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
v.
Income-tax Officer, Ward -2, Kottayam*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NO. 418 (COCH.) OF 2010
[ASSESSMENT YEAR 2006-07]
[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.
MUMBAI, JULY 24, 2013: THE issues before the Bench are - Whether role of the Audit parties is to point out factual mistakes and not to advise the AO on legal matters and Whether, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held as the formation of an independent opinion for the purpose of section 147. And the verdict goes against the Revenue.
Facts of the case
Assessee-company, engaged in the business of leasing and investment banking, filed its original return that was assessed u/s 143(3) of the Act on 25.02.2005. AO determined the total income of the assessee at Rs.90,48,86,939/-under the normal provisions and at Rs. 85,99,59,539/- u/s.115JB of the Act. While passing order u/s 143(3) of the Act, AO made the additions on account of leasing equalisation reserve was added to the total income of the assessee, while computing the income under the normal provisions of the Act, but while computing the book profit u/s 115JB of the Act, AO did not add the said amount. Similarly, provision for investment valuation was considered by the AO for computing income as per the provisions of section 115JB of the Act, but same was not considered for computing income under normal provisions of the Act.
Subsequently, AO re-opened the case u/s 147 of the Act as he was of the opinion that there were reasons to believe that certain income chargeable to tax had escaped assessment. Accordingly, a notice u/s 148 of the Act was issued. The assessee vide his letter dated 05.01.2006 stated that the original return filed by it should be taken as the return filed in response to notice issued u/s 148.
During re-assessment proceedings, the AO asked for various details from the assessee and after considering the explanation of the assessee certain additions/disallowances were made in the assessment order passed u/s 143(3) r.w. section 147 of the Act. CIT(A) upheld the action of the AO in initiating reassessment proceedings.
On further appeal, the ITAT held that,
++ reopening of a completed assessment, is governed by certain principles. One of the settled principles, in this regard, is that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what is stated in the reasons recorded u/s.148(2) and nothing more. Secondly, it can hardly be disputed that once the AO notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and, therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the AO allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the AO, over which the assessee beyond trying to persuade the AO, would have no control whatsoever;
++ if the AO on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the AO cannot be seen to have formed any opinion on such a claim. Such a contention, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinised by the AO during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. In other words, in a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition;
++ jurisdictional High Court, in the case of Export Credit Guarantee Corporation of India Ltd. (2013-TIOL-56-HC-MUM-IT), has held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. Thus, the most important factor to issue notice u/s.148 of the Act is existence of tangible material;
++ the AO even within a period of four years cannot reopen an assessment merely on the basis of a change of opinion. The AO has no power to review an assessment which has been concluded. But, where he has tangible material to come to the conclusion that there is an escapement of income from assessment, the power to reopen can be exercised. In the case under consideration only tangible material referred to by the AO is his errors in including/excluding certain items of income while calculating the income of the assessee under the normal provisions or under MAT provisions;
++ reassessment proceedings were initiated by the AO after objections were received from the internal audit party, the dates of audit objections and the dates of issue of notice u/s. 148 establish the fact that there was nexus between the two. From the sequence of the events it is clear that the AO had issued the notice for reopening after considering the issues raised by the audit party. The items involved in the audit objections find place in the reasons recorded by the AO. While passing the original assessment order, AO had called for the details about lease equalisation reserve as well as about the writing off of non- performing assets. Question No. 16 & 18 of the questionnaire issued by the AO on 16.11.2004 is about these two issues. After considering the submissions of the assessee, AO decided that lease equalisation reserve and provision of diminution in investment has to be given particular treatment. One of the items was taxed under normal provisions and not under MAT provisions, whereas the other item was considered for MAT provisions and not for computation under normal provisions of the Act. Thus, an informed decision was taken by the AO about both the items. In these circumstances, if AO decided to issue a fresh notice for reopening the completed assessment, it has to be treated as change of opinion. It can also be said that the order of assessment that was passed by the AO u/s 143(3) is not silent in respect of points on the basis of which the assessment was sought to be reopened. There is merit in the contention which has been urged on behalf of the assessee that queries had been raised during the course of the assessment and the assessment order would ex facie disclose that the AO had applied his mind to the points on the basis of which the assessment was now sought to be reopened. Thus, no tangible material existed to reopen the assessment in the present case;
++ role of the Audit parties is to point out the factual mistakes and not to advise the AO on legal matters. Therefore, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held forming of an independent opinion. Whether a particular item has to be added or not while computing the income under normal provisions or MAT provisions is an issue to be decided by the AO. He is the only person to interpret the law pertaining to computation of income as per the provisions of section 115 JB of the Act. It is not the case that AO had not called for any details from the assessee in this regard. He analysed the pieces of information supplied by the assessee about both the issues and later on decided to assess the income in a particular manner. It is noteworthy that order was passed by a senior officer of the department i.e. by Additional CIT in the case under consideration an experienced officer has taken a view after considering the relevant facts and law.He has not initiated reassessment proceedings on his own. As stated earlier, 148 notice was issued after receiving objection from audit party. It is true that, while initiating 147 proceedings, he has not mentioned that reason for reopening was not the audit objections. But, if we consider the surrounding circumstances it is clear that trigger point was the objections raised by the audit party;
++ considering the particular facts and circumstances of the case under consideration, reopening was result of change of opinion. Fact that the AO did not record reasons for computing income under normal/MAT provisions, would be of no consequence. Therefore, the notice u/s. 148 in the present case was issued without jurisdiction.
Assessee-company, engaged in the business of leasing and investment banking, filed its original return that was assessed u/s 143(3) of the Act on 25.02.2005. AO determined the total income of the assessee at Rs.90,48,86,939/-under the normal provisions and at Rs. 85,99,59,539/- u/s.115JB of the Act. While passing order u/s 143(3) of the Act, AO made the additions on account of leasing equalisation reserve was added to the total income of the assessee, while computing the income under the normal provisions of the Act, but while computing the book profit u/s 115JB of the Act, AO did not add the said amount. Similarly, provision for investment valuation was considered by the AO for computing income as per the provisions of section 115JB of the Act, but same was not considered for computing income under normal provisions of the Act.
Subsequently, AO re-opened the case u/s 147 of the Act as he was of the opinion that there were reasons to believe that certain income chargeable to tax had escaped assessment. Accordingly, a notice u/s 148 of the Act was issued. The assessee vide his letter dated 05.01.2006 stated that the original return filed by it should be taken as the return filed in response to notice issued u/s 148.
During re-assessment proceedings, the AO asked for various details from the assessee and after considering the explanation of the assessee certain additions/disallowances were made in the assessment order passed u/s 143(3) r.w. section 147 of the Act. CIT(A) upheld the action of the AO in initiating reassessment proceedings.
On further appeal, the ITAT held that,
++ reopening of a completed assessment, is governed by certain principles. One of the settled principles, in this regard, is that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what is stated in the reasons recorded u/s.148(2) and nothing more. Secondly, it can hardly be disputed that once the AO notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and, therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the AO allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the AO, over which the assessee beyond trying to persuade the AO, would have no control whatsoever;
++ if the AO on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the AO cannot be seen to have formed any opinion on such a claim. Such a contention, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinised by the AO during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. In other words, in a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition;
++ jurisdictional High Court, in the case of Export Credit Guarantee Corporation of India Ltd. (2013-TIOL-56-HC-MUM-IT), has held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. Thus, the most important factor to issue notice u/s.148 of the Act is existence of tangible material;
++ the AO even within a period of four years cannot reopen an assessment merely on the basis of a change of opinion. The AO has no power to review an assessment which has been concluded. But, where he has tangible material to come to the conclusion that there is an escapement of income from assessment, the power to reopen can be exercised. In the case under consideration only tangible material referred to by the AO is his errors in including/excluding certain items of income while calculating the income of the assessee under the normal provisions or under MAT provisions;
++ reassessment proceedings were initiated by the AO after objections were received from the internal audit party, the dates of audit objections and the dates of issue of notice u/s. 148 establish the fact that there was nexus between the two. From the sequence of the events it is clear that the AO had issued the notice for reopening after considering the issues raised by the audit party. The items involved in the audit objections find place in the reasons recorded by the AO. While passing the original assessment order, AO had called for the details about lease equalisation reserve as well as about the writing off of non- performing assets. Question No. 16 & 18 of the questionnaire issued by the AO on 16.11.2004 is about these two issues. After considering the submissions of the assessee, AO decided that lease equalisation reserve and provision of diminution in investment has to be given particular treatment. One of the items was taxed under normal provisions and not under MAT provisions, whereas the other item was considered for MAT provisions and not for computation under normal provisions of the Act. Thus, an informed decision was taken by the AO about both the items. In these circumstances, if AO decided to issue a fresh notice for reopening the completed assessment, it has to be treated as change of opinion. It can also be said that the order of assessment that was passed by the AO u/s 143(3) is not silent in respect of points on the basis of which the assessment was sought to be reopened. There is merit in the contention which has been urged on behalf of the assessee that queries had been raised during the course of the assessment and the assessment order would ex facie disclose that the AO had applied his mind to the points on the basis of which the assessment was now sought to be reopened. Thus, no tangible material existed to reopen the assessment in the present case;
++ role of the Audit parties is to point out the factual mistakes and not to advise the AO on legal matters. Therefore, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held forming of an independent opinion. Whether a particular item has to be added or not while computing the income under normal provisions or MAT provisions is an issue to be decided by the AO. He is the only person to interpret the law pertaining to computation of income as per the provisions of section 115 JB of the Act. It is not the case that AO had not called for any details from the assessee in this regard. He analysed the pieces of information supplied by the assessee about both the issues and later on decided to assess the income in a particular manner. It is noteworthy that order was passed by a senior officer of the department i.e. by Additional CIT in the case under consideration an experienced officer has taken a view after considering the relevant facts and law.He has not initiated reassessment proceedings on his own. As stated earlier, 148 notice was issued after receiving objection from audit party. It is true that, while initiating 147 proceedings, he has not mentioned that reason for reopening was not the audit objections. But, if we consider the surrounding circumstances it is clear that trigger point was the objections raised by the audit party;
++ considering the particular facts and circumstances of the case under consideration, reopening was result of change of opinion. Fact that the AO did not record reasons for computing income under normal/MAT provisions, would be of no consequence. Therefore, the notice u/s. 148 in the present case was issued without jurisdiction.
IT : Where Assessing Officer completed assessment of assessee under section 143(3) and subsequently he reopened said assessment solely on basis of objection of audit party without application of his mind independently, reopening of assessment was invalid
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[2013] 32 taxmann.com 161 (Gujarat)
HIGH COURT OF GUJARAT
Jagat Jayantilal Parikh
v.
Deputy Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 16062 OF 2012
FEBRUARY 28, 2013
Section 147, read with section 148, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [Audit objection] - Assessment year 2007-08 - Assessing Officer completed assessment of assessee under section 143(3) - Subsequently audit party examined assessment order and raised objection to effect that there was irregular allowance of some expenses by Assessing Officer involving short levy of tax upon assessee - Thereupon Assessing Officer issued on assessee a notice under section 148 seeking to reopen aforesaid assessment - Reasons recorded by Assessing Officer for reopening assessment were almost identically worded as that of audit party - No material on record to show that Assessing Officer had any independent application of mind - Whether notice of reopening was invalid for Assessing Officer having not formed his independent belief - Held, yes - Whether, therefore, impugned notice of reopening was liable to be quashed - Held, yes [Paras 7 & 8] [In favour of assessee]
FACTS
| ■ | For the assessment year 2007-08, the assessee filed the return of income giving all details and statements coupled with the audit report. The Assessing Officer issued on the assessee a notice under section 143(2), which was duly replied by the assessee. Thereupon the Assessing Officer completed the assessment of the assessee under section 143(3). | |
| ■ | Subsequently the audit party examined the impugned assessment order and raised objection to the effect that there was irregular allowance of some expenses by the Assessing Officer involving short levy of tax upon the assessee. Thereupon the Assessing Officer issued on the assessee a notice under section 148 seeking to reopen the aforesaid assessment. The reasons recorded by the Assessing Officer for reopening the assessment were similarly worded as the objection of the audit party. The assessee objected to the said notice contending that the said notice was nothing but a mere change of opinion on the part of the Assessing Officer. The Assessing Officer did not deal with the objection raised by the assessee. He passed straightway an assessment order on the assessee and raised tax demand upon him. | |
| ■ | On writ, the assessee contended that (i) the Assessing Officer had not applied his mind independently but acted on the objection of audit party, therefore, reopening was based on the change of opinion only, and (ii) the notice for reopening the assessment had been issued at the instance of the audit party and, therefore, notice was contrary to the well laid down ratio that any notice for reopening solely on the objection of audit party without application of mind could not be sustained. |
HELD
| ■ | On perusal of the original file of the Assessing Officer pertaining to the assessment in question, it is clear that the Assessing Officer had serious objections to the report of audit party. He vide his letter dated 23-3-2011 addressed to the Senior Audit Officer ventilated his objections in following fashion: the query raised by the audit party was based on the wrong understanding of accounting principles and failure to differentiate between business expenditure and personal expenditure. The provision for purchase made by the assessee had no personal nature of expenditure. It was pure and simple business expenditure for which liability was booked on provisional value till the actual event get crystallized. [Para 5.7] | |
| ■ | It is clear from the aforesaid letter dated 23-3-2011 that the Assessing Officer himself was convinced that audit party's query was raised on wrong understanding of accounting principles and on failure to differentiate between business expenditure and personal expenditure. He also opined that as far as the personal expenditure was concerned that was pure and simple business expenditure on which liability was booked on provisional value till the actual event get crystallized. [Para 5.8] | |
| ■ | It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment and while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen, validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party. [Para 5.9] | |
| ■ | On 1-4-1989, after the Direct Tax Laws (Amendment) Act, 1989, the powers of reopening assessment under section 147 have been made very wide. The Assessing Officer needs to have reason to believe that income has escaped assessment for any assessment year. The term reason to believe provided in section 147 would indicate that it is his own subjective satisfaction based on reasonable grounds. [Para 5.10] | |
| ■ | In the instant case, the assessment was completed on scrutiny. In post assessment period the Assessing Officer had strongly objected to the objections raised by the audit party by communicating internally as mentioned hereinabove. [Para 6] | |
| ■ | The reasons for reopening the assessment are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring and they clearly establish absence of subjective satisfaction of Assessing Officer. Thus the ground raised by the assessee that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained. [Para 7] | |
| ■ | Resultantly the impugned notice of reopening was liable to be quashed. [Para 8] |
CASES REFERRED TO
GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963 (SC) (para 3), Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Application No. 15566 of 2011, dated 14-12-2011] (para 5.11) and CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 8).
Manish J. Shah for the Petitioner. Mrs. Mauna M. Bhatt for the Respondent.
JUDGMENT
Ms. Sonia Gokani, J. - The petitioner is an individual assessed in the same status for last several years under the Income-tax Act, 1961 (for short, hereinafter referred to as "the Act"). The petitioner herein has challenged the validity of the notice issued under Section-148 of the Act dated 21.11.2011, seeking to reopen the assessment framed by the Assessing Officer on scrutiny under Section-143(3) of the Act for the Assessment Year 2007-2008. The facts & details for appreciating the issue raised by the petitioner herein in the present petition under Article 226 of the Constitution of India are as under.
1.1 The petitioner, in the Assessment Year 2007-2008, declared his total income of Rs.1,89,040/- in the return filed by him under Section 139 of Act. The statement of income and audit report under Section 44AB accompanied the return. In the audit report, under the heading of "Money Market Trading Account-Tax Free" reflected computation of the transaction. The petitioner had claimed a net loss of Rs.13,22,953.43 in one account. All other accounts clubbed together had shown a net loss of Rs.11,52,464/-.
1.2 A notice under Section 143(2) was issued on 30.10.2009. A letter was addressed by the petitioner-assessee to the Assessing Officer on 09.11.2009, inter alia, urging that qualitative particulars along with valuation had already been furnished in terms of the account. On the basis thereof, the Assessing Officer completed scrutiny assessment under Section 143(3) & passed an order on 14.12.2009.
1.3 Subsequent thereto, it emerges from record that the audit objection in this regard was raised. The Assessing officer, of course, did not agree with office objection. However, on 21.11.2011, the petitioner received a notice under Section 148 of the Act for reopening of the assessment on the ground that the income of the petitioner has escaped the assessment & he was directed to file his return within 30 days.
1.4 The return was submitted by the petitioner and the ground was raised in the communication dated 20.12.2011 that such reopening was in direct response to the audit objection which was untenable as advance sale securities is a regular feature in the petitioner's business. Request was made for furnishing of copies of return. The reasons were furnished vide letter dated 22.08.2012 which are required to be reproduced as under:
"It is seen that you had returned gross total salary income of Rs.2,99,040 and gross business loss of Rs.15,85,666 as per the statements of computation of total income. It is further, noticed that you have debited an amount of Rs.1,24,31,189 towards "provision for purchase" (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards "provision for purchases reversed." The net loss of Rs.13,22,953.43 of this Money Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was taken for computation of business income. After adjustment of various items depreciation etc. the net business loss of Rs.15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs.71,65,489.92 (1,24,189.18-52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only. Thus there was escapement of taxable income for the assessment year 2007-2008, and as such notice u/s. 148 has been issued."
1.5 Objections were filed by the petitioner on 05.09.2012 wherein it is emphasized that the said notice is nothing but a mere change of opinion on the part of the Assessing Officer. Instead of dealing with these objections and pass any order, Assessing Officer passed straightway an assessment order dated 17.10.2012 making an addition of Rs.71,65,490/- and sent a demand notice dated 17.10.2012 of Rs.34,96,100/-.
1.6 Resultantly, this petition with a prayer to quash and set aside the notice.
2. On issuance of notice to the other side, affidavit-in-reply has been filed by the Deputy Commissioner, Income-tax, denying all averments of the petition. It is urged that the notice has been issued as the income chargeable to the tax has escaped the assessment and the reasons recorded are also provided for such reopening. The assessee also appeared during the re-assessment proceedings and sought various details. It is further contended that the assessee-petitioner had not objected to such reopening. It is only after tax liability fixed to the tune of Rs.34,96,100/-, such objection have been raised.
2.1 It is further contended that the petitioner has also filed an appeal before the CIT (A) and on his having availed alternative remedy, this petition is not maintainable.
3. Heard learned senior counsel Mr. J.P. Shah with learned counsel Mr. M.J. Shah for the petitioner who submitted that the notice is based on one of the issues, already previously raised in the scrutiny assessment. The Assessing Officer had not applied his mind independently but acted on the objection of audit party and reopening, therefore, is based on the change of opinion only. Learned counsel has also taken a firm stand that while issuing notice for reopening the assessment, action has been initiated at the instance of the audit party and therefore also, notice is contrary to the well laid down ratio that any notice for reopening solely on the objection of audit party without application of mind, cannot be sustained. He further urged that even the basis of the plea that the income chargeable to tax has escaped assessment, lacks validity. It is urged further that the Assessing Officer has proceeded to frame fresh assessment without disposing of the objections of the petitioner separately and thereby, violated the ratio laid down by the Apex Court reported in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963
4.1 Learned counsel Ms. Mauna Bhatt has objected to entertain this petition preferred under Article 226 of the Constitution of India. According to her, the Assessing Officer has independently examined the question. She has further submitted that the Assessing Officer had a reason to believe that taxable income since has escaped assessment, impugned notice requires no interference at this stage.
4.2 Learned counsel has also urged that the Assessing Officer, on the basis of the report of the audit party, has right to form his own opinion with respect to escapement of the income and only because the indication has come from the audit party, that itself cannot be the ground of holding the opinion of the Assessing Officer invalid.
5. Upon thus hearing both the sides and also on perusal of the original file of the Assessing Officer pertaining to the assessment in question, this petition requires to succeed for the following reasons.
5.1 As can be noted from submissions made by both the sides, on three grounds, challenge is made to the notice of re-assessment.
| (i) | On scrutiny assessment, the issue raised in the impugned notice has been finalized and therefore, this notice of reopening is nothing but only a change of opinion on the part of the Assessing Officer. | |
| (ii) | The Assessing Officer proceeded to frame fresh assessment without disposing of the objections by a separate reasoned order and thereby, violated the law on the subject. | |
| (iii) | Despite the initial disagreement of Assessing Officer to the objections raised by the audit party, this notice of reopening is issued only at the instance of the audit party. |
5.2 Taking firstly, the last contention of the petitioner, it can be noted that for the Assessment Year 2007-2008, a return of income was filed by the petitioner on 31.10.2007, giving all details and statements coupled with the audit report. A notice was issued by the Assessing Officer under Section 143(2) on 30.10.2009 which was replied to on 09.11.2009. It also enclosed along with the monthly particulars of the trading in G-Security, MMD and Bonds by further mentioning that qualitative particulars with money value had already been given in the account. No further queries were raised and the assessment order was passed on 14.12.2009 on scrutiny, under Section 143(3) of the Income-tax Act taking into account all these aspects.
5.3 It appears that, subsequent to this, audit objections were raised in the following manner:
"Under Section 37 of the Income Tax Act, 1961, any expenditure, not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession.
The assessee, Shri Jagat Jayant Parikh, an individual, a dealer in securities, filed its return of income for the Assessment Year 2007-2008 on 30.10.2007 declaring total income, including salary income at Rs.1,89,040 under Section 143(1) of the Income Tax Act, 1961. The return was processed on 19.3.2009 accepting the same income. Thereafter, the return was selected for security under Section 143(3) and the same was finalized on 24.12.2009 determining total income Rs. 2,12,320.
Audit scrutiny of the assessment records revealed that the assessee had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs.15,85,666 as per the statement of computation of total income. It is, further, noticed that the assessee had debited an amount of Rs. 1,24,31,189.18 towards "Provision for purchase (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs. 52,65,699.26 had been credited towards "Provision for purchase reversed." The net loss of Rs. 13,22,953.43 of this Money Market Trading Account was debited to the Profit and Loss Account and net business loss of Rs. 11,52,464 was take for computation of business income. After adjustment of various items including depreciation etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years.
Thus, allowance of net provision of Rs. 71,65,489.92 (1,24,31,189.18 - 52,65,699) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure being a provisionally.
This resulted in irregular allowance of expenses of Rs. 71,65,490 involving short levy of tax of Rs. 32,07,832 as mentioned below"
5.4 On the basis of such audit objection, notice had been issued to the petitioner on 21.11.2012 under Section 148 of the Income-tax Act, 1961 without furnishing copy of reasons recorded for reopening the assessment. The same were supplied to the assessee on 29.08.2012. The reasons recorded are as follows:
"It will be appreciated that under section 37 of the Income tax act, 1961, any expenditure, not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure of personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business of profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession.
It is seen that you are a dealer in Securities. You filed return of income for the A.Y.2007-2008 on 3.10.2007 declaring total income, including salary income at Rs.1,89,040. The return was processed on 19.03.2009 accepting the same income. Thereafter, the return was selected for scrutiny under section 143(3) and the same was finalized on 24.12.2009 determining total income at Rs.2,12,320.
It is seen that you had returned gross total salary income of Rs.2,99,040/- and gross business loss of Rs.15,85,666/- as per the statements of computation of total income. It is further noticed that you have debited an amount of Rs.1,24,31,189 towards "provision for purchase" (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards "provision for purchases reversed". The net loss of Rs.13,22,953.43 of this Money Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was take for computation of business income. After adjustment of various items depreciation etc., the net business loss of Rs.15,85,666/- was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of [Rs.71,65,489.92 (1,24,189.18 - 52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only]. Thus there was escapement of taxable income for the assessment year 2007-08, and as such notice u/s.148 has been issued."
5.5 After such reasons were supplied to the petitioner which are similarly worded as the objection of audit party, he addressed a letter dated 08.10.2012 to the Deputy Commissioner of Income-tax, containing specifically that all these aspects have been duly examined and this is nothing but a change of opinion on the part of the Assessing Officer. It was also contended that the inquiry based on the report of the audit party cannot be the ground for reopening the assessment & entire issue for which reopening was done, was examined in scrutiny assessment by stating thus.
"[5] Sir, a sale is complete only when the delivery is made. The Assessee maintains the books of account of Mercantile basis and hence a contract is recorded when prices tend to move in either directions or real time basis. However, a sale remains incomplete when the goods are not delivered. And it is for this reason that an incomplete sale cannot contribute to the profit or loss for any period. It is equally true that accounting entries do not create an income or expenditure and Court have ruled in number of cases that Income Tax is not dependent on the accounting entries passed. Under the circumstances the sales recorded in our books does not give rise to any surplus or loss. However by way of abundant caution the assessee has balance a contractual sale (incomplete) by way of purchases MTM against these incomplete sales to ascertain true profit for the said previous year, had the transaction was completed at the year end at prices prevailing on last day of the previous year.
[6] Your Honor's observation that any provision in the books does not constitute expenditure and hence must be disallowed does not hold good ground. The proposal to tax the difference between provision for purchase in the beginning of the year and the provision at year end is mere hypothetical and has no legal or account base. The description "provision for purchase" is a nomenclature to describe purchases at MTM for all pending sale deals and cannot be treated at par with any accounting provision to meet any contingent future liability."
5.6 In the instant case, we deemed it appropriate to call for the record of the Assessing Officer for our perusal.
5.7 It could be noticed from the said record that the Assistant Commissioner of Income-tax had serious objections to the said report of audit party & vide his letter dated 23.03.2011 addressed to the Senior Audit Officer, he, in his communication, ventilated his objections in following fashion:
"2. The main contention of the Audit Party is that the assessee has debited an amount of Rs.1,24,31,189 towards the provision of purchase and out of this an amount of Rs.52,65,699 has been credited towards provisions for purchase reverse. The provisions for the expenses is not admissible expenditure.
3. The audit objection raised is not acceptable as it is contrary to the facts of the case. It may be mentioned that every expenditure related to business transaction is allowable in Income tax and when there is a determined and defined expenditure there is entry in the books of accounts. When such defined but indetermined expenditure in incurred, it referred to as provision. This provision is allowable as expenditure in Income Tax Act. Only un ascertained transactions when provided, are disallowed.
4. In the present case of the assessee is a dealer in securities, transactions of buying and selling are defined and determined. These are based on deals entered into at the relevant time. However, when sale-deal is entered into without holding the stock of the said script, these are settled by bought deal at a future date, either by delivery or settlement of difference in price prevailing on the date of settlement. In such cases, transactions are defined but purchase price is not determined till the date of settlement. It gets determined on the date of settlement.
5. When such a deal is entered into just prior to the date of annual closing day, i.e. before 31st March, actual profit or loss gets divided between two financial years. The same needs to be bifurcated based on the price prevailing on the last day of the financial year. Here, assessee made the entries in the books for short sale of securities and provided for purchase of those securities on the last day of Financial year at prices prevailing on that day. Thus correct profit or loss for this financial year can be ascertained. In the subsequent year, this provision for purchaser are reversed on the first day of the Financial year and when actual purchases are made, the net profit or loss relating to subsequent financial year is ascertained. Thus correct bifurcation of profit/loss between two financial years get ascertained and taxed in respective years.
6. The provision sought to be disallowed is not appropriation of profit or contingent expenditure or income of the assessee but a liquidated, ascertained and defined liability as creditors for purchases and purchase of stock is reflected in the books of accounts. This is basic and fundamental principle of accountancy and only method to ascertain correct profit or loss for any financial year.
7. Thus query raised by the audit party is based on the wrong understanding of accounting principles and failure to differentiate between business expenditure and personal expenditure. This provision has no personal nature of expenditure. It is pure and simple business expenditure for which liability is booked on provisional value till the actual event get crystalized."
5.8 It is thus clear from this communication that the Assessing Officer himself was convinced that audit party's query was raised on wrong understanding of accounting principles and on failure to differentiate between business expenditure and personal expenditure. The Assessing Officer also opined that as far as the personal expenditure was concerned that was pure and simple business expenditure on which liability was booked on provisional value till the actual event get crystalized.
5.9 It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment & while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen, validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party.
5.10 On 01.04.1989, after the Amending Act, 1989, the powers of reopening assessment under Section 147 have been made very wide. What is predominantly questioned in this petition is the absence of exercise of powers given by the Statute under Section 147 by the Assessing Officer and his having reopened the assessment despite his own objection. The Assessing Officer needs to have reason to believe that income has escaped assessment for any assessment year. The term reason to believe provided in Section 147 of the Act would indicate that it is his own subjective satisfaction based on reasonable grounds.
5.11 This Court has also examined identical issue in yet another matter where other judgments of the Apex Court on the issue are also taken into account. It would be relevant to reproduce some of the relevant paragraphs from the case of Cadila Healthcare Ltd. v.Asstt. CIT [Special Civil Application No. 15566 of 2011, dated 14-12-2011], as under:
"Counsel vehemently contended that the entire issue has cropped up on the insistence of the Audit Party. He submitted that mere opinion of the audit party cannot form a basis for the Assessing Officer to believe that the income chargeable to tax has escaped assessment. In this regard, counsel relied on the following decisions :
| (i) | CIT v. Lucas T.V.S. Ltd., 249 ITR 306 in which the Apex Court upheld the the decision of the High Court in which the High Court had quashed the reopening proceedings wherein apart from the information furnished by the audit party, the Income Tax Officer had no other information for reopening the assessment. | |
| (ii) | Agricultural Produce Market Committee v. ITO , [2011] 15 taxmann.com. 170 (Gujarat) wherein Division Bench of this Court was pleased to quash the notice for reopening where the only basis was the revenue audit objection as regards the eligibility of the assessee for exemption. | |
| (iii) | Adani Exports v. Deputy CIT, 240 ITR 224 wherein Division Bench of this Court held as under: |
"It is true that satisfaction of the assessing officer for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of record, burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the assessing officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the assessing officer has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit u/s 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on 8.2.97 that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the assessing officer by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction u/s 80HHC, for the reasons stated by the audit. The reason is not far to seek."
On the other hand, learned counsel Shri Bhatt appearing for the Revenue opposed the petition contending that the petitioner had not made full and true disclosures in the return filed. Relying on the explanation to section 147, counsel submitted that mere indication that any tax was required to be deducted at source in the return would not absolve the assessee from disclosing other relevant aspects.
Counsel further submitted that the Assessing Officer, on the basis of what is pointed out by the audit party, can still form his own opinion with respect to escapement of income and merely because it was pointed out by the Audit party would not render his opinion invalid or the notice illegal. In this regard, counsel relied on the decision of CIT v. P.V.S. Beedies Pvt. Ltd., 237 ITR 13and in the case of Indian & Eastern Newspaper Society v. C.I.T. 119 ITR 996.
Having thus heard the learned counsel for the parties, we are not required to go into several contentions put forth by both sides. This is so, because on the available material on record, we are inclined to hold that the Assessing Officer could not have reopened the assessment by issuing the impugned notice.
The petitioner has been contending that the Assessing Officer had no independent reason to hold a belief that income chargeable to tax has escaped assessment. It is only at the insistence of the audit party that he had issued notice for reopening. In the petition, it is averred that "the issue on which the case of the petitioner has been reopened is based on the objection raised by the audit party. It is a matter of record that the Audit Party had raised an objection in regard to non deduction of tax under section 195 of the Income-tax Act, 1961 in respect of international transactions with associated enterprises in regard to payment for product registration services availed amounting to Rs.51,94,204/- and based on the same opined that the said expenditure was liable to be disallowed under section 40(1)(i) of the Act. The petitioner respectfully submits that since this objection had been raised on the basis of the information available on the assessment records of the petitioner's case for the A.Y. 2004-05, it clearly establishes that there was no default on the part of the petitioner in fully and truly disclosing the primary facts."
Since the specific case of the petitioner was that the Assessing Officer had acted at the behest of the Audit Party and held no independent opinion on its own with respect to the income escaping assessment, we had called for the original records pertaining to the files of the assessee from the Revenue Department. Learned counsel Shri Bhatt after detailed search, made available a copy of the letter dated 21.5.2009 from one Ritu Singh Sharma, Asstt. Commissioner of Income-tax, in charge of this case at the relevant time addressed to the Senior Audit Officer. In the said letter, she has stated that the audit party has observed that for the amount in question TDS was required to be deducted. Thereupon, details were called for. She concluded that looking to the Board's circular dated 8th August 1995, TDS was not required to be deducted. Taking note of the explanation of the assessee she stated as under:
"In view of the above explanation, there was no under assessment in the assessee company's case in both the assessment years i.e. A.Y.2004-05 & A.Y. 2005-06.
Further, basis requirement of deducting tax u/s.195 is that whether payment of sum to an non-resident is chargeable to tax under the provisions of the Act or not. TDS liability u/s.195 arises only when income is credited to account of payee or on actual payment of same.
Therefore, as the above mentioned expenditure is in the nature of reimbursement of expenses no TDS is required to be deducted in view of Board's circular No.715 dt. Aug 8, 1995."
Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the AO, she held correspondence with the assessee. Taking into account the assessee's explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board's circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decisions of the Apex Court in the case of P.V.S. Beedies Pvt. Ltd. (supra) and Indian & Eastern Newspaper Society(supra), if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening assessment. However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the Audit Party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year."
6. As is more than apparent, assessment was completed on scrutiny. In post assessment period, audit party raised the objection and Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.
7. In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained.
8. As regards other two grounds raised by the petitioner which are also contested heavily, petitioner sought support from the decision of the Apex Court in GKN Driveshafts (India) Ltd. (supra) which makes it obligatory on the part of Assessing Officer to pass a reasoned order on receipt of objections from assessee before finalizing assessment and from CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) which does not permit change of opinion of Assessing Officer at the time of reopening of assessment. These aspects need not be gone into when the challenge of petitioner on the main ground itself has succeeded effectively.
Resultantly, the impugned notice of re-opening dated 21.11.2011 needs to be quashed. Petition is allowed and the same stands disposed of in the above terms. No order as to costs.
IT : Where Assessing Officer has acted only under compulsion of audit party and not independently, action of reopening assessment in such a case would be vitiated
■■■
[2013] 32 taxmann.com 41 (Gujarat)
HIGH COURT OF GUJARAT
Vijay Rameshbhai Gupta
v.
Assistant Commissioner of Income-tax, Circle-2*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 17207 OF 2012
MARCH 4, 2013
Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [Opinion of audit party] - Assessment year 2007-08 - Whether, where Assessing Officer has acted only under compulsion of audit party and not independently, action of reopening assessment in such a case would be vitiated - Held, yes [Para 10] [In favour of assessee]
FACTS
| ■ | In the course of assessment, the Assessing Officer took a view that income earned by assessee from leasing out his restaurant was taxable as business income. | |
| ■ | Subsequently, the Assessing Officer initiated reassessment proceedings on the ground that aforesaid lease income was liable to be taxed as income from other sources and, thus, business expenses were wrongly allowed against said income. | |
| ■ | The assessee filed instant writ petition challenging the validity of reassessment proceedings contending that the Assessing Officer was compelled by the audit party to reopen the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment. |
HELD
| ■ | From the series of evidence, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This is so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for reexamination of the issue. Thereupon, he in fact, wrote a letter and gave elaborate reasons why he did not agree to make any addition on the controversial issue. [Para 7] | |
| ■ | In said letter, the Assessing Officer firmly asserted that the assessee's income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer was not acceptable. [Para 9] | |
| ■ | Thus, it is apparent on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide belief that the treatment to the income which he had accorded in the original assessment was as per the correct legal position. [Para 9] | |
| ■ | By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. It is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of reopening would be vitiated. [Para 10] | |
| ■ | In view of above, the impugned notice seeking to reopen the assessment was to be quashed. |
CASES REFERRED TO
CIT v. P.V.S. Beedies (P.) Ltd. [1999] 237 ITR 13/103 Taxman 294 (SC) (para 10) and Cadila Healthcare Ltd. v. Asstt. CIT [2012] 65 DTR 385 (Guj.) (para 10).
S.N. Divatia for the Petitioner. Mrs. Mauna M. Bhatt for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for final hearing of the petition.
2. The petitioner has challenged a notice dated 26th March 2012 issued by the respondent-Assessing Officer reopening assessment of the petitioner for the Assessment Year 2007-08. It can thus be seen that the notice for reopening was issued within a period of four years from the end of relevant assessment year. The Assessing Officer had recorded his reasons for issuing such a notice, which read as under :-
"On verification of Form 3CD, Profit & Loss Account and various submissions in respect of rent income and food preparation charges, it is noticed that from the start of the A.Y 2007-08, the assessee has ceased himself from the restaurant business and had leased/licensed his entire assets of restaurant to other parties for which he received rents. As per terms of contracts, repair/maintenance/replacement of leased building/furniture/ACs/crockery and utensils and local taxes thereof were to be paid by lessee. Further, the assessee had received food preparation charges from lessee which were fixed amount as per agreements signed by assessee and lessee. As per agreements for food preparing charges, assessee was to provide only manpower for preparation of food and all materials and related expenditure was to be provided by lessee. The assessee had provided two persons at one such restaurant incurring salary expenditure of Rs. 1,59,000/= and had provided four persons at another such restaurant incurring salary expenditure of Rs. 3,18,000/=. As the assessee had ceased to do any business and he is deriving his income by virtue of various rent and money received under agreement and his role is limited to provide six persons to his handed over business, his income was required to be treated as income from other sources and not business income and except for salary expenditure on these persons, various business expenditures allowed as deduction as business expenditure was required to be disallowed [Rs. 13,64,205/= - Rs. 18,41,205/= - Rs. 4,77,000/=].
On examination of the document, I have, therefore, reason to believe that income chargeable to tax of Rs. 13,64,205/= has escaped assessment within the meaning of Section 147 of the Act and the assessment for the A.Y 2007-08 is required to be re-opened by issue of notice u/s. 148 of the Act."
3. In the present case, the sole ground pressed in service by the petitioner was that the Assessing Officer was compelled by the audit party to re-open the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment.
4. To enable us to examine above contentions of the petitioner, we had requested counsel for the Revenue to make available for our perusal, the original file of the petitioner-assessee. Having perused the file, we noticed that the following facts emerge :
| (a) | Assessment for the year under consideration was originally framed on 1st July 2009. Such assessment was made after scrutiny; | |
| (b) | Audit party brought following facts to the notice of the Assessing Officer :- |
"Scrutiny of Form 3CD, Profit and Loss Account and various submissions in respect of rent income and food preparation charges revealed that from the start of the A.Y., the assessee had ceased himself from the restaurant business and had leased/licensed his entire assets of restaurant to other parties for which he received rents. As per terms of contract, repair/maintenance/replacement of leased building/furniture/ACs/Crockery and utensils and local taxes thereof were to be paid by lessee. Further, the assessee had received food preparation charges from lessee which were fixed amount as per agreements signed by assessee and lessee. As per agreements for food preparing charges expenditure was to be provided by lessee. The assessee had provided two persons at one such restaurant incurring salary expenditure of Rs. 1,59,000/= and had provided four persons at another such restaurant incurring salary expenditure of Rs. 3,18,000/=. As the assessee had ceased to doing any business and he is deriving his income by virtue of various rent and money received under agreement and his role has limited to provide six persons to his handed over business, his income was required to be treated as income from other sources and not business income and except for salary expenditure on these six persons, various business expenditures allowed as deduction as business expenditure were required to be disallowed {13,64,205 (1841205-477000)}.
Failure to do so resulted in short levy of tax of Rs. 5,87,765/= (including interest) as under :-
Tax @ 30% + 10% SC + 2% ES of Rs. 13,64,205/- = Rs. 4,59,191
Interest u/s. 234B for 28 months [4/07 to 7/09] = Rs.1,28,573
Total = Rs. 5,87,765
From the same document, we noticed that the audit party recorded as under :-
"On this being pointed out the ACIT 12, Ahmedabad replied that as audit objection needs time to examine, detailed reply would be sent later. He further stated that audit objection was not acceptable as the case would be time barred in December 2010. Reply is not acceptable as remedial action has to be taken in suitable cases as prescribed by CBDT for audit observations."
5. On 8th June 2011, the Assessing Officer did not agree to the above suggestion of the audit party and wrote to the AG [Audit] stating as under :-
"3. The assessee has shown in the audit report for year under consideration the nature of business "Restaurant Business". When the assessee is shown the income under the head "Profit and Gain of business or profession" and paid salary to his employees, the salary expenditure is therefore allowable expenditure under the head business expenditure. The assessee has given a part of his asset on contract and managing the rest of his own.
It is clearly mentioned in the decision of Hon'ble Supreme Court in the case of S.K. Sahana & Sons Limited v. CIT [(1999) 104 Taxman 86/236 ITR 432 (SC)] that where the assessee company leased its colliery to the managing contractor and the assessee was to be paid the profit at a certain rate on the amount of coal raised, as income arose out of a contractual relationship between the principal and the agent, the assessee's income from leasing of its business was to be assessed as business income and not as income from other sources.
In view of the above the audit objection is not acceptable and you are requested to drop the same at earliest."
(d) The audit party, under an undated communication addressed to the Commissioner of Income Tax, which apparently was received after the reply dated 8th August 2011, conveyed as under :-
"Kindly refer to your office letter mentioned above in respect of LAR No. 2047 of ACIT, Circle 12, Ahmedabad. Replies to the follows Paras are not acceptable for the reasons mentioned below :
Para No. 22 : Vijay R. Gupta : A.Y 2007-08 : Reply is not acceptable as judgment of Supreme Court quoted was delivered in 1945 i.e., much prior to introduction of current Income Tax Act, 1961. Further, the Hon'ble Court decided the issue "is assessee entitle to the full amount of depreciation u/s. 102 (vi) of income tax Act, irrespective of period of lease" it is evident that objection raised is not covered under the said judgment. Reply may be reconsidered in view of fact mentioned above and the Para."
6. Thereafter, impugned show cause notice came to be issued with supporting reasons, which we have already recorded earlier.
7. From the series of evidence, in our opinion, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This we say so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for re-examination of the issue. Thereupon, he in fact, wrote a letter dated 8th June 2011 and gave elaborate reasons why he did not agree to make any addition on the controversial issue.
8. We may recall that the controversy was whether the assessee had discontinued his business of running restaurant and that therefore, the income should be treated as the income from such business or from other sources.
9. In his letter dated 8th June 2011, the Assessing Officer firmly asserted that the assessee's income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer is not acceptable. In support of such assertion, the Audit Officer once again referred to and relied upon para-22 of his earlier communication. In short, he reiterated that this was a case where income had escaped assessment and that remedial action therefore be taken. It writs large on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide belief that the treatment to the income which he had accorded in the original assessment was as per the correct legal position.
10. By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. Referring to the decision in case of CIT v. P.V.S Beedies (P.) Ltd. [1999] 237 ITR 13/103 Taxman 294 (SC), it is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of re-opening would be vitiated. In a recent decision dated 14th December 2011 rendered in case of Cadila Healthcare Ltd. v. Asstt. CIT [2012] 65 DTR 385 (Guj.), the High Court had an occasion to examine such issues. It was held and observed as under :-
"Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the A.O., she held correspondence with the assessee. Taking into account the assessee's explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board's Circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decision of the Apex Court in case of PVS Beedies Private Limited [Supra] and Indian & Eastern Newspaper Society[Supra], if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening assessment. However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the Audit party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year."
11. In the result, we have no hesitation in striking down the impugned notice for re-opening, which we hereby do so. Petition is allowed.
SUNILRegards,
IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 31st October, 2011
ITA NO.2072/2010
COMMISSIONER OF INCOME TAX Vs. HARNARAIN
SIDDHARTH MRIDUL, J.
1. The present Appeal filed by the Department under Section 260A of
the Income Tax Act, 1962 (hereinafter referred to as the "Act") was
admitted on the following substantial question of law:-
"Whether the ITAT could have affirmed the order of the CIT(A) in
deleting the penalty when the assessee despite filing return of income
after date of search that is 18.6.2003 did not offer additional income
till after questionnaire was served on him, when it was imminent that
the assessee had no choice but to furnish details regarding the gift
received?"
2. Despite service of notice none appeared on behalf of the
Respondent/Assessee and the matter has been determined in their
absence.
3. The facts as are necessary for the disposal of the present Appeal are that:-
(a) A search and seizure action under Section 132 of the Act was
conducted at the residential premises of the Assessee on 18th June,
2003.
(b) The Assessee filed his return of income for the assessment year
2004-05 on 28th October, 2004.
(c) Since a search was initiated under Section 132, a notice under
Sections 143(2) and 142(1) along with detailed questionnaire was
issued on 10th October, 2005. In response to this notice the Assessee
filed details in response to the above questionnaire. The Assessee
further offered an amount of `89,57,106/- received on account of gift
for taxation vide letter dated 2nd December, 2005.
(d) After examination of seized material pertaining to the Assessee
and the reply filed by the authorized representative of the Assessee,
income of the Assessee was assessed at `1,15,49,232/-.
(e) It is pertinent to mention herein that the Assessee had filed a
confirmation with regard to the receipt of gift. The Assessee had
further filed copies of the gift deed and other related papers to
support the gift. The Assessee had also offered the amount voluntarily
without there being any detection by the Department. However, the
Assessing Officer(AO) rejected the explanation of the Assessee and
directed that since the Assessee has concealed particulars of income
and furnished inaccurate particulars of income, penalty under Section
271(1)(c) was levied.
(f) The Assessee carried the matter in appeal before the Commissioner
of Income Tax (Appeals)[CIT(A)]. After making a detailed and elaborate
discussion as to the facts of the case and the legal decisions
referred to in this connection by the assessee before it, the CIT(A)
deleted the penalty.
(g) The Department carried the matter further in appeal before the
Income Tax Appellate Tribunal (ITAT), which upheld the order of the
CIT(A) and dismissed the appeal filed by the Revenue. The Revenue is
in Appeal against that order of the ITAT date 22nd December, 2009
before us.
4. It was submitted on behalf of Ms. Suruchii Aggarwal, learned
Counsel for the Revenue, that when the Assessee offered the gift for
taxation, it was clearly established that the Assessee did not
disclose his true income in the return of income filed by him and,
therefore, the penalty had been correctly levied by the AO and,
consequently, the order dated 28th February, 2007 passed by the CIT(A)
and the impugned order dated 22nd December, 2009 passed by the ITAT
deserved to be interfered with.
5. At this juncture, it would be appropriate and relevant to extract
the submissions made on behalf of the Assessee before the CIT(A) as
well as the ITAT:-
"Therefore, keeping in view of the fact that:
1. the appellant had submitted the sufficient evidence regarding the
genuineness of receipt of gift.
2. the gift amount is being offered for taxation without accepting
that the gift amount was his concealed income.
3. the appellant had offered the gift amount as income for taxation
purpose at the initial stage of assessment proceedings.
4. the appellant had surrendered additional income before AO could
detect the concealment of income.
5. the appellant had surrendered the amount on the condition that
penalty would not be levied and the addition was being made on the
basis of such surrender.
6. the appellant has surrendered the amount of gift merely for
avoiding further litigation without accepting that he had deliberately
furnished inaccurate particulars or concealed any income.
7. there may be a ground for making addition in the income of the
assessee but that alone will not be enough for imposing penalty in
absence of any material brought out by the Department to prove that
assessee had willfully or due to fraud had concealed the income.
8. there was no circumstances to lead to a reasonable and positive
inference that the assessee"s case - that the gift received was false.
9. the facts and circumstances are equally consistent with the
hypothesis that it could have been genuine gift. Therefore, even
taking recourse to Explanation, same circumstances or state of
evidence on which the gift were treated as income, could not by
themselves justify imposition of penalty without anything more on
record produced by the assessee or the Department.
10. there is no clinching evidence as regards to the concealment.
11. there was no fraud or gross or willful neglect on the part of the
assessee in returning the correct income and that the initial burden
cast on the assessee stood discharged. Moreover, the department in
penalty proceedings made no effort to enquire the status of
surrendered Gift."
6. It is also necessary at this stage to note the observation of the
AO while making the assessment under Section 143(3) of the Act. The
AO"s assessment order under Section 143(3) reads as under:
"Assessee filed return of income on 28.10.2004 for the assessment year
2004-05 declaring total income of Rs. 25,92,126/-. Since a search was
initiated u/s 132 of the Act on 18.06.2003 at his residence, a notice
u/s 143(2) was issued on 07.10.2005. A detailed questionnaire
alongwith notice u/s 142(1) of the Income Tax Act, 1961 was issued on
10.10.2005. Shri S.C. Verma, C.A. / A.R. of the assessee appeared
before the undersigned from time to time and filed details in response
to above questionnaire. He has further offered an amount of Rs.
89,57,106/- received on account of gift for taxation vide letter dated
02.12.2005. He has also filed a confirmation of the assessee in this
regard. After the examination of seized materials pertaining to the
assessee and reply filed by the A.R. of the assessee, income of the
assessee is assessed at Rs. 1,15,49,232/-. Since the assessee has
concealed the particulars of income and furnished inaccurate
particulars of income, penalty proceedings u/s 271(1)(c) of the Income
Tax Act are initiated."
7. The ITAT in the impugned order considered it proper to extract and
approve the order of the CIT(A) as under:
"11. After considering all the facts and position of law, the CIT(A)
deleted the penalty by passing a speaking and reasoned order. We,
therefore, find it proper to extract the order of the CIT(A) as
under:-
"I have considered facts of the case and arguments taken by Sh. Verma
including various judicial decisions relied upon by him quite
carefully. It is true that the additional income which was offered was
not a part of return of income filed, to begin wit for the Asstt. Year
under consideration. However, it is further seen that during the
course of research not a single evidence regarding non-genuineness of
gift amount which is offered as additional income was found. On
perusal of penalty order, it is seen that there is no mention of any
inquiry/investigation/information that the Investigation Wing or with
the assessing officer regarding the fact that whether the aforesaid
gifts were not genuine one which were offered as additional income
vide letter dated 02.12.2005. With this background, I have also gone
through and copy of questionnaire dt.10.10.2005 in which Assessing
Officer has raised simply query at query no. 10 in the questionnaire
for the Asst. Year. "Had you taken/given any loan/gift during the F.Y.
under consideration? If yes, please furnish details." This letter was
received by the appellant on 12.10.205 and thereafter, vide letter
dt.2.12.2005, the appellant had furnished the details of gift received
in the present year from NRIs and had also furnished the copies of
gift deed along with reply. Besides this, in the same letter, the
assessee made it clear that through the aforesaid amount was received
by the appellant as a gift but to buy the peace and to avoid any
dispute, the appellant was offering the amount of gift received from
NRIs for the present A.Y. as taxable income subject to the condition
that no penalty action shall be initiated against the assessee under
any section of I.T. Act. In the same letter, it was further made clear
by the appellant that the gift under consideration as shown to have
been received were genuine one and related document of gift were
annexed along with the letter. From this it is clear that the
Assessing Officer was not having any piece of information regarding
the fact that the gifts were not genuine one and these were part of
total income of the appellant. Even in the questionnaire, in the most
general way it was inquired to furnished the details of any gift/loan
if received during the relevant F.Y. It makes quite clear that this
fact was not a detection by the Assessing Officer that the gifts were
not genuine but it was the appellant who has offered without any
specific inquiry regarding such gift by the Assessing Officer that the
amount of gift can be considered as income though the relevant gift
deed from NRIs from whom the gift claim to have been received were
also filed along with the letter dt. 2.12.2005. It was further made
clear in the aforesaid letter dt. 2.12.2005 that the said amount of
gift has been offered as additional income without detection of the
same by Assessing Officer. In this respect, the decision given by
Hon"ble Supreme Court in the case of K.C. Builders vs. ACIT (2004) 265
ITR 562 and observations therein are quite relevant in which Hon"ble
Supreme Court has observed that in the word "concealment" that there
has been a deliberate act on the part of the assessee and the
concealment inherently carries with it, the element of mens rea.
Hon"ble Court has further observed that mere omission from return, any
item of receipt does neither amount to concealment nor deliberate
furnishing inaccurate particulars of income unless and until there is
some evidence to show or some circumstance found from which it can be
gathered that the omission was attributable to and intention or desire
on the part of the assessee to hide or conceal the income so as to
avoid imposition of tax there upon. Hon"ble Supreme Court in the same
judgment has further observed that a penalty u/s. 271(1)(c) may be
imposed when it has to be proved that the assessee has consciously
made the concealment or furnished inaccurate particulars of income. In
the background of aforesaid judgment, the facts of present case are
quite matching. Here also, there is no evidence to show that the
omission to offer additional income on account of gift received was
attributable to any intention or desire on the part of the assessee to
hide or conceal the income. Hon"ble M.P. High Court also in the case
of CIT vs. S.V. Electricals P. Ltd. (155 Taxman 158) has given a
finding that where the assessee surrenders its full income though at a
later has given a finding that where the assessee surrenders it full
income though at a later stage, there was no question of any
concealment on its part and no penalty, u/s. 271(1)(c) was levied.
Hon"ble Jharkhand High Court in the case of CIT vs. Ashim Kumar
Aggarwal (153 Taxman 226) has given a finding in that particular case
that omission from return of income did not amount to concealment. In
that particular case during the course of search cash balance was
found and explanation furnished was rejected in the assessment order
and thereafter, the Assessing Officer has also imposed the penalty
then Hon"ble Jharkhand High Court has observed that even if it was
presumed that particulars of income had not been properly disclosed by
the assessee, then also, mere omission of the same form return of
income did not amount to concealment. Contrary to this, in the present
case, the affidavit from the donors were furnished, there was no show
cause seeking specific information regarding genuineness of specific
gifts under consideration and it was the appellant who along with
furnishing necessary evidence and explanation for genuineness of the
gift had offered on his own the amount of gifts from NRIs as
additional income for both the A.Ys. under consideration. Hon"ble
Kolkata High Court in the case CIT vs. Kusum Products Ltd. (203 ITR
672) had held that without through revised return, the appellant has
offered additional amount of cash credit though to begin with the
confirmatory letters from the lenders were filed and the lenders
subsequently denied the fact the fact of giving loan. However, in the
present case, the donor has not denied the fact of giving gift.
Similarly, Hon"ble Patna High Court in the case of CIT vs. Bimla Devi
Sharma (192 ITR 482) has observed that mere rejection of assessee"s
explanation did not amount of concealment. In that particular, the
explanation furnished regarding cash credit was not accepted by the
AO. In the present case also, the explanation and evidence regarding
fact of receiving the genuine gift were furnished and over and above,
the same was offered as additional income. Further, Hon"ble Delhi ITAT
in the case of Ram Commercial Enterprises Ltd. vs. ACTI (52 ITD 147)
has given a finding that the assessee had substantiate its explanation
with evidence regarding cash credit u/s. 68 when he filed confirmation
and affidavit regarding source of money then penalty in that case u/s.
271(1)(c) was held to be not justified. Quite similarly in the present
case, the confirmation and affidavit regarding genuineness of the
gifts were furnished which means that the assessee has substantiated
its explanation that evidence and, therefore, the facts of present
case are also matching with the aforesaid decision.
6. Considering the aforesaid judicial analysis of various decisions,
including various decisions quoted by Sh.Verma, in my considered view,
the AO was not justified in imposing the penalty u/s. 271(1)(c) of
I.T. Act of Rs. 29,55,845/- for the A.Y. 2004-05 and, therefore the
same is hereby cancelled by allowing relevant ground of appeal. Here
it shall be out of place to mention that the decision given by the
Hon"ble Supreme Court in the case of K.P. Madhusudan is not applicable
in the facts of the case rather the decision given by the Hon"ble
Supreme Court in the case of K.C. Builders is squarely applicable to
which is discussed and analyzed by me in the earlier part of this
appellate order."
8. In the present case it is observed that the AO included the amount
of gift in the total income of the Assessee merely on the basis of the
Assessee"s declaration. Also, the AO did not point out or refer to any
evidence or material to show and establish that the gift received by
the Assessee was either bogus or sham. Admittedly, the Assessee had
offered the gift for taxation voluntarily and it was not the case of
the Revenue that the same was done after its detection by the
Department. Further, it was also not the case of the Revenue that
material was found during the search indicating that the gift
transaction was an arranged affair to accommodate the Assessee"s
unaccounted money. In this respect it is evident that the ITAT
correctly came to the conclusion that the AO did not possess any piece
of information that the gift was not genuine and was part of the
undisclosed income of the Assessee. In the questionnaire dated 10th
October, 2005 the AO had simply raised a query for the relevant
assessment year in the following manner:- "Had you taken/given any
loan/gift during the F.Y. under consideration? If yes, please furnish
details". In response to this query the Assessee had furnished the
details of gift received in the relevant year from NRI"s and had also
furnished the copy of gift deed along with reply. Apart from this,
simultaneously the Assessee made it clear that aforesaid amount was
received by the Assessee as gift, but to buy peace and to avoid any
dispute the Assessee was offering the amount of gift as taxable income
subject to the condition that no penalty action should be initiated
against the Assessee. Furthermore, it was made clear by the Assessee
that the gift under consideration was a genuine one and the related
documents of gift were sent to the AO. Thus it was quite clear, that
this entire transaction was not detection of the AO that the gift was
not genuine, and that the Assessee had offered the amount without any
specific enquiry regarding such gift by the AO.
9. In K.C. Builders v. ACIT, (2004) 265 ITR 562, the Hon"ble Supreme
Court observed that word "concealment" requires there to be a
deliberate act on the part of the assessee, and the concealment
inherently carries with it the element of mens rea. It was further
observed that a mere omission from return of any item of receipt does
neither amount to concealment nor deliberate furnishing of inaccurate
particulars of income unless and until there is some evidence to show
or some circumstance found from which it can be gathered that the
omission was attributable to an intention or desire on the part of the
assessee to hide or conceal the income so as to avoid imposition of
tax thereupon. It was also held by the Supreme Court that before a
penalty under Section 271(1)(c) is imposed it has to be established
that the assessee had consciously made the concealment or furnished
inaccurate particulars of income.
10. It is also observed that the CIT(A) had relied on the decision of
the Madhya Pradesh High Court and the Jharkhand High Court in the case
of CIT v. S.V. Electricals P. Ltd.( 155 Taxman 158) and CIT v. Ashim
Kumar Agarwal ( 153 Taxman 226) respectively where it was held that
where the assessee surrenders his full income, though at a later
stage, there was no question of any concealment on his part and
consequently no penalty under Section 271(1)(c) was leviable, and that
a omission from return of income did not amount to concealment.
11. In view of the discussion above and the cited decisions, surrender
of the amount by the Assessee after receipt of the questionnaire could
not lead to an inference that it was not voluntary, in the absence of
any material on record to suggest that it was bogus or untrue. It is
further evident that there was neither any detection nor any
information in the possession of the Revenue which might lead to a
conclusion that there was a detection by the Revenue of concealment.
Accordingly, the question of law framed is answered against the
Revenue and in favour of the Assessee. The Appeal is dismissed. No
costs.
SIDDHARTH MRIDUL, J.
ACTING CHIEF JUSTICE
OCTOBER 31, 2011
Related posts:
In the absence of clear finding as to concealment of income furnishing
inaccurate particulars, initiation of penalty proceedings will be
without jurisdiction
Disclosure of undisclosed income in a revised return as a matter of
purchasing peace would not render the penalty imposed under s
271(1)(c) unsustainable in absence of a satisfactory explanation with
regard to its non-disclosure in the original return
Mere enquiry about any loan/gift does not tantamount to detection of
concealment of income u/s. 271(1)(c) of IT Act, 1961
Mere non-filing of an appeal against the additions made by the AO and
voluntary surrender of any amount to buy peace of mind alone cannot
constitute sufficient grounds for the imposition of a concealment
penalty
Penalty for concealment of income u/s. 271(1)(c) can be imposed only
if the concealment is proved : SC
Date of decision: 31st October, 2011
ITA NO.2072/2010
COMMISSIONER OF INCOME TAX Vs. HARNARAIN
SIDDHARTH MRIDUL, J.
1. The present Appeal filed by the Department under Section 260A of
the Income Tax Act, 1962 (hereinafter referred to as the "Act") was
admitted on the following substantial question of law:-
"Whether the ITAT could have affirmed the order of the CIT(A) in
deleting the penalty when the assessee despite filing return of income
after date of search that is 18.6.2003 did not offer additional income
till after questionnaire was served on him, when it was imminent that
the assessee had no choice but to furnish details regarding the gift
received?"
2. Despite service of notice none appeared on behalf of the
Respondent/Assessee and the matter has been determined in their
absence.
3. The facts as are necessary for the disposal of the present Appeal are that:-
(a) A search and seizure action under Section 132 of the Act was
conducted at the residential premises of the Assessee on 18th June,
2003.
(b) The Assessee filed his return of income for the assessment year
2004-05 on 28th October, 2004.
(c) Since a search was initiated under Section 132, a notice under
Sections 143(2) and 142(1) along with detailed questionnaire was
issued on 10th October, 2005. In response to this notice the Assessee
filed details in response to the above questionnaire. The Assessee
further offered an amount of `89,57,106/- received on account of gift
for taxation vide letter dated 2nd December, 2005.
(d) After examination of seized material pertaining to the Assessee
and the reply filed by the authorized representative of the Assessee,
income of the Assessee was assessed at `1,15,49,232/-.
(e) It is pertinent to mention herein that the Assessee had filed a
confirmation with regard to the receipt of gift. The Assessee had
further filed copies of the gift deed and other related papers to
support the gift. The Assessee had also offered the amount voluntarily
without there being any detection by the Department. However, the
Assessing Officer(AO) rejected the explanation of the Assessee and
directed that since the Assessee has concealed particulars of income
and furnished inaccurate particulars of income, penalty under Section
271(1)(c) was levied.
(f) The Assessee carried the matter in appeal before the Commissioner
of Income Tax (Appeals)[CIT(A)]. After making a detailed and elaborate
discussion as to the facts of the case and the legal decisions
referred to in this connection by the assessee before it, the CIT(A)
deleted the penalty.
(g) The Department carried the matter further in appeal before the
Income Tax Appellate Tribunal (ITAT), which upheld the order of the
CIT(A) and dismissed the appeal filed by the Revenue. The Revenue is
in Appeal against that order of the ITAT date 22nd December, 2009
before us.
4. It was submitted on behalf of Ms. Suruchii Aggarwal, learned
Counsel for the Revenue, that when the Assessee offered the gift for
taxation, it was clearly established that the Assessee did not
disclose his true income in the return of income filed by him and,
therefore, the penalty had been correctly levied by the AO and,
consequently, the order dated 28th February, 2007 passed by the CIT(A)
and the impugned order dated 22nd December, 2009 passed by the ITAT
deserved to be interfered with.
5. At this juncture, it would be appropriate and relevant to extract
the submissions made on behalf of the Assessee before the CIT(A) as
well as the ITAT:-
"Therefore, keeping in view of the fact that:
1. the appellant had submitted the sufficient evidence regarding the
genuineness of receipt of gift.
2. the gift amount is being offered for taxation without accepting
that the gift amount was his concealed income.
3. the appellant had offered the gift amount as income for taxation
purpose at the initial stage of assessment proceedings.
4. the appellant had surrendered additional income before AO could
detect the concealment of income.
5. the appellant had surrendered the amount on the condition that
penalty would not be levied and the addition was being made on the
basis of such surrender.
6. the appellant has surrendered the amount of gift merely for
avoiding further litigation without accepting that he had deliberately
furnished inaccurate particulars or concealed any income.
7. there may be a ground for making addition in the income of the
assessee but that alone will not be enough for imposing penalty in
absence of any material brought out by the Department to prove that
assessee had willfully or due to fraud had concealed the income.
8. there was no circumstances to lead to a reasonable and positive
inference that the assessee"s case - that the gift received was false.
9. the facts and circumstances are equally consistent with the
hypothesis that it could have been genuine gift. Therefore, even
taking recourse to Explanation, same circumstances or state of
evidence on which the gift were treated as income, could not by
themselves justify imposition of penalty without anything more on
record produced by the assessee or the Department.
10. there is no clinching evidence as regards to the concealment.
11. there was no fraud or gross or willful neglect on the part of the
assessee in returning the correct income and that the initial burden
cast on the assessee stood discharged. Moreover, the department in
penalty proceedings made no effort to enquire the status of
surrendered Gift."
6. It is also necessary at this stage to note the observation of the
AO while making the assessment under Section 143(3) of the Act. The
AO"s assessment order under Section 143(3) reads as under:
"Assessee filed return of income on 28.10.2004 for the assessment year
2004-05 declaring total income of Rs. 25,92,126/-. Since a search was
initiated u/s 132 of the Act on 18.06.2003 at his residence, a notice
u/s 143(2) was issued on 07.10.2005. A detailed questionnaire
alongwith notice u/s 142(1) of the Income Tax Act, 1961 was issued on
10.10.2005. Shri S.C. Verma, C.A. / A.R. of the assessee appeared
before the undersigned from time to time and filed details in response
to above questionnaire. He has further offered an amount of Rs.
89,57,106/- received on account of gift for taxation vide letter dated
02.12.2005. He has also filed a confirmation of the assessee in this
regard. After the examination of seized materials pertaining to the
assessee and reply filed by the A.R. of the assessee, income of the
assessee is assessed at Rs. 1,15,49,232/-. Since the assessee has
concealed the particulars of income and furnished inaccurate
particulars of income, penalty proceedings u/s 271(1)(c) of the Income
Tax Act are initiated."
7. The ITAT in the impugned order considered it proper to extract and
approve the order of the CIT(A) as under:
"11. After considering all the facts and position of law, the CIT(A)
deleted the penalty by passing a speaking and reasoned order. We,
therefore, find it proper to extract the order of the CIT(A) as
under:-
"I have considered facts of the case and arguments taken by Sh. Verma
including various judicial decisions relied upon by him quite
carefully. It is true that the additional income which was offered was
not a part of return of income filed, to begin wit for the Asstt. Year
under consideration. However, it is further seen that during the
course of research not a single evidence regarding non-genuineness of
gift amount which is offered as additional income was found. On
perusal of penalty order, it is seen that there is no mention of any
inquiry/investigation/information that the Investigation Wing or with
the assessing officer regarding the fact that whether the aforesaid
gifts were not genuine one which were offered as additional income
vide letter dated 02.12.2005. With this background, I have also gone
through and copy of questionnaire dt.10.10.2005 in which Assessing
Officer has raised simply query at query no. 10 in the questionnaire
for the Asst. Year. "Had you taken/given any loan/gift during the F.Y.
under consideration? If yes, please furnish details." This letter was
received by the appellant on 12.10.205 and thereafter, vide letter
dt.2.12.2005, the appellant had furnished the details of gift received
in the present year from NRIs and had also furnished the copies of
gift deed along with reply. Besides this, in the same letter, the
assessee made it clear that through the aforesaid amount was received
by the appellant as a gift but to buy the peace and to avoid any
dispute, the appellant was offering the amount of gift received from
NRIs for the present A.Y. as taxable income subject to the condition
that no penalty action shall be initiated against the assessee under
any section of I.T. Act. In the same letter, it was further made clear
by the appellant that the gift under consideration as shown to have
been received were genuine one and related document of gift were
annexed along with the letter. From this it is clear that the
Assessing Officer was not having any piece of information regarding
the fact that the gifts were not genuine one and these were part of
total income of the appellant. Even in the questionnaire, in the most
general way it was inquired to furnished the details of any gift/loan
if received during the relevant F.Y. It makes quite clear that this
fact was not a detection by the Assessing Officer that the gifts were
not genuine but it was the appellant who has offered without any
specific inquiry regarding such gift by the Assessing Officer that the
amount of gift can be considered as income though the relevant gift
deed from NRIs from whom the gift claim to have been received were
also filed along with the letter dt. 2.12.2005. It was further made
clear in the aforesaid letter dt. 2.12.2005 that the said amount of
gift has been offered as additional income without detection of the
same by Assessing Officer. In this respect, the decision given by
Hon"ble Supreme Court in the case of K.C. Builders vs. ACIT (2004) 265
ITR 562 and observations therein are quite relevant in which Hon"ble
Supreme Court has observed that in the word "concealment" that there
has been a deliberate act on the part of the assessee and the
concealment inherently carries with it, the element of mens rea.
Hon"ble Court has further observed that mere omission from return, any
item of receipt does neither amount to concealment nor deliberate
furnishing inaccurate particulars of income unless and until there is
some evidence to show or some circumstance found from which it can be
gathered that the omission was attributable to and intention or desire
on the part of the assessee to hide or conceal the income so as to
avoid imposition of tax there upon. Hon"ble Supreme Court in the same
judgment has further observed that a penalty u/s. 271(1)(c) may be
imposed when it has to be proved that the assessee has consciously
made the concealment or furnished inaccurate particulars of income. In
the background of aforesaid judgment, the facts of present case are
quite matching. Here also, there is no evidence to show that the
omission to offer additional income on account of gift received was
attributable to any intention or desire on the part of the assessee to
hide or conceal the income. Hon"ble M.P. High Court also in the case
of CIT vs. S.V. Electricals P. Ltd. (155 Taxman 158) has given a
finding that where the assessee surrenders its full income though at a
later has given a finding that where the assessee surrenders it full
income though at a later stage, there was no question of any
concealment on its part and no penalty, u/s. 271(1)(c) was levied.
Hon"ble Jharkhand High Court in the case of CIT vs. Ashim Kumar
Aggarwal (153 Taxman 226) has given a finding in that particular case
that omission from return of income did not amount to concealment. In
that particular case during the course of search cash balance was
found and explanation furnished was rejected in the assessment order
and thereafter, the Assessing Officer has also imposed the penalty
then Hon"ble Jharkhand High Court has observed that even if it was
presumed that particulars of income had not been properly disclosed by
the assessee, then also, mere omission of the same form return of
income did not amount to concealment. Contrary to this, in the present
case, the affidavit from the donors were furnished, there was no show
cause seeking specific information regarding genuineness of specific
gifts under consideration and it was the appellant who along with
furnishing necessary evidence and explanation for genuineness of the
gift had offered on his own the amount of gifts from NRIs as
additional income for both the A.Ys. under consideration. Hon"ble
Kolkata High Court in the case CIT vs. Kusum Products Ltd. (203 ITR
672) had held that without through revised return, the appellant has
offered additional amount of cash credit though to begin with the
confirmatory letters from the lenders were filed and the lenders
subsequently denied the fact the fact of giving loan. However, in the
present case, the donor has not denied the fact of giving gift.
Similarly, Hon"ble Patna High Court in the case of CIT vs. Bimla Devi
Sharma (192 ITR 482) has observed that mere rejection of assessee"s
explanation did not amount of concealment. In that particular, the
explanation furnished regarding cash credit was not accepted by the
AO. In the present case also, the explanation and evidence regarding
fact of receiving the genuine gift were furnished and over and above,
the same was offered as additional income. Further, Hon"ble Delhi ITAT
in the case of Ram Commercial Enterprises Ltd. vs. ACTI (52 ITD 147)
has given a finding that the assessee had substantiate its explanation
with evidence regarding cash credit u/s. 68 when he filed confirmation
and affidavit regarding source of money then penalty in that case u/s.
271(1)(c) was held to be not justified. Quite similarly in the present
case, the confirmation and affidavit regarding genuineness of the
gifts were furnished which means that the assessee has substantiated
its explanation that evidence and, therefore, the facts of present
case are also matching with the aforesaid decision.
6. Considering the aforesaid judicial analysis of various decisions,
including various decisions quoted by Sh.Verma, in my considered view,
the AO was not justified in imposing the penalty u/s. 271(1)(c) of
I.T. Act of Rs. 29,55,845/- for the A.Y. 2004-05 and, therefore the
same is hereby cancelled by allowing relevant ground of appeal. Here
it shall be out of place to mention that the decision given by the
Hon"ble Supreme Court in the case of K.P. Madhusudan is not applicable
in the facts of the case rather the decision given by the Hon"ble
Supreme Court in the case of K.C. Builders is squarely applicable to
which is discussed and analyzed by me in the earlier part of this
appellate order."
8. In the present case it is observed that the AO included the amount
of gift in the total income of the Assessee merely on the basis of the
Assessee"s declaration. Also, the AO did not point out or refer to any
evidence or material to show and establish that the gift received by
the Assessee was either bogus or sham. Admittedly, the Assessee had
offered the gift for taxation voluntarily and it was not the case of
the Revenue that the same was done after its detection by the
Department. Further, it was also not the case of the Revenue that
material was found during the search indicating that the gift
transaction was an arranged affair to accommodate the Assessee"s
unaccounted money. In this respect it is evident that the ITAT
correctly came to the conclusion that the AO did not possess any piece
of information that the gift was not genuine and was part of the
undisclosed income of the Assessee. In the questionnaire dated 10th
October, 2005 the AO had simply raised a query for the relevant
assessment year in the following manner:- "Had you taken/given any
loan/gift during the F.Y. under consideration? If yes, please furnish
details". In response to this query the Assessee had furnished the
details of gift received in the relevant year from NRI"s and had also
furnished the copy of gift deed along with reply. Apart from this,
simultaneously the Assessee made it clear that aforesaid amount was
received by the Assessee as gift, but to buy peace and to avoid any
dispute the Assessee was offering the amount of gift as taxable income
subject to the condition that no penalty action should be initiated
against the Assessee. Furthermore, it was made clear by the Assessee
that the gift under consideration was a genuine one and the related
documents of gift were sent to the AO. Thus it was quite clear, that
this entire transaction was not detection of the AO that the gift was
not genuine, and that the Assessee had offered the amount without any
specific enquiry regarding such gift by the AO.
9. In K.C. Builders v. ACIT, (2004) 265 ITR 562, the Hon"ble Supreme
Court observed that word "concealment" requires there to be a
deliberate act on the part of the assessee, and the concealment
inherently carries with it the element of mens rea. It was further
observed that a mere omission from return of any item of receipt does
neither amount to concealment nor deliberate furnishing of inaccurate
particulars of income unless and until there is some evidence to show
or some circumstance found from which it can be gathered that the
omission was attributable to an intention or desire on the part of the
assessee to hide or conceal the income so as to avoid imposition of
tax thereupon. It was also held by the Supreme Court that before a
penalty under Section 271(1)(c) is imposed it has to be established
that the assessee had consciously made the concealment or furnished
inaccurate particulars of income.
10. It is also observed that the CIT(A) had relied on the decision of
the Madhya Pradesh High Court and the Jharkhand High Court in the case
of CIT v. S.V. Electricals P. Ltd.( 155 Taxman 158) and CIT v. Ashim
Kumar Agarwal ( 153 Taxman 226) respectively where it was held that
where the assessee surrenders his full income, though at a later
stage, there was no question of any concealment on his part and
consequently no penalty under Section 271(1)(c) was leviable, and that
a omission from return of income did not amount to concealment.
11. In view of the discussion above and the cited decisions, surrender
of the amount by the Assessee after receipt of the questionnaire could
not lead to an inference that it was not voluntary, in the absence of
any material on record to suggest that it was bogus or untrue. It is
further evident that there was neither any detection nor any
information in the possession of the Revenue which might lead to a
conclusion that there was a detection by the Revenue of concealment.
Accordingly, the question of law framed is answered against the
Revenue and in favour of the Assessee. The Appeal is dismissed. No
costs.
SIDDHARTH MRIDUL, J.
ACTING CHIEF JUSTICE
OCTOBER 31, 2011
Related posts:
In the absence of clear finding as to concealment of income furnishing
inaccurate particulars, initiation of penalty proceedings will be
without jurisdiction
Disclosure of undisclosed income in a revised return as a matter of
purchasing peace would not render the penalty imposed under s
271(1)(c) unsustainable in absence of a satisfactory explanation with
regard to its non-disclosure in the original return
Mere enquiry about any loan/gift does not tantamount to detection of
concealment of income u/s. 271(1)(c) of IT Act, 1961
Mere non-filing of an appeal against the additions made by the AO and
voluntary surrender of any amount to buy peace of mind alone cannot
constitute sufficient grounds for the imposition of a concealment
penalty
Penalty for concealment of income u/s. 271(1)(c) can be imposed only
if the concealment is proved : SC
IT : Where major expenses were not towards earning of exempted income disallowance of expenditure under section 14A was to be restricted
■■■
[2013] 35 taxmann.com 210 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Oriental Structural Engineers (P.) Ltd.*
BADAR DURREZ AHMED AND R.V. EASWAR, JJ.
IT APPEAL NO. 605 OF 2012†
JANUARY 15, 2013
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Interest] - Assessment year 2008-09 - Commissioner (Appeals) found that only a part of interest was paid on funds that was utilized for making investments on which exempted income was receivable, while major investment was made in subsidiary company to form Special Purpose Vehicle to obtain NHAI contract - Further, Tribunal held that expenses which had been claimed by assessee were not towards exempted income - Whether in view of factual finding recorded by Tribunal, disallowance was to be limited - Held, yes [Para 3] [In favour of assessee]
Sanjeev Rajpal for the Appellant. Rajat Navet and Ms.Prachi V. Sharma for the Respondent.
JUDGMENT
1. This appeal has been preferred by the revenue against the order dated 02.12.2011 passed by the Income Tax Appellate Tribunal, New Delhi in ITA No.4245/Del/2011 in respect of the assessment year 2008-09. The issue before the Tribunal, which is also an issue before us, was whether in the facts and circumstances of the case the Commissioner of Income Tax (Appeals) had erred in restricting the disallowance under section 14A of the Income Tax Act, 1961 to 2% of dividend income of Rs.20,27,812/-.
2. It was the contention of the revenue that Rule 8D of the Income Tax Rules, 1962 had not been applied properly in respect of the assessment year 2008-09. This aspect has been considered by the Tribunal in detail and it has observed as under: -
"6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs.2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs.6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPV) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A r.w. Rule 8D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs.40,556/- calculated @ 2% of the dividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same."
3. On going through the above observations we are of the view that this is merely a question of fact and does not involve any question of law much less a substantial question of law, as the Tribunal held that the expenses which have been claimed by the assessee were not towards the exempted income. The disallowance, therefore, was rightly limited to a sum of Rs.40,556/-. The question of interpreting Rule 8-D is not in dispute and the only dispute is with regard to facts which have been settled by the Tribunal.
The appeal is dismissed.
POOJAIT : Where Assessing Officer made addition in income of assessee-company under section 68 on plea that it could not prove that share applicants had enough money on date of purchase of its shares, since share applicants were identified and they had submitted their bank statements, cash extracts and returns filing receipts, impugned addition was not justified
■■■
[2013] 35 taxmann.com 289 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax, Meerut
v.
Nav Bharat Duplex Ltd.*
R. K. AGRAWAL AND RAM SURAT RAM (MAURYA), JJ.
IT APPEAL NO. 279 OF 2010†
JANUARY 4, 2013
Section 68 of the Income-tax Act, 1961 - Cash credits [Share application money] - Assessment year 2004-05 - During assessment proceedings, assessee-company submitted informations relating to share applicants, who had invested in its share capital - Assessing Officer held that assessee could not discharge its onus in proving that share applicants of amount of Rs. 25 lakhs had enough money in their bank accounts on date of purchase of shares - He, therefore, added said amount to income of assessee as unexplained cash credit under section 68 - Commissioner (Appeals) held that five companies subscribing equity shares amounting to Rs. 25 lakhs were identified and they had submitted their bank statements, cash extracts and returns filing receipts - He, therefore, deleted impugned addition made by Assessing Officer - Tribunal upheld order of Commissioner (Appeals) - Supreme Court while dealing with similar issue in various cases held that identity of shareholder alone is required to be proved in case of capital contributed by shareholders - Whether since five companies subscribing equity shares amounting to Rs. 25 lakhs were identified and they had submitted their bank statements, cash extracts and returns filing receipts, identity of share applicant companies and purchase of share had been proved by assessee - Held, yes -Whether, therefore, appellate authorities had rightly deleted impugned addition made by Assessing Officer - Held, yes [Para 6] [In favour of assessee]
CASE REVIEW
CIT v. Stellr Investments Ltd. [2001] 251 ITR 263/115 Taxman 99 (SC) (para 6) and CIT v. Lovely Exports [2008] 172 Taxman 44 (SC) (para 6)followed.
Ram Lal Agrawal v. CIT [2006] 280 ITR 547/[2005] 149 Taxman 342 (All.) (para 6) Dissent.
CASES REFERRED TO
CIT v. Lovely Export [2008] 172 Taxman 44 (SC) (para 4), Ram Lal Agrawal v. CIT [2006] 280 ITR 547/[2005] 149 Taxman 342 (All.) (para 5),CIT v. Steller Investment Ltd. [2001] 251 ITR 263/115 Taxman 99 (SC) (para 6).
Dhananjay Awasthi for the Petitioner. Rakesh Ranjan Agrawal and Suyash Agrawal for the Respondent.
JUDGMENT
Ram Surat Ram (Maurya), J. - Heard Sri Dhananjay Awasthi, Senior Standing Counsel for the appellant and Sri Rakesh Ranjan Agrawal, the counsel for the respondent.
2. This appeal has been filed, under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the Act) from the order of Income Tax Appellate Tribunal, Delhi Bench 'G', New Delhi (hereinafter referred to as the Tribunal) dated 05.10.2009, passed in Income Tax Appeal No. 3423/Del/2009 by which the appeal filed by the Revenue has been dismissed and the order of Commissioner Income -tax (Appeals), Meerut, allowing the appeal of the assessee, has been upheld. The appellant has proposed the following substantial questions of law, said to be involved in the appeal:-
| 1. | "1. Whether on the facts and in the circumstances of the case and in law, the Income Tax AppellateTribunal erred in deleting the addition of Rs. 25,00,000/- on account of bogus share application money, ignoring the facts that identity and creditworthiness of the alleged share applicants and genuineness of the transactions remained unproved as the assessee failed to give any information about alleged shareholders? | |
| 2. | Whether the ITAT was justified in ignoring the decision of Hon'ble Jurisdictional High Court in the case of Ram Lal Agrawal Vs. Commissioner of Income Tax (2006) 280 ITR 547 (Alld) whereas the decision was binding being of Jurisdictional High Court and the ratio was fully applicable to the case under consideration? | |
| 3. | Whether the ITAT was justified in relying on the obitor dicta of the Supreme Court in Lovely Exports, 172 Taxman 44, while ration of the same did not at all apply in the case of the assessee to exclusion of the Jurisdictional High Court's judgment reported in 280 ITR 547 (All.)? | |
| 4. | Whether on the facts and in the circumstances of the case and in law, the Income Tax AppellateTribunal has erred in ignoring the provisions of Section 68 of the IT Act, 1961 by upholding the order of CIT(A) despite of the fact that identity of the alleged shareholders, genuineness of the transaction and creditworthiness of the share applicants were not proved at all?" |
3. The facts giving rise to the present appeal are as follows:
The appeal relates to the assessment year 2004-05. M/s Nav Bharat Duplex Ltd. (the assessee) filed Income Tax Return on 25.10.2004, in capacity of company, showing total loss of Rs. 48,41,804/-. The Return was processed. Later on, the case was selected for scrutiny and notice under Section 143 (2) was issued and served upon the assessee on 26.05.2005. Thereafter notice under Section 142 (1) vide order sheet entry dated 28.08.2006 along with detailed questionnaire was issued and served upon the assessee. The assessee filed his reply on 12.10.2006, and submitted information relating to 18 parties, who had invested in the share capital of the assessee, of the amount of Rs. 1,12,50,000/-. No information has been submitted in respect of balance amount. Thereafter show cause notice dated 28.12.2006 was issued to the assessee who submitted it's reply on 29.12.2006.
4. However the Assessing Officer passed the assessment order dated 29.12.2006 in line of direction issued by Additional Commissioner of Income-tax, Range-2, Meerut. It has been held that the assessee could not discharge his onus in proving that the share applicants of the amount of Rs. 25,00,000/- had enough money in their bank accounts on the date of purchase of the share. Accordingly price of the shares of Rs. 25,00,000/- was added in the income of the assessee. The assessee preferred an appeal from the aforesaid order, before the Commissioner of Income Tax (Appeals), Meerut who by his order dated 26.05.2009 held that five companies subscribing the equity shares amounting to Rs. 25,00,000/- were identified and they had submitted their bank statements, cash extracts and returns filing receipts. As such relying upon the judgment of the Supreme Court in CIT v. Lovely Export [2008] 172 Taxman 44, it has been held that additions made by the Assessing Officer was illegal. However it was observed that the jurisdictional Assessing Officer may proceed against the aforesaid five share applicant companies. On these findings, the appeal was allowed and the addition was deleted. The Revenue, feeling aggrieved, filed an appeal before the Tribunal. The Tribunal by the impugned order dated 05.10.2009 dismissed the appeal of the Revenue and upheld the order of the CIT(A).
5. Sri Dhananjay Awasthi, Senior Standing Counsel, submitted that the creditworthiness of the alleged share applicants and genuineness of the transactions were not proved by the assessee. Merely disclosing the identity of the share applicant companies was not sufficient. In such circumstances, the Assessing Officer had rightly made addition in the income of the assessee under Section 68 of the Act. He further submitted that the CIT(A) has wrongly relied upon the obiter dicta of the judgment of Supreme Court in Lovely Export case (supra) and ignored the judgment of this Court in Ram Lal Agrawal v. CIT [2006] 280 ITR 547/[2005] 149 Taxman 342 (All.) which was fully applicable in this case.
6. We have considered the arguments of the counsel for the parties. CIT(A) found that five companies subscribing the equity shares amounting to Rs. 25,00,000/- were identified and they had submitted their bank statements, cash extracts and returns filing receipts. As such identity of the share applicant companies and purchase of share had been proved by the assessee. Supreme Court in the cases of CIT v. Steller Investments Ltd. [2001] 251 ITR 263/115 Taxman 99 and Lovely Exports case (supra), has held that the identity of the shareholder alone is required to be proved, in case of the capital contributed by the shareholders. In view of the authoritative pronouncement of the Supreme Court in the aforesaid cases, judgment of this Court in Ram Lal Agrawal case (supra) is no longer a good law. Accordingly CIT(A) and the Tribunal has not committed any illegality in allowing the appeal of the assessee. We do not find any illegality in the judgment of the CIT(A) and the Tribunal.
7. As a result of the aforesaid discussion the appeal has no force and is dismissed.
SKJIT: Where assessee engaged in business of transport and hiring of trucks, made payment for truck hire charges without deducting tax at source, since it was not clear as to whether said payments were for transportation of goods in form of independent contract or it was made to sub-contractors as a part of back to back hiring arrangements, impugned disallowance made under section 40(a)(ia) was to be set aside and, matter was to be remanded back for disposal afresh
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[2013] 35 taxmann.com 234 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'B'
Laxmandas Tolaram Gurnani
v.
Income-tax Officer, Ward - 9(4) Ahmedabad*
PRAMOD KUMAR, ACCOUNTANT MEMBER
AND KUL BAHARAT, JUDICIAL MEMBER
AND KUL BAHARAT, JUDICIAL MEMBER
IT APPEAL NO. 3442 (AHD.) OF 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
APRIL 29, 2013
Section 194C, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [Transport contracts] - Assessment year 2007-08 - Assessee was engaged in business of transport, hiring trucks and warehousing - He made payments of truck hire charges without deducting tax at source - Assessing Officer thus disallowed said payments under section 40(a)(ia) - Whether in case assessee used hired truck in course of carrying out his business of transportation of goods, it would be an independent contract and, thus, payments for truck hire could not be treated as payments to sub-contractor - Held, yes - Whether, in such a situation, provisions of section 194C(2) would not come into play - Held, yes - Whether, however, in case hire of trucks was in course of back to back hiring arrangements, it would clearly be a case of sub-contracting and provisions of section 194C(2) would come into play - Held, yes - Whether since there was no finding on aforesaid aspect, impugned disallowance was to be deleted and matter was to be remanded back for disposal afresh - Held, yes [Para 6][Matter remanded]
FACTS
| ■ | The assessee was engaged in the business of transport, hiring trucks and warehousing. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee had paid truck hire charges without deducting tax at source. | |
| ■ | The assessee submitted that payments of truck hire charges were not under a sub-contract, but under a separate standalone contract, and, accordingly, the provisions of section 194C, requiring the assessee to deduct tax at source from payments to sub-contractor, would not apply to payments in question. | |
| ■ | The Assessing Officer, however, took a view that the assessee was a contractor, as he carried on the business of transport, and the payments for hire of trucks was nothing but a payment for sub-contract work. | |
| ■ | On said basis, the Assessing Officer disallowed payments made by assessee under section 40(a)(ia), read with section 194C. | |
| ■ | The Commissioner (Appeals) upheld said disallowance. | |
| ■ | On appeal: |
HELD
| ■ | There is no dispute between the parties that the provisions of section 194C(1) cannot be pressed into service in this case, since, at the material point of time, tax withholding requirements did not extend to 'individuals' and that, it was only as a result of the amendment by the virtue of Finance Act, 2008 with effect from 1-6-2008, that individuals were imposed tax deduction obligations under section 194C(1). The case of the revenue thus hinges on application of section 194C(2). [Para 4] | |
| ■ | In the present case, the assessee is mainly engaged in the business of transporting of goods, and, in the course of carrying out such business, he takes the trucks on hire for transportation of goods, the truck hire is an independent and standalone contract which, though essentially an integral part of the business of transportation, cannot be said to be a sub-contract. However, a perusal of material on record available before the authorities below does not help to reach any specific finding to that effect either. | |
| ■ | If that be the case, the assessee may not have any tax withholding obligation in respect of truck hire payments in the pre-amendment period. Therefore, everything hinges on the findings as to whether the trucks were hired for the purpose of hiring out simplicitor of trucks, or for the purpose of use of these trucks in the course of transportation of goods by the assessee. [Para 5] | |
| ■ | In a case in which the assessee used the hired truck in the course of carrying out his business of transportation of goods, and not that of hiring out trucks, the payments for truck hire could not be treated as payments to sub-contractor, and, accordingly, the provisions of section 194C(2), and, therefore, the provisions of section 40(a)(ia) cannot come into play. The impugned disallowance, therefore, will have to be deleted. | |
| ■ | In case, however, it is found that trucks were hired by the assessee for back-to-back hiring out of trucks by the assessee, it will indeed be a case of sub-contracting the work, and, to that extent, provisions of section 194C(2) will indeed come into play. | |
| ■ | With aforesaid observations, impugned disallowance was set aside and the matter was remanded back for disposal afresh. [Para 6] |
S.N. Divatia for the Appellant. Y.P. Verma for the Respondent.
ORDER
Pramod Kumar, Accountant Member - By way of this appeal, the assessee has challeneged correctness of CIT(A)'s order dated 12th October 2010, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2007-08. Grievance raised by the assessee, in substance, is that the learned CIT(A) erred in sustaining the disallowance of expenditure of Rs 6,50,000 incurred by the assessee on hiring of trucks, the ground that the assessee had failed to discharge his tax withholding obligations in respect of the same.
2. The issue lies in a narrow compass of undisputed material facts. The assessee is engaged in the business of, as stated in the assessment order itself, "transport, and hiring trucks and warehousing". In the course of the assessment proceedings, the Assessing Officer noticed that the assessee has paid truck hire charges amonting to Rs 6,50,000, but has not deducted any tax at source from the same. When Assessing Officer required the assessee to show cause as to why this amount not be disallowed under section 40(a)(ia), it was stated by the assessee that payments of truck hire charges are not under a sub contract, but under a separate standalone contract, and, accordingly, the provisions of Section 194C, requiring the assessee to deduct tax at source from payments to sub-contractor, will not apply to these payments. This submission did not, however, satisfy the Assessing Officer. He was of the view that the assessee is a contractor, as he carries on the business of transport, and the assessee pays for hire of trucks which is nothing but a payment for subcontract work. On this basis, the Assessing Officer disallowed Rs 6,50,000, on account of truck hire, under section 40(a)(ia) r.w.s. 194C. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Thee assessee is not satisfied and is in further appeal before us.
3. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
4. There is no dispute between the parties that the provisions of Section 194C(1) cannot be pressed into service in this case, since, at the material point of time, this tax withholding requirements did not extend to 'individuals' and that, it was only as a result of the amendment by the virtue of Finance Act 2008 w.e.f 1st June 2008, that individuals were imposed tax deduction obligations under section 194C(1). The case of the revenue thus hinges on application of section 194C(2), which, for ready reference, is reproduced below:
"(2) Any person (being a contractor and not being an individual or a Hindu undivided family), responsible for paying any sum to any resident (hereafter in this section referred to as the subcontractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein.
Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section.
Explanation I : For the purposes of sub-section (2), the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.
Explanation II : For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation III : For the purposes of this section, the expression "work" shall also include -
| (a) | Advertising; | |
| (b) | Broadcasting and telecasting including production of programmes for such broadcasting or telecasting; | |
| (c) | Carriage of goods and passengers by any mode of transport other than by railways; | |
| (d) | Catering" |
5. A plain reading of the above provision indicates that in order to attract the applicability of Section 194C(2), the payment has to be made by a contractor to a sub-contractor for "carrying out or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply". It is, therefore, a condition precedent, for invoking section 194C(2), that the payment in question has to be for carrying out a part of the work, or the work itself, undertaken by the contractor, or the supply undertaken by the contractor. What follows from the above analysis is that so far as pre June 2008 position is concerned, tax withholding obligations under section 194 C in respect of an individual only in cases where the payments were made to a sub-contractor for carrying out a part of work, or the work itself, undertaken by the assessee. That would have been the case, for example, when assessee received the goods for transportation and the assessee had made payment for such transportation of goods, not truck hire simplictor. That is certainly not the case before us because the charges paid by the assessee are not for transportation of goods but simply for the payment of truck hire. Alternatively, when the assessee is engaged in the business of giving out trucks on hire and it is in the course of this business activity that the assessee has order for hire of trucks, and, to execute that work, the assessee takes truck on hire from someone else, this will also be a case for sub-contracting. There is no finding to this effect in the orders of the authorities below, even though the scope of assessee's business, as evident from a perusal of the assessment order, may indeed extend to such a transaction as well. If the hire of trucks is in the course of such back to back hiring arrangements, it will clearly be case of sub-contracting and the provisions of Section 194 C(2) will come into play. As we have noted earlier, in the present case, the assessee is mainly engaged in the business of transporting of goods, and, in a situation in which the assessee is doing the business of transport of goods, and in the course of carrying out such business, he takes the trucks on hire for transportation of goods, the truck hire is an independent and standalone contract which, though essentially an integral part of the business of transportation, cannot be said to be a sub contract. However, a perusal of material before us as indeed orders of the authorities below, does not help us reach any specific finding to that effect either. If that be the case, the assessee may not have any tax withholding obligation in respect of truck hire payments in the pre-amendment period. Therefore, everything hinges on the findings as to whether the trucks were hired for the purpose of hiring out simplictor of trucks, or for the purpose of use of these trucks in the course of transportation of goods by the assessee.
6. When the above position was set out before the learned representatives, they very graciously agreed to the matter being restored to the file of the Assessing Officer for adjudication de novo in the light of above legal position. In a case in which the assessee has used the hired truck in the course of carrying out his business of transportation of goods, and not that of hiring out trucks, the payments for truck hire cannot be treated as payments to sub-contractor, and, accordingly, the provisions of Section 194C(2), and therefore, the provisions of Section 40(a)(ia) cannot come into play. The impugned disallowance, therefore, will have to be deleted. In case, however, it is found that trucks were hired by the assessee for back to back hiring out of trucks by the assessee, it will indeed be a case of sub-contracting the work, and, to that extent, provisions of Section 194 C(2)will indeed come into play. However, as we have heard this case only on the limited issue of scope of Section 194C(2), the assessee will have the liberty to raise other legal issues, as he may be advised, as well. While giving effect to these directions, and thus deciding the matter afresh, he will give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law in a fair and objective manner, by way of a speaking order, and after giving a reasonable opportunity of hearing to the assessee. We direct so.
7. In the result, the appeal is allowed for statistical purposes in the terms indicated above.
SUNIL IT : Where assessee during course of survey conducted under section 133A had surrendered certain amount and in return of income filed claimed set off against this surrendered amount claiming that said amount was his income from business, surrendered amount formed income of assessee from business and it was entitled to get set off against said amount
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[2013] 35 taxmann.com 229 (Rajasthan)
HIGH COURT OF RAJASTHAN
Commissioner of Income-tax
v.
Ram Gopal Manda*
NARENDRA KUMAR JAIN AND ARUN BHANSALI, JJ.
D.B. IT APPEAL NO. 33 OF 2009†
MAY 13, 2013
Section 28(i), read with section 56, of the Income-tax Act, 1961 - Business income - Chargeable as [Surrendered amount] - Assessment year 2003-04 - During course of survey conducted under section 133A, assessee had surrendered a sum of Rs. 1.75 crores - In return of income for assessment year 2003-04, assessee claimed set off against this surrendered amount claiming that said amount was his income from business - Assessing Officer held that surrendered amount was income from other sources and accordingly disallowed claim of assessee for set off - Commissioner (Appeals) held that surrendered amount was an income of assessee from business and not from other sources as pointed out by Assessing Officer - He further held that assessee was entitled to get set off of Rs. 54 lakhs against total surrendered amount - Tribunal affirmed order of Commissioner (Appeals) - No perversity had been pointed out in finding of Commissioner (Appeals) as well as Tribunal to extent that surrendered amount was an income of assessee from business and not from other sources as held by Assessing Officer - Whether in facts and circumstances of case appeal preferred by revenue was liable to be dismissed- Held, yes [Paras 12 and 13] [In favour of assessee]
FACTS
| ■ | The competent authority conducted a survey under section 133A at the business premises of the assessee on 28-1-2003 and found certain incriminating documents/loose papers, etc. On the basis of the said material, the assessee had surrendered a sum of Rs. 1.75 crores vide his letter dated 31-1-2003 before the department. In the return of income for the assessment year 2003-04, the assessee claimed set off against this surrendered amount claiming that the said amount was his income from business. | |
| ■ | The Assessing Officer concluded that the surrendered amount was the income from other sources. He accordingly disallowed the claim of the assessee for set off. | |
| ■ | On appeal, the Commissioner (Appeals) held that the surrendered amount was an income of the assessee from business and not from other sources as pointed out by Assessing Officer. He further held that the assessee was entitled to get set off of Rs. 54 lakhs against total surrendered amount. | |
| ■ | On second appeal, the Tribunal affirmed the order of the Commissioner (Appeals). | |
| ■ | On appeal to High Court: |
HELD
| ■ | The question involved in the instant case is as to whether the surrendered amount of Rs. 1.75 crores should be treated as income of assessee from business or from other sources. [Para 9] | |
| ■ | From the conditions mentioned in the letter of surrender by the assessee, it is clear from condition Nos. (a), (b) and (c) that the assessee had claimed that the surrendered amount was income from the business. From the order of Assessing Officer, it appears that he considered only the condition Nos. (e) and (f) and not the condition Nos. (a),(b) and (c) at all. The Commissioner (Appeals) considered all the conditions mentioned in the letter of surrender and other facts and circumstances of the case and thereafter recorded a finding that the surrendered amount was an income of the assessee from business and not from other sources as held by Assessing Officer and consequently it was held that the assessee is entitled to get set off of Rs. 54 lakhs. [Para 10] | |
| ■ | Whether the surrendered amount is an income from business or from other sources is essentially a question of fact. In the instant case, the Commissioner (Appeals) as well as the Tribunal have recorded a concurrent finding of fact based on cogent material available before them that surrendered amount was an income of the assessee from business and not from other sources. The revenue is unable to point out any perversity in the said finding recorded by the Commissioner (Appeals) as well as the Tribunal. There is no dispute between the parties on the issue that in case the surrendered amount is treated as an income from business, then the assessee is entitled to get set off of the amount of Rs. 54 lakhs. [Para 11] | |
| ■ | In view of the above, the questions of law framed in the instant case cannot be said to be the questions of law. [Para 12] | |
| ■ | Therefore, the appeal preferred by the revenue was liable to be dismissed. [Para 13] |
K.K. Bissa for the Appellant. Dinesh Mehta for the Respondent.
ORDER
1. Heard learned counsel for parties.
2. This Court, while admitting the appeal, framed the following substantial questions of law on 15th February, 2011 :-
| (i) | Whether the Tribunal was justified in directing set off of Rs. 54,10,054/- as against the surrendered income of the assessee amounting to Rs. 1,29,07,00/- by upholding the finding of CIT (Appeals) on this issue? | |
| (ii) | Whether the finding recorded by the Tribunal in Paragraph 7 is factually sustainable in the absence of any discussion much less cogent discussion, more so when assessee was not represented? |
3. The relevant facts, for disposal of this appeal, are that during the course of survey under Section 133A conducted on 28-01-2003, certain incriminating documents/loose papers/note books etc. were found at the business premises of the assessee and on the basis of the said material, the assessee had surrendered a sum of Rs. 1,75,00,000/- vide his letter dated 31st January, 2003 before the department.
4. During the assessment proceedings, the assessee claimed set off against this surrendered amount claiming that the said income was from business. The Assessing Officer did not agree with the submission of assessee and came to a conclusion that the surrendered amount of Rs.1,75,00,000/- is an income from other sources vide assessment order dated 28th March, 2006 in respect of Financial Year 2002-2003 i.e. Assessment Year 2003-2004.
5. Being aggrieved with the assessment order passed by Assessing Officer, whereby set off was not allowed/the assessee preferred an appeal before the Appellate Authority. The Commissioner of Income Tax (Appeals)-II, Bikaner vide its order dated 18th December, 2006 (Annex.2) partly allowed the appeal filed by the assessee. The Commissioner of Income Tax discussed the matter in detail and came to a conclusion that assessee is entitled to get set off of Rs.54,10,054/- and directed the Assessing Officer to give set off of the said amount against total surrendered income. The Revenue preferred appeal before Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal vide its order dated 27th June, 2008 (Annex.1) dismissed the appeal of the Revenue and affirmed the finding of the Appellate Authority. Hence, the Revenue has preferred this appeal before this Court.
6. Submission of Mr. K.K. Bissa, learned counsel appearing on behalf of Revenue, is that learned Appellate Authority as well as Appellate Tribunal, both committed an illegality in treating the surrendered amount of Rs. 1,75,00,000/- as income of assessee from business, whereas the learned Assessing Officer was absolutely right in not allowing the set off by recording a finding that the said surrendered income was income of the assessee from other sources. He, therefore, submitted that orders passed by Appellate Authority as well as Income Tax Appellate Tribunal, both be set aside and order of Assessing Officer be restored.
7. Mr. Dinesh Mehta, learned counsel appearing on behalf of assessee, supported the impugned orders passed by Income Tax Appellate Tribunal as well as Appellate Authority and submitted that amount of Rs.1,75,00,000/- was surrendered with specific conditions, which were considered and dealt with by the Appellate Authority. He submitted that Assessing Officer did not consider all the facts including the conditions mentioned by assessee, while surrendering the amount. He further submitted that Appellate Authority quoted all the conditions, which were mentioned in the letter, while surrendering the amount of Rs.1,75,00,000/-. He referred the finding of the appellate authority and submitted that Revenue is unable to point out any perversity in the finding recorded by the Appellate Authority as well as Appellate Tribunal. He, therefore, submitted that there is no force in the submission of learned counsel for Revenue. He also submitted that the questions framed in the present case are not the questions of law, therefore, this appeal is liable to be dismissed.
8. We have considered the submissions of learned counsel for parties and examined the impugned orders passed by Appellate Authority as well as Income Tax Appellate Tribunal and also the assessment order and other documents available on record.
9. From the various orders as well as submissions of learned counsel for the parties, it appears that the question involved in the present case is as to whether the surrendered amount of Rs.1,75,00,000/- should be treated as income of Assessee from business or from other sources. The Appellate Authority as well as Income Tax Appellate Tribunal, both have recorded a finding that the said surrendered amount was an income of the assessee from business and not from other sources as pointed out by Assessing Officer. The conditions mentioned in the letter of surrender by assessee are reproduced, as under :-
| "a. | The notebooks and loose papers contain entries pertaining to my business | |
| b. | I have examined the entries and after discussion about such entries with the worthy CIT, Bikaner, I offer income of Rs. 1.75 crores to tax for the current year 2002-03 | |
| c. | The surrendered income covers all the entries appearing in such notebooks and loose papers, | |
| d. | I am surrendering this income to purchase peace and in full and final settlement of my case. It is requested that no action to levy of penalty and prosecution etc. will be taken against me, | |
| e. | It is to cooperate with the department that I have surrendered the above income over all above the regular income to be declared for the financial year 2002-03 which shall not be less than the income disclosed for the Assessment Year 2002-03, | |
| f. | The tax on the above income surrendered will be paid as agreed by the worthy CIT, Bikaner, | |
| g. | I request that my above submission may be accepted so that no dispute at all in my case once for all which I have surrendered the above income of Rs. 1.75 crore for the Assessment Year 2002-03." |
10. From the conditions quoted above, it is clear from Condition Nos. a, b and c that the assessee had claimed that the surrendered amount was income from the business. From the order of Assessing Officer, it appears that Assessing Officer considered only the condition No. e & f and not the condition Nos. a, b and c at all. The Commissioner of Income Tax (Appeals) considered all the conditions mentioned in the letter of surrender and other facts and circumstances of the case and thereafter recorded a finding that the surrendered amount was an income of the assessee from business and not from other sources as held by Assessing Officer and consequently it was held that assessee is entitled to get set off of Rs.54,10,054/-.
11. Whether the surrendered amount is an income from business or from other sources is essentially a question of fact. In the present case, the Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal, both have recorded a concurrent finding of fact based on cogent material available before them, that surrendered amount was an income of the assessee from business and not from other sources. Learned counsel for Revenue is unable to point out any perversity in the said finding recorded by Appellate Authority as well as Appellate Tribunal. There is no dispute between the parties on the issue that in case, the surrendered amount is treated as an income from business, then assessee is entitled to get set off of the amount of Rs.54,10,054/- .
12. In view of the above, the questions of law framed in the present case, particularly when no perversity has been pointed out in the finding of Commissioner of Income Tax as well as Income-tax Appellate Tribunal to the extent that the surrendered amount was an income of the assessee from business and not from other sources as held by Assessing Officer, cannot be said to be the questions of law. Therefore, both the questions are liable to be answered in favour of the assessee.
13. In view of above discussions, we do not find any merit in this appeal and the same is liable to be dismissed and is hereby dismissed with no order as to costs
Work contract services - Various issues
Introduction
1. Work contract service was brought into service tax net for the first time w.e.f. 01/06/2007. At the inception a composition scheme was also brought out, to give an option to pay service tax @ 2% on the gross amount charged, rather than paying service tax at the prescribed rate on valuation of services involved, u/r 2A of the Service Tax Valuation Rules, 2006.Within a year rate of composition was increased to 4% and further to 4.8% w.e.f. 01/04/2012.
Recently, w.e.f. 01/07/2012, not only composition scheme has been removed, but valuation system u/r 2A has also been changed. Further, if works contract service is provided by an individual, HUF, firm including AOP and is received by a business concern which is body corporate, then liability to pay service tax on whole contract of service is brought in Joint charge mechanism under Rule 2(1)(d) of the Service Tax Rules, 1994, that is, 50% of the tax liability shall be deposited by contractor and rest of 50% by the business concern which is body corporate. Body corporate means a company, whether or not incorporated in India.
Joint Charge Mechanism
2. Work contract is covered under joint charge, only when :
| Service provider is an Individual, HUF, firm (including LLP), AOP | AND | Service receiver is a business concern which is body corporate |
Joint charge in case of earlier contracts
3. Joint charge mechanism would be applicable to earlier contracts also, if point of taxation is on or after 01/07/2012 in accordance with the rules of the Point of Taxation Rules, 2011.
Work Contracts mean:
4. Section 65B(54) of the Act defines work contract as follows :-
"Work contracts" mean a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. "
Valuation of service portion of works contract
5. Valuation under revised Rules 2A of the Service Tax Valuation Rules, 2006 requires that for determining value of service portion in the execution of works contract, value of property in goods transferred in works contract along with VAT thereon has to be deducted from gross amount charged. It further says that if VAT is being paid on the actual value of goods involved, then such value shall be taken as the value for the purpose of valuation of the service portion.
However, if value cannot be determined as above, then service portion in the execution of works contract shall be ad hoc value as a specified percentage of the total amount charged as under.
If there is works contract (i.e., including material), the service tax liability, shall be as under:-
| If W.C. is original contract S.T. liability shall be on | 40% of the total amount charged |
| Maintenance, renovation , repair, etc., of any goods | 70% of the total amount charged |
| If W.C. is other than above (i.e., finishing services of construction ) S.T. liability shall be on | 60% of the total amount charged |
Notes - (a) Total amount charged=Total amount charged for works contract + Fair market value of all goods and services supplied and not charged by service receiver in or in relation to the execution of works contract.
(b) Fair market value shall be determined in accordance with the generally accepted accounting principles.
Further, total service tax liability shall be shared in between specified contractor and company as under :
| Contractor | Company |
| 50% | 50% |
Contractor is a person who is an individual, HUF, firm, AOP. But if contractor is a company, above provision of sharing shall not be applicable and contractor solely shall be required to pay total tax liability.
5.1 A few illustrations
5.1-1 Case 1 - Say a contract is for Rs 10,000+S.Tax. Valuation shall be as under :
| Nature of contract | Valuation (Rs.) | Service Tax liability (Rs.) |
| Original contract | 40,000 | 4,944 |
| Maintenance, renovation, repairetc., of any goods | 70,000 | 8,652 |
| Other contract (finishing contract) | 60,000 | 7,416 |
Note - Original works contract means all new constructions, all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable or erection, commissioning or installation of plant, machinery or equipment or structures, whether prefabricated or otherwise.
5.1-2 Case 2 - If during the contract material worth Rs.50,000 is supplied by the company (service receiver) service tax liability shall be calculated as follows :
| Particulars | Valuation (Rs.) | Service tax liability (Rs.) |
| Original contract | 60,000 | 7,416 |
| Maintenance, renovation,repair etc., of any goods | 105,000 | 12,978 |
| Other contract (finishing contract) | 90,000 | 11,124 |
5.2 Sharing of liability in between contractor and company :
5.2-1 Case 1 :
| Nature of Contract | Contractor (50%) (Rs.) | Company (50%) (Rs.) |
| Original | 2,472 | 2,472 |
| Maintenance, renovation , repair etc., of any goods | 4,326 | 4,326 |
| Other contract (finishing contract) | 3,708 | 3,708 |
The contractor shall make bill of Rs. (10000+2472) = 102472 and company needs to pay Rs. 2,472 directly to the government. The amount of service tax shall be Rs. 4,326, Rs. 3,708, respectively, in other cases.
5.2-2 Case 2 :
| Nature of Contract | Contractor (50%) (Rs.) | Company (50%) (Rs.) |
| Original contract | 3,708 | 3,708 |
| Maintenance,renovation , repair, etc., of any goods | 6,489 | 6,489 |
| Other (finishing contract) | 5,562 | 5,562 |
The contractor shall make bill of Rs. (100000+3708) =103708 and company needs to pay Rs. 3,708 directly to the government. The amount of service tax shall be Rs. 6,489, Rs. 5,562, respectively, in other cases.
Notes :
6. When to deposit tax ?
| Contractor | Within 5 days from the end of quarter in which bill is raised (see note1) |
| Company | Within 5 days from the end of the month in which payment is made. (see note 2) |
Notes :
| 1. | If contractor has turnover (taxable service provided) of less than 50 lacs in the preceding year and has opted for paying tax on the receipt basis during current year, up to 50 lacs receipt, and time shall be 'within 5 days from the end of the quarter in which payment is received' (Rule 6(1) of the Service Tax Rules, 1994) | |
| 2. | If company does not pay for the bill within 6 months from the date of bill, then its liability shall be within 5 days from the end of the month when bill is raised and need to pay interest at applicable rate ( 18% p.a. or 15% p.a., as the case may be) (Rule 7 of the Point of Taxation Rules, 2011) |
6.1 To illustrate the situation (Case 1) - Say bill is raised on 25-07-2012 and amount is received on 20-11-2012
| Person Liable to Pay Service Tax | Due date of Tax Deposit |
| Contractor (In either option, i.e., whether liable on due or receipt basis) | 5-10-2012 |
| Company | 5-12-2012 |
Note - Contractor is assumed to be quarterly liable.
If bill is raised on 25-07-12 and amount is paid on 02-2-2013
| Person liable to pay service tax | Due date of tax deposit |
| Contractor (If opted for due basis) | 05-10-2012 |
| Contractor (If opted for receipt basis) | 31-03-2013 |
| Company | 05-08-2012 |
Note - Contractor is assumed to have quarterly liability.
Registration & filing of returns
7. Contractor need to get registration as service provider and company need to get registration as service receiver. Both need to file six monthly returns in Form ST-3 with 25 days from the end of six month, viz., 30th Sept. or 31st March, as the case may be.
Composition Scheme @ 4.944%
8. This scheme is no more applicable w.e.f. 01-07-2012.
TDS in Income Tax u/s 194C of the Income Tax Act, 1961
9. TDS by the company needs to be made on invoice amount, as made by the contractor.
Pure Labour Contract
10. Pure Labour Contract is not a works contract. Above provisions shall not be applicable , if contract is a pure labour contract, i.e.,service contract. That situation shall be normally regulated and contractor would be solely liable to deposit service tax liability.
Cenvat credit
11. Service tax paid on works contract service, whether wholly paid by contractor (when not covered under joint charge mechanism) or partly paid by contractor and partly (50%) paid by the business concern which is a body corporate, that service tax would not be eligible for the Cenvat credit in case of service receiver.
However, Cenvat credit as mentioned above, shall be eligible for the service receiver when such service is used by service receiver for specified services (e.g., construction or works contract service) (Rule 2(l) of the Cenvat Credit Rules, 2004).
Conclusion
12. Where ever works contract service is involved, generally its quantum is huge and impact of wrong decision is also significant. Hence, while deciding various issues with respect to works contract service, one should thoroughly read and understand the legal provisions under section 65B(54), 68 of the Finance Act, 1994, Rule 2(1)(d), 6 of the Service Tax Rules, 1994, Point of Taxation Rules, 2011 and the amended rule 2A of the Service Tax ( Determination of Value) Rules, 2006.
IT : MAT deposit made in advance under section 115JA on basis of book profit bears character of tax paid in advance and, therefore, interest under section 244A has to be granted in case of excess deposit of said amount
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[2013] 35 taxmann.com 58 (Rajasthan)
HIGH COURT OF RAJASTHAN
Commissioner of Income-tax, Kota
v.
Chambal Fertilizers & Chemicals Ltd., Gadepan*
NARENDRA KUMAR JAIN AND JAINENDRA KUMAR RANKA, JJ.
D.B. IT APPEAL NO. 487 OF 2011†
JANUARY 22, 2013
Section 244A, read with section 115JA, of the Income-tax Act, 1961 - Refunds - Interest on [Excess deposit of MAT] - Assessment year 2000-01 - Whether MAT deposit made in advance under section 115JA on basis of book profit bears character of tax paid in advance and, therefore, interest under section 244A has to be granted in case of excess deposit of said amount - Held, yes [In favour of assessee]
FACTS
| ■ | The assessee-company filed its return declaring nil income. It paid taxes of Rs. 17.17 crore on book profit under section 115JA. | |
| ■ | The return was processed under section 143(1)(a). The AO computed MAT on the book profit disclosed by the assessee at Rs. 16.03 crore. | |
| ■ | Since assessee paid excess tax under MAT, the Assessing Officer worked out a refund including interest under section 244A. | |
| ■ | The Commissioner passed a revisional order holding that in case of excess tax paid by assessee as per provisions of MAT on book profit, interest could not be granted on amount of refund. | |
| ■ | The Tribunal opined that the MAT payable on book profit was subject to determination by way of assessment under the provisions of the Act and the MAT deposit made in advance under section 115JA on the basis of book profit was nothing but bearing the character of tax paid in advance and, thus, interest ought to have been allowed under section 244A on the excess deposit. | |
| ■ | Accordingly, the Tribunal set aside the revisional order. | |
| ■ | On revenue's appeal: |
HELD
| ■ | The language of sections 234A, 234B and 234C as well as the language of section 244A is almost same inasmuch as, while in sections 234A, 234B and 234C, the department is entitled to charge/levy interest in case there is short fall of payment of advance tax whereas in case the assessee has deposited the excess amount by way of advance tax or TDS, it becomes entitled to grant of interest under section 244A. [Para 17] | |
| ■ | In view of the fact that in the case of assessee itself, while interest was being charged in the past under sections 234B and 234C therefore, the Assessing Officer rightly allowed the interest under section 244A. [Para 19] | |
| ■ | Even otherwise, the Commissioner while invoking the provisions of section 263 was not correct in drawing analogy of section 115JAA and its proviso which was not applicable for the year under appeal. The Legislature in its own wisdom have not enacted such proviso as bar for payment of interest in case of excess deposit under section 115JA with which instant appeal was concerned. [Para 21] | |
| ■ | In view of above, The Commissioner had committed an error in invoking the provisions of section 263 and the Tribunal had rightly quashed the revisional order of law arise out of the order of the ITAT. The appeal, being devoid of merit is dismissed in limine. [Para 22] |
CASES REFERRED TO
Jt. CIT v. Rolta India Ltd. [2011] 330 ITR 470/196 Taxman 594/9 taxman.com 36 (SC) (para 14), CIT v. Kwality Biscuits Ltd. [2006] 284 ITR 434 (SC) (para 14), Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519/110 Taxman 47 (Kar.) (para 14), CIT v. Apar Industries Ltd. [2010] 323 ITR 411/190 Taxman 353 (Bom.) (para 15) and CIT v. Vijaya Bank [2011] 338 ITR 489/201 Taxman 371/12 taxmann.com 485 (Kar.).
Mrs. Parinitoo Jain for the Appellant.
ORDER
1. Instant appeal has been preferred by the Commissioner of income Tax, Kota, for the Assessment Year 2000-2001, assailing the order dated 28.02.2006 passed by the learned Income Tax Appellate Tribunal, Jaipur Bench, Jaipur In short the 'ITAT') for quashing the order under Section 263 of the Income-tax Act, 1961, in short ('The Act').
2. The brief facts of the case are given hereunder:-
The respondent-Company being a Ltd. Company, filed its return on 30.11.2000 declaring nil income and paid taxes of Rs. 17,17,98,327/- under (Minimum Alternate Tax) ( in short 'MAT') on book profit under Section 115JA of the Act. The return was processed under Section 143(1)(a) by the Assessing Officer on 30.3.2001 and the tax/MAT was also computed by Assessing Officer on the book profit disclosed by the respondent at Rs.16,03,07,717/-. In view of the payment of excess tax paid under MAT at Rs. 17,17,98,327/- the Assessing Officer worked out a refund of Rs. 1,74,90,610/- (17,17,98,327-16,03,07,717) and directed for issuing a refund of Rs. 1,95,89,482/-) to the respondent-company including interest under Section 244A of the Act, accordingly, the refund was issued along with interest.
3. The respondent-company further moved an application under section 154 of the Act on 17.8.2001 claiming further interest under Section 244A for the period 1.4.2001 to 18.7.2001. The Assessing officer, being satisfied granted further interest under Section 244A amounting to Rs. 6,12,171/- for the balance period as claimed.
4. The learned Commissioner of Income Tax , Kota in short ('CIT) while issuing notice under Section 263 of the Act, had held that the two orders passed by the Assessing Officer dated 30.3.2001 as well as dated 13.6.2002 were erroneous and prejudicial to the interest of revenue on the basis that tax has been paid by the assessee under MAT ,on the book profit under Section 115JA of the Act, which cannot be equated with payment of the advance tax by the respondent on its total income/current income which is chargeable to tax following the financial year under consideration and further that proviso to Sub-section(2) of Section 115JAA dealing with the tax credit in respect of tax paid on deemed income relating to certain companies, clearly stated that no interest shall be payable on the tax credit alone under Sub-section (1) thereof. Accordingly, the CIT by invoking the provisions of Section 263 of the Act directed the Assessing Officer to withdraw the interest so granted under Section 244A of the Act, amounting to Rs. 21,98,872/- and further Rs. 6,12,171/- respectively which was allowed vide two orders dated 30.3.2001 and 13.06.2002 referred to hereinabove.
5. Aggrieved by the order passed by the learned CIT, the respondent-company preferred an appeal before the learned ITAT who, after detailed examination of facts and various Judgments and the scheme of section 115JA of the Act, allowed the appeal of the Respondent-company and quashed the order under Section 263 of the Act passed by the Commissioner of Income Tax, Kota.
6. Being aggrieved by the said order passed by the learned ITAT the appellant preferred the instant appeal under Section 260A of the Act.
7. The appellant has raised and claimed that the following substantial questions of law arise out of the order of the learned ITAT:-
"(1) Whether on the facts and circumstances of the case and in law the Tribunal was legally justified in setting aside the order passed by the learned CIT u/s. 263 by holding that the same was not warranted?
(2) Whether the findings of the Tribunal are perverse in holding that the proviso to Section 115JAA (2) was not applicable in the facts and circumstances of the case?
(3) Whether the Tribunal was legally justified in upholding the order of the Assessing Officer of allowing interest u/s. 244A? and
(4) Whether the Tribunal was justified in holding that Section 263 was not warranted as it was simply a case of wrong recomputation of interest and an error apparent from the face of record?"
8. Learned counsel for the appellant, Mrs. Parinitoo Jain, has drawn our attention to the order of the learned ITAT as well as to the order of learned CIT, Kota and has claimed that substantial questions of law arise out of the order of learned ITAT and that learned ITAT was not justified in quashing the order under section 263 passed by the learned
9. At this juncture, it would be appropriate to refer relevant portion of Section 115JA and Section 115JAA of the Act, which reads as under :-
"115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 [but before the 1st day of April, 2001] (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):"
"S1153AA (1) where any amount of tax is paid under sub-section (1) of Section 115JA by an assessee being a company for any assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this Section.
(1A) Where any amount of tax is paid under sub-section (l) of Section 115DB by an assessee, being a company for the assessment year commencing on the lst day of April, 2006 and any subsequent assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.
(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under sub-section (1) of section 115JA and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act:
Provided that no interest shall be payable on the tax credit \ allowed under sub-section (1).
10. It would also be relevant here to quote relevant Sections relating to advance tax payable by Assessee namely Sections 207 and 208 of the Act, which reads as under:-
"Section 207. Tax shall be payable in advance during any financial year, in accordance with the provisions of Sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income being hereafter in this Chapter referred to as 'Current Income"."
"Section 208. Advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this Chapter, is '[ ten thouseand] rupees or more]"
11. Section 209 of the Act, provides that for making calculation for the purpose of advance tax, the assessee shall first estimate its current income and apply that rate of tax of income on that current income. Section 207 as quoted above, provides that advance tax is payable in respect of the "total income" which is also referred as "current income".
12. In the case of respondent-company itself, the -appellant department in the earlier years was charging interest under Section 234B and Section 234C of the Act, in respect of deemed income under Section 115JA of the Act, in case, there was shortfall of taxes and without any demur, the respondent-company was also depositing the interest in cases there was delay/shortfall in making of instalments of advance tax. Therefore, on this analogy, the ITAT has rightly come to the conclusion that when interest under Sections 234B and 234C is leviable then on the same analogy interest under section 244A is equally allowable to the assessee-respondent.
13. Ultimately, the ITAT after referring to certain Judgments came to the conclusion that when the department is charging interest on the delayed payment of instalments of MAT which the assessee was under obligation to deposit in advance then the department is also bound to pay interest on the excess/surplus payment made by the assessee-respondent which the department has very well enjoyed. It is also observed by the ITAT that when the amount in advance is deposited by the assessee, the assessee, may not be aware that at the end of the financial year, the assessee would fall under Section 115JA of the Act or the amount deposited as an advance tax shall take colour of MAT paid in advance. The liability of depositing mat became payable only because of the legal fiction created by the said Section. It was further observed by the ITAT that as per its income, the respondent-company was not liable to pay regular tax as there was NIL income for the assessment year 2000-2001 and in fact tax paid was payable as MAT on book profit as per Section 115JA of the Act. Ultimately, the ITAT came to the conclusion that the MAT payable, on book profit is subject to determination by way of assessment under the Provisions of the income Tax Act and the MAT deposit made in advance under Section 115DA on the basis of book profit is nothing but bearing the character of tax paid in advance and when the Department was charging interest under section 234B and 234C of the Act, then on the same analogy the interest ought to. have been allowed under Section 244A on the excess deposit. Accordingly, the ITAT came the conclusion that granting of interest under Section 244A of the Act, by the Assessing Officer., as per the two orders were not erroneous and prejudicial to the interest of the revenue on the above analogy and thus quashed the order under Section 263.
14. We have heard the learned counsel Mrs. Parinitoo Jain at length and after hearing her, come to the conclusion that no substantial question of law, arises out of the order of the learned ITAT particularly, in view of the fact that the Hon'ble Apex Court in the Case of Jt. CIT v. Rolta India Ltd. [2011] 330 ITR 470/196 Taxman 594/9 taxmann.com 36 had considered the issue with reference to interest under Section 234b of the Act on applicability of MAT provisions under Section 1153A of the Act, and after detailed analysis held at page 478 as under:-
"The question which remains to be considered is whether the Assessee, which is a MAT Company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection the Assessee placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT reported in [2000] 243 ITR 519 and, according to the Karnataka High Court, the profit as computed under the income Tax Act, 1961 had to be prepared and thereafter the book profit as contemplated under Section 115J of the Act had to be determined and then, the liability of the Assessee to pay tax under Section 115J of the Act arose, only if the total income as computed under the provisions of the Act was less than 30 per cent of the book profit. According to the Karnataka High Court, this entire exercise of computing income or the book profits of the company could be done only at the end of the financial year and hence the provisions of Sections 207, 208, 209 and 210 predecessors of Sections 234B and 234C) were not applicable until and unless the accounts stood audited and the balance sheet stood prepared, because till then even the Assessee may not know whether the provisions of Section 115J would be applied or not. The Court, therefore, held that the liability would arise only after the profit is determined in accordance with the provisions of the Companies Act, 1956 and, therefore, interest under Sections 234 and 234C is not leviable in cases where Section 115J applied. This view of the Karnataka High Court in Kwality Biscuits Ltd. was not shared by the Gauhati High Court in Assam Bengal Carriers Ltd. v. CIT reported in [1999] 239 ITR 862 and Madhya Pradesh High Court in Itarsi Oil and Flours (P.) Limited v. CIT reported in [2001] 250 ITR 686 as also by the Bombay High Court in the case of CIT v. Kotak Mahindra Finance Ltd. reported in [2003] 130 Taxman 730 which decided the issue in favour of the Department and against the Assessee. It appears that none of the Assessees challenged the decisions of the Gauhati High court, Madhya Pradesh High Court as well as Bombay High Court in the Supreme Court. However, it may be noted that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. was confined to Section 115J of the Act. The Order of the Supreme Court dismissing the Special Leave Petition in limine filed by the Department against Kwality Biscuits Ltd. is reported in (2006) 284 ITR 434. Thus, the judgment of Karnataka High Court in Kwality Biscuits stood affirmed. However, the Karnataka High Court has thereafter in the case ofJindal Thermal Power Company Ltd. v. Dy. CIT reported in [2006] 154 Taxman 547 distinguished its own decision in case of Kwality Biscuits Ltd. (supra) and held that Section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under Section 115JB, it was liable to pay interest under Sections 234B and 234C of the Act. Thus, it can be concluded that interest under Sections 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable under Section 115JA/115JB. For the aforestated reasons, Circular No. 13/2001 dated 9.11.2001 issued by CBDT reported in (2001) 252 ITR (St.) 50 has no application. Moreover, in any event, para 2 of that Circular itself indicates that a large number of companies liable to be taxed under MAT provisions of Section 115JB were not making advance tax payments. In the said circular, it has been clarified that Section 115JB is a self-contained code and thus, all companies were liable for payment of advance tax under Section 115J and consequently provisions of Sections 234B and 234C imposing interest on default in payment of advance tax were also applicable.
For the aforestated reasons CIT succeeds in the Civil. Appeal arising out of S.L.P. (C) No. 25746 of 2009 (Jt. CIT v. Rolta India Ltd.) as also in the Civil Appeal arising out of S.L.P. (c) No. 18367 of 2010 (CIT-3 v. Export Credit Guarantee Corporation of India Ltd.). Consequently, Civil Appeal No. 459 of 2006 (Nahar Exports v. CIT) and Civil Appeal No. 7429 of 2008 (Lakshmi Precision Screws Ltd. v. CIT) stand dismissed with no order as to costs."
This Authority of the Apex Court has already considered the Judgment rendered by the Hon'ble Apex court in the Case of CIT v. Kwality Biscuits Ltd. [2006] 284 ITR 434 which had dismissed the appeal of the revenue by affirming the Judgment of the Hon'ble High court in the Case of kwality Biscuits Ltd. v CIT [2000] 243 ITR 519/110 Taxman 47 (Kar.).
15. In the Case of CIT v. Apar industries Ltd. [2010] 323 ITR 411/190 Taxman 353, the Bombay High Court was considering the issue as to whether the Minimum Alternate Tax (MAT) to which the assessee is undisputedly entitled must be given before computing interest payable by the assessee under Section 234B of the Act or whether as contended by the Revenue, the credit is allowable after the liability to pay interest under Section 234B as computed, after considering the various judgments of various courts, the Bombay High Court, came to the conclusion that MAT credit is to be allowed first and then if at all and in case, even thereafter, there is a shortfall then the interest under Section 234B of the Act, could be charged. In this very case, there is another issue which is before us and that is with regard to allowability of interest under Section 244A on account of excess payment of TDS, advance tax, self-assessment tax etc. the Court in this regard held at page 429 as under:-
"Insofar the second question is concerned, counsel appearing on behalf of the Revenue has conceded before the court that it would be consequential to the determination of the first question. As already noted earlier in this judgment, as against the tax payable of Rs. 2.46 crore, the tax paid by the assessee amounted to Rs. 4.24 crore after giving due adjustment for MAT credit, TDS, advance tax and self-assessment tax. The assessee was, therefore, entitled to a refund of excess tax paid for the assessment year 2000-01 over and above the tax which was computed as being due and payable. Interest under Section 244A was allowable. As we have already noted, it has been stated on behalf of the Revenue during the course of the hearing that the answer to the second question would be consequential to the determination of the first question. Consequently, the second question shall stand answered in favour of the assessee and against the Revenue."
16. The Hon'ble Karnataka High Court in the Case of CIT v. Vijaya Bank [20l1] 338 ITR 489/201 Taxman 3711/12 taxmann.com 485 (Kar.), under identical circumstances held that MAT provisions were applicable and the Hon'ble Court observed as under:-
"Therefore, the object behind insertion of section 244A as understood by the Department is that, an Assessee is entitled to payment of interest for money remaining with the Government which would be ordered to be refunded. Therefore, if that object behind the insertion of Section 244A, the contention of the Revenue that if the case does not fall under either of the clauses in Section 244A, no interest is payable, is without any substance.
Clauses (a) and (b) specifically refer to the instances where interest is paid under the Act. It is not exhaustive. It is possible, in a given case, that after the expiry of the financial year, the Assessee may pay tax either along with the self-assessment return or even before the return is filed, if ultimately the said payment is found to be in excess and the Department chooses to refund the said amount, then the question would be, from what date interest is payable since interest is payable on such refunds under Section 244A. In the absence of an express proviso as contained in Clause (a), it cannot be said that the interest is payable from the 1st of April of the assessment year. At the same time, as the said payment of tax was not made in pursuance of a notice of demand issued under Section 156, explanation to Clause (b) has no application. In such cases, as the opening words of Clause (b) specifically referred to "as in any other case", the interest is payable from the dates of payment of the tax. As Clause (b) expressly provides in any other case the payment of tax subsequent to the first day of April of the assessment year, either before or along with filing of the return would squarely fall under Clause (b) and therefore, when the said amount is ordered to be refunded, the interest is to be calculated from the date of such payment of tax. Having regard to the scheme of Section 244A, and the circular issued by the Board which shows how the Department has understood the Section coupled with the fact that the principle underlying the said section is that, any excess payment of tax paid by the Assessee is not only to be refunded but it has to be refunded with interest, if the case of the Assessee does not fall under clause (a) or the explanation to Clause (b), the excess tax paid shall be refunded with interest from the date of payment of such tax.
In the instant case, it is not in dispute that the Assessee has paid a sum of Rs. 15.5 crore on 29.06.2002, even before the date of filing of the returns. It is that amount which is ordered to be refunded as excess payment Though the occasion to order for refund arose after the assessment order in which the payment of tax was adjusted towards the tax liability, the case does not fall under Clause (a) or explanation to Clause (b). The said excess payment is to be refunded with interest from the date of payment of such tax, that is from 29.06.2002, till the date of refund. This is precisely what the Appellate Commissioner as well as the Tribunal has said. It is in accordance with law. No illegality nor any case for interference is made out. The substantial question of law is answered in favour of the Assessee and against the revenue. Appeal stands dismissed. No costs."
17. We have gone through/the language of Section 234A.234B and 234C of the as well as the language of Section 244A and we feel that language is almost same in all the above inasmuch as, while in Section 234A,234B and 234c, the department is entitled to charge/levy interest in case, there is short fall of payment of advance tax or otherwise, however, in case, the assessee has deposited the excess amount by way of advance tax or TDS the assessee thus, become entitled to grant of interest under Section 244A of the Act.
18. Revisional powers conferred on the Commissioner under Section 263 of the Act is wide, it enables the CIT to call for and examine the record of the case or pass any order under the Act and also empowers him to make or cause to be made such an inquiry as he deems fit and necessary in order to find out, if the order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of Revenue, however, he has to have certain material to come to the conclusion. Once, he comes to the above conclusion that there is material, the CIT is empowered to pass an order as per the circumstances of the case which may warrant as he is empowered to take recourse to any of the three courses indicated in Section 263 only. Therefore, it is clear that CIT does not have unfettered and unchequered discretion/power to reverse the order. He can do so within the bounds of the law and has to satisfy the need of fairness in action and fair play with due respect to the principles of Audi Alteram Partem as envisaged in the Constitution. The law is well settled that the CIT cannot invoke the powers to correct each and every mistake or error committed by the Assessing Officer. Every loss to the Revenue, cannot be treated as prejudicial to the interest of the Revenue and if the Assessing Officer has adopted one of the course permissible under the law or where two views are possible and the Assessing Officer has taken one view which the CIT does not agree, it cannot be treated as an order erroneous and prejudicial to the interest of the Revenue, the Assessing Officer exercises quasi-judicial power vested in him and if he exercises such powers in accordance with law, arrives at a just conclusion such conclusion cannot be termed to be erroneous only because the CIT dose not feel satisfied with the conclusion.
19. In view of the fact that in the case of assessee-respondent itself, while interest was being charged in the. past under Sections 234B and 234C of the Act, therefore, the Assessing officer rightly allowed the interest under Section 244 A of the Act. Granting interest by the Assessing officer under section 244A was not erroneous in our view, two views are possible and when two views are possible even otherwise provisions of Section 263 cannot be invoked. Further in view of the catena of Judgments referred to above, the respondent-company was even otherwise entitled to interest under section 244A of the viewed from all angles, the learned ?? rightly come to the correct ?? and rightly quashed the order of the CIT under section 263 of the Act.
20. Thus, insofar as the issue involved in the present appeal is concerned, when it has been decided by the Hon'ble Apex Court in the case referred to above (supra), having been covered, as such, the Assessiong Officer, was quite justified in allowing the interest under section 244A of the Act.
21. We have extracted the proposed substantial questions of law hereinabove and in question (ii), the issue which has been raised about applicability of proviso to section 115JAA(2) of the Act, however, the said proviso is not applicable insofar as the matter is concerned, firstly, the present appeal relates to the Assessment Year 2000-2001 when section 115JA was applicable and secondly proviso to section 115JAA itself, came to be introduced from 1.4.2006 therefore, even otherwise, the question No. (ii) is misconceived and not relevant to the year under appeal. Therefore, even otherwise, the CIT while invoking the provisions of section 263 was not correct in drawing analogy of section 115JAA and its proviso which oven otherwise was not applicable for the year under appeal. The legislatures in its own wisdom have not enacted such proviso or bar for payment of interest in excess deposit under Section 115JA of the Act, with which we are concerned in this appeal.
22. In view of the aforesaid judgments of the Apex Court and various other Courts, granting of interest under Section 244A of the Act, is justified, therefore, the learned CIT had committed an error in invoking the provisions of Section 263 of the Act and the learned ITAT had rightly quashed the invoking of the provisions of Section 263 of the Act. No substantial questions of law arise out of the order of the ITAT in view of the above judgments, the appeal, being devoid of merit is dismissed in limine.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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EXCISE DUTY BLOW TO FIRMS SELLING GOODS BELOW COST
Companies selling products below manufacturing cost to enhance market penetration will now have to pay excise duty on the normal price ( production cost plus profit). The finance ministry decision follows the Supreme Court ( SC) ruling of last year that upheld excise demand on sales of carmaker Fiat's discounted Uno brand. This could be a twin blow for companies in sectors like automobiles, oil marketing, fast moving consumer goods ( FMCG), consumer durables, information technology ( IT) hardware, fertiliser & chemicals — some of those already selling products at loss a to penetrate a fiercely competitive market. These companies might soon get notices from the excise department. The Central Board of Excise & Customs ( CBEC), however, is finalising safeguards so that there is no blanket application of the SC judgment on all companies. It will clarify that the excise duty would be levied at discounted prices when a product is sold below cost due to a sudden increase in raw material cost or increase in interest rates, or under some government mandate. The Society of Indian Automobile Manufacturers ( Siam) and some industry bodies have provided CBEC with details of situations other than market penetration when products are sold below cost. They have suggested the ruling should not apply retrospectively and senior officials of a company should not be summoned by revenue authorities. SIAM Director- General Vishnu Mathur said the ministry had been urged to provide relief to companies that had built up huge inventory due to difficult market conditions — as is the case at present — and were having to sell at discounted prices. " We have looked into industry's request. There will be no change in law. So, Fiat and identical cases will not get any relief," said a finance ministry official, adding: "Right now, the Supreme Court judgment is open for interpretation. We can clarify to the field formations the scope of the judgment, so that it's not extended to the areas where it should not apply." Experts said, in the absence of a clarification, field officers might start applying the judgment to other situations to boost the government's revenue collections. "Show cause notices so far are primarily being issued to auto sector companies. But this can go to other sectors like FMCG, too," said Saloni Roy, senior director, Deloitte. Pratik Jain, partner, KPMG, agreed FMCG could be the next target and cautioned amendment to the law was the only longterm solution, as all large companies dealing with multiple products would have a situation where a few products are sold at a loss. At present, field officers are asking auto companies for details of situations when goods are sold below cost. Notices have been sent to many auto firms, seeking information on their cost structure. But the industry is apprehensive about sharing such ' sensitive' data on business strategy. In its representation to Revenue Secretary Sumit Bose recently, the industry sought a relief from the SC ruling. CBEC, however, has made it clear that it is not possible to do so without an amendment to the Central Excise Act. It has ruled out amending the law, justifying the SC ruling and, instead, suggested the industry consider changing its processes.
When we refer to an entry of loan transaction as `fake loan' received from a `paper company', it invariably means that such entry represents unaccounted money of the person in whose books of account the money has been credited as loan and the lender company is only a conduit for routing the money back to the books of account of that person. However, despite having knowledge of this fact and knowing the techniques and methods used by the assessees for this purpose, it remains a huge challenge for the tax authorities to bring all material facts and evidences on record so as to prove which in his opinion is a fact beyond doubt.
2. In an economy where unaccounted income is a big menace, there are always efforts made by the tax evaders to bring their unaccounted income back to their books of account without paying any tax on the same. Numerous methods and techniques are used for this purpose and there are lots of techniques that authorities know about and probably countless others that have yet to be uncovered. Routing the unaccounted income back to the books of account disguised as loan or share capital is one of such methods widely used by the tax evaders in our country. The method is most prevalent and perhaps also one of the most organized one to bring the unaccounted money back to the books of account and even the established business houses resort to this method to bring their unaccounted money back to their business without paying any tax on the same.
The process to bring the money back in this manner is commonly known in business parlance as Jamakharchi entries or accommodation entries. This is a well organized racket controlled and conducted by persons known as entry providers. Kolkata is undoubtedly the Mecca of such operations liberally providing entries to business concerns all over the country but other business hubs such as Mumbai and Delhi are also not far behind in having organized rackets for providing accommodation entries to the willing tax evaders. Although, there is no uniformity of methodology or approach, or certainty of estimation of unaccounted income being brought back in the books of accounts in this manner, the magnitude of the same, without any doubt, is significant and huge.
2.1 The method of providing accommodation entry entails breaking up large amounts of money into smaller, less-suspicious amounts. In India, this smaller amount has to be below Rs. 50,000/- as deposit of cash below this amount does not require providing PAN of the depositors. The money is then deposited into one or more bank accounts either by multiple people or by a single person over an extended period of time. Also, even larger amounts are deposited in the banks with PAN numbers of individuals who are mostly illiterate and work for these entry operators for small salary or commission. The money is then routed through paper companies controlled by these operators. These companies are incorporated by taking care of all formalities such as registering with ROC but having only postal addresses with no real office or employees. The directors of such companies are again individuals who are mostly illiterate or semiliterate and work for the entry operators for small salaries or commission. At first sight, most of these companies would pass of as finance, investment or technology companies. But as the entry operators would secretly admit, these are only paper companies used to route the unaccounted income and, at the same time, clean hoards of unaccounted income for their clients. These companies used for routing the unaccounted money are basically fake companies that exist for no other reason than to `layer' the entries or pass it on to the beneficiary as loan or share capital. They take in unaccounted money as "loan or share capital" and pass it on to either another such paper company for `layering' of the transaction or directly to the beneficiary as loan or share capital. They simply create the appearance of legitimate transactions through fake entries of loans or share capital in their books of account. As has been exposed from time to time through search and seizure operations by the department, such entry operators controls hundreds of bank accounts for depositing cash and hundreds of companies for routing the entries. Limited resource and infrastructure of the Registrar of Companies (ROC) perhaps makes it easier for them to incorporate large number of such paper companies without any difficulty. The process, prima facie, may appear very simple but it is extremely difficult to expose the whole chain of money deposited and `layers' through which it is routed back to the beneficiary. The biggest problem is that there is no effective deterrence to curb the activities of these entry operators. Even conducting search and seizure operations against them have not really worked as a deterrence and such operations often ended up in disclosure of `unaccounted commission income' of these entry operators which definitely could not be the purpose of conducting search and seizure operations against these operators.
2.2 In USA, in 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug lord Jose Santacruz-Londono. Even in India, people with a whole lot of unaccounted income typically hire such `financial experts' to handle the process to bring the money back to books of account without paying tax on the same. It's complex by necessity. The whole idea is to make it impossible for Income-tax authorities to trace the unaccounted money and it's source during the process of bringing it back to the books of account of the assessee. However, we do not have such provisions in Income-tax Act 1961 to put such operators behind bars. Hence, the solution at the moment is to handle the individual cases of such entries routed back through paper companies at the time of assessment in the purview of available provisions of Income- tax Act and judicial pronouncements in respect of the same.
3. Recourse under Section 68 of the Income-tax Act 1961:
The recourse available for the assessing officers to tackle the individual cases of such fake loans brought back in the books of account as cash credit is within the meaning of Section 68 of the Income-tax Act 1961. The provision relating to cash credit, as in Section 68, was provided for the first time in the Income Tax Act 1961 (Act No.43 of 1961) as there was no corresponding provision in the Income Tax Act, 1922. It would be pertinent to note that Section 68 is a new section in comparisons with the provision of the Income Tax Act, 1922 and it is a culmination of a series of judicial pronouncements under the provisions of the Income Tax Act, 1922.
3.1 For the purpose of better comprehension, the Section 68 may be divided as below:
(1) Where any sum is found credited in the books of an assessee;
(2) Maintained for any previous year; and
(3) Assessee offers no explanation about the nature and source thereof; or
(4) The explanation offered by him, is not, in the opinion of the Assessing Officer, satisfactory;
(5) The sum so credited may be charged to Income tax;
(6) As the income of the assessee, of that previous year.
The initial catchphrase of the section is " Where any sum is found credited in the books of account of the assessee" meaning thereby that Section 68 is attracted where an entry relating to a sum is found to have been credited in the books of the assessee, which thus implies, existence of books and recording of a sum which the Assessing Officer considers as doubtful. Perusal of Section 68 would show that in relation to the expression `books', the emphasis is on the word `assessee'. In other words, such books have to be the books of the assessee himself and not of any other person and books of account of even a firm in which the assessee is a partner cannot be considered as the books of the assessee as held in the case of Smt. Shanta Devi v. CIT [1988] 171 ITR 532 (Punj. & Har.).
On this issue, it would also be pertinent to refer to another recent decision by Hon. Indore Bench of ITAT in case of Agrawal Coal Corpn. (P.) Ltd. v. Asstt. CIT 63 DTR 201. In this case it was held by the Tribunal that merely because the companies were registered with ROC, were filling return of income, having PANs/bank accounts, share application forms were submitted but the same did not establish their identity as these companies might have been existing on papers or in real sense at the time of registration but were specifically found to be non-existent. Further, assessee even failed to produce the director or employees of these share applicants and, thus, addition under Section 68 made in the hands of assessee was sustainable.
In CIT vs. Frostair (P.) Ltd. [2012] 26 taxmann. com 11 (Delhi), it was held that the assessee was under a burden to explain nature and source of share application money received in a given case and he had to establish shareholder's identity; genuineness of transaction; and creditworthiness of shareholders. On being informed that assessee had accepted share capital from some companies which were engaged in providing bogus entries, in form of loan and share application money, Assessing Officer asked for details under Section 142 of the Act. Assessee submitted a list of 18 shareholders from which Assessing Officer discerned that PAN/GIR No. of shareholders was not correct, they were not available at addresses given and they were not filing their ITRs with concerned officers. It was held by the Hon. High Court that since Assessing Officer had examined all facts in exhaustive manner, addition under Section 68 and, consequently initiation of penalty proceedings were justified.
Another recent decision by Hon. Allahabad High Court dated July 30, 2012 in the case of CIT vs.Hindon Forge (P.) Ltd. [2012] 25 taxmann. com 239 (All.), may also be referred to on this issue. In this case the Assessee-company had taken unsecured loans from eight different trusts. One `R' was common managing trustee of all these trusts. He was also managing director of assessee-company and other directors were his close relatives. `R' did not produce trust deeds, its objects, and beneficiaries of trusts to establish that there were beneficiaries other than him and his associates. Trusts were receiving cash donations, which were transferred on same day to assessee by way of cheques. Assessee did not prove that trusts had any other sources of fund or that they had given credits to any other person or company. In the given facts it was held that the method and manner adopted by assessee clearly established that he was playing a fraud with revenue and, since genuineness of transactions were not established at all, there was no question of shifting burden under Section 68 on revenue and, therefore, addition of unsecured loans to income of assessee was justified. It is important to note that the decision of Hon. Gujarat High Court in the case of Dy. CIT v. Rohini Builders (supra) was also referred to in this decision.
There is another recent and significant decision dated 15th February 2012 in the case of Commissioner of Income-tax vs. Nova Promoters & Finlease (P) Ltd. [2012] 18 taxmann.com 217 (Delhi) which is of immense relevance, as in this case important observations have been made by the Hon. Delhi High Court as to the burden of proof and shifting of onus in the cases of cash credit under Section 68 of the Act. In this case, the assessee filed its return declaring loss for relevant assessment year which is Assessment Year 2000-01. Subsequently, Assessing Officer received information from the Investigation Wing that assessee had obtained accommodation entries in garb of share application monies. In order to examine genuineness and creditworthiness of companies which gave entries to the assessee, Assessing Officer issued summons to two persons namely, `M' and `R' who did not appear before him. Subsequently, assessee filed a letter with Assessing Officer along with affidavits of `M' and `R' in which both of them had stated that transactions with assessee were genuine and earlier statements recorded from them by the Investigation Wing were given under pressure. The Assessing Officer, however, did not accept those affidavits and made certain additions to the income of the assessee under Section 68. But, Hon.Tribunal, taking a view that there was no dispute about identity of shareholders namely `M' and `R', deleted addition made by the Assessing Officer. On revenue's appeal, it was noted by the Hon. High Court that both `M' and `R' had admitted before Additional Director (Investigation) that they were acting as accommodation entry providers. They had also given a list of 22 companies in which they were operating accounts. It was also apparent that out of 22 companies whose names figured in information given by them to the Investigation Wing, 15 companies had provided so-called `share subscription monies' to the assessee. It was held by the Hon. High Court that on facts, there was specific involvement of assessee-company in modus operandi followed by `M' and `R' and, therefore, impugned order passed by Tribunal deleting addition was to be set aside. It was held by the Hon. High Court that "the ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under Section 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed "accommodation entry providers", whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement of the assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such "entry providers". The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre-meditated plan – a smokescreen – conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under Section 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his possession and then come forward to merely reject the same, without carrying out any verification or enquiry into the material placed before him. The case before us does not fall under this category and it would be a travesty of truth and justice to express a view to the contrary.
Reference was also made on behalf of the assessee to the recent judgment of a Division Bench of this court in CIT v. Oasis Hospitalities Private Limited, (2011) 333 ITR 119. We have given utmost consideration to the judgment. It disposes of several appeals in the case of different assessees. These quoted observations clearly distinguish the present case from CIT v Oasis Hospitalities P Ltd. (supra). Except for discussing the modus operandi of the entry operators generally, the Assessing Officer in that case had not shown whether any link between them and the assessee existed. No enquiry had been made in this regard. Further, the assessee had not been confronted with the material collected by the investigation wing or was given an opportunity to cross examine the persons whose statements were recorded by the investigation wing.
In the case before us, not only did the material before the Assessing Officer show the link between the entry providers and the assessee-company, but the Assessing Officer had also provided the statements of Mukesh Gupta and Rajan Jassal to the assessee in compliance with the rules of natural justice. Out of the 22 companies whose names figured in the information given by them to the investigation wing, 15 companies had provided the so-called "share subscription monies" to the assessee.
In the light of the above discussion, we are unable to uphold the order of the Tribunal confirming the deletion of the addition of Rs.1,18,50,000 made under Section 68 of the Act as well as the consequential addition of Rs.2,96,250."
Another decision of Hon. Delhi High Court, which is most recent dated 21st December 2012 in the case of CIT vs. N R Portfolios Pvt. Ltd. in ITA Nos. 134/2012 could be of utmost help for the assessing officers dealing with the challenges of exposing accommodation entries and bringing it to tax under Section 68 of the Act. In this case, the assessee, a company, received Rs. 35 lakhs towards share allotment. As the shareholders did not respond to summons, the AO assessed the said sum as an unexplained credit under Section 68. On appeal, the CIT(A) and Tribunal relied on Lovely Exports 216 CTR 195 (Del) & Divine Leasing 299 ITR 268 (SC), held that as the assessee had furnished the PAN, bank details and other particulars of the share applicants, it had discharged the onus of proving the identity and credit-worthiness of the investors and that the transactions were not bogus. It was also held that the AO ought to have made enquiries to establish that the investors had given accommodation entries to the assessee and that the money received from them was the assessee's own undisclosed income. On appeal by the department the Hon. High Court, held reversing the decision of Ld.CIT(A) & Hon. Tribunal that:
Though in previous decisions (Lovely Exports) it was held that the assessee cannot be faulted if the share applicants do not respond to summons and that the Revenue authorities have the wherewithal to compel anyone to attend legal proceedings, this is merely one aspect. An assessee's duty to establish the source of the funds does not cease by merely furnishing the names, addresses and PAN particulars, or relying on entries in the Registrar of Companies webs ite. The company is usually a private one and the share applicants are known to it since the shares are issued on private placement basis. If the assessee has access to the share applicant's PAN or bank account statement, the relationship is closer than arm's length. Its request to such concerns to participate in income tax proceedings, would, from a pragmatic perspective, be quite strong. Also, the concept of "shifting onus" does not mean that once certain facts are provided, the assessee's duties are over. If on verification, the AO cannot contact the share applicants, or the information becomes unverifiable, the onus shifts back to the assessee. At that stage, if it falters, the consequence may well be an addition underSection 68 (A. Govindarajulu Mudaliar 34 ITR 807 followed).
Another decision of utmost relevance is of Hon. ITAT Indore Bench in the case of Vaibhav Cotton (P.) Ltd. vs. Income-tax Officer, 4(4) Indore, [2012] 26 taxmann.com 352 (Indore.) In this case the assessee company had shown in its balance sheet certain amount representing share capital received from a Kolkata based company and some other individual investors. Face value of shares was Rs. 10 and those shares were issued at a premium of Rs. 90 per share. Next year, promoters/directors of assessee-company purchased those shares back at a discount of 90 per cent. In order to ascertain genuineness of share transactions, Assessing Officer issued notices to Kolkata based company and other alleged shareholders which were returned by postal authorities with a remark `left'. He also visited respective banks through which money was routed by these investors and found that cash was deposited immediately prior to issue of cheque to assessee and accounts of those companies were closed immediately after transfer of funds. Assessing Officer thus taking a view that share transactions were not genuine, added amount in question to assessee's taxable which was upheld by the Hon. Tribunal.
4. It is not necessary to establish that the money came back to the books of the assessee as `entry' actually emanated from his coffers :
While dealing with doubtful cash credits, is it necessary for the assessing officer to establish that the money came back to the books of the assessee as `entry' actually emanated from the coffers of the assessee? This issue has been decided by the Hon'ble Delhi High Court in a recent decision dated 20.07.2012 in the case of Commissioner of Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012), which is significant as the observation made by the Hon. Court in this decision would be a great help in establishing the cases where `entries' have been taken from paper companies. In this case it was alleged by the Investigation wing that the assessee-company received share capital from those persons who had given statements before Investigation wing that they were entry providers giving accommodation entries after receiving cash and after charging their commission. Assessee furnished PAN of subscriber-companies, share application forms, board resolutions, copy of bank statement, pay orders, confirmation from subscribers, their income-tax returns, copies of their balance sheets, etc. However it was held by the Hon. Court that if explanation adduced by assessee with regard to identity and creditworthiness of subscriber-companies and genuineness of transactions was not acceptable for valid reasons, Assessing Officer could make addition under Section 68 and for that purpose he would not be under any duty to further show or establish that monies emanated from coffers of assessee-company. The Hon. Court further observed that "We are unable to uphold the view of the Tribunal that it is incumbent upon the Assessing Officer, on the facts and circumstances of the case, to establish with the help of material on record that the share monies had come or emanated from the assessee's coffers. Section 68 of the Act casts no such burden upon the Assessing Officer. This aspect has been considered more than 50 years back by the Supreme Court in the case of A Govindarajulu Mudaliar v.CIT [1958] 34 ITR 807 where precisely the same argument was advanced before the Supreme Court on behalf of assessee. The argument was rejected by the Court."
4.1 The Hon'ble Court further referred that in the above case, Shri Venkatarama Iyer, J. speaking for the Court observed as under: -
"Now the contention of the appellant is that assuming that he had failed to establish the case put forward by him, it does not follow as a matter of law that the amounts in question were income received or accrued during the previous year, that it was the duty of the Department to adduce evidence to show from what source the income was derived and why it should be treated as concealed income. In the absence of such evidence, it is argued, the finding is erroneous. We are unable to agree. Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. In the present case the receipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000/- and the other being receipt of Rs. 42,000/- from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are accordingly dismissed with costs."
5. Responsibility towards source of source :
In ordinary circumstances, assessee's burden is confined to prove creditworthiness of creditor with reference to transaction between assessee and creditor. It was so held in Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 (Gau.),that a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the assessee. It is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction, which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, since, these aspects may not be within the special knowledge of the assessee.
5.1 However, on this issue, it is important to keep in mind that it may not be the responsibility of the assessee to prove source of source but nothing precludes the assessing officer to make enquiry in respect of the source of the source as well to establish that both the source and it's source are part of a larger chain of `paper companies' engaged in the business of providing accommodation entries to the willing tax evaders. Once a valid presumption is raised by way of an enquiry about the genuineness of transaction between the source and it's source the same could be used as an evidence to doubt the integrity of the source of the assessee and to raise a valid presumption about the transaction between the assessee and it's source being not genuine.
6. Test of human probability :
As has been discussed earlier, the issue of shifting of onus in the cases of cash credit is a complex one and each case has to be examined in it's own facts and circumstances. Hence, in the cases of `fake loan' from `paper companies' the theory of preponderance of human probability as pronounced by the Hon. Apex Court in the cases of CIT v. Durga Prasad More [1971] 82 ITR 540 and Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC) is of utmost importance. In the cases where it has been established that the source company is a mere `paper company' solely engaged in the activity of providing accommodation entries, the presumption on the basis of human probability may be referred to by the assessing officers to fortify their findings.
6.1 Hon. Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 , at pages 545-547 made a reference to the test of human probabilities in the following fact situation : –
"… Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide-open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.
Now, coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about it. Herein the assessee was receiving some income. He says that it is not his income but his wife's income. His wife is supposed to have had two lakhs of rupees neither deposited in banks nor advanced to others but safely kept in her father's safe. Assessee is unable to say from what source she built-up that amount. Two lakhs before the year 1940 was undoubtedly a big sum. It was said that the said amount was just left in the hands of the father-in-law of the assessee. The Tribunal disbelieved the story, which is, prima facie, a fantastic story. It is a story that does not accord with human probabilities. It is strange that the High Court found fault with the Tribunal for not swallowing that story. If that story is found to be unbelievable as the Tribunal has found, and in our opinion rightly, then the position remains that the consideration for the sale proceeded from the assessee and, therefore, it must be assumed to be his money.
It is surprising that the High Court has found fault with the Income-tax Officer for not examining the wife and the father-in-law of the assessee for proving the department's case. All that we can say is that the High Court has ignored the facts of life. It is unfortunate that the High Court has taken a superficial view of the onus that lay on the department.
`…Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But, in that sphere, the decision of the final fact-finding authority is made conclusive by law." (p. 545)
6.2 The test of human probabilities has been emphasized in yet another decision of the Hon. Supreme Court in the case of Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC). It was held in this case that in view of Section 68, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of the previous year if the explanation offered by the assessee about the nature and source thereof, is, in the opinion of the Assessing Officer, not satisfactory. In such case there is prima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonable.
6.3 Why this decision is so important while dealing with cases of `fake loan' from `paper companies', because it acknowledges that what is apparent may not be real and test of human probabilities has to be applied to understand if the apparent is real and if the transaction fails to withstand the test of human probabilities it has to be taken as an in-genuine transaction even if documentary evidences suggest otherwise. In this case, the assessee, a dealer in art pieces, had shown income from horse-race winnings in two consecutive accounting years. The assessing officer did not accept this and made addition under Section 68 which was confirmed by the Appellate Assistant Commissioner. Thereafter the assessee approached the Settlement Commission. The Settlement Commission also took the view that the claim of winnings in races was false and what were passed off as such winnings really represented the appellants taxable income from some undisclosed sources. Hon. Supreme Court also agreed with the Settlement Commission saying that after considering the surrounding circumstances and applying the test of human probabilities the Commission had rightly concluded that the assessee's claim about the amount being her winnings from races was not genuine.
6.4 The test of human probability often comes to the help of the revenue to track unaccounted income. This could be a great help in exposing the `fake loans' from `paper companies' as well. In one of its special kinds, the test of human probability made an assessee pay huge amount of tax in Som Nath Maini v. CIT [2008] 306 ITR 414 (Punj. & Har.). In this case, the assessee in his return declared loss from sale of gold jewellery and also declared a short-term capital gain from sale of shares so that the two almost match each other. This simple tax planning became ineffective after the Assessing Officer disbelieved the astronomical share price increase applying the test of human probability. The Assessing Officer observed that short-term capital gains were not genuine in as much as the assessee had purchased 45000 shares of Ankur International Ltd. at varying rates from Rs. 2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two respective transactions for purchase and sale of shares were routed through two different brokers, yet the Assessing Officer did not believe the astronomical rise in share price of a company from Rs. 3 to Rs. 55 in a short-term.The assessee lost its case before the Tribunal. Confirming the order of the Tribunal, the Punjab and Haryana High Court held that the burden of proving that income is subject to tax is on the revenue but, on the facts, to show that the transaction is genuine, burden is primarily on the assessee. As per the Court, the Assessing Officer is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of the evidence that the transaction was genuine, cannot be conclusive. Any such evidence is required to be assessed by the Assessing Officer in a reasonable way. Genuineness of the transaction can be rejected in case the assessee leads evidence which is not trustworthy, and the department does not lead any evidence on such an issue.
7. Responsibility of the Assessing Officer :
There is no denying to the fact that in the case of cash credit the primary onus is on the assessee and where the assessee fails to discharge such onus the Assessing Officer is well within his jurisdiction to treat the cash credit as income of the assessee within the meaning of Section 68 of the Act. However, the balance of burden in the case of cash credits is delicate and complex and unless and until the Assessing Officer shows his intention to make enquiry to examine the truth, the additions made under Section 68 in the cases of `fake loan' from `paper companies' would not get affirmation of the appellate authorities. In the cases of loans from `paper companies', additions are often made by the Assessing Officers by highlighting the defects in the submission of the assessee without making further enquiries which does not help the case of revenue as merely highlighting defects in the submission of the assessee without making any further enquiry would in most cases be not accepted as sufficient to reach a conclusion that entry of such loan represents income of the assessee.
Some example of the same is given below for illustration:
1. The assessee has provided name, address and PAN of the creditor but did not provide confirmations from him.
2. Confirmatory letters from the creditors were filed but the creditors were not produced for examination.
3. Summons issued under Section 131 to the creditors but they did not respond to the summons.
4. The letters sent to the creditors at the given address returned unserved with comment "not found" or "inadequate address".
5. The confirmation of the creditor was filed but his bank statement was not produced or his credit worthiness have not been established.
7.1 It must be kept in mind that such instances could be the circumstances to have a valid doubt as to the genuineness of the loan but these alone would not be sufficient to have a valid presumption as to the fact that the cash credit represents income of the assessee. Under Section 68 of the Act, the Assessing Officer has jurisdiction to make enquiries with regard to the nature and source of the sums credited in the books of account of the assessee and it is immaterial as to whether the amount so credited is given the colour of a loan or share application money or sale proceeds. The use of the words "any sum credited in the books" in Section 68 indicates that the section is very widely worded and the Assessing Officer is not precluded from making an enquiry as to the true nature and source of the sum credited in the accounts even if it is credited as loan from another company. The Assessing Officer would be entitled, and it would indeed be his duty to enquire whether the alleged creditors do in fact exist or not and whether the loan shown in the garb of a credit from a company is nothing but an accommodation entry routed through a paper company solely existing for the purpose of providing such accommodation entries. Although, given in the context of share application money, the decision of Hon. Delhi High Court in the case of CIT vs. Sofia Finance Ltd. 205 ITR 98 (full bench) is extremely significant where explaining and rather over ruling some observations of the division bench in Steller Investment case which has been confirmed by the Hon. Supreme Court in 164 CTR 287 in a one line decision stating that no question of law arose in such a case. The full bench observed as under :
"what is clear, however, is that Section 68 clearly permits an ITO to make enquires with regard to the nature and source of any of all the sums credited in the books of account of the company irrespective of the name and cloture or the source indicated by the assessee. In other words, the truthfulness of the assertion of the assessee regarding the nature and the source of the credit in his books of account can be gone into by the ITO. In the case of Steller Investments Ltd., the ITO had accepted the entries subscribed share capital. Section 68 of the Act was not referred to and the observations in the said judgement cannot mean that the ITO cannot or should not go into the position as to whether the alleged share holder actually existed or not. If share holders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regard as capital receipts and to that extent the observations in the case of Steller Investment Ltd. are correct, but if, on the other hand, the assessee offers new explanation at all or explanation offered is not satisfactory then, the provision of Section 68 may be invoked."
7.2 It is, therefore, imperative on the part of the Assessing Officer to make enquires as to the nature and source of cash credits and bring evidence on record to expose the fact that the loan is a fake one representing an accommodation entry from a paper company. Although, the nature and extent of enquiry has to be case- specific so as to raise a valid presumption to treat the loan as income of the assessee. However, in the case of accommodation entries received through paper companies the Assessing Officer can easily bring certain facts on record to highlight that the loan received actually represents an accommodation entry. It could be proved that the company providing loan exists only on paper, it has no employees, the address given is only a postal address and the company does not have any physical set up at the given address, the same address is used as postal address for multiple companies indulging in to the same activity of providing accommodation entries. It could also possibly be proved that the directors of the companies are non- existent or even if they exist, they are illiterate or semi illiterate individuals who do not have competence or credibility to operate any investment company. Examining the directors on oath under Section 131 could also be a way to carry the enquiry further so as to prove that they may be acting on behalf of some other person for petty amounts received as salary or commission. It could also be proved that the company is receiving huge amount as loan and giving the same to other concerns without any apparent motive of conducting any actual business and the directors of the company are not even aware of such huge transactions made by the company for, considering the doctrine of business purposes, the company should have a reason, other than avoidance of taxes, for undertaking such transactions. Necessary enquiries may also be made from the bank to examine the bank account of the creditor and also to examine the person who has introduced such bank accounts. In some of the cases, It may have been held that the assessee do not have responsibilities to prove the source of the source, but nothing precludes the Assessing Officer to examine even the source of the source as a process of enquiry to bring the truth on record that these companies work in a chain as conduit to provide accommodation entries which does not represent any genuine transactions.
7.3 As discussed earlier, in number of decisions the efforts of the Assessing Officers have been acknowledged and applauded by the appellate authorities where enquires have been made and additional information and evidences have been brought on record to raise a valid presumption as to the cash credit being income of the assessee. It is, therefore, required that the Assessing Officers properly analyse the individual cases before them and, instead of solely depending on the submissions of the assessee and highlighting the deficiency of the same, conduct independent enquiry and bring additional facts and evidences on record to raise a valid presumption, in favour of accommodation entry representing income of the assessee, which could sustain the test of appeal.
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Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
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