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2013-TIOL-484-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMEDABAD
BENCH 'A' AHMEDABAD
ITA No.1212/Ahd/2010
Assessment Years: 2004-05
Assessment Years: 2004-05
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, SURAT
CIRCLE-3, SURAT
Vs
M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
PAN NO:AAAFY2524R
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
PAN NO:AAAFY2524R
ITA No.4421/Ahd/2007
Assessment Years: 2004-05
Assessment Years: 2004-05
M/s YADUNANDAN CORPORATION
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
148-149, CITY LIGHT ROAD
ATHWAL INES, SURAT-395009
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, SURAT
CIRCLE-3, SURAT
D K Tyagi, JM and T R Meena, AM
Dated: April 19, 2013
Appellant Rep by: Shri Rahul Kumar, Sr. DR
Respondent Rep by: Shri Rajesh M Upadhyay, AR
Respondent Rep by: Shri Rajesh M Upadhyay, AR
Income tax – Sections 40(b), 40A(2), 69C, 133A, 145, 271(1)(c) – Whether when the assessee accepted unaccounted expenditure during survey, the accounts were rightly rejected by AO u/s 145 – Whether the assessee is entitled to claim deduction for expenses out of the income offered to cover up the unaccounted expenditure – Whether an expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s 40A(2)(b) of the Act as being excessive or unreasonable – Whether when the assessee accounted for the unaccounted income / expenditure in the books of account before filing of return of income, penalty is rightly deleted for the same as no particulars were concealed or inaccurate particulars were furnished.
A) Assessee a partnership is engaged in construction business and had a project of shopping complex. A survey u/s 133A was carried out in which two diaries were found wherein unaccounted withdrawals by partners and unaccounted expenses were found. A statement of partner of the firm was also recorded in which he declared additional income of Rs. 42 lacs. Assessee was following project completion method of accounting. AO rejected the books of account. CIT (A) confirmed the action of rejection of books u/s 145 by AO. Assessee contended that there was no defect pointed out by AO before applying section 145.
B) AO confirmed an addition on the basis of dairies found for unaccounted expenses. Assessee adjusted the amount against work-in-progress after crediting the additional income disclosed. AO made addition stating that during the course of survey, the books of account by the current assessment year were not found. No stock register was maintained by the assessee firm and no details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
CIT (A) confirmed the addition observing that the contention of assessee was that even though the expenses were not found accounted during survey, deduction should be allowed after survey, since the relevant entries were passed in the books of account. It is observed that assessee incurred unaccounted expenses to the extent of Rs. 22.35 lacs and also had unaccounted withdrawal of Rs. 19.60 lacs by partners. Such expenses and such withdrawals could be made only out of unaccounted income. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction.
Assessee contended that the expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. Unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure.
C) AO made disallowance for interest and remuneration paid to partners observing that the same was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. Before CIT (A), assessee contended that CIT (A) confirmed the addition stating that in cases where a payment is covered by Sec. 40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. The payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. An expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. AO observed that assessee had never claimed such huge interest and remuneration in earlier years. It is clear that the assessee claimed the huge amount to neutralize the additional burden due to unaccounted income disclosed. The sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum by way of excessive and unreasonable sum of interest and remuneration paid to the partners, thus AO correctly disallowed a sum under section 40A(2)(b).
Assessee contended that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction.
D) AO imposed penalty u/s 271(1)(C) on the basis of addition made by under the head "unaccounted expenses" as unreasonable and excessive interest and remuneration to the partners. CIT (A) deleted the penalty observing that the sums were out of unaccounted expenditure subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Though disallowance could have been made in assessment proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.
Assessee contended that the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee. The assessee declared its income including disclosure of Rs.42 lacs. Thus, penalty should be deleted. Further, interest as well as remuneration expenses u/s. 40(b) were incurred on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite penalty.
After hearing both the parties, the ITAT held that,
A) ++ the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, the said ground is dismissed;
B) ++ the appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income u/s 69C, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed;
C) ++ AO is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act;
D) ++ the assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, the penalty is correctly deleted by CIT (A).
A) Assessee a partnership is engaged in construction business and had a project of shopping complex. A survey u/s 133A was carried out in which two diaries were found wherein unaccounted withdrawals by partners and unaccounted expenses were found. A statement of partner of the firm was also recorded in which he declared additional income of Rs. 42 lacs. Assessee was following project completion method of accounting. AO rejected the books of account. CIT (A) confirmed the action of rejection of books u/s 145 by AO. Assessee contended that there was no defect pointed out by AO before applying section 145.
B) AO confirmed an addition on the basis of dairies found for unaccounted expenses. Assessee adjusted the amount against work-in-progress after crediting the additional income disclosed. AO made addition stating that during the course of survey, the books of account by the current assessment year were not found. No stock register was maintained by the assessee firm and no details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
CIT (A) confirmed the addition observing that the contention of assessee was that even though the expenses were not found accounted during survey, deduction should be allowed after survey, since the relevant entries were passed in the books of account. It is observed that assessee incurred unaccounted expenses to the extent of Rs. 22.35 lacs and also had unaccounted withdrawal of Rs. 19.60 lacs by partners. Such expenses and such withdrawals could be made only out of unaccounted income. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction.
Assessee contended that the expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. Unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure.
C) AO made disallowance for interest and remuneration paid to partners observing that the same was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. Before CIT (A), assessee contended that CIT (A) confirmed the addition stating that in cases where a payment is covered by Sec. 40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. The payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. An expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. AO observed that assessee had never claimed such huge interest and remuneration in earlier years. It is clear that the assessee claimed the huge amount to neutralize the additional burden due to unaccounted income disclosed. The sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum by way of excessive and unreasonable sum of interest and remuneration paid to the partners, thus AO correctly disallowed a sum under section 40A(2)(b).
Assessee contended that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction.
D) AO imposed penalty u/s 271(1)(C) on the basis of addition made by under the head "unaccounted expenses" as unreasonable and excessive interest and remuneration to the partners. CIT (A) deleted the penalty observing that the sums were out of unaccounted expenditure subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Though disallowance could have been made in assessment proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.
Assessee contended that the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee. The assessee declared its income including disclosure of Rs.42 lacs. Thus, penalty should be deleted. Further, interest as well as remuneration expenses u/s. 40(b) were incurred on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite penalty.
After hearing both the parties, the ITAT held that,
A) ++ the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, the said ground is dismissed;
B) ++ the appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income u/s 69C, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed;
C) ++ AO is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act;
D) ++ the assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, the penalty is correctly deleted by CIT (A).
Assessee's partly allowed
ORDER
Per: T R Meena:
These two appeals filed by the Assessed and Revenue, which have emanated from the orders of CIT(A)-II, Surat, dated 05-01-2010 for A.Y. 2004-2005 in both cases. These two appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First we take, ITA No.4421/Ahd/2007
Grounds of assessee's appeal are as under:
"(1) learned D.C.I.T. of I.T. has erred in law and on facts to invoke the provisions of the Act and to make additions to the returned income without pointing out any defects in the accounts maintained and produced before him and Accounting method consistently followed by the appellant. Learned CIT(Appls) has also erred in confirming I.T.O.'s action.(2) Addition Rs.22,35,685/- made solely on the basis of the statement of one of the partners and impounded dairies during the survey proceedings being contrary to Honourable CBDT's circular is not legal. Learned CIT(Appls) has also erred in confirming D.C. of IT's action.(3) After the amendment of assessing partners, sec.40(b) of I..Act, 1961 overides all other sections. Remuneration to the working partners if paid as per the specified limits, learned DCIT is not justified to disallow such claim made on the basis of books profit shown by the appellant. Learned DCIT and CIT(Appls) has erred in confirming disallowance of Rs.19,17,916/- on this score.(4) Learned D.C. and CIT(Appls) has erred to add an amount of Rs.22,35,685/- claimed against disclosed income and Rs.69,43,250/- amount credited under the head work in progress. There is no possibility to earn book profit of Rs.26,87,800/-. Thus additions made by DC of IT and confirmed by CIT(Appls) is not proper and just."
3. Originally, in this case, the ld. Co-ordinate 'D' Bench, Ahmadabad has dismissed the assessee's appeal by applying the CIT vs. Multiplan India (Pvt.) Ltd., 38 ITD 320 (Del) = (2003-TIOL-85-ITAT-DEL), which was recalled by the M.A. No. 05/Ahd/2011 by 'D' Bench, vide order dated 02.03.2012.
4. The first ground of assessee's appeal is against the appellant had challenged the rejection of books account u/s.145(3) of the IT Act. The assessee is a partnership firm engaged in the business of construction. The assessee had the project of construction of the shopping complex of Bhagvati Ashish-1 & Bhagwati Ashish-2, City Light road behind Petrol Pump, Surat. A survey u/s.133A of the IT Act was carried out on 11.09.2003. During the course of survey, the books of account as per Annexure-B and cash of Rs.15,400/- was found. During the course of survey, two diaries were found wherein the following unaccounted matters were found recorded. These two diaries were impounded u/s.133A(1)(ia) of the Act. During the course of survey, statement of Shri Dhansukhbhai Rajput, partner of the firm was recorded. In answer to question no.19, he had declared additional income of Rs.42,00,000/-.
| Red Narmada diary Bhagwati Ashish-1 | Green Darshna diary Bhagwati Ashish-2 | Total | |
| Unaccounted withdrawal by partners as per diary | Rs.18,20,000/- | Rs.1,40,000/- | Rs.19,60,000/- |
| Unaccounted expenses as per diary | Rs.15,63,111/- | Rs.6,72,574/- | Rs.22,35,685/- |
Total | Rs.34,83,111/- | Rs.8,12,574/- | Rs.41,95,685/- |
The appellant followed project completion method of accounting. The assessee had shown work in progress at Rs. 89,43,250/- and had claimed deduction of Rs.22,35,685/- as work in progress i.e. unaccounted expenses recorded in the diary for which no bill and vouchers were found during the course of survey. The ld. A.O. rejected the books of account u/s.145 of the IT Act, which has been confirmed by the ld. CIT(A). The ld. A.R. of the appellant submitted that there was no defect pointed out by the A.O. before applying the Section 145 of the IT Act. After considering the argument of the both parties, the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, we dismiss the ground no.1.
5. Ground no.2 of the assessee's appeal is against confirming the addition of Rs.22,35,685/-. During the survey, Red Narmada diary Bhagwati Ashish-1 & Green Darshna diary Bhagwati Ashish-2 were found and impounded in which unaccounted expenses were recorded by the assessee in total Rs.22,35,685/-. The A.O. gave reasonable opportunity of being heard on this issue, as the appellant has adjusted this amount against the work in progress, after crediting the additional income of disclosed, during the course of survey at Rs.42,00,000/-. The ld. A.O. after relying upon the Hon'ble Delhi High Court decision in case of Yadu Hari Dalmiya vs. CIT (1980) 126 ITR 48 (Delhi), he had disallowed the expenses. Further he has observed that during the course of survey, the books of account by the current assessment year were not found. It is also stated by A.O. that no stock register was maintained by the assessee firm. No details of expenses on construction or other administrative expenses or payment of interest and remuneration to the partner was available at the time of survey.
6. The assessee carried the matter before the CIT(A) who had confirmed the addition by observing as under:
"6. I have carefully considered both the position. The basic contention of the Assessee is that, even though the expenses to the extent of Rs.22,35,685/- were found not accounted for in course of the survey, yet, after the survey, since the relevant entries were passed in the books of account the same should be allowed as a deduction. In other words, even though the Assessee had made a disclosure of unaccounted income of Rs.22,35,685/- yet, unaccounted, expenses of Rs.42,00,000/- should have been allowed to be adjusted against such income and only the balance amount could be brought to tax. Such a proposition is simply not acceptable. In course of the survey, it was clearly found that the Assessee had incurred unaccounted expenses on the construction activity to the extent of Rs.22,35,685/-. At the same time, the partners of the assessee firm were found to have made unaccounted withdrawals of Rs.19,60,000/-. Quite obviously, such expenses could have been incurred and such withdrawals made only out of unaccounted income. It follows therefore, that the total sum of Rs.41,95,685/- (para-2) represented the unaccounted income of the Assessed for the year under consideration. It is for this reason that the Assessed had made a disclosure of Rs.42 lacs. Once such unaccounted income had been detected and accepted by the Assessed, a part of the same income could not be claimed as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as 'income' It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction. Thus, the claim of the AR that the unaccounted expenses should have been reduced from the unaccounted income, is without any logical basis. His further contention that a document has to be utilized as a whole and not in part, is also not relevant to the point dealt herein. The AO therefore, was fully justified in disallowing the claim of deduction. The addition of the sum of Rs.22,35,685/- is therefore, confirmed."
7. Now the assessee is before us. Ld. Counsel for the appellant submitted that there was a survey u/s.133A and the appellant had disclosed Rs.42 lacs during the course of survey, which has been credited in the p&l account of the A.Y. 04-05. The appellant had incurred expenses, which were unaccounted as per diary impounded by the department. He argued that this expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. He relied upon the following cases for claiming of these expenses:
i. CIT vs. P.D. Abrahm Alias Appachan and Others (2012) 252 CTR 407 = (2012-TIOL-356-HC-KERALA-IT) - In respect of unaccounted expenditure explanation to section 37(1) and proviso to section 69C cannot be made applicable.ii. Laxmanbhai R. Jalu vs. ITO, ITA No.1772/Ahd/2005 A.Y. 2002-03 - Condition to invoke provisions of section 69C cannot be made applicable.iii. CIT vs. Radhika Creation, ITA NO.692 of 2009 = (2010-TIOL-314-HC-DEL -IT) Jd. Dtd. 30.04.2010 - Weather expenses can be disallowed u/s 69C when there is assessee's admission that it was not in a position to produce vouchers or authenticate the genuineness of exp.iv. CIT vs. Lakshmi Hospital (2011) 245 CTR 0471 = (2011-TIOL-452-HC-KERALA-IT) - Against unaccofunted income disclosed in search, department is bound to give deduction of expenses, if proved, against such income.v. Dhanvarsha Builders & Developers P. Ltd. v. Dy. CIT (2007) 289 ITR (AT) 50 Pune = (2006-TIOL-239-ITAT-PUNE) - The expenditure around sum of Rs.40 lakhs became admissible to the assessee as cash expenditure in relation to cash receipts of the assessee.vi. CIT vs. Navsari Cotton Mills 135 ITR 546 (Guj.) – Conditions to claim expenses u/s 37 of I.T. Act.
Ld. Counsel contended that unaccounted expenditure cannot be disallowed u/s.69C of the IT Act and onus on revenue to prove the existence and source of the expenditure. Therefore, these expenses are allowed. At the outset, ld. Sr. D.R. relied upon the orders of the lower authorities and requested to confirm the addition.
8. We have heard the rival contentions and perused the material on record. The appellant had made disclosure of income of Rs.42,00,000/- during the course of survey, it means additional income after all deductions. The appellant had applied its unaccounted income in expenditure and kept outside the regular books of account. Therefore, case laws referred by the assessee is not squarely applicable. The total disclosure made by the appellant is unaccounted income which has been detected by the department and admitted by the assessee. Therefore, it is a deeming income to the extent of Rs.22,35,685/- u/s.69C of the IT Act, as the assessee has not explained the source of these expenses. Accordingly, this ground of appeal is confirmed.
9. The third ground of appeal is against not allowing the remuneration to the working partners u/s.40(b) of the I T Act. The A.O. observed that the appellant had claimed deduction of huge amount of interest and remuneration to partners as under:
| A.Y. 2004-05 | A.Y. 2003-04 | |
| Interest to partners | Rs.13,17,187/- | Rs.5,65,169/- |
| Remuneration to partners | Rs.6,00,729/- | Rs. Nil |
Total | Rs.19,17,916/- | Rs.5,65,169/- |
As per A.O., it was held that the interest and remuneration to the partner was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. The A.O. gave reasonable opportunity of being heard on this issue. After considering the assessee's reply and various case laws mentioned in paragraph nos. 14 to 19 held that the interest and remuneration paid to the partners compared to immediate preceding year was not reasonable. Thus, he made addition of Rs.19,17,916/-
10. The assessee carried the matter before the CIT(A) who had confirmed the addition which is reproduced as under:
"9.5 I have carefully considered the view taken by the AO as also the written submissions of AR. First of all, the ratio of the case of Yoganand Textiles (supra) does not apply to the facts of the Assessee's case. This is because, in that case, the Hon. Court was dealing with the scope of sec. 40(b) as it stood prior to its substitution by the Finance Act, 1992 with effect from 1.04.1993. The order of the Hon. Court is dated 20.9.1999. However, a close study of the text shows that as per the Hon. Court, the word 'any' in section 40(b) is a word of wide importance, which imposes an absolute embargo against deduction in respect of any payment made by a firm to any partner of the firm. There was nothing in the provisions to indicate that any category of salary, remuneration etc. paid to a partner could fall outside the scope of such provisions. The Hon. Court further held that the prohibition against the deduction of the amounts of the nature covered under clause (b) of Sec.40 is not dependent on whether or not such payment is made for the purpose of earning profit or whether it is made out of the profit and, if any such distinction is to be read in clause (b) of sec. 40, it would be unreal. The Hon. Court then went on to observe that the provisions of sec. 40A have effect notwithstanding anything contained to the contrary in any of the provisions of the Act relating to the computation of income under the head of "Profits and gains of business or profession". Sub. Sec.2(a) and (b) inter-alia, provide that, where the Assessee incurs an expenditure in respect of which payment was made or is to be made to any person including a partner of the firm, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable, so much of the expenditure as is considered excessive or unreasonable shall not be allowable as a deduction under the provisions of sub sec (2) of Sec.40-A. It is clear that the payments made to a partner which covered by sec. 40A(2) are of the nature other than those which are prohibited by clause (b) of Sec. 40. In other words, it is in cases where payments other than those which are covered by clause (b) of Sec. 40 are made to the partner, that the question of excessiveness or unreasonable has of the payments may arise, which would be governed by the provisions of Sec.40A(2).10.1 A perusal of the view recorded by the Hon. Court clearly shows that the case of Yoganand Textiles (supra) is of no help to the Assessee, and in fact supports the position taken by the AO. Therefore, there is no merit in the contention of the AR that in cases where a payment is covered by Sec.40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. These are contained in sub-clauses (i) to (v) r.w. the proviso, as also the Explanation below the said section. As per the decision for the Hon. Gujarat High Court, the payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. It goes without saying that once a payment made by the firm is not allowable as a deduction u/s. 40(b) of the IT Act, there remains no scope for such payment to be considered under Sec. 40A(2)(b) of the Act. On the other hand, an expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. Therefore, it is fallacious on the part of the AR to contend that since, the interest and remuneration paid to the partners was covered by Sec. 40(b), the provisions of Sec. 40A(2)(b) would not apply. Therefore, the AR's submissions regarding the partners being actively engaged in the day to-day conduct of the business etc. is also of no relevance at all.10.2 On the other hand, the AO noted that the Assessee had never claimed such huge interest and remuneration to the partners in the earlier years, even though, it has been claimed by the AR that, in the year relevant to the AY 2001-02, a total remuneration of Rs.5,99,842 had been paid to the partners. Whatever may have been the terms and conditions laid down in the partnership deed yet, in the year under consideration, it was absolutely clear that the Assessee had claimed the payment of interest totalling Rs.19,17,916 simply to neutralise the additional burden of tax that had arisen due to the unaccounted income disclosed in course of the survey. Moreover, as correctly pointed out by the AO, in the case of M/s. Whiteline Chemicals (supra) the Hon. ITAT has clearly held that the income which is disclosed in course of a survey would have to be shown in the return of income in addition to the normal current year's profit. This meant that the Assessee could not have credited the disclosed some to the profit and loss account and could not have claimed any expenditure against the same. Apart from the principle of accounting of disclosure laid down by the Hon. ITAT, what has to be appreciated is that, the sum which is disclosed as unaccounted is essentially an 'income', which means that it is net of all expenses. Therefore, no expenditure could be further claimed against the same sum after the disclosure is made. Since, the Assessee had incorrectly credited the disclosed sum of Rs.42,00,000/- in the P & L A/c. and had debited expenses against the same, which included the excessive and unreasonable sum of Rs. 19,17,916 as interest and remuneration paid to the partners, the AO was fully justified in disallowing the same under the provisions of section 40A(2)(b) of the Act. The action of the AO was justified in view of the case-laws relied upon by him, as also in view of the decision of the Gujarat High Court in the case of Yoganand Textiles (supra) which ironically has been relied upon by the AR. The action of the AO is therefore sustained, and the disallowance of Rs.19,17,916 is confirmed."
11. Now the assessee is before us. The ld. A.R. of the appellant submitted that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. He further argued that Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction. He relied upon following cases:
i. Munjal Sales Corp. vs. CIT & Anr. (2008) 298 ITR 298 (SC) = (2008-TIOL-26-SC-IT) - Conditions for claiming deduction u/s. 40(b)(iv) i.e. partner's capital interest vis-à-vis interest allowable u/s.36(iii) of IT Act.ii. CIT vs. Yoganand Textiles 202 ITR 869 (Guj.) - Section 40A is not applicable to payments covered by section 40(b).iii. DCIT Circle-6, Surat vs. Om Terrace, ITA No. 440/Ahd./2012 - Deduction u/s.40(b), in accordance with partnership deed, is allowable from undisclosed income declared in survey/search.iv. Gist of severat judgments - Deduction u/s 40(b)(iv) and 40(b)(v) allowable against undisclosed income.v. CIT & Anr. Vs. S.K. Srigiri & Bros. 298 ITR 13 (Karn-HC) - Deduction u/s 40(b)(iv) and 40(b)(v) allowable against income disclosed in survey.vi. Kathiawadi Hotel vs. ITO, Valsad, ITA No. 827/Ahd/2007 - Deduction u/s. 40(b)(iv) and 40(b)(v) allowable against disclosure of stock in survey.vii. S.K. Engineering v. Jt. CIT 14(II) ITCL 51 (Bang.Trib) - Without giving finding as to what was the excessive or unreasonable portion in total expenses, expenses could not be disallowed on the ground that in earlier year it was paid at lower rate was not justified.viii. Chhaged Steel Corporation vs. ACIT 77 ITD 0419 - Section 40A(2)(b) will not be applied for computing deduction u/s.40(b).
At the outset, ld. Sr. D.R. relied upon the orders of CIT(A) & A.O. and requested to confirm the order of the CIT(A).
12. We have perused the orders and gone through the case laws referred by the A.R. The appellant heavily relied in case of CIT vs. Yoganand Textiles 202 ITR 869 (Guj.) for A.Y. 1976-77, order dated 20th September, 1991, wherein it was held that any amount paid by way of the salary, bonus, commission or remuneration to the partners – scope of Section 40(b) – Provision is very wide and imposes absolute embargo – Section 40(b) does not envisage splitting up capacities in which a partner works – Section 40A is not applicable to payments covered by Section 40(b) of the Income Tax Act. The ld. CIT(A) had interpreted words 'any' Section 40(b) and held that disallowance u/s.40A can be made on the basis of excessive and reasonableness of the expenses from the interest payment and remuneration to the partner by the firm. The Co-ordinate 'D' Bench in case of DCIT Circle-6, Surat vs. Om Terrace, ITA No. 440/Ahd./2012, held by following the Ahmadabad 'D' Bench decision in case of M/s. Arihant Enterprise vs. DCIT, Cir-3, Surat, as under:
"6. Since our coordinate Benches had decided the issue of granting deduction in respect of salary worked out as per the provisions of Section 40(b) of the Act and in accordance with the partnership deed from the undisclosed income disclosed during the course of survey considering the same as business income as cited in the decisions supra, we do not have any hesitation to uphold the decision of the learned CIT(A) in this case before us because the facts are identical. It is ordered accordingly."
After considering the Co-ordinate 'D' Bench decision dated 11.05.2012, in case of DCIT Circle-6, Surat vs. Om Terrace (supra), the A.O. is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act. This ground of appeal is set aside.
13. Ground no.4 of assessee's appeal is not pressed by the ld. A.R. Accordingly, it is dismissed as not pressed.
14. In the result, assessee's appeal is partly allowed.
15. Now, we take ITA No.1212/Ahd/2010
Ground of Revenue's appeal is as under:
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting penalty levied by the AO of Rs.14,53,760/- for concealment of income."
16. Revenue's appeal is against deleting the penalty by the CIT(A) at Rs.14,53,760/-. The A.O. imposed penalty u/s. 271(1)(C) vide penalty order dated 27.03.2009 for A.Y. 04-05 (wrongly mentioned A.Y. 05-06 by both the authorities) on the basis of addition made by the A.O. under the head "unaccounted expenses" of Rs.22,35,685/- as unreasonable and excessive interest and remuneration to the partners at Rs.19,17,916/-. This penalty was imposed by the A.O. on the basis of ld. CIT(A)-II, Surat had dismissed the assessee's appeal in quantum case.
17. The assessee carried the penalty matter before the CIT(A) who had deleted the penalty by observing as under:
"6. I have carefully considered the view taken by the AO as also the written submission of the AR. First of all, it must be accepted that the unaccounted expenses of Rs.22,35,685/- was included in the total disclosure of Rs.42 lacs made during the survey. The break-up of this sum has been shown by the AO in para-4 of the penalty order, according to which this sum included Rs.15,63,111 on the basis of a diary pertaining to the Bhagwati Ashish-1 project, and Rs.6,72,574/- as recorded in a diary pertaining to the Bhagwati Ashish-2 project. These sums were subsequently accounted for in the books of account after the survey. The accounting results which emerged at the end of the relevant financial year and which was incorporated in the return of income, could not be treated as representing the furnishing of inaccurate particulars of income or the concealment of income. Even though the disallowance of the said sums would have been justified in asst. proceedings yet, there was no ground to treat such disallowance as representing the furnishing of inaccurate particulars of income or even the concealment of income.6.1 The next disallowance made by the AO was of interest and remuneration paid to the partners, totaling Rs.19,17,916, the details of which have been shown by the AO in para-6 of the penalty order. Once again, even though such disallowance could have been made in asst. proceedings as being unreasonable and excessive by applying the provisions of sec.40A(2)(b) of the IT Act, yet, such disallowance/addition could not be treated as representing the furnishing of inaccurate particulars of income or even the concealment of income.6.2 Given such facts and circumstances of the case, it is held that there was no basis for the AO to levy any penalty u/s.271(1)(C) of the IT Act. The penalty of Rs.14,53,760/- will therefore have to be deleted."
18. Now, the revenue is before us. Ld. Sr. D.R. requested to restore back the order of the A.O. as he rightly imposed the penalty u/s.271(1)(C) on claiming unaccounted expenses as well as unreasonable and excessive interest and remuneration to the partner. At the outset, ld. Counsel for the appellant has submitted that both items of addition made by the A.O., had been disclosed in the regular books of account. Nothing has been concealed by him. He further relied in case of Rayala Corporation (P) Ltd. Vs. UOI & Ors. (2007) 15 (I) ITCL 476,CIT vs. Manu Engineering Works (1980) 122 ITR 306 (Guj), ITAT, Ahmadabad decision inNavinbhai M. Patel vs. ITO (1988) 27 ITD 411, Hon'ble Apex Court decision in case of UOI vs. Dharmendra Textile Processors [2008] 306 ITR 277 (SC) = (2008-TIOL-192-SC-CX-LB), CIT vs. Atul Mohan Bindal [2009] 317 ITR 1 = (2009-TIOL-97-SC-IT), Dilip N. Shroff v. JCIT [2007] 291 ITR 519= (2007-TIOL-96-SC-IT), CIT vs. Ram Commercial Enterprise Ltd. v. CIT [2000] 246 ITR 568 (Delhi) = (2003-TIOL-69-HC-DEL-IT), T. Ashok Pai v. CIT [2007 292 ITR 11 (SC) = (2007-TIOL-98-SC-IT),CIT vs. SAS Pharmaceuticals & CIT vs. Reliance Petro Product Pvt. Ltd. and claimed that during the course of survey whatever discrepancy was found had been disclosed by the assessee by offering the addition of amount of Rs.42 lacs. Since, the survey was conducted on 11.09.2003 in F.Y. 03-04, for that assessment year, the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured when the income tax return was ultimately filed by the assessee on 01.11.2004. The assessee declared its income of Rs.7,67,840/- including disclosure of Rs.42 lacs. Therefore, he requested to confirm the order of the CIT(A). The assessee has claimed interest as well as remuneration expenses u/s. 40(b) on the basis of terms and conditions of partnership deed. Therefore, mere disallowance of claim would not invite the penalty u/s.271(1)(C).
19. We have heard the rival contentions and perused the material on record. The assessee had not concealed any income or not furnished any inaccurate particulars of income. As assessee disclosed the claim in the return and interest and remuneration to the partner claimed as per Section 40(b) of the IT Act. The addition is debatable. Therefore, we confirm the order of the CIT(A).
20. In the result, the revenue's appeal is dismissed.
21. In the combined result, Assessee's appeal is partly allowed and Revenue's appeal is dismissed.
(These Orders pronounced in open Court on 19.4.2013)
IT :Appellate Commissioner has power to grant stay pending appeal
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[2013] 34 taxmann.com 242 (Gujarat)
HIGH COURT OF GUJARAT
Uttar Gujarat Vij Co. Ltd.
v.
Assistant Commissioner of Income-tax , Circle - 4*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 3193 OF 2013
APRIL 16, 2013
Section 250 of the Income-tax Act, 1961 - Commissioner (Appeals) - Powers of [Power to grant stay] - Assessment year 2011-12 - Assessing Officer framed assessment of petitioner for relevant assessment year and immediately thereafter sent a demand notice for recovery - Petitioner requested Deputy Commissioner to postpone recovery till appeal of petitioner against assessment order was disposed of - Revenue did not accede to petitioner's request - Thereafter, petitioner filed instant petition - Whether Appellate Commissioner has power to grant stay pending appeal - Held, yes - Whether, therefore, petitioner should file application for stay pending appeal before Appellate Commissioner and till then there would be no recovery against petitioner arising out of order of assessment - Held, yes [Paras 5 & 6] [In favour of assessee]
FACTS
| ■ | For the relevant assessment year, the Assessing Officer after framing assessment sent a demand notice for recovery asking the petitioner to pay the sum within 30 days of the receipt of the notice. | |
| ■ | The petitioner requested the Deputy Commissioner to postpone the recovery till the appeal of the petitioner was disposed of. | |
| ■ | The revenue did not accede to the petitioner's request therefore, the petitioner filed the instant petition. |
HELD
| ■ | The recovery notice was issued even without waiting for the limitation period for filing the appeal to expire. Particularly, when the petitioner was a Government company, one wonder why such extraordinary urgency was shown. [Para 3] | |
| ■ | When the petitioner's appeal against assessment order is pending before the Commissioner, in facts of the case, it would be appropriate to allow the Commissioner to decide whether and on what conditions the recovery pending appeal should be stayed. [Para 5] | |
| ■ | In a recent decision in case of Maheshwari Agro Industries v. Union of India [2012] 346 ITR 375/206 Taxman 375/17 taxmann.com 68 (Raj.), the Rajasthan High Court has taken a view that the Commissioner would have the power to grant stay pending appeals. [Para 5] | |
| ■ | The petition is disposed of with the following directions: |
| (a) | The petitioner shall file petition/application for stay pending appeal before the Commissioner. | |
| (b) | If so done, the Commissioner shall after hearing the petitioner, pass such order as he thinks fit in accordance with law. | |
| (c) | Till this is done, there shall be no recovery against the petitioner arising out of order of assessment. [Para 6] |
CASES REFERRED TO
UTI Mutual Fund v. ITO [2012] 345 ITR 71/206 Taxman 341//19 taxmann.com 250 (Bom.) (para 4), KEC International Ltd. v. Balakrishnan[2001] 251 ITR 158/119 Taxman 974 (Bom.) (para 4), Maheshwari Agro Industries v. Union of India [2012] 346 ITR 375/206 Taxman 375/17 taxmann.com 68 (Raj.) (para 5) and ITO v. Mohammed Kunhi [1969] 71 ITR 815 (SC) (para 5).
Manish J. Shah for the Appellant. K.M. Parikh for the Respondent.
ORDER
Akil Kureshi, J. - The petitioner Uttar Gujarat Vij Company Ltd. has filed this petition challenging a demand notice dated 12.12.2013 as at Annexure-C to the petition issued by the respondent. In view of the ultimate conclusion that we have arrived at, it may be sufficient to record facts very briefly.
2. For the assessment year 2011-2012, the Assessing Officer framed assessment on 31.1.2013. Almost immediately thereafter, on 12.2.2013, he sent a demand notice for recovery of sum of Rs.69,87,04,100/- asking the petitioner to pay the sum within 3 0 days of the receipt of the notice. Such notice was received by the petitioner on 15.2.2013. On 27.2.2013, the Assessing Officer issued yet another notice reminding the petitioner that such amount was due for payment on 14.3.2 013. On 7.3.2013, the petitioner requested the Deputy Commissioner of Income Tax to postpone the recovery till the appeal of the petitioner is disposed of. We are informed that such appeal was filed on 12.3.2013. Since the department did not accede to the petitioner's request, the present petition has been filed.
3. We notice that the recovery notice was issued even without waiting for the limitation period for filing the appeal to expire. Particularly, when the petitioner was a Government company, we wonder why such extraordinary urgency was shown.
4. Learned counsel for the petitioner relied on the decision of Division Bench of Bombay High Court in case of UTI Mutual Fund v. ITO [2012] 345 ITR 71/206 Taxman 341/19 taxmann.com 250, in which, on facts of the case, the demand notice was quashed and recovery was suspended till the appeal is decided. In the said decision, the Court had referred to earlier decision in case of KEC International Ltd. v. Balakrishnan [2001] 251 ITR 158/119 Taxman 974 (Bom.), in which the Bench had laid down following guidelines for recovery pending the appeal:
| "(a) | While considering the stay application, the authority concerned will at least briefly set out the case of the assessee. | |
| (b) | In cases where the assessed income under the impugned order far exceeds returned income, the authority will consider whether the assessee has made out a case for unconditional stay. If not, whether looking to the questions involved in appeal, a part of the amount should be ordered to be deposited for which purpose, some short prima facie reasons could be given by the authority in its order. | |
| (c) | In cases where the assessee relies upon financial difficulties, the authority concerned can briefly indicate whether the assessee is financially sound and viable to deposit the amount if the authority wants the assessee to so deposit. | |
| (d) | The authority concerned will also examine whether the time to prefer an appeal has expired. Generally, coercive measures may not be adopted during the period provided by the statute to go in appeal. However, if the authority concerned comes to the conclusion that the assessee is likely to defeat the demand, it may take recourse to coercive action for which brief reasons may be indicated in the order. | |
| (e) | We clarify that if the authority concerned complies with the above parameters while passing orders on the stay application, then the authorities on the administrative side of the Department like respondent No. 2 herein need not once again give reasoned order. |
The above parameters are not exhaustive. They are only recommendatory in nature."
5. When the petitioner's appeal is pending before the Appellate Commissioner, in facts of the case, we are of the opinion that it would be appropriate to allow the Appellate Commissioner to decide whether and on what conditions the recovery pending appeal should be stayed. We notice, as pointed out by the counsel Shri Ketan Parikh for the Revenue, that in a recent decision in case of Maheshwari Agro Industries v. Union of India [2012] 346 ITR 375/206 Taxman 375/17 taxmann.com 68 (Raj.), Rajasthan High Court has taken a view that the Appellate Commissioner would have the power to grant stay pending appeals. Court had referred to and relied upon the decision of the Supreme Court in case of ITO v. Mohammed Kunhi [1969] 71 ITR 815 holding that the Income Tax Appellate Tribunal would have inherent powers to grant stay pending appeal and also relied on section 220(6) of the Income Tax Act, which authorises the Assessing Officer where the appeal is pending on his discretion and subject to such conditions as he may think fit to treat the assessee as not being in default in respect of the amount in dispute in the appeal.
6. Under the circumstances, this petition is disposed of with the following directions :
| (1) | The petitioner shall file petition/application for stay pending appeal before the Appellate Commissioner. This shall be done latest by 30.4.2013. | |
| (2) | If so done, the Appellate Commissioner shall after hearing the petitioner's authorised representative, pass such order as he thinks fit in accordance with law. The petitioner shall cooperate with early hearing and disposal of such application. | |
| (3) | The Commissioner shall dispose of such application preferably by 30.6.2013. | |
| (4) | Till this is done, there shall be no recovery against the petitioner arising out of order of assessment. |
7. It would be open for the petitioner also to request the Appellate Commissioner for early disposal of the appeal which the Commissioner may consider depending on availability of time on hand.
8. Disposed of accordingly.
ST : Department cannot recover service tax during pendency of stay application before Tribunal; and Union of India must establish as many number of Benches of CESTAT for early disposal of appeals/stay applications
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[2013] 34 taxmann.com 251 (Karnataka)
HIGH COURT OF KARNATAKA
Karnataka Industrial Areas Development Board (KIADB)
v.
Union of India*
RAM MOHAN REDDY, J.
WRIT PETITION NO. 14181 OF 2013 (T-TAR)
MARCH 25, 2013
Section 87 of the Finance Act, 1994 - Recovery of any amount due to Central Government - Department initiated recovery proceedings during pendency of assessee's stay application before Tribunal - Assessee argued that Bangalore Bench of Tribunal had jurisdiction over 3 states i.e., Karnataka, Andhra Pradesh and Kerala and pendency of appeal and stay application was on account of non-constitution of Bench and, therefore, Revenue ought to have refrained itself from issuing any demand notice until consideration of stay application - HELD : Failure on part of Union of India in not making appointment of a judicial member to CESTAT cannot be said to be due to assessee's lapse - When assessee cannot be held responsible for non-constitution of Bench of CESTAT, demand notice issued by Department required interference - Union Government must wake up to clarion call and constitute any number of Benches as may be required for speedy disposal of appeals - Accordingly, a direction was issued : (1) to department not to recover arrears of service tax and await orders of CESTAT over stay application filed by assessee ; and also (2) to Union of India, by way of a writ of mandamus, to constitute and establish as many number of Benches of CESTAT for three southern states of Karnataka, Andhra Pradesh and Kerala forthwith and file a report thereof with Registrar General of the High Court on or before 3-6-2013, failing which matter would be taken seriously [Paras 2 to 4] [In favour of assessee]
Circulars and Notifications : Circular No. 967/1/2013-CX., dated 1-1-2013
EDITOR'S NOTE
The CBEC Circular No. 967/1/2013-CX., dated 1-1-2013, which mandated issuance of impugned demand notice, has brought too much disgrace to the CBEC as well as the Union of India. Nevertheless, it has led to revelation of lack of willpower with the Union of India to create speedy justice delivery systems. It is too much doubtful whether this direction will be fulfilled in toto by the Union of India; it is expected that the Union of India will either seek extension or cite its inability to comply with the directions.
K.S. Naveen Kumar and S. Sivakumar for the Appellant. Jeevan J. Neeralgi for the Respondent.
JUDGMENT
1. Having heard the learned counsel for the parties, perused the pleadings, undoubtedly the appeal preferred by the petitioner is pending consideration before the CESTAT which has jurisdiction over 3 states ie., Karnataka, Andhra Pradesh, Kerala. The pendency of the appeal and the application for interim stay is on account of non re-constitution of the Bench, which was reconstituted sometime during February 2013. If that is so, then the respondent-Revenue ought to have refrained itself from issuing any demand notice until such time the interlocutory application for stay of the amount due, subject-matter of appeal, is considered by CESTAT.
2. The failure on the part of the Union of India in not making appointment of a judicial member to CESTAT, it cannot be said that it is due to petitioner's lapse that the appeal and the IA for stay are not considered by CESTAT. When the petitioner cannot be held responsible for the non-constitution of the Bench of CESTAT, undoubtedly the demand notice issued by the respondent calls for interference.
3. Learned counsel for the parties submit that there are any number of Benches of CESTAT up north, while down south, more appropriately for the 3 states, supra, there is only one Bench and large number of matters are pending consideration. If that is so, then the Union Government must wake up to the clarion call and constitute any number of Benches as may be required for speedy disposal of the appeals. Though no relief is sought for in the petition for a writ of mandamus to direct the 1st respondent - Union of India to constitute additional Benches of CESTAT for the southern states, it is appropriate to issue necessary directions.
4. In the result, this petition is allowed in part. A direction is issued to the respondent not to recover the arrears of service tax pursuant to the demand notice, Annex.E and await orders of CESTAT over the application filed along with the appeal by the petitioner for interim stay of the demand impugned therein. A direction is issued to the 1st respondent - Union of India by way of a writ of mandamus to constitute and establish as many number of Benches of CESTAT for the 3 southern states of Karnataka, Andhra Pradesh and Kerala forthwith and file a report with the Registrar General of the High Court by way of compliance, on or before 3/6/2013, failing which the matter would be takes seriously.
VINEET ST/ECJ : In case of a transport operation effected between two points within national territory of India, service tax is leviable even where a part of that journey is completed outside its national territory
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[2013] 32 taxmann.com 34 (ECJ)
EUROPEAN COURT OF JUSTICE
Trans Tirreno Express SpA
v.
Ufficio Provinciale IVA*
K. BAHLMANN, PRESIDENT
O. DUE AND F. SCHOCKWEILER, JJ.
O. DUE AND F. SCHOCKWEILER, JJ.
CASE 283/84
JANUARY 23, 1986
Section 66C of the Finance Act, 1994, read with rule 11, rule 2(d) and rule 2(g) of the Place of Provision of Services Rules, 2012 - Place of provision of services - Passenger Transport Services - In case of a transport operation effected between two points within national territory of India, service tax is leviable even where a part of that journey is completed outside its national territory [Para 21] [In favour of revenue]
FACTS
Facts
| ■ | The assessee M/s. Trans Tirreno Express Spa, was engaged in carriage of passengers and goods by ship between the Port of Livorno, on the Italian mainland, and Olbia, in Sardinia. | |
| ■ | The Department sought to charge VAT in respect of the whole distance, including that part of the route which passed through international waters. | |
| ■ | The assessee was unwilling to pay the proportion of the tax demanded relating to the part of the route which passes through international waters. |
Statutory Provisions, Sixth Council Directive 77/388/EEC of 17 May, 1977
| ■ | Article 9(2)(b) : As regards transport services, the place where such services are supplied "shall be the place where transport takes place, having regard to the distances covered". |
Issue Involved
| ■ | Does Article 9(2)(b) of the sixth Directive make only distances crossed within the territory of Member States in the course of international transport (from state to state) subject to VAT or is national transport (from one point to another in the same Member State) which is carried out, as in this case, mainly in extra-territorial waters also subject thereto ? |
HELD
Objective of Article 9 :
| ■ | The territorial scope of the Directive is defined in Articles 2 and 3. According to Article 2, VAT is charged on the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such. According to Article 3, the territory of the country is the area of application of the Treaty establishing the European Economic Community as defined for each Member State in Article 227. Article 3(2) expressly excludes certain national territories. [Para 13] | |
| ■ | Article 9 is designed to secure the rational delimitation of the respective areas covered by national value added tax rules by determining in a uniform manner the place where services are deemed to be provided for tax purposes. [Para 14] | |
| ■ | In order to avoid conflicts of jurisdiction in cases where the supply of services is covered by the laws of more than one Member State, Article 9(1), by way of derogation from the strict principle of territoriality, lays down the general rule that the service is deemed to be supplied at the place where the supplier has established his business or has a fixed establishment from which the service is supplied. [Para 15] | |
| ■ | Article 9(2) provides for certain derogations from that general rule for specific services where the fiction that the services are supplied at the supplier's place of business is inappropriate and it lays down other criteria defining the place at which those services are deemed to be supplied. [Para 16] |
Place of provision of transport services :
| ■ | According to Article 9(2)(b), in the case of transport services, the place of performance and, therefore, the place of supply for tax purposes is deemed to be the place where transport takes place, having regard to the distances covered. [Para 17] | |
| ■ | It was necessary to make that exception to the general rule laid down in Article 9(1) because a transporter's place of business is not an appropriate reference for establishing territorial jurisdiction for tax purposes. The very nature of the performance of the specific service constituted by transport, which is liable to be effected on the territory of more than one Member State, requires a different criterion, which essentially must make it possible to determine the jurisdiction of each of the states involved for tax purposes. [Para 17] |
Article 9 not applies to transport taking place within a Member State :
| ■ | A transport operation of the type in question in this case, does not give rise to any conflict of jurisdiction as far as the charging of VAT is concerned where the ship effecting the transport plies between two points within a single Member State and where the route chosen, even if part of it is outside the national territory, does not pass through any area falling under the national sovereignty of another state. [Para 18] | |
| ■ | In the case of such transport operations, which may be regarded as purely internal, the territorial scope of VAT must be determined in relation to the basic rules laid down in Articles 2 and 3 of the Directive and not to Article 9. [Para 19] | |
| ■ | Article 9(2)(b), in no way restricts the freedom of the Member States to extend the scope of their tax legislation beyond their normal territorial limits, so long as they do not encroach on the jurisdiction of other states. [Para 20] |
Conclusion - VAT was leviable :
| ■ | Article 9(2)(b) does not prohibit a Member State from applying its value added tax legislation to a transport operation effected between two points within its national territory, even where a part of that journey is completed outside its national territory, provided that it does not encroach on the tax jurisdiction of other states. [Para 21] |
EDITOR'S NOTE
| ■ | As per rule 11 of Place of Provision of Services Rules, 2012, the place of provision in respect of a passenger transportation service shall be the place where the passenger embarks on the conveyance for a continuous journey. Hence, if a passenger embarks in India and disembarks in India only, there can't be any doubt as to charge of service tax thereon in India. |
Guido Berardis for the Appellant. Marcello Conti for the Respondent.
JUDGMENT
1. By an order of 23 November 1984, which was received at the court on 29 November 1984, the Commissione tributaria di secondo grado, sassari, referred to the court for a preliminary ruling under Article 177 of the EEC Treaty a question on the interpretation of Article 9(2)(b) of the sixth Council Directive, no 77/388/EEC of 17 May 1977, on the harmonization of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment (Official Journal 1977, l 145, p. 1, hereinafter referred to as 'the sixth Directive').
background to the dispute
2. according to the information supplied by the national court, the plaintiff in the main proceedings, trans tirreno express spa, carries passengers and goods by ship between the port of livorno, on the italian mainland, and olbia, in sardinia. The ufficio provinciale iva, sassari, seeks to charge trans tirreno vat in respect of the whole distance, including that part of the route which passes through international waters.
3. trans tirreno is unwilling to pay the proportion of the tax demanded relating to the part of the route which passes through international waters and disputes the right of the italian state to charge tax in respect of that part of the route. In that respect it claims that Article 9(c) of presidential decree no 633 of 26 October 1972 (ordinary supplement to italian official state gazette no 292, p. 2), as amended by presidential decree no 94 of 31 March 1979 (italian official state gazette no 93, p. 3011), which fixes the basis of assessment for vat in respect of transport services carried out in the territory of the state 'in proportion to the distance covered therein', implements Article 9(2)(b) of the sixth Directive, under which, in trans tirreno's view, vat may not, by virtue of the principle of territoriality, be charged on journeys which take place outside the national territory.
4. the Commissione tributaria di secondo grado, sassari, considered that in those circumstances it needed to obtain an interpretation of Article 9(2)(b) of the sixth Directive in order to enable it to decide the dispute and that, moreover, it was necessary to apply the relevant Community law uniformly in all the Member States. It therefore requested the Court of Justice to give a preliminary ruling on the following question:
does Article 9(2)(b) of the sixth Directive make only distances crossed within the territory of Member States in the course of international transport (from state to state) subject to vat or is national transport (from one point to another in the same Member State) which is carried out, as in this case, mainly in extra-territorial waters also subject thereto?
observations submitted to the court
5. trans tirreno express spa, the government of the French Republic, the government of the Federal Republic of Germany and the Commission of the European Communities submitted written observations and presented oral argument. The government of the Kingdom of Denmark submitted written observations and the Italian Republic presented oral argument.
6. according to trans tirreno express spa, it follows from a literal and strict interpretation of Article 9(2)(b) of the sixth Directive that that provision endorses the principle of territoriality with regard to taxation and that distances covered in international waters may not and must not be taxed.
7. the government of the Federal Republic of Germany argues on the basis of Articles 2 and 3 of the sixth Directive that extra-territorial waters do not form part of the 'territory of the country' within the meaning of the Directive and that only the part of the voyage completed within the country is subject to vat, even where the transport operation starts and finishes in the same Member State.
8. the government of the French Republic maintains that the sixth Directive requires the Member States to charge vat on transport services only where such services are carried out within their national territory. Outside the national territory Member States are free to decide whether or not to charge vat, as, moreover, the court acknowledged, although in relation to a different provision, in its judgment of 4 July 1985 (case 168/84 berkholz (1985) ecr 2251).
9. the government of the Kingdom of Denmark, for its part, takes the view that the sixth Directive lays down no express rule on the question, but that it must be inferred from the general scheme of the Directive not only that vat may be charged on the parts of the voyage completed in international waters, but that indeed it must be charged in order to avoid abuses whereby unnecesssary detours are made through international waters for the purpose of avoiding the tax. Moreover, the danish government considers that for national vessels in international waters, a transport operation in international waters continues to be covered by national tax rules, since such vessels are within the jurisdiction of the state of registration.
10. the government of the Italian Republic argued that Article 9 of the sixth Directive was intended to resolve conflicts of jurisdiction in cases where the supply of services was governed by the laws of more than one Member State. In its view, there is no such conflict in this case and a solution should be based on Articles 2 and 3 of the sixth Directive. Ultimately it is for each Member State to determine the territorial scope of its vat scheme.
11. the Commission considers that Article 9(2)(b) of the sixth Directive applies solely to the transport of persons. Since the transport of goods is an ancillary service it is governed by other provisions. The transport of persons between two points within the same country is to be regarded as internal transport which under the Directive is subject to national vat, even in respect of the distances completed in international waters, provided that no stop is made in another state.
the reply to be given to the national court
12. in order to reply to the question referred to the court it is necessary to consider the aim of Article 9 in relation to the general scheme of the Directive.
13. the territorial scope of the Directive is defined in Articles 2 and 3. According to Article 2, vat is charged on the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such. According to Article 3, the territory of the country is the area of application of the Treaty establishing the European Economic Community as defined for each Member State in Article 227. Article 3(2) expressly excludes certain national territories.
14. in its judgment of 4 July 1985 (berkholz, cited above) the court held that, as the seventh recital in the preamble to the Directive implies, Article 9 is designed to secure the rational delimitation of the respective areas covered by national value added tax rules by determining in a uniform manner the place where services are deemed to be provided for tax purposes.
15. in order to avoid conflicts of jurisdiction in cases where the supply of services is covered by the laws of more than one Member State, Article 9(1), by way of derogation from the strict principle of territoriality, lays down the general rule that the service is deemed to be supplied at the place where the supplier has established his business or has a fixed establishment from which the service is supplied.
16. Article 9(2) provides for certain derogations from that general rule for specific services where the fiction that the services are supplied at the supplier's place of business is inappropriate and it lays down other criteria defining the place at which those services are deemed to be supplied.
17. thus, according to Article 9(2)(b), in the case of transport services, the place of performance and, therefore, the place of supply for tax purposes is deemed to be the place where transport takes place, having regard to the distances covered. It was necessary to make that exception to the general rule laid down in Article 9(1) because a transporter's place of business is not an appropriate reference for establishing territorial jurisdiction for tax purposes. The very nature of the performance of the specific service constituted by transport, which is liable to be effected on the territory of more than one Member State, requires a different criterion, which essentially must make it possible to determine the jurisdiction of each of the states involved for tax purposes.
18. it should be noted that a transport operation of the type in question in the case pending before the national court does not give rise to any conflict of jurisdiction as far as the charging of vat is concerned where the ship effecting the transport plies between two points within a single Member State and where the route chosen, even if part of it is outside the national territory, does not pass through any area falling under the national sovereignty of another state.
19. in the case of such transport operations, which may be regarded as purely internal, the territorial scope of vat must be determined in relation to the basic rules laid down in Articles 2 and 3 of the Directive and not to Article 9.
20. although, as has been stated above, the territorial scope of the sixth Directive corresponds to that of the EEC Treaty as defined for each Member State in Article 227, and although the rules laid down in the Directive therefore have binding and mandatory force throughout the national territory of the Member States, the Directive, and in particular Article 9(2)(b) thereof, in no way restricts the freedom of the Member States to extend the scope of their tax legislation beyond their normal territorial limits, so long as they do not encroach on the jurisdiction of other states.
21. in reply to the question referred to the court it must therefore be stated that Article 9(2)(b) of the sixth Council Directive, no 77/388/EEC of 17 May 1977, on the harmonization of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, does not prohibit a Member State from applying its value added tax legislation to a transport operation effected between two points within its national territory, even where a part of that journey is completed outside its national territory, provided that it does not encroach on the tax jurisdiction of other states.
Costs
22. the costs incurred by the governments of the Italian Republic, the Federal Republic of Germany, the French Republic and the Kingdom of Denmark and by the Commission of the European Communities, which have submitted observations to the court, are not recoverable. As these proceedings are, so far as the parties to the main proceedings are concerned, in the nature of a step in the proceedings pending before the national court, the Decision on costs is a matter for that court.
OPERATIVE PART
On those grounds, the court (second chamber), in reply to the question referred to it by the Commissione tributaria di secondo grado, sassari, by an order of 23 November 1984, hereby rules:
Article 9(2)(b) of the sixth Council Directive, no 77/388/EEC of 17 May 1977, on the harmonization of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, does not preclude a Member State from applying its value added tax legislation to a transport operation effected between two points within its national territory, even where a part of the journey is completed outside its national territory, provided that it does not encroach on the tax jurisdiction of other states.
CL : Judges of any forum shall vacate the official residence within a period of one month from the date of superannuation/retirement. However, after recording sufficient reason(s), the time may be extended by another one month. Since allotment of government accommodation is a privilege given to the Ministers and Members of Parliament, the matter of unauthorized retention should be intimated to the Speaker/Chairman of the House and action should be initiated by the House Committee for the breach of the privileges which a Member/Minister enjoys and the appropriate Committee should recommend to the Speaker/Chairman for taking appropriate action/eviction within a time bound period
• The instant case relates to the occupation of government accommodation by members of all the three branches of the State, viz., the Legislature, the Executive and the Judiciary beyond the period for which the same were allotted.
• The occupation of such government houses/quarters beyond the period prescribed causes difficulty in accommodating other persons waiting for allotment and, therefore, the Government is at a loss on the one hand in not being able to accommodate those persons who are in need and on the other is unable to effectively deal with the persons who continue to occupy unauthorisedly beyond the period prescribed.
• Despite the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 ('the Act'), it is seen that it has not been effective enough in dealing with the eviction inasmuch as the competent Authority, i.e., Estate Officer has to first initiate proceedings and pass orders after hearing the parties and thereafter, one statutory appeal lies to the District Judge under Section 9 of the Act.
• After disposal of the appeal, people resort to writ proceedings thereby enjoying the scarce government accommodation. There are cases where the occupants are so affluent that they are willing to pay the penal/market rent and continue to occupy government quarters especially in metropolitan cities where such government quarters are a luxury situated in several acres of land within the heart of the city.
• In spite of existing provisions/rules, directions etc., the fact remains same and the persons from all the three branches either by their influence or by lengthy procedure as provided in the Act, continue to stay in the government accommodation by paying paltry amount either by way of rent or penalty.
• In addition to the statutory provisions, there is need to frame guidelines for the benefit of both Union of India/States and Union Territories for better utilization of their premises. Hence , the following guidelines laid down:
| (i) | As a precautionary measure, a notice should be sent to the allottee/officer/employee concerned under Section 4 of the PP Act three months prior to the date of his/her retirement giving advance intimation to vacate the premises. | |
| (ii) | The Department concerned from where the government servant is going to retire must be made liable for fulfilling the above-mentioned formalities as well as follow up actions so that rest of the provisions of the Act can be effectively utilized. | |
| (iii) | The principles of natural justice have to be followed while serving the notice. | |
| (iv) | After following the procedure as mentioned in SR 317-B- 11(2) and 317-B-22 proviso 1 and 2, within 7 working days, send a show cause notice to the person concerned in view of the advance intimation sent three months before the retirement. | |
| (v) | Date of appearance before the Estate Officer or for personal hearing as mentioned in the Act after show cause notice should not be more than 7 working days. | |
| (vi) | Order of eviction should be passed as expeditiously as possible preferably within a period of 15 days. | |
| (vii) | If, as per the Estate Officer, the occupant's case is genuine in terms of Section 5 of the Act then, in the first instance, an extension of not more than 30 days should be granted. | |
| (viii) | The responsibility for issuance of the certificate should be on the Department concerned from where the government servant has retired for the occupation of the premises for next 15 days and further. Giving additional responsibility to the department concerned will help in speedy vacation of such premises. Baseless or frivolous applications for extensions have to be rejected within seven days. | |
| (ix) | If as per the Estate Officer the occupant's case is not genuine, not more than 15 days' time should be granted and thereafter, reasonable force as per Section 5(2) of the Act may be used. | |
| (x) | There must be a time frame within how much time the Estate Officer has to decide about the quantum of rent to be paid. | |
| (xi) | The same procedure must be followed for damages. | |
| (xii) | The arrears/damages should be collected as arrears of land revenue as mentioned in Section 14 of the Act. | |
| (xiii) | There must be a provision for compound interest, instead of simple interest as per Section 7. | |
| (xiv) | To make it more stringent, there must be some provision for stoppage or reduction in the monthly pension till the date of vacation of the premises. | |
| (xv) | Under Section 9 (2), an appeal shall lie from an order of eviction and of rent/damages within 12 days from the day of publication or on which the order is communicated respectively. | |
| (xvi) | Under Section 9(4), disposal of the appeals must be preferably within a period of 30 days in order to eliminate unnecessary delay in disposal of such cases. | |
| (xvii) | The liberty of the appellate officer to condone the delay in filing the appeal under Section 9 of the Act should be exercised very reluctantly and it should be an exceptional practice and not a general rule. | |
| (xviii) | Since allotment of government accommodation is a privilege given to the Ministers and Members of Parliament, the matter of unauthorized retention should be intimated to the Speaker/Chairman of the House and action should be initiated by the House Committee for the breach of the privileges which a Member/Minister enjoys and the appropriate Committee should recommend to the Speaker/Chairman for taking appropriate action/eviction within a time bound period. | |
| (xix) | Judges of any forum shall vacate the official residence within a period of one month from the date of superannuation/retirement. However, after recording sufficient reason(s), the time may be extended by another one month. | |
| (xx) | Henceforth, no memorials should be allowed in future in any Government houses earmarked for residential accommodation. |
■■■
[2013] 35 taxmann.com 176 (SC)
SUPREME COURT OF INDIA
S.D. Bandi
v.
Divisional Traffic Officer, KSRTC
P. SATHASIVAM AND RANJAN GOGOI, JJ.
CIVIL APPEAL NO. 4064 OF 2004
JULY 5, 2013
JUDGMENT
P. Sathasivam, J. - The instant case relates to the occupation of government accommodation by members of all the three branches of the State, viz., the Legislature, the Executive and the Judiciary beyond the period for which the same were allotted. The occupation of such government houses/quarters beyond the period prescribed causes difficulty in accommodating other persons waiting for allotment and, therefore, the Government is at a loss on the one hand in not being able to accommodate those persons who are in need and on the other is unable to effectively deal with the persons who continue to occupy unauthorisedly beyond the period prescribed.
2. Despite the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 (in short 'the Act'), it is seen that it has not been effective enough in dealing with the eviction inasmuch as the competent Authority, i.e., Estate Officer has to first initiate proceedings and pass orders after hearing the parties and thereafter, one statutory appeal lies to the District Judge under Section 9 of the Act. After disposal of the appeal, people resort to writ proceedings thereby enjoying the scarce government accommodation. There are cases where the occupants are so affluent that they are willing to pay the penal/market rent and continue to occupy government quarters especially in metropolitan cities where such government quarters are a luxury situated in several acres of land within the heart of the city.
3. Before proceeding further, it is useful to find out the circumstances and basis on which the matter was agitated.
One Shri S.D. Bandi filed the present appeal against the order dated 25.03.2004 passed by the High Court of Karnataka at Bangalore in W.A. No. 324 of 2002 whereby the Division Bench of the High Court while disposing of the appeal filed by the respondents herein granted time to the appellant herein to vacate the government quarter by 30.04.2004. The appellant was working as a Driver in the Karnataka State Road Transport Corporation (for short "the Corporation"), Mysore Division at Mysore. By order dated 31.05.1992, he was transferred to the Mangalore Division and for joining the place of duty, he was relieved from the duty of Mysore Division on 12.06.1997. Challenging the order of transfer, the appellant herein filed Reference No.21 of 1997 before the Industrial Tribunal, Mysore. At the same time, he did join the place of posting at Mangalore but did not vacate the quarter. On 19.07.1999, the competent officer under the Karnataka Public Premises (Eviction of Unauthorised Occupants) Act, 1974 passed an order of eviction against the appellant in KPP No.3 of 1998. Against the said order, the appellant preferred an appeal before the District Judge, which was dismissed and the order of eviction was confirmed. Being aggrieved, the appellant preferred a writ petition being W.P. No. 41762 of 2001 before the High Court of Karnataka which was allowed on 10.12.2001. In the meantime, on 03.07.2000, the Industrial Tribunal set aside the order of transfer and ordered the appellant to be restored to his original place of work at Mysore. Against the said order, the Corporation filed a petition being Writ Petition No. 3249 of 2001 in which rule nisi was issued and the award of the Industrial Tribunal was stayed. Thereafter, the Corporation preferred Writ Appeal being No. 324 of 2002 against the order dated 10.12.2001 in W.P. No. 41762 of 2001 which was allowed by impugned order dated 25.03.2004 and the appellant herein was also directed to vacate the quarter by 30.04.2004. Challenging the said order, the present appeal has been preferred before this Court by way of special leave.
4. By order dated 13.07.2004, after hearing all the parties, this Court dismissed the appeal and directed the competent officer of the Corporation, Mysore Division to at once evict the appellant from the quarter.
5. Pursuant to the said order, this Court, taking note of the fact that in government quarters, unauthorisedly, people are continuing for years together to the detriment of the persons who are entitled to occupy the same and also that the same is the position in most of the State capitals and Head quarters of the Union Territories, issued notices to the Union of India, all the States and the Union Territories with a direction to furnish the list of such unauthorized occupants of government quarters in the State capitals and Head quarters of Union Territories belonging to all the three limbs of the State, viz., the Legislature, the Executive and the Judiciary. This Court further directed to furnish all the details including names of such persons, details of quarters, period of unauthorized occupancy, steps taken for vacation and its result etc., and also that in case no steps have been taken, reasons for such inaction.
6. Pursuant to the above directions, the Union of India, all the States and Union Territories were represented by their counsel. In order to eliminate the problem and frame workable guidelines in addition to the existing statutory provisions, this Court appointed Mr. Ranjit Kumar, learned senior counsel and Ms. Anjani Aiyyagari, learned counsel as amicus curiae to assist the Court.
7. Mr. Ranjit Kumar, learned amicus curiae, after highlighting various aspects, particularly, the persons in all the three wings occupying official premises/quarters/bungalows even after expiry of their term/period submitted that in addition to the statutory provisions, this Court has to frame certain workable guidelines. He took us through various provisions of the Act, Fundamental Rules (FRs) applicable to the persons working under Central Government, various State enactments similar to the Central Act, some of the provisions of the Indian Penal Code, 1860 (in short "the IPC") and earlier decisions, particularly, Shiv Sagar Tiwari v. Union of India and others [1997] 1 SCC 444 which dealt with the similar problem confining to National Capital Territory of Delhi.
8. We propose to deal with all these aspects in detail hereinafter.
9. Pursuant to the notice issued by this Court, Union of India and some of the States submitted their views and suggestions and others though represented by counsel, did not convey their views by filing affidavit or report which we are going to discuss after quoting the report of learned amicus curiae.
10. Learned amicus curiae in his report submitted as under:-
"II(a) Menace of unauthorized occupation is required to be dealt with firmly and the charging of penal rent/market rent is not a sufficient alternative. In this connection, it may be stated here that the States of Orissa and Uttar Pradesh have amended Section 441 of the Indian Penal Code, 1860 (in short 'the IPC') in its application to their States by providing as under:-
….. or having lawfully entered into or upon such property, remains there with the intention of taking unauthorized possession or making unauthorized use of such property and fails to withdraw such property or its possession or use, when called upon to do so by that another person by notice in writing, duly served on him, is said to have committed "criminal trespass". (Orissa)
….. or having entered into or upon such property, whether before or after the coming into force of the Criminal Law (U.P. Amendment) Act, 1961, with the intention of taking unauthorized use of such property fails to withdraw from such property or its possession or use, when called upon to do so by that another person by notice in writing, duly served upon him, by the date specified in the notice, is said to commit "criminal tresspass". (Uttar Pradesh)
Thus, in these two States, the Governments are in a position to file criminal proceedings for the offence of criminal trespass in the case of unauthorized occupation of Government accommodation. This acts as a deterrent for any officer to live beyond the period prescribed.
(b) Though this Court in one of its Orders in these proceedings had sought the opinion of the other States as to whether they would like to make amendments on similar lines vide Orders dated 24.07.2007 and 19.09.2007, The response of the various States was as under:-
| (a) | Union of India said 'No' | |
| (b) | The Government of Bihar said 'No' | |
| (c) | The Government of Haryana said they would follow if the Union of India amends. | |
| (d) | The State of Andhra Pradesh said the matter was under consideration. | |
| (e) | The State of Madhya Pradesh said that it will do so if need arises. | |
| (f) | The State of Karnataka said that it was drafting rules for this purpose. | |
| (g) | The State of Maharashtra said that it has approved the amendment. | |
| (h) | The State of Uttarakhand said that the proposal is sent for amendment. | |
| (i) | The State of Nagaland said that it will take steps for the amendment. | |
| (j) | The State of Sikkim said 'No' | |
| (k) | The State of Mizoram said that it will bring about the amendment if the Supreme Court directs. | |
| (l) | The State of Manipur said that it had amended and sent it to the Union of India for approval. | |
| (m) | The Union Territory of Chandigarh welcomed the amendment but was bound to follow the Union of India. |
The remaining other States did not respond before this Court.
(III) Though the Act provides under Section 11 for offences and penalty for unlawful occupation and makes the offence cognizable under Section 11A, it has been found as a matter of practice that the Estate Officers do not ordinarily take any action under the said Section because of the proviso to Section 11(1) which reads as under:-
"Provided that a person who, having been lawfully in occupation of any public premises by virtue of any authority (whether by way of grant, allotment or by any other mode whatsoever) continues to be in occupation of such premises after such authority has ceased to be valid, shall not be guilty of such offence."
This proviso gives the window for not prosecuting a person who had been allotted a premise but continues to occupy so unauthorisedly after the authority to occupy the premises ceases to be valid. Thus, the unauthorized occupant continues to unlawfully occupy the government accommodation without fear of any prosecution.
IV It has also been seen that even where outstanding rents including penal/market rent are there, there are persons continuing in occupation who do not pay the amounts and there is difficulty in recovering the same. In this regard, apart from the provisions under the Act, there are provisions under the Public Demand Recovery Act and Revenue Recovery Act which can be applied for the recovery of the arrears as arrears of land revenue, because if the totality of the government houses in all the States of India are taken into account, the amount due works out to several crores.
V.(a) Fundamental Rule 45-A prescribes for the Government accommodation to be occupied and details the licence fee etc. including the continued occupation/retention beyond the permissible period and guidelines have also been framed for that purpose. However, these rules and guidelines do not state anything about the eviction possibly on the premise that Public Premises Act will take care of it.
(b) The Supplementary Rules in Chapter VIII Division 26 made under Fundamental Rule 45 provide for rules for allotment of residences vide SR 311 to 316. Similarly, under Chapter 26B, the Allotment of Government Residences (General Pool in Delhi) Rules, 1963 are provided in SR 317.
What is of significance is that while providing these rules, the government while allowing persons to continue to retain the Government accommodation does not provide for their eviction, again presumably because of the provisions of the Public Premises Act. However, as explained hereinabove on account of the proviso to Section 11(1), the Estate Officer cannot take any penal action against such unauthorized occupants except for going through the process of eviction.
It would have been useful if the Government while promulgating such rules/orders/notifications had also provided for certain undertakings to be taken from the Government officer prior to his allotment to make sure that a person does vacate the quarters as soon as his period prescribed for its retention gets over."
11. After furnishing all these materials, he suggested the following guidelines to be issued by this Court which are as under:-
| (i) | At the time of allotment of the Government accommodation to the three wings of the Government, viz., the Legislature, the Executive and the Judiciary, an undertaking should be taken from the allottee that he/she shall vacate the premises within the prescribed period under the rules failing which he/she will be liable to disciplinary action apart from any other liability that he/she may incur. | |
| (ii) | All arrears of rent including penal/market rent shall be recovered as arrears of land revenue. | |
| (iii) | The proviso to Section 11(1) of the Act should be declared ultra vires as it is in conflict with the main provisions of providing for offences and penalty for the unauthorized occupation of government houses. | |
| (iv) | Any person who is in service and continues to unauthorisedly occupy the government accommodation beyond the period of retention should be suspended immediately, pending disciplinary action as per the undertaking given at the time of taking the Government quarter. | |
| (v) | Since allotment of Government accommodation is a privilege given to the Ministers and Members of Parliament, the matter of unauthorized retention should be intimated to the Speaker/Chairman of the House and action should be initiated by the House Committee for the breach of the privileges which a Member/Minister enjoys and the appropriate Committee should recommend the same to the Speaker/Chairman for taking deterrent action. | |
| (vi) | In view of paucity of Government accommodation, all the allotments to persons belonging to categories other than the three wings of the Government should be henceforth immediately cancelled and discontinued as such allotments are made on discretion which is mostly abused. | |
| (vii) | All government houses which have been turned into memorials should be retrieved, memorials in Government houses should be removed and no more memorials should be allowed in future. |
12. Before considering the response of the Union of India, States and the Union Territories as to the suggestions of learned amicus curiae, let us consider the relevant provisions of the Act applicable to the persons in service. The Act was enacted to provide for eviction of unauthorized occupants from public premises. Section 2(e) of the Act defines 'public premises' as under:
"(e) "public premises" means-
(1) any premises belonging to, or taken on lease or requisitioned by, or on behalf of, the Central Government, and includes any such premises which have been placed by that Government, whether before or after the commencement of the Public Premises (Eviction of Unauthorised Occupants) Amendments Act, 1980, under the control of the Secretariat of either House of Parliament for providing residential accommodation to any member of the staff of that Secretariat;
(2) any premises belonging to, or taken on lease by, or on behalf of,-
| (i) | any company as defined in section 3 of the Companies Act, 1956, in which not less than fifty-one per cent, of the paid up share capital is held by the Central Government or any company which is a subsidiary (within the meaning of that Act) of the first-mentioned company." |
Section 2(g) defines "unauthorized occupation" as under:
"(g) "unauthorised occupation", in relation to any public premises, means the occupation by any person of the public premises without authority for such occupation, and includes the continuance in occupation by any person of the public premises after the authority (whether by way of grant or any other mode of transfer) under which he was allowed to occupy the premises has expired or has been determined for any reason whatsoever."
Section 4 of the Act speaks about issue of show cause notice before passing an order of eviction and Section 5 deals with eviction of unauthorized occupants. Section 7 relates to direction for payment of rent or damages in respect of public premises. Section 9 speaks about appeal against the order of the Estate Officer. In terms of Section 10, the order passed by the Appellate Authority shall be final and shall not be called in question in any original suit, application or execution proceedings whereas Section 11 speaks about offences and penalty.
13. Apart from the above provisions of the Act, for the benefit of the persons working in Central service, the Central Government framed certain rules which are called "Fundamental Rules". Among other rules, FR 45, 45A and 45B are relevant which are as under:-
"F.R.45 The Central Government may make rules or issue orders laying down the principles governing the allotment to officers serving under its administrative control, for use by them as residences, of such buildings owned or leased by it, or such portions thereof, as the Central Government may make available for the purpose. Such rules or orders may lay down different principles for observance in different localities or in respect of different classes of residences, and may prescribe the circumstances in which such an officer shall be considered to be in occupation of a residence."
"F.R. 45-A I. Deleted
II. For the purpose of the assessment of licence fee, the capital cost of a residence owned by Government shall include the cost or value of sanitary, water supply and electric installations and fittings; and shall be either -
| (a) | the cost of acquiring or constructing the residence including the cost of site and its preparation and any capital expenditure incurred after acquisition or construction; or when this is not known; | |
| (b) | the present value of the residence, including the value of the site." |
"F.R. 45-B. I. This rule applies to Government servants other than those to whom Rule 45-A applies or than those occupying residence belonging to the Indian Railway or rented at the cost of railway revenues.
II. For the purpose of sub-clause(b) Clause III, the capital cost of a residence owned by Government shall not include the cost or value of such special services and installations (including furniture, tennis courts and sanitary, water supply or electric installations and fittings_ as it may contain; and shall be either :-
| (a) | the cost of acquiring or constructing the residence, including the cost of site and its preparation and any capital expenditure incurred after acquisition or construction; or, when this is not known. | |
| (b) | The present value of the residence including the value of site." |
14. This Court had an occasion to consider the similar grievance/problem viz., availability of government accommodation in Delhi in Shiv Sagar Tiwari(supra). In this case, taking note of the fact that Delhi being the capital of the country and is also the seat of the Central Government and that the issue applies to a large number of persons, this Court analysed the entire issue relating to government accommodation and various rules applicable. Even in that matter, Mr. Ranjit Kumar, the present amicus curiae assisted this Court. Though the said order was confined to the National Capital Territory of Delhi, this Court has categorized various groups, viz., 'vacated list', 'arrears list', 'change from same type', 'change to higher type', 'medical cases within the existing policy', 'medical cases outside the existing policy', '5 year category', 'infructuous cases', 'out of turn and above entitlement', 'functional grounds', 'eviction cases', 'procedure for eviction' etc. After analyzing all these categories with facts and figures as well as the provisions applicable, this Court summed up various principles and issued directions for the authorities concerned. Since we are considering the problem of such government accommodation/residential quarters/bungalows etc. at the national level, the guidelines and the ultimate decision in Shiv Sagar Tiwari (supra) framed for National Capital Territory of Delhi may be immensely helpful.
15. We have already referred to the suggestions made by learned amicus curiae; now let us consider the response of Union of India, States and some of the Union Territories. On behalf of the Union of India, Shri Manish Kumar Garg, Director of Estates, Ministry of Urban Development, Government of India, Nirman Bhavan, New Delhi has filed an affidavit on 16.11.2011. Mr. P.P. Malhotra, learned Additional Solicitor General, took us through the stand taken by the Ministry of Urban Development. Since the department concerned has expressed its views about suggestions put forward by learned amicus, we intend to incorporate the same which are as under:-
| "1. | It is submitted that the allotment of government house to the employees/officers of the three wings of the government, the Legislature, the Executive and the Judiciary is made under the provisions of allotment of Government Residences (General Pool in Delhi) Rules, 1963 as amended from time to time. These rules provide for allotment, cancellation, retention, penalties for non- vacation of quarters within the permissible retention period. It is submitted that the applicant has to be given an undertaking in "Application Form" itself that he/she agrees to abide by the Allotment of Government Residences (General Pool in Delhi) Rules, 1963 also in the Acceptance Form, the allottee undertakes to vacate the accommodation allotted to him/her within the stipulated period. However, because of certain unavoidable circumstances which may be beyond the control of allottee, the allottee sometimes retains the house for a few days beyond the permissible retention period for which damages rate is charged vis-à-vis action for eviction under Public Premises (Eviction of Unauthorised Occupants) Act, 1971. Therefore, the provision of disciplinary may not be desirable. In case of unauthorized occupation, in the case of subletting, apart from charging damages (penal rent) and action is initiated for eviction, disciplinary proceedings are initiated against the unauthorized occupant. In view of these provisions already existing in the rules further undertaking may not be necessary. | |
| 2. | As per the existing provisions penal/market rent is recovered from the unauthorized occupant by raising bills on the employee or his/her department. In case of retiring employees, 10% of gratuity is withheld for adjustment of outstanding dues on account of licence fee and damages. The withheld amount of gratuity is released by the employer only after the retired employee obtains a "No Demand Certificate" from the Directorate of Estates after making payment for all the dues and submits the same to his/her employer. In case some retired employees do not turn up for "No Demand Certificate", and dues on account of licence fee/damages remain unrecovered, action is initiated for recovery of dues as arrears of land revenue under the provisions of the Act. | |
| 3. | It is submitted that Section 11(1) of the Act deals with three categories of unauthorized occupation - (i) A person who unlawfully occupies a public premises (ii) A person who having been lawfully in occupation of a public premises by virtue of authority etc., continues to be in occupation of such premises after such authority has ceased to be valid and (iii) A person who has been evicted from the public premises under the Act again occupies the premises without any authority. While Section 11(1) of the Act provides for punishment to unlawful occupants, the proviso of the section deals with unauthorized occupants due to expiry of licence or allotment period. Both the categories i.e., (i) and (ii) are not comparable. Therefore, the provisions meet the requirements to deal with various types of unauthorized occupants and hence cannot be declared ultra vires. | |
| 4. | A person who is in Government service is liable to surrender Government accommodation in case of his/her transfer to an ineligible office at the same station or outside. However, with a view to enable the government servant to make arrangements for settling his family, retention is permitted upto 8 months i.e. 2 months under SR-317-B and 6 months under SR-317-B-22. In the case of retention of accommodation beyond the permissible retention period, the employee/family is liable to be evicted from the house under the provisions of the Act and damages are charged from the concerned employee. | |
| However, there may be a few cases where the allottee or his/her family retains the accommodation beyond the permissible period due to unavoidable circumstances, say, in the case of regularization, re-posting or severe illness for which damages is charged vis-à-vis action under the provisions of the Act. However, in the case of unauthorized occupation on account of subletting, the Directorate of Estates cancels the allotment and initiates eviction proceedings and the controlling department of the unauthorized allottee proceeds for disciplinary action including placing him/her under suspension. Therefore, the suggestion to put all serving unauthorized occupants under suspension will be too harsh and does not fall within the ambit of provisions of the Act. Moreover, suspension is resorted to under certain specific circumstances as a matter of administrative action under CCS (CCA) Rules. | ||
| 5. | Allotment to a Union Minister is made by the Directorate of Estates, Ministry of Urban Development as per provisions of Ministers' Residences Rules, 1962. The Ministers, on ceasing to be a Minister, are required to vacate the official accommodation within one month. Alternate accommodation, if necessary, is allotted as per their entitlement by the House Committee concerned. The allotment to Members of Parliament is made by the respective House Committees, viz., Lok Sabha House Committee, Rajya Sabha House Committee. However, in the event of unauthorized occupation, the respective House Committees refer the case to the Directorate of Estates for initiating eviction proceedings under the provisions of the Act. Allotment to Members of Parliament is also made by the Directorate of Estates from the General Pool as per laid down guidelines. Hence, such a matter does not fall within the purview of breach of privilege. | |
| 6. | Allotment of government accommodation to persons belonging to categories other than the three wings of the Government, viz., Journalists, eminent Artists, freedom fighters, social workers etc. is made as per provisions in the guidelines framed as per direction of the Supreme Court in Writ Petition (C) No. 585/1984 titled Shiv Sagar Tiwari vs. Union of India. These allotments are made out of the 5% discretionary quota allowed by the Supreme Court. In view of this, cancellation of such allotments already made and discontinuation of such further allotment may not be desirable. | |
| 7. | The government houses which have been turned into memorial were allotted on lease to respective Trusts/Societies by the Cabinet Committee on Accommodation in accordance with the guidelines framed for the purpose as per direction of the Supreme Court in C.P. (W) No. 585/1994 titled Shiv Sagar Tiwari vs. Union of India. The lease agreement has been executed between the Government of India and the respective Trusts etc. for specified period. It would, therefore, be violation of the agreement if such houses are retrieved before the lease period is over. The guidelines formulated in November 2000 put complete ban on the conversion of Government bungalows into memorials of the departed leaders. As such, the suggestion given by the amicus curiae has already been taken care of. The present guidelines provide for allotment of accommodation to non- Government organizations which are working for national interest or for meeting international obligations." |
16. It is clear from the response submitted by the Ministry of Urban Development that in view of various provisions in the Act for taking action against unauthorized occupants, existing provisions would suffice. It is also clear that in respect of retiring employees, without clearing arrears of rent/penal/ market rent and No Due Certificate from the Directorate of Estates, the retirement benefits will not be settled and as per the provisions, 10% of the gratuity is to be withheld for adjustment of outstanding dues.
17. The Department also highlighted that for allotment to Members of Parliament, it is the "House of Committee" which controls such allotment and no further guidelines are required for the same.
18. It was also pointed out that for the persons from special categories, viz., journalists, eminent artists, freedom fighters, social workers etc., guidelines framed by this Court earlier, govern the issue and no further direction is required.
19. On behalf of the State of Sikkim, the Principal Resident Commissioner has filed an affidavit highlighting the position and the procedure that is in vogue in the State. He emphasized that the Government never allows anyone to overstay including unauthorized retention of government accommodation by the Ministers and Members of Parliament.
20. On behalf of the Government of Madhya Pradesh, Directorate of Estates has filed an affidavit wherein it is highlighted that so far as the employees of the State Government, executive and judiciary are concerned, there is no objection in taking an undertaking as suggested by this Court. However, according to the government, the houses allotted to the members of the legislative assembly, members of parliament and ministers are concerned, the matter needs to be examined after taking views of the Secretary, Vidhan Sabha. It is also pointed out that the Government of Madhya Pradesh has issued separate rules called Madhya Pradesh Government Quarters Allotment Rules, 2000 which provides effective mechanism for eviction of unauthorized persons and recovery of rent, if any.
21. On behalf of the State of Andhra Pradesh, Principal Secretary to Government, General Administration (Accomm.) Department has filed a reply affidavit furnishing information as to the position in the State and the steps that are being taken by them.
22. On behalf of the State of Jammu & Kashmir, Director, Estates Department has filed an affidavit informing about various steps being taken by them. He also submitted that the government is ready to comply with further/additional directions being issued by this Court.
23. Union Territory of Puducherry through its Secretary (Housing) highlighted the availability of government quarters, number of unauthorized occupants and the procedure being followed for eviction of those persons. He also informed this Court that all the directions and instructions of the Government of India are being followed in the Union Territory of Puducherry.
24. On behalf of the State of Maharashtra, Deputy Secretary, General Administration Department filed an affidavit highlighting various instructions issued to the competent authority dealing with unauthorized occupants. He also furnished a statement showing the eviction cases pending with the competent authority and also the cases in which rent recovery is going on.
25. On behalf of the State of Haryana, Special Secretary Coordination from the office of Chief Secretary to Government, Haryana filed an affidavit conveying their comments on the propositions made by learned amicus curiae.
26. On behalf of the State of Uttar Pradesh, Assistant Estates Officer, Government of U.P. submitted his response as to the suggestions of the learned amicus curiae. He also highlighted that necessary amendments should be made in their allotment rules. According to him, in respect of arrears of rent and damages, the rules enable them to recover the same as arrears of land revenue. The State has also highlighted that stringent provision, viz., Section 11 of the U.P. Public Premises (Eviction of Unauthorised Occupants) Act, 1972 is in force. As per the said provision, if any person who has been evicted from any public premises again occupies the same without authority for such occupation, he shall be punishable with imprisonment for a term which may extend to 1 year or fine which may extend to Rs. 1,000/- or with both. He also highlighted the allotment procedure in respect of journalists, the legislature, the executive, the judiciary as well as memorials available in their State.
27. As per the details furnished by learned amicus curiae and various comments made by Union of India as well as some of the States and the Union Territories, it cannot be said that at present there is no machinery to check eviction of unauthorized occupants as well as recovery of arrears of rent including penal charges. However, it is not in dispute that in spite of existing provisions/rules, directions etc., the fact remains same and the persons from all the three branches either by their influence or by lengthy procedure as provided in the Act, continue to stay in the government accommodation by paying paltry amount either by way of rent or penalty. In these circumstances, we are of the view that in addition to the statutory provisions, there is need to frame guidelines for the benefit of both Union of India/States and Union Territories for better utilization of their premises.
28. The following suggestions would precisely address the grievances of the Centre and the State governments in regard to the unauthorized occupants:
Suggestions:
| (i) | As a precautionary measure, a notice should be sent to the allottee/officer/employee concerned under Section 4 of the PP Act three months prior to the date of his/her retirement giving advance intimation to vacate the premises. | |
| (ii) | The Department concerned from where the government servant is going to retire must be made liable for fulfilling the above-mentioned formalities as well as follow up actions so that rest of the provisions of the Act can be effectively utilized. | |
| (iii) | The principles of natural justice have to be followed while serving the notice. | |
| (iv) | After following the procedure as mentioned in SR 317-B-11(2) and 317-B-22 proviso 1 and 2, within 7 working days, send a show cause notice to the person concerned in view of the advance intimation sent three months before the retirement. | |
| (v) | Date of appearance before the Estate Officer or for personal hearing as mentioned in the Act after show cause notice should not be more than 7 working days. | |
| (vi) | Order of eviction should be passed as expeditiously as possible preferably within a period of 15 days. | |
| (vii) | If, as per the Estate Officer, the occupant's case is genuine in terms of Section 5 of the Act then, in the first instance, an extension of not more than 30 days should be granted. | |
| (viii) | The responsibility for issuance of the genuineness certificate should be on the Department concerned from where the government servant has retired for the occupation of the premises for next 15 days and further. Giving additional responsibility to the department concerned will help in speedy vacation of such premises. Baseless or frivolous applications for extensions have to be rejected within seven days. | |
| (ix) | If as per the Estate Officer the occupant's case is not genuine, not more than 15 days' time should be granted and thereafter, reasonable force as per Section 5(2) of the Act may be used. | |
| (x) | There must be a time frame within how much time the Estate Officer has to decide about the quantum of rent to be paid. | |
| (xi) | The same procedure must be followed for damages. | |
| (xii) | The arrears/damages should be collected as arrears of land revenue as mentioned in Section 14 of the Act. | |
| (xiii) | There must be a provision for compound interest, instead of simple interest as per Section 7. | |
| (xiv) | To make it more stringent, there must be some provision for stoppage or reduction in the monthly pension till the date of vacation of the premises. | |
| (xv) | Under Section 9 (2), an appeal shall lie from an order of eviction and of rent/damages within 12 days from the day of publication or on which the order is communicated respectively. | |
| (xvi) | Under Section 9(4), disposal of the appeals must be preferably within a period of 30 days in order to eliminate unnecessary delay in disposal of such cases. | |
| (xvii) | The liberty of the appellate officer to condone the delay in filing the appeal under Section 9 of the Act should be exercised very reluctantly and it should be an exceptional practice and not a general rule. | |
| (xviii) | Since allotment of government accommodation is a privilege given to the Ministers and Members of Parliament, the matter of unauthorized retention should be intimated to the Speaker/Chairman of the House and action should be initiated by the House Committee for the breach of the privileges which a Member/Minister enjoys and the appropriate Committee should recommend to the Speaker/Chairman for taking appropriate action/eviction within a time bound period. | |
| (xix) | Judges of any forum shall vacate the official residence within a period of one month from the date of superannuation/retirement. However, after recording sufficient reason(s), the time may be extended by another one month. | |
| (xx) | Henceforth, no memorials should be allowed in future in any Government houses earmarked for residential accommodation. |
29. It is unfortunate that the employees, officers, representatives of people and other high dignitaries continue to stay in the residential accommodation provided by the Government of India though they are no longer entitled to such accommodation. Many of such persons continue to occupy residential accommodation commensurate with the office(s) held by them earlier and which are beyond their present entitlement. The unauthorized occupants must recollect that rights and duties are correlative as the rights of one person entail the duties of another person similarly the duty of one person entails the rights of another person. Observing this, the unauthorized occupants must appreciate that their act of overstaying in the premise directly infringes the right of another. No law or directions can entirely control this act of disobedience but for the self realization among the unauthorized occupants. The matter is disposed of with the above terms and no order is required in I.As for impleadment and intervention.
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