finance Corpn. of India Ltd. v. Jt. CIT [2010] 2 ITR (Trib) 1 and National Co-operative Development Corpn. v. Asstt. CIT [2011] 16 taxmann.com 251/[2012] 204 Taxman 6 (Delhi). Further, according to him, equitable consideration were out of place while interpreting a taxing statute and when the language was clear and un-ambiguous, there was no scope for importing into the statute, words, which were not there. In this regard reliance was placed on the decisions of the Hon'ble Apex Court in the case of CIT v. Orissa State Warehousing Corpn. [1993] 201 ITR 729 and Smt Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC).
10. Per contra, Ld. A.R. in support of his appeal and supporting the order of CIT(A) with regard to his allowance of hiring income submitted that long term finance had many facets. It did not simply mean, direct cash loan, but also included loans, which helped acquisition of assets. According to him, lease as well as hire agreements were only for providing finance to the M/s. Tamilnadu Electricity Board, which was directly acquiring the assets. Further, it was submitted by the A.R that assets hired or leased out to M/s. Tamilnadu Electricity Board could never be resumed back. By very nature of such assets, it could not be used elsewhere other than in the sub-station & distribution and power projects of M/s. TNEB. When M/s. Tamilnadu Electricity Board could not satisfy the rigorous conditions for availing a cash loan, finance was provided to it in an indirect manner by helping it purchase the assets it required, and paying for such purchase. Strict construction of the lease and hire purchase agreements made by Assessing Officer was out of place. According to him, commercial consideration ought have been given more importance. Ld. A.R submitted that the terms used in section 36(1)(viii) were profits derived from business of providing long term finance and not profits derived from long term finance. According to him, there was a subtle difference between profit derived from business of providing long term finance and profit derived from long term finance. Business of providing long term finance included all type of financing, including indirect financing by way of leasing and hire purchase. Reliance was placed on the decision of Delhi Bench of this Tribunal in Power Finance Corporation Ltd. v. Jt. CIT [2006] 10 SOT 190 and Rural Electrification Corpn. Ltd. v. Addl. CIT [2009] 34 SOT 159.
11. We have perused the orders of the lower authorities and heard rival contentions. We find that the matter was earlier considered by this Tribunal for very same Assessment Year and remitted back to the Assessing Officer for consideration afresh with following directions:-
"The learned counsel of the assessee has submitted that the assessee is solely a long term lending institution and its resources and applications have nexus with long term finance. It has been submitted that deduction u/s 36(1)(viii) contemplates benefit of deduction to be given to approved financial corporations on the profits derived from business of providing long term finance and the benefits is not limited to "profit from providing long term finance" but from profit derived there from. Finance can be in many ways viz., loans, equities, hire purchase, lease, investments and deposit. These all can be and are in fact for long term. Hence, the entire income is from business of providing long term finance and the assessee has no other business.
The learned departmental representative in rebuttal of the aforesaid claim placed reliance upon the sanguine provisions of section 36(1)(viii) and the explanation thereto which reads as under:
"(viii) [in respect of any special reserve created [and maintained] by a financial corporation which is engaged in providing long-term finance for .. [industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head ''Profits and gains of business or profession" [before making any deduction under this clause]) carried to such reserve account:]
Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds [twice the amount of] the paid-up share capital [and of the general reserves] of the corporation [or, as the case may be, the company], no allowance under this clause shall be made in respect of such excess.
[Explanation.-In this clause,-
| (a) | "financial corporation" shall include a public company and a Government company; | |
| (b) | "public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956(1 of 1956); | |
| (c) | "Government company" shall have the meaning assigned to it in section 617 of the Companies Act; 1956 (1 of 1956); | |
| [(d) | ''infrastructure facility shall have the meaning assigned to it in clause (23G)of section 10:) | |
| [(e) | "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]" |
From the reading of the aforesaid, it is evident that the deduction envisaged under this section pertains to profits derived from business of providing long term finance, which has specifically been defined. In this context, we also draw support from exposition in H.H. Prince Azam Jha Bahadur v.Expenditure Tax Officer 1971 83 ITR 92 (SC) that the act in the very nature of things cannot be absolutely cast upon logic. It is to be read and understood according to its language. If a plain reading of the language compels the Court to adopt an approach different from that dictated by any rule of logic, the Court may think of adopting it.
It further transpires that the circular explaining the rationale for amendment in section 36(1)(viii) reads as under.:
"It was noted that many of these approved financial corporations/approved public companies had diversified their activities and were claiming deduction under this section even in respect of their income derived from activities other than those specified in this section. As there was no justification for allowing the deduction with reference to income from other activities or from sources other than business the Finance Act, 1995, has amended section 36(1) (viii) to limit the deduction to 40 per cent only in respect of income derived from providing long term finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business will not be taken into account for computing deduction under section 36(1)(viii)."
Considering the present case, particularly in the light of the CBDT circular clarifying the rationale behind the amendment, it is evident that the intention of providing deduction u/s. 36(1)(viii) is only in respect of income derived from providing long term finance for the activities specified u/s 36(l)(viii). Hence, the learned counsel of the assessee's interpolation that the word "derived" used in the section will bring omnibus activities of the assessee under the sweep of this section is not on terra firma. As is evident from the aforesaid circular, the very purpose of bringing this amendment was to restrict this deduction as income derived from other diversified activities were being claimed under it.
Under the circumstances, the reliance placed by the learned counsel of the assessee on the word "derived" cannot oxygenate the assessee's claim. As held by Privy Council in Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh & Others [1948] 16 ITR 325, the word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product but the enquiry should stop as soon as the effective sources are discovered.
Considering the present case through the prism of the aforesaid precedent, we find that in determining the profits eligible for deduction under this section, one has to go no further than explanation 'e' defining 'long term finance' under this section.
From the facts of this case, we find that in dealing with the eligibility of the disputed income for deduction contemplated u/s 36(1)(viii), the lower authorities have not gone into this aspect as to whether this aspect of section is satisfied or not. Hence, in the interest of justice, we restore this issue to the files of the Assessing Officer to give a finding as to whether these activities would come under explanation 'e' of section 36(1)(viii). It that be so, the assessee will be eligible for this deduction."
12. The direction of the Tribunal was to consider whether the income from leasing and hiring fell within the ambit of section 36(1)(viii) and also whether such activities came within the definition of Long term Finance given in Explanation (e) to section 36(1)(viii). In other words, essentially it was required to decide whether such activities of lease and hire undertaken by the assessee fell within the definition of long term finance and if it were to be considered long term finance whether income from such activities could be considered as derived from business of providing long term finance. For deciding these issues, primary requirement, in our opinion, is to see the agreements based on which assessee had provided such facilities to M/s. Tamilnadu Electricity Board or to any other customer, for that matter. Without going through terms of the hire agreement and terms of the lease agreement, if one was to come to a conclusion that it was a simple case of financing, it will be terra figmenta and not terra firma. The terms entered in between the parties will decide the nature of the transactions. Substance of such agreement will show whether the intention was only financing or the intention was leasing or hiring. We also find some contradictions between the findings of the CIT(A) and the findings of the Assessing Officer. Assessing Officer states in his order that assessee had claimed depreciation both for leased assets as well as hired assets, whereas the CIT(A) in his order says that assessee had not claimed depreciation on assets hired out. Further, Assessing Officer mentions in his order that hire purchase income was claimed by the assessee as exempt from interest tax, whereas CIT(A) says that assessee had paid interest tax on hire receipts. However, none of the lower authorities went into the agreements entered by the assessee with its customers to find the true nature of the transactions.
13. Difference between a finance lease and operating lease and hire purchase finance and simple hiring of goods, have been well brought out by the decision of Hon'ble Apex Court in the case of ICDS Ltd. v. CIT [2013] 350 ITR 527/212 Taxman 550/29 taxmann.com 129. Relevance of Accounting Standards-19 of Institute of Chartered Accountant of India, while deciding on such issues has been clearly brought out by the Special Bench of this Tribunal in the case of IndusInd Bank Ltd. v. Addl. CIT [2012] 135 ITD 165/19 taxmann.com 173 (Mum.). What comes out of these decisions is that nature of a hire and for lease have to be seen before coming to a conclusion whether these were mere operational or financial. No doubt, Assessing Officer relied on the definition of 'Hire Purchase Agreement' under the Hire Purchase Act, 1972 and definition of 'lease' under Transfer of Property Act, 1882. These are definitions in the respective enactments and will have little relevance if the terms of agreements entered into by the parties show a different intention. Unless and until all the ingredients specified in Explanation (e) to section 36(1)(viii) are satisfied, the transaction will not fall within the reach of long term finance. If the transactions are not considered as 'Longterm Finance', there is no question of any deduction being given under section 36(1)(viii) of the Act since the claim gets ousted at the threshold. An interpretation often taken that in case of ambiguity or doubt, benefit always went to the assessee, in our opinion, no longer hold good in view of the judgement of Hon'ble Apex Court in the case of CCE v. Harichand Shrigopal [2011] 1 SCC 236. Their Lordships clearly held that a person who claimed exemption or concession, is required to establish clearly that he was covered by the provision concerned and in the case of doubt or ambiguity, benefit would go to the State. Considering all these aspects, we are of the opinion that matter requires a fresh look by the Assessing Officer. We set aside the the orders of the authorities below and remit the issues regarding claim of deduction under section 36(1)(viii) on lease income and hire purchase income, back to the file of Assessing Officer for consideration afresh in accordance with law.
14. The finding of the Assessing Officer that interest on short term deposits was not eligible for the deduction under section 36(1)(viii), which were confirmed by the CIT(A), in our opinion, is in accordance with law. Deposits can never be treated on par with loans or advances. Therefore, interest on deposits will never fall within the definition of long term finance given in Explanation (e) to section 36(1)(viii) of the Act. We do not find any merit in this ground taken by the assessee in its appeal for A.Y. 2007-08.
15. Revenue has taken a ground regarding levy of interest Under section 234D in their appeals for Assessment Years 1997-98, 1999-00, 2000-01, 2001-02, 2002-03, 2003-04 & 2006-07. Ld. CIT(A) held that such levy was applicable only from Assessment Year 2004-05 relying on the decision of Delhi Special Bench of Tribunal in the case of ITO v. Ekta Promoters (P.) Ltd. [2008] 113 ITD 719. However, we find that Hon'ble jurisdictional High Court in the case of CIT v. Infrastructure Development Finance Co. Ltd. [2012] 340 ITR 580/21 taxmann.com 48 (Mad.) has held that where regular assessment was completed after the amended provision came into operation, assessee was liable to pay interest on the refunded amount. Therefore, the issue of levy of interest for these years is remitted back to the file of the Assessing Officer, for verifying the date on which the regular assessments were completed for the impugned Assessment Years. If regular assessments were completed after 01.06.03, levy of penalty under section 234D was justified and if the regular assessment was completed prior to that date, there could not be any levy of penalty under section 234D of the Act. Ordered accordingly. Related ground of the Revenue is allowed for statistical purposes.
16. Only other issue left in Revenue appeal is a ground in its appeal for Assessment Year 2006-07, regarding disallowance under section 43D of the Act, which was deleted by the CIT(A).
17. Facts apropos are that assessee had advanced a sum of Rs. 300 lakhs, as term loan to M/s. NEPC Micon Ltd., who had failed to repay the installments due from 01.04.1997. Assessee had classified the dues as Non-Performing Asset in its books based on Reserve Bank of India guidelines. Assessee had not shown any accrual of interest on such term loan in its accounts. Assessing Officer was of the opinion that since it was following mercantile system of accounting, it was mandatory to show the accrued interest. As per the Assessing Officer, RBI guidelines were only for the purpose of supervision, and management of non banking financial companies and was not relevant for ascertaining income under the Income Tax Act. Though assessee explained that by virtue of Sec.43D, it was necessary for it to offer such interest income, only when interest was realized, Assessing Officer was not impressed. An addition was made.
18. In its appeal before the CIT(A), argument of assessee was that interest was not at all credited to the profit and loss account. When interest was not at all credited, there was no question of accrual, especially since the assessee had classified the loan as non performing asset. Further, according to the assessee, Sec.43D was applicable, since Government of Tamilnadu by G.O. Ms. No.47 dated 09.01.1991 had declared it as a State Financial Corporation. Ld. CIT(A) was appreciative of these contentions and deleted the addition made by the Assessing Officer.
19. Now, before us, Ld. D.R assailing the order of Ld. CIT(A) submitted that assessee was following mercantile accounting system and therefore, it was mandatory to account the income accrued on loans given by it. Parties were duty bound to pay interest to the assessee and assessee was lawfully entitled for such interest. Hence, it could not say that there was no accrual of income. Per contra, Ld. A.R. supported the order of Ld. CIT(A).
20. We have perused the orders of the lower authorities and heard the rival contentions. There is no doubt that assessee had not charged in its books of accounts any interest on the loans classified by it as non performing assets. It is not a case where assessee had credited such interest and then claimed write off. Assessee might have been following mercantile system of accounting. However, the prudential norms prescribed by RBI, for non banking financial Company under section 45 Q of the RBI Act, made it obligatory for the assessee to classify the loans on which interest was not received for a period exceeding six months, as non-performing assets. Once it was so classified, interest could not be charged in its accounts and taken as income. Jurisdictional High Court in the case of CIT v. Elgi Finance Ltd [2007] 293 ITR 357 (Mad.) has held that assessee was justified in not recognizing income from non performing assets in consonance with the notification issued by RBI. We are of the opinion that this decision of Hon'ble jurisdictional High Court goes in favour of the assessee. We therefore, cannot find any reason to interfere with the order of the CIT(A) in this regard.
21. To summarise the result, appeals of assessee for Assessment Years 1996-97, 1997-98, 1998-99, 1999-00, 2000-01, 2001-02, 2002-03, 2003-04 and 2006-07 are allowed for statistical purposes whereas its appeal for Assessment Year 2007-08 is partly allowed for statistical purposes. Appeal of Revenue for Assessment Years 1996-97, 1997-98, 1998-99, 1999-00, 2000-01, 2001-02, 2002-03, 2003-04 & 2007-08 are allowed for statistical purposes whereas its appeal for Assessment Year 2006-07 is partly allowed for statistical purposes.
VARSHA IT: Penalty imposed on account of disallowance of interest on borrowing as per High Court's judgment was not justified
IT: Where assessee had withdrawn its claim of bad debt claiming same to be inadvertent error, penalty need not be imposed
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[2013] 34 taxmann.com 132 (Punjab & Haryana)
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax - III, Ludhiana
v.
Trident Infotech Corpn. Ltd.*
HEMANT GUPTA AND MS. RITU BAHRI, JJ.
IT APPEAL NO. 267 OF 2012 (O&M)†
APRIL 23, 2013
I. Section 271(1)(c), read with section 36(1)(iii), of the Income-tax Act, 1961 - Penalty - For concealment of income [Bona fide claim] - Assessment year 2004-05 - Assessee had given interest-free advances and borrowed interest bearing loan - On basis of judgment of High Court, Assessing Officer disallowed interest on borrowings under section 36(1)(iii) and made addition to income of assessee - Further, he imposed penalty - Whether since additions were made on basis of decision of High Court, it did not establish that assessee had either concealed its income or furnished inaccurate particulars of income and, therefore, penalty was to be deleted - Held, yes [In favour of assessee] [Para 3]
II. Section 271(1)(c), read with section 36(1)(vii), of the Income-tax Act, 1961 - Penalty - For concealment of income [Bona fide claim] - Assessment year 2004-05 - Whether where assessee had claimed deduction on account of bad debt and later, he withdrew his claim treating it to be an inadvertent mistake and offered same as additional income, there was no justification to hold that assessee had furnished inaccurate particulars of income - Held, yes - Whether imposition of penalty on said ground was to be set aside - Held, yes [In favour of assessee] [Para 4]
CASES REFERRED TO
CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.)(Para 2).
Rajesh Katoch for the Appellant.
ORDER
Hemant Gupta, J. - The present appeal under Section 260A of the Income Tax Act, 1961 (for short 'the Act') arises out of an order dated 26.03.2012 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A' Chandigarh (for short 'the Tribunal') in relation to assessment year 2004-05 whereby the penalty imposed consequent to addition of Rs. 45,14,373/- and Rs. l1,45,476/- was set aside by the Tribunal.
2. During the year in question, the assessee has given interest free advances and borrowed interest bearing loan. The question whether the advances of interest free loan in these circumstances is entitled to deductions under Section 36(1)(iii) of the Act came to be decided by this court in the case of CIT v.Abhishek Industries Ltd [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.). The court has held to the following effect:
"34 ….Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest."
3. In the present case, the assessee has furnished its return prior to the judgment of this Court in Abhishek Industries Ltd. case (supra). In view of the principles of law laid down in the aforesaid judgment, the Assessing Officer made addition to the extent of Rs.45,14,373/-. The learned Tribunal has set aside the penalty on the aforesaid addition inter alia for the reasons that such additions were made on account of judgment of this Court in Abhishek Industries Ltd. case (supra) and it does not establish that the assessee has either concealed its income or furnished inaccurate particulars of income. The scope of the provisions of the Act came to be interpreted by this court in the aforesaid judgment. Therefore, the claim of the Assessee cannot be said to be concealment of income, which may attract penalty.
4. In respect of addition of Rs. 11,45,476/-, the assessee claimed it as bad debts expenses in the profit and loss account filed with the return of income. But vide letter dated 24.10.2006, the assessee communicated to the Assessing Officer that actually this amount was written off in the books of account and the same be added to the returned income at the time of finalizing the assessment for the assessment year in question. It is, thereafter, the assessment was finalized by the Assessing Officer on 28.11.2006. The learned Tribunal found that when the assessee has disclosed the particulars in the return of income and withdrawn his claim of expenditure being made because of an inadvertent mistake and offered the same as additional income, there is no justification to hold that the assessee has furnished inaccurate particulars of income. Therefore, the order of penalty was set aside.
5. Consequently, we do not find that the reasoning given by the Tribunal warrants any interference in appeal when the additions are direct result of judgment of jurisdictional Court.
The appeal is dismissed accordingly.
POOJARegards,
Pawan Singla
BA (Hon's), LLB
A senior IRS (Income Tax) officer of the rank of Chief Commissioner, requested for a State Government Bungalow for his residence. The Home Secretary was not too willing, but the IRS officer got it anyway from the Chief Minister's quota. He was apparently angry with the Home Secretary for not processing his file promptly and so got the Home Secretary's house raided by Income Tax sleuths. Following the raid, the Home Secretary was suspended and charge-sheeted, but later, all charges were dropped and he was reinstated. The IAS officer challenged the raid in the High Court. The High Court recently quashed the search and consequential actions. The IAS officer has now filed a complaint in a Police Station to register an FIR against the IRS officer. The IRS officer has since retired as a Member of the Board and the IAS officer is still in service.
The war between the services will go on for some more time!
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