IT: Assessment done pursuant to directions issued by Additional Commissioner under section 144A cannot be reopened; however, revisionary power under section 263 can be exercised
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[2013] 35 taxmann.com 53 (Calcutta)
HIGH COURT OF CALCUTTA
Amrit Sales Promotion (P.) Ltd.
v.
Union of India*
SOUMITRA PAL, J.
W.P. NO. 1347 OF 2006
APRIL 4, 2013
Section 144A, read with sections 147 and 263, of the Income-tax Act, 1961 - Deputy Commissioner, power of to issue directions in certain cases [Binding force of directions] - Assessment year 2001-02 - Whether directions issued by Additional Commissioner under section 144A are not only to guide Assessing Officer to enable him to complete assessment but such directions are also binding on such officer - Held, yes - Whether, where an assessment order passed pursuant to directions given by Additional Commissioner under section 144A on an issue attains finality, issuing notice for reopening of assessment on same issue cannot be held as justified - Held, yes - Whether, however, revisionary power under section 263 can be invoked in respect of an order passed under section 144A - Held, yes [Paras 10 & 11] [In favour of assessee]
FACTS
■ | In the assessment proceedings, the Assessing Officer proposed to apply the Explanation to section 73 to treat share trading loss as deemed speculation loss. However, the assessee approached the Additional Commissioner, to call for the records and to issue appropriate direction in this regard. Thereafter, the Additional Commissioner issued direction that Explanation to section 73 would not be applied. | |
■ | Pursuant to the order issued by the Additional Commissioner, the Assessing Officer completed the assessment under section 143(3)/144A. | |
■ | However, after completion of the assessment proceedings a notice was issued to the assessee for reopening of the assessment on the ground that there were reasons to believe that the income of the said assessment year had escaped assessment with regard to loss in share dealing business. | |
■ | Thereafter, the assessee filed writ petition against the reopening of the assessment and contended that the issue, which had already been negatived by the higher authority pursuant to the directions given by the Additional Commissioner could not be reopened. Since the direction given by the Additional Commissioner are binding on the Assessing Officer. Further, contended that issues which had attained finality could not be reopened on mere change of opinion. | |
■ | On the other hand the revenue contended that the directions issued by the Additional Commissioner were limited for the purpose of making assessment and therefore, notice issued for reassessment was justified. |
HELD
■ | The question is, whether the Assessing Officer could issue the notice under section 148 for reopening the assessment proceedings. So far the facts are concerned it is evident from the records that there has been no change. Rather facts are similar. Therefore, as the Assessing Officer tried to reopen and reappraise the assessment on the same set of facts, it was a mere change of opinion. Secondly, had the Department considered the order passed under section 144A prejudicial to the interests of the Revenue, it could have invoked the provisions contained in section 263, which it did not. Therefore, the order passed under section 144A, which has a 'binding' effect on the Assessing Officer, became final and could not be reopened by issuing the impugned notice under section 148. That direction under section 144A has a 'binding' effect is clear since statute postulates that Joint Commissioner, may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment, making his jurisdiction very wide. | |
■ | Therefore, in view of the settled position of law, since the Department did not take steps to revise the order passed under section 144A by invoking the provisions of section 263, the impugned notice under section 148 cannot be sustained and is, thus, set aside and quashed. Accordingly, all consequential proceedings are also set aside and quashed. The writ petition is allowed. |
V. Murarka and Ms. S. Roychowdhury for the Petitioner. Dipak Shome and Md. Nizamuddin for the Respondent.
JUDGMENT
Soumitra Pal, J. - In the writ petition, the petitioner, a company under the Companies Act, 1956, has challenged the reassessment notice dated March 31, 2006, issued by the Assistant Commissioner of Income-tax, Circle-5, Kolkata, respondent No. 2, under section 148 of the Income-tax Act, 1961 ("the Act" for short), for the assessment year 2001-02 and all proceedings relating thereto.
2. It appears from the facts, as stated in the petition, that during the relevant assessment year, the petitioner carried on the business, inter alia, of actual delivery based purchase and sale of shares and speculation business in shares. The petitioner suffered a loss of Rs. 11,49,39,400 in business of share dealing and a loss of Rs. 5,50,95,999 in speculation business. The petitioner earned short-term capital gain of Rs. 1,57,23,404 and long-term capital gain of Rs. 10,86,84,635 and dividend income of Rs. 9,26,000 during the previous year.
3. On October 22, 2001, the petitioner filed return under the Act for the said assessment year showing a total income of Rs. 94,68,640 comprising the said business loss, the said speculation loss, the said short-term capital gain and the said long-term capital gain. In the assessment proceedings, the Income-tax Officer, Ward-4(3) (Kolkata), respondent No. 3, as the Assessing Officer, proposed to apply the provisions contained in the Explanation to section 73 of the Act to the said business loss in actual share dealing business. During the said proceedings, the petitioner by letter dated November 6, 2003, submitted that as non-speculative business was much less than the income from capital gain, the provisions contained in section 73 were not applicable. However, as respondent No. 3 insisted upon applying the provisions contained in the Explanation to section 73, the petitioner by a letter dated December 18, 2003, invoked the provisions in section 144A of the Act requesting the Additional Commissioner of Income-tax, Range-4, Kolkata, to call for the assessment records and to issue appropriate direction. Thereafter, the Additional Commissioner of Income-tax directed respondent No. 3 to send the draft assessment order, which was duly sent by respondent No. 3 proposing to include the said speculation loss for the purpose of deciding the applicability of section 73 to the said business loss. Assailing the said proposal, the petitioner on February 20, 2004, made a written submission before the Additional Commissioner of Income-tax and oral hearing was granted. Thereafter, by direction dated March 23, 2004, under section 144A, the Additional Commissioner decided the issue regarding the applicability of the Explanation to section 73 and directed respondent No. 3 not to treat the share trading loss of Rs. 11,11,77,739 as deemed speculation loss within the meaning of the Explanation to section 73 of the Act and the Assessing Officer was directed to frame the assessment in the light of the direction contained in the said order. Pursuant to the order under section 144A, respondent No. 3 by assessment order dated March 31, 2004, under section 143(3)/144A completed the assessment by passing an assessment order. However, after completion of the assessment proceedings, the petitioner received the impugned notice dated March 31, 2006, under section 148 of the Act for the said assessment year on the ground that the said respondent had reasons to believe that the income of the petitioner chargeable to tax under the Act for the said assessment year had escaped assessment within the meaning of section 147 and, therefore, the petitioner was required to file a return. In compliance with the notice under section 148, the petitioner filed the return and requested respondent No. 2 to furnish the recorded reasons on which the impugned notice was issued.
4. In the recorded reasons, respondent No. 2 had observed that the interest income and incentive of investments were treated as business income along with share loss in share dealing business and, thus, the business loss of Rs. 11,49,39,400 and speculation loss of Rs. 5,50,95,999 were shown separately and not considered as business income. Moreover, capital gains and dividend income were shown separately and total income was computed at Rs. 9,48,640. Thereafter, the petitioner filed his objection to the recorded reasons on the ground that it was contrary to the Explanation to section 28 and section 43(5) and since assessment was made under the provisions of sections 143(3)/144A of the Act, wherein the question of applicability of the Explanation to section 73 of the Act as proposed in the recorded reasons by respondent No. 2 was disapproved by the higher authority by exercising its discretion under section 144A, the same issue could not be reopened or reexamined and could not be gone afresh or did not constitute a relevant material for formation of belief under section 147. Moreover, such reopening was violative of the directions under section 144A, which has a binding effect. After notice under section 148 was served, the petitioner by a representation dated August 21, 2006, prayed for its cancellation. Thereafter, writ petition was moved on September 19, 2006, when direction was issued for filing of affidavits and an interim order was passed restraining the respondents from reopening the assessment. Further, the Assessing Officer was directed to pass a reasoned decision on the objection filed by the petitioner to the impugned notice. Consequently, the Assessing Officer by letter dated September 22, 2006, replied.
5. Mr. Murarka, learned advocate appearing on behalf of the petitioner, supporting the statements in the writ petition has contended that a view taken by the Assessing Officer which was negatived by the higher authorities pursuant to the directions under section 144A cannot be reopened by taking recourse to the procedure under section 147 of the Act. Since the directions by the Additional Commissioner under section 144A are binding on the Assessing Officer, he cannot pass an order contrary to the directions under section 144A since it is apparent from the reply dated September 22, 2006, that the Assessing Officer was trying to reopen the issues which have been concluded pursuant to the assessment order under section 143(3)/ 144A. Moreover, the order under section 144A had achieved its finality since the Commissioner did not revise the order passed under section 144A by invoking the provisions contained in section 263.
6. Mr. Shome, learned senior advocate, appearing on behalf of the respondents, has submitted that since the directions under section 144A was limited to assessment and its purpose was to make assessment, the Department was justified in issuing the notice under section 148. Moreover, since the order dated September 22, 2006, by respondent No. 2 was an order in answer to the representation dated August 21, 2006, and since it raised fresh cause of action, no order may be passed.
7. The question is whether the Department by taking recourse to the proceedings under section 147/148 can reopen an assessment which was done pursuant to the directions issued by the Additional Commissioner under section 144A.
8. In order to answer the question it is necessary to refer to the relevant portion of section 144A, which is as under :
"A Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer:" (emphasis supplied)
9. As seen, section 144A envisages that not only the Joint Commissioner has been granted discretion to issue such directions to guide the Assessing Officer to enable him to complete the assessment but such directions are also "binding" on such officer.
10. Looking at the facts I find that it is an admitted position that the petitioner at the stage of assessment had objected to the application of the provisions contained in the Explanation to section 73 of the Act and had invoked the provisions of section 144A. Pursuant thereto, on March 19, 2004, the Additional Commissioner after considering the various provisions of the Act had passed an order under section 144A holding, "I, therefore, direct the Assessing Officer not to treat the share trading loss of Rs.11,11,77,739 as deemed speculation loss within the meaning of the Explanation to section 73 of the Act. The Assessing Officer shall now frame the assessment in the light of the directions contained in this order". Thereafter, on March 31, 2004, assessment order was passed under section 143/144A of the Act. However, after the assessment was made, respondent No. 2 had issued the impugned notice under section 148 of the Act. It is evident from the recorded reasons that respondent No. 2 is trying to reopen the assessment on the same ground on which earlier the Assessing Officer proceeded to assess before order under section 144A was passed. Now, the moot question is, in such circumstances can the Assessing Officer issue the notice under section 148 for reopening the assessment proceedings ? So far the facts are concerned it is evident from the records that there has been no change. Rather facts are similar. Therefore, as the Assessing Officer is trying to reopen and reappraise the assessment on the same set of facts, in my view, it is a mere change of opinion. Secondly, had the Department considered the order passed under section 144A prejudicial to the interests of the Revenue, it could have invoked the provisions contained in section 263, which it did not. Therefore, the order passed under section 144A, which has a "binding" effect on the Assessing Officer, became final and cannot be reopened by issuing the impugned notice under section 148. That direction under section 144A has a "binding" effect is clear since statute postulates that "A Joint Commissioner...., may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment....." making his jurisdiction very wide. In this context, it is appropriate to refer to the judgment of the apex court in CIT v. Rao Thakur Narayan Singh [1965] 56 ITR 234, relied on by the petitioner, wherein the Assessing Officer was seeking to reopen the assessment on the same set of facts, wherein it was held (page 240) :
"The finding of the Tribunal is, therefore, binding on the Income-tax Officer and he cannot, in the circumstances of the case, reopen the assessment and initiate proceedings over again. If that was not the legal position, we would be placing an unrestricted power of review in the hands of an Income-tax Officer to go behind the findings given by a hierarchy of tribunals and even those of the High Court and the Supreme Court with his changing moods."
11. Therefore, in view of the settled position of law and since in the instant case, the Department did not take steps to revise the order passed under section 144A by invoking the provisions of section 263, the impugned notice under section 148 of the Income-tax Act, 1961, dated March 31, 2006, issued by respondent No. 2, cannot be sustained and is, thus, set aside and quashed. Accordingly, all consequential proceedings are also set aside and quashed. The writ petition is allowed.
12. No order as to costs.
IT : Loss from derivative trades is speculative loss under section 73 as definition in section 43(5) is not applicable to section 73
• Definition of 'speculative transaction' in section 43(5) which excludes derivative trades in shares from the scope of 'speculative transaction' is not applicable for section 73 purposes.
• Even though it is the only definition of 'speculative transaction' in the Act, it cannot be applied in the context of section 73 as it is specifically made applicable for sections 28 to 41 and 43.
• A definition enacted for restricted purposes cannot be applied for other objects or purposes as it would be contrary to the statute.
• Loss from derivatives trading is speculative loss for section 73 purposes and cant be set off against non-speculative business losses .
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[2013] 35 taxmann.com 280 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax, Delhi - IV
v.
DLF Commercial Developers Ltd.
S. RAVINDRA BHAT AND NAJMI WAZIRI, JJ.
IT APPEAL NO. 94 OF 2013
JULY 11, 2013
Sanjeev Sabharwal and Puneet Gupta for the Appellant. Ajay Vohra and Ms. Kavita Jha for the Respondent.
JUDGMENT
S. Ravindra Bhat, J. - This appeal of the revenue impugns an order of the Income Tax Appellate Tribunal (ITAT) dated 30.11.2011 in the assessee's appeal [ITA No. 1446 (Del) of 2011] whereby its contention about inapplicability of Explanation to Section 73 of the Income Tax Act, 1961 in respect of its transactions, and the resulting relief in carry forward of its losses for the previous year, in respect of its derivative business was upheld. This Court framed the following question of law for consideration, and heard the parties, i.e :
"Did the Income Tax Appellate Tribunal (ITAT) fall into error in not holding that the loss of Rs. 4,92,71,000/- on account of derivative transaction was a speculative loss, and was entitled to the benefit of Section 73, in view of the Explanation to Section 73 of the Income Tax Act;"
2. The brief facts are that the assessee claimed loss of Rs. 492.71 lakhs on account of purchase and sale of shares. The assessee argued that the loss in trading of derivatives was not a speculative loss in terms of Section 43(5) of the Income Tax Act and could not be disallowed as speculative loss under any provisions of the Income Tax Act. The Assessing Officer rejected that submission and held that Section 73 applied since it was independent of Section 43(5). Explanation to Section 73 can be applied even if there is delivery based sale purchase of shares and also in situations of trading of derivatives. It was held that the assessee was not engaged in any of the specifically excluded categories of business as to render Explanation to Section 73 inapplicable. The AO held that loss of Rs. 492.71 lakhs had to be treated as speculative loss and could not be allowed to be adjusted against business income. The CIT (Appeals) rejected the assessee's contentions. Therefore, a further appeal was preferred to the ITAT, which accepted the contention that Explanation to Section 73 applied, and granted the relief claimed. The revenue is in appeal against that part of the impugned order of the Tribunal.
3. Learned counsel for the Revenue argued that the reliance placed upon an amended Section 43 (4) of the Income Tax Act by the impugned order is erroneous. It is highlighted in this regard that the scheme and structure of Section 73 is clear. Counsel argued that explanation to the provision categorically provides that where any part of the business of the company includes purchase and sale of shares of other company, it shall be deemed to be carrying on speculation business to the extent to which the business consists of that activity. The intention of Section 43, counsel submitted, was to define certain terms in respect of classification of income and for purposes of Sections 28-41. Section 43(5) stated that transactions where contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips, it would not be deemed to be speculative transaction. By the amendment made w.e.f. 01.04.2006, four categories of contracts including the one provided under Section 43(5)(d) i.e. transaction in respect of trading and derivative as defined under Securities Contract (Regulation) Act, 1956 are not to be deemed to be speculative transaction. However, counsel drew strength from the fact that the said provision, i.e., Section 43(5)(d) has restricted application in that it defines speculative transaction and excludes transactions and derivatives only for a limited purpose. On the other hand, Section 73 has wider application and relates to all manner of losses. It deals with a question of under what circumstances can carry forwarding of such losses be permitted. Learned counsel for the Revenue relied upon the decisions reported as CIT v. Intermetal Trade Ltd., 2006 (285) ITR 536 (MP); CIT v. Arvind Investments Ltd., 1991 (192) ITR 365 (Cal) and Eastern Aviation and Industries Ltd. v. CIT, 1994 (208) ITR 1023. In this regard, it is submitted that the specific inclusion of the activity of sale and purchase of share of other companies from the otherwise general application of principles underlying Section 73 meant that those transactions could not claim the benefit of the provision. Derivatives of the kind and nature traded by the assessee in the present case were relatable to stocks and shares and what is more were the subject matter of transactions under the National Stock Exchange. In these circumstances, the Tribunal ought not to have permitted the assessee the benefit of Section 73.
4. Learned counsel for the Revenue submitted that there is no infirmity with the judgment and order of the Tribunal impugned in the present case. He highlighted the fact that the trade and transactions in derivatives as defined under Section 2 of the Securities Contract (Regulation) Act, 1956, were specifically excluded from the definition of speculative transactions. Even though that definition was in Section 43(5), yet neither the Tribunal nor the Court could ignore it since there was no other definition of derivatives in the Income Tax Act. Counsel sought to highlight that derivative need not be only in respect of stocks and shares but could also pertained to commodities. Such being the case, the Tribunal acted within its jurisdiction and correctly concluded that the assessee could enjoy the benefit of Section 73 and did not fall within the mischief of its explanation.
5. Counsel submitted that the decision of the Madras High Court in Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd., AIR 2011 Mad 144 in support of the submission that derivatives depend on underlying assets which are not confined to stocks and shares but can be commodities, metals, energy resources, bonds and foreign currencies etc. Assessee's counsel also relied upon the decision of the Division of the Bombay High Court reported as CIT v. Bharat R. Ruia (HUF), 2011 (337) ITR 452 (Bom) where especially the discussion relating to the amended position had taken place. The Bombay High Court had considered the pre-amended position and held that derivatives in the light of the then existing position under Section 45 (5) were speculative transactions but the position had changed after 01.04.2006 in view of the clarification by way of the amendment.
6. Before a discussion on the merits of the appeal, it would be essential to extract the relevant provisions of the Income Tax Act. Section 73 (with explanation), to the extent it is relevant, reads as follows:
"Losses in speculation business.
73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) | it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and | |
(ii) | if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. |
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than [four] assessment years immediately succeeding the assessment year for which the loss was first computed.
[Explanation.- Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]
Section 43, to the extent it is relevant, reads as follows:
43. In Sections 28 to 41 and in this section, unless the context otherwise requires-
** | ** | ** |
(5) "Speculative transaction" means a transaction in which a contract for the purchase of sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause-
(a) | A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or | |
(b) | a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or | |
(c) | a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member (or) | |
(d) | An eligible transaction in respect of trading in derivatives referred to in clause {(ac)} of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;] |
Shall not be deemed to be a speculative transaction,
[Explanation - Four the purpose of this clause, the expressions -
(i) | "eligible transaction" means any transaction - |
(A) | Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; ;and | |
(B) | which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; |
(ii) | "recognized stock exchange" means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] |
7. It is apparent, facially, that the term "speculative transaction" has been defined only in Section 43 (5). At the same time, it is qualified, i.e. that the scope of the definition is restricted in its application to working out the mandate of Sections 28 to 41 of the Act. In terms of the Explanation to Section 73 (4) in the case of a company, business of purchase and sale of shares is deemed to be speculation business. However, certain companies are excluded from this Explanation which are:
(i) | a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources'. | |
(ii) | a company, the principal business of which is the business of banking or the granting of loans and advances. |
8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall in Chapter IV, in Section D, which deal with computation of business income. The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out.
9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that "..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down...." The High Court then, after examining the nature and characteristics of derivatives transactions, observed that:
"5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows:
A derivative is a financial instrument:
(a) | whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); | |
(b) | that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and | |
(c) | that is settled at a future date. |
Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies."
10. It is no doubt, tempting to hold that since the expression "derivatives" is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus contextual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms (such as "unless the context otherwise requires") are used. In The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr AIR 1960 SC 971 it was held that:
"It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word "insurer" in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances."
Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that:
"4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used..............."
11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, "derivatives are assets, whose values are derived from values of underlying assets"; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives -once removed from it and entirely dependent on stocks and shares, for determination of their value).
12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses; the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to costs.
IT: Provisions of section 68 cannot be invoked while considering expenditure on sales promotion; such expenses are incurred for business and, thus, allowable under section 37(1)
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[2013] 35 taxmann.com 59 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax -2, Mumbai
v.
Sankalp Consumer Products (P.) Ltd.*
J.P. DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL (L) NOS. 153, 154, 157 & 158 OF 2013
MARCH 19, 2013
Section 37(1), read with section 68, of the Income-tax Act, 1961 - Business expenditure - Allowability of [Sales Promotion Expenses] - Assessment years 2003-04 to 2006-07 - Assessee was engaged in business of providing services for marketing consumer products belonging to various multinational companies - Assessing Officer disallowed amount paid to various parties as sales promotion expenses on ground that payment made to those parties were not genuine - Commissioner (Appeals) allowed appeal and held that assessee was dealing with organizations of repute and many of clients had reimbursed expenses to assessee - Tribunal held that provisions of section 68 cannot be invoked while considering expenditure on sales promotion as sought to be done by Assessing Officer - Expenses were incurred for purpose of business and, therefore, allowable under section 37(1) - Whether impugned order was based on concurrent finding of fact arrived at by Commissioner (Appeals) and Tribunal - Held yes [Para 5] [In favour of assessee]
Suresh Kumar for the Appellant.
ORDER
1. Office objections waived.
2. In these appeals by the Revenue for assessment years 2003-04, 2004-05, 2005-06 and 2006-07, following common question of law has been proposed for our consideration.
"Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the CIT (A), allowing the entire claim of expenses towards sales promotion?"
3. The respondent - assessee is engaged in the business of providing services for marketing consumer products belonging to various multinational companies. In the course of its marketing business, the respondent - assessee has debited a sum of Rs.2.38 crores towards sales promotion expenses. The assessing officer disallowed an amount of Rs.3.75 crores being the amount paid to various parties as sales promotion expenses on the ground that the payment made to these parties were not genuine. The Commissioner of Income Tax (A) allowed the appeal, holding that the respondent - assessee was dealing with the organizations of repute such as Cadbury India Limited etc. and many of the clients have reimbursed the expenses to the respondent - assessee.
4. On further appeal by the Revenue, the Tribunal while upholding the order of the Commissioner of Income Tax (A) held that the payment made for sales promotion expenses has to be allowed and it cannot be disallowed merely because the persons to whom the payments were being made did not file their sales-tax returns. The test to be applied is whether in the light of Section 37 of the Income Tax Act, 1961 ('Act' for short), the expenditure was of revenue nature and incurred for the purposes of business and the provisions of Section 68 of the Act cannot be invoked while considering the expenditure incurred on sales promotion as sought to be done by the assessing officer. The Tribunal while upholding the order of the Commissioner of Income Tax (A) held that the expenses were actually incurred for the purposes of business and, therefore, allowed under Section 37 of the Act.
5. The conclusion in the impugned order is based on concurrent finding of fact arrived at by the Commissioner of Income Tax (A) and the Tribunal. In these circumstances, we see no reason to entertain the proposed question of law. Accordingly, all the four appeals are dismissed with no order as to costs.
No exception for Govt. bodies under proviso to section 2(15)
IT : Proviso to section 2(15) would be attracted if activity carried on by institutions are similar to trade, commerce or business; for this purpose use or application or retention of consideration received is not relevant at all
IT : Proviso to section 2(15) will also apply to a regulatory body or a body incorporated by Government
■■■
[2013] 34 taxmann.com 210 (Panaji - Trib.)
IN THE ITAT PANAJI BENCH
Entertainment Society of Goa
v.
Commissioner of Income-tax*
P.K. BANSAL, ACCOUNTANT MEMBER
AND D.T. GARASIA, JUDICIAL MEMBER
AND D.T. GARASIA, JUDICIAL MEMBER
IT APPEAL NO. 90 (PANAJI) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
APRIL 5, 2013
Section 2(15) of the Income-tax Act, 1961 - Charitable purpose [Proviso] - Assessment year 2009-10 - Whether to attract proviso to section 2(15) inserted by Finance Act, 2008, institution need not actually be carrying on trade, commerce or business but activity carried on by it is to be similar to trade, commerce or business even without profit motive - Held, yes - Whether for determining whether assessee is engaged in charitable purpose in view of amended section 2(15), use or application or retention of consideration received is not relevant at all - Held, yes - Whether section 2(15) does not provide any exception under proviso to a regulatory body or a body incorporated by State Government or Central Government - Held, yes [para 15][In favour of revenue]
Section 2(15) of the Income-tax Act, 1961 - Charitable purpose [Registration of] - Assessment year 2009-10 - Main activity of assessee-trust was to organise and host international film festivals and to build multiplexes, cinema halls, media centers, screening rooms, auditoriums, comprehensive infrastructure facilities, etc., for holding such events - All services provided by it were for consideration - Whether amounts received by assessee by way of sponsorship, administrative charges, listing of hotels on their website, conducting film appreciation course clearly represented receipts from activity of rendering services in relation to trade, commerce or business and after insertion of proviso in section 2(15), assessee could not be regarded to have been established for charitable purpose - Held, yes [paras 18 & 19][In favour of revenue]
Words and Phrases : Words 'any activity in nature of' as occurring in proviso to section 2(15) of the Income-tax Act, 1961
FACTS
■ | The main objects of the activities of the assessee/trust/society was holding international film festival of India, advise the Government of India on various policies and issues relating to entertainment industry in the State of Goa, to create entertainment hub and to give global visibility, to inspect film education and film centre, and to build multiplexes, cinema halls, auditoriums, etc. It was granted registration under section 12A by the Commissioner vide order dated 13-4-2006 on the basis of the definition of 'Charitable purpose' as it existed under section 2(15) at that time. | |
■ | Subsequently, the definition of 'charitable purpose' was amended by inserting proviso thereto. In view of the amendment to section 2(15), the Commissioner was of the opinion that the assessee-institution could no more be said to have carrying on charitable purpose as the activities carried on by the institution were in the nature of trade, commerce or business or rendering service in relation to trade, commerce or business which were more than Rs. 10 lakh in the year. Therefore, he cancelled registration of the assessee from assessment year 2009-10. | |
■ | On appeal: |
HELD
■ | In view of provisions of section 12A, it is essential for the assessee for the purpose of the registration under the Act to prove that it has been established for charitable or religious purpose. It is not the case of the assessee-society that it is a religions society. Section 2(15) defines the 'charitable purpose'. This section was amended by the Finance Act 2008. The Commissioner, vide his order dated 13-4-2006, granted registration to the assessee-institution as its objects were within the term the advancement of any other object of 'General Public Utility'. Subsequently, the definition of 'charitable purpose' has been amended by adding the proviso thereto. [Para 13] | |
■ | Since the definition of charitable purpose got amended, it is incumbent on the part of the assessee to prove that it is not hit by the proviso to section 2(15). [Para 14] | |
■ | The proviso clearly states that the advancement of any other object of general public utility shall not be charitable purpose and subsequent to that it gives certain conditions. If the institution fulfils those conditions as are stipulated in the proviso, the institution will not be regarded to have been engaged for the advancement of any other object of general public utility for the purpose of section 2(15) and will no longer remain to have been engaged in charitable purposes. In fact, this proviso puts an embargo on the institution that in case the institution falls within the proviso, it will no longer be regarded to have been engaged for charitable purpose even if it is engaged in the advancement of any other object of general public utility. The embargo states that if the institution is engaged in carrying on of any activity in the nature of trade, commerce or business or any activity or rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, the institution shall not be regarded to have been involved in carrying on charitable purpose. This proviso in the last sentence further states that nature of use or application or retention of the income by the institution from such activity will not be relevant consideration. In view of this specific provision, one is not concerned to look into how an institution has used, applied or retained its income, if the same has been received by the institution from any activity carried out in the nature of trade, commerce or business or from any activity of rendering any service in relation to trade, commerce or business. The words used in the proviso are 'carrying on of any activity in the nature of trade, commerce or business' and not the words 'carrying on trade commerce or business'. Using of the words 'any activity in the nature of' prior to 'trade, commerce or business' has a specific meaning while interpreting the proviso. These words cannot be ignored. This mandates that the institution need not actually be carrying on trade, commerce or business but the activity carried on by it are to be similar to trade, commerce or business. The profit motive is required while an institution is carrying on trade, commerce or business. The use of words 'carrying on any activity in the nature of trade, commerce or business' will mean that there need not be profit motive in carrying on the activity by the institution. The legislature is fully aware of that an institution which is incorporated for charitable purpose cannot have profit motive. | |
■ | The assessee contended that whatever receipts or income the institution has received, that is for the purpose of holding of the film festival. This argument does not have any leg to stand for deciding whether the proviso of section 2(15) is applicable in the case of the assessee or not because the proviso clearly states that 'the nature of use or application or retention of the income from the activity carried on by the institution which are in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business' is not relevant. [Para 15] | |
■ | The main activity of the institution, as is apparent from its aims and objects, is to organize and host international film festival, to promote the entertainment industry. The institution, as per object (vi), is also entitled to earn revenue on long-term basis from ventures in film entertainment and leisure projects. The institution is also entitled as per object (viii) to build multiplexes, cinema halls, media centres, screening rooms, auditoriums, comprehensive infrastructure facilities, etc., for holding such events. | |
■ | The institution itself accepts that so far as sponsorship and contributions are concerned, it is directly connected with the film festival. It has received authorization charges for conducting the shooting; it has received hiring charges for hiring out the auditorium; it has received the licence fees for issuing licence to the multiplexes, even the premises usage charges have also been received; and it has received charges for listing hotels in their website. This represents activity of rendering the service in relation to film industry. It is not denied that all the services were rendered for a consideration. It has also received the film exhibit fees from the viewers for screening the film; it has received even short film receipts by way of entrance fees. Even the institution has given various stalls on hire and got receipt from that. This involves the carrying on activities in the nature of commerce or business. The nature of the receipts, even though might have been shown under the head 'Other receipts' in the Income & Expenditure, are, receipts received from carrying on activity in the nature of trade, commerce or business or from the activity of rendering any service in relation to commerce or business. The receipts by way of sponsorship, administrative charges, listing of hotels on their website, conducting film appreciation course clearly represent the receipts from the activity of rendering services in relation to trade, commerce or business. | |
■ | The assessee contended that exhibiting of the films, providing multiplexes, auditoriums, etc., are not for any fee or consideration. Its main argument circled around on the utilization of these receipts, that the purpose of these receipts is to defray the expenses of the film festival and film promotion. The proviso clearly states that for determining whether the assessee is engaged in charitable purpose, the use or application or retention of the consideration received is not relevant at all. The activities carried on by the institution, by any stretch of imagination, cannot be regarded not to be in the nature of trade, commerce or business. [Para 16] | |
■ | The institution cannot be regarded to be a regulatory body discharging the Government function and working as an arm of the Government. Had it been a regulatory body, it must have been authorized and incorporated under a separate Act of the Parliament as part of the Government Deptt. for regulating the exhibition of film, hosting of film festival, shooting of the films and providing licence and control over the multiplexes and the picture theatres. The institution is not authorized under any law and not been incorporated as such. Even if it is accepted that the institution is a regulatory body, section 2(15) does not provide any exception under the proviso that the proviso will not apply to a regulatory body or a body incorporated by the State Government or Central Government. [Para 17] | |
■ | Therefore, after the insertion of the proviso in section 2(15), the assessee cannot be regarded to have been established for charitable purpose. [Para 18] | |
■ | Since due to the insertion of the proviso in section 2(15), the assessee-society no longer remains to have been established or created for carrying out the charitable purposes. This is a mistake of law apparent on record which has crept into the order of the Commissioner passed under section 12A granting the registration to the assessee-society from the date of insertion of the proviso in section 2(15) and the order so passed requires rectification. [Para 19] | |
■ | No doubt, section 12AA(3) does empower the Commissioner to withdraw the registration under two circumstances only: |
(a) | Commissioner is satisfied that the activities of such trust are not genuine; or | |
(b) | the activities of the trust or institution are not being carried out in accordance with the objects of the trust. |
■ | The case of the assessee is different. The Commissioner issued notice to the assessee as the definition of 'charitable purpose' underwent change by the Finance Act, 2008. It is a case where the eligility of the assessee to get the registration undergoes a change due to the fact that the assessee no more remains being established for charitable purpose after the amendment being made in the definition of 'charitable purpose' given under section 2(15). The assessee, when applied for registration, was very much a charitable institution as per the definition of the 'charitable purpose' given under section 2(15) at that time and, therefore, entitled to the registration under section 12A. Once the assessee no more remains being established for charitable purpose after the insertion of proviso to section 2(15), the eligibility of the assessee for registration stands cancelled. The Commissioner is the law-implementing authority under section 12A and, therefore, it has power to rectify its order by cancelling/withdrawing the registration by rectifying the order passed under section 12A from the date when the assessee no more remains to be charitable institution. A legal mistake has occurred in the order of the Commissioner dated 13-4-2006 from the date when the proviso under section 2(15) has been inserted as the institution no more remains to have been created/established for charitable purposes or religious purposes. It is not the case of the assessee-institution that it has been created or established for religious purposes. If the registration will remain continued, the purpose of amendment made in section 2(15) will be defeated and injustice will be caused to those institutions having the similar objects as the assessee has but created or established after the amendment in section 2(15). The proviso cannot be read in this manner. [Para 20] | |
■ | The Commissioner has rightly cancelled the registration granted under section 12A as a mistake apparent on record has occurred in the order due to the amendment in section 2(15) of the Income-tax Act, and, therefore, no interference is called for in the order of the CIT. |
CASE REVIEW
Jalandhar Development Authority v. CIT [2010] 35 SOT 15 (Amr.) (para 18); M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd.[1958] 34 ITR 143/(SC) (para 19); IAC of Agricultural Income-tax & Sales Tax (Special) v. M. Ravi Namboodiripad [1974] 96 ITR 73 (SC)(para 19); J.M. Bhatia, Appellate CWT v. J.M. Shah [1985] 156 ITR 474/23 Taxman 58 (SC) (para 19); GTC Industries Ltd. v. Dy. CIT [2007] 104 ITD 86 (Mum.) (TM) (para 19) followed.
Addl. CIT v. Surat Art Silk Cloth Mfg. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC) (para 15); Himachal Pradesh Environment Protection & Pollution Control Board v. CIT [2010] 42 SOT 343 (Chd.) (para 17); CIT v. Sarvodaya Ilakkiya Pannai [2012] 343 ITR 300/20 taxmann.com 546/206 Taxman 115 (Mag.) (Mad.) (para 21) and Chaturvedi Har Prasad Education Society v. CIT [2011] 45 SOT 108 (Luck.) (URO) (para 22) distinguished.
CASES REFERRED TO
Himachal Pradesh Environment Protection & Pollution Control Board v. CIT [2010] 42 SOT 343 (Chd.) (para 4), H.P. Govt. Energy Development Agency v. CIT [2010] 134 TTJ (Chd.) (UO) 33 (para 4), CIT v. Sarvodaya Ilakkiya Pannai [2012] 343 ITR 300/20 taxmann.com 546/206 Taxman 115 (Mag.) (Mad.) (para 4), Addl. CIT v. Surat Art Silk Cloth Mfg. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC)(para 4), Goa Industrial Development Corporation v. CIT [IT Appeal No. 26 (Pnj.) of 2012, dated 22-6-2012] (para 5), Gujarat Industrial Development Corpn. v. Asstt. CIT [2010] 8 taxmann.com 2010/[2011] 129 ITD 73 (Ahd.) (Para 17), Jalandhar Development Authority v. CIT[2010] 35 SOT 15 (Asr.) (para 18), M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143 (SC) (para19), IAC of Agricultural Income-tax & Sale Tax (Special) v. M. Ravi Namboodiripad [1974] 96 ITR 73 (SC) (para19), J.M. Bhatia, Appellate Asstt. CWT v.J.M. Shah [1985] 156 ITR 474/23 Taxman 58 (SC) (para 19), GTC Industries Ltd. v. Dy. CIT [2007] 104 ITD 86 (Mum.) (TM) (para 19), CIT v.Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom.) (para 21), Chaturvedi Harprasad Education Society v. CIT [2011] 45 SOT 108 (Luck.) (URO) (para 22), Women India Trust [I.T. Appeal No. 1095 (Mum.) of 2012] (para 22) and Gujarat Cricket Association v. DIT(E) [2012] 19 ITR (Trib.) (520) (Ahd.) (para 22).
M.M. Golvala for the Appellant. Suresh Babu for the Respondent.
ORDER
P.K. Bansal, Accountant Member - This appeal filed by the Assessee is barred by limitation by one day. After the hearing the rival submissions and going through the Affidavit of the Chief Executive Officer of the institution stating therein that the appeal was drafted and signed on Friday, 2nd November, 2012 but could be filed only on the next working day i.e. Monday, 5th November, 2012. The limitation for filing the appeal since expired on 3.11.2012 and 3.11.2012 was a Saturday. Therefore, the appeal was filed on 5.11.2012. In view of this fact, we condone the delay and admit the appeal.
2. The only issue involved in this appeal filed by the assessee relates to the validity of the cancellation of registration by the CIT from assessment year 2009-10 which was guaranteed to the assessee u/s 12A of the Income Tax Act by the order dated 13.4.2006. The brief facts of the case are that the CIT noted that the assessee was granted registration u/s 12A by the CIT vide order dated 13.4.2006 on the basis of the definition of charitable purpose as it exists u/s 2(15) at that time. Subsequently, the definition of the charitable purpose was amended by inserting therein proviso. In view of this, the CIT issued notice to the assessee why the registration granted should not be cancelled. The CIT noted that the main objects of the activities of the trust / society is holding International Film Festival of India, advise the Govt. of India on various policies, issues relating to entertainment industry in the state of Goa, to create entertainment hub and to give global visibility, to inspect film education and film centre, to build multiplexes, cinema halls, auditoriums etc from the trust deed. The CIT noticed various aims and objects for which the institution was registered under the Societies Registration Act, 1980 and therefore in view of the amendment to section 2(15), the CIT was of the opinion that the assessee institution no more can be said to have carrying on charitable purpose and due to which the order passed granting the registration to the institution earlier requires review. Therefore, after hearing the assessee and going through the income and expenditure of the assessee he took the view that the activities carried on by the institution are in the nature of trade, commerce or business or rendering service in relation with trade, commerce or business which are more than Rs. 10 lakhs in each year and the institution fall within the purview of the amendment to section 2(15) of the Income Tax Act. CIT, therefore, cancelled the registration by observing as under :-
"7. I have gone through assessee's submissions and various documents. The assessee society has been holding International Film Festival in Goa and to create entertainment hub to give the state global visibility, to spread film education, film culture, to build multiplexes, cinema halls, auditorium etc and to develop infrastructure to meet the needs of IFFI. In this regard, the society has received licence fees from Multiplex, Hire charges for auditorium, income from sale of programme tickets, income from sale of tender forms, membership fees, income from authorization charges for conducting shootings and also income from stalls and usage of premises and disclosed them as revenue in the Income and Expenditure account. On perusal of Income and Expenditure account, it is seen that society has received major part of income by way of income from house property and government grant. Apart from house property income by way of income from house property and government grant. Apart from house property income and government grant, the society has earned substantial miscellaneous income from sale of programme tickets and web tender forms, bank interest, licence fee from multiplex, hire charge of auditorium, stall booking and administrative charges. All these activities hover around in the field of commerce or business or can be termed as rendering of service in relation to trade, commerce or business. Therefore, activities carried out by the society is akin to activities undertaken by private enterprises who are liable for tax. As per proviso to section 2(15) of the IT Act 1961 w.e.f. 01-04-2009, the advancement of any object general public utility will not be treated as for charitable purpose, if it involves the carrying on any activity in the nature of trade, commerce or business, or any activity or rendering any service in relation to any trade, commerce or business for a fee of any other consideration irrespective of the nature of use or application or retention of income from such activities. The society is clearly rendering some of the services in relation to trade, commerce or business for which it is charging fees which have been disclosed in Income and expenditure account as income. Section 2(15) further provides that the first proviso shall not apply if the aggregate value of receipts from the activities is Rs. 10 lakh or less. From the Income and expenditure accounts for A.Ys 2009-10 and 2010-11, it is seen that total receipts are Rs. 8,75,78,174 and Rs, 5,39,18,849 respectively. The society is also undertaking these activities and rendering service by charging income just like a commercial venture. Considering these facts, it is quit clear that the activities of society can not be held for charitable purposes and it's activities are directly hit by the amendment to section2(15) of the IT Act 1961 w.e.f 01-04-2009. The activities of society are therefore interconnected and interwoven with commerce or business. Therefore even if the main objective is to hold International Film Festival of India inter alia general public utility, in view of the insertion of proviso to section 2(15) w.e.f. 01-04-2009, the society is no more eligible for exemption as a Trust/Society under section 11 read with section 12A of I.T. Act 1961. The various decisions cited by the assessee are distinguishable on facts and objects and each case has to be decided on its own facts and no generalization is possible. Many decisions relied on by the assessee are relatable to legal position prior amendment to section 2(15) w.e.f. 01-04-2009. In view of the aforesaid facts and legal position, the contentions of the assessee can not be accepted.
8. In fact, the functions of society are similar to that of film industry i.e. to create entertainment hub and give global visibility, to spread film education and film culture, to build multiplexes, cinema halls, auditorium etc. and to develop infrastructure to meet the needs and aspirations of IFFI. In this regard, the society has received licence fees from Multiplex, Hire charges received from auditorium, sale of programme ticket, income from sale of tender form, membership fees, income from authorization charges for conducting shootings and also income received from stalls and usage of premises. Therefore earning is a predominant feature which negates the very concept of charitable purpose. The income generated by the society from these activities are not applied for general charitable purpose as is commonly understood but to further this commercial activity itself. The Supreme Court in the case of Thyagarajan Charities v. Addl. CIT and Ors has laid out that the test to find out if a trust is entitled to exemption u/s 11 r.w.s. 2 (15) of the Income Tax act,1961, because it has been established for the advancement of an object of general public utility not involving the carrying on of any activity for profit is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub serve the charitable purpose or to earn the profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. In the present case the predominant and sole activity is itself profit/income motivated and as such cannot be called as "Charitable" as defined U/s 2(15) of the Income Tax Act, 1961.
9. As laid out in the case of Self Employer's Service Society v. CIT (KER) 247 ITR 80 under the provisions of Section 12 AA, the Commissioner shall call for documents and information and hold enquiries regarding the genuineness of the trust or institution. If he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he will be pass an order granting registration and if he is not satisfied can refuse registration. Even if several charitable objects/activities were included in the objects of the society, but no charitable work and activities are done, the rejection of the application is justified.
10. Although the objects of the society falls under the limb "any other object of general public utility". The activities are commercial in nature to meet out its purpose of holding International Film Festival and develop film culture and propogation. As mentioned above, the activities are clearly in the field of trade, commerce or business and hence the society is not eligible for exemption u/s 11 of the I.T. Act. Therefore after careful consideration of the submissions and for the reasons as detailed above, I am of the opinion that the assessee society cannot be allowed the benefit of registration u/s 12A as a Charitable Trust w.e.f. 01-04-2009. Accordingly, the registration granted by the Commissioner of Income tax, Panaji vide order dated 13-04-2006 is hereby cancelled u/s 12AA (3) of the I. T. Act, from A.Y. 2009-10 onwards."
3. The Learned AR before us vehemently contended that the CIT was incorrect in law in cancelling the registration granted to the assessee under Section 12A of the Income Tax Act. The assessee has been established as per the aims and objects as contained in clause 3 of the Memorandum of Association and mainly for the purpose of holding International Film Festival of India since the Central Government, Ministry of Information & Broadcasting as declared Goa as permanent venue for holding International Film Festival of India (IFFI) since 2004. Other aims and objects include advice to Government of Goa on various policies, issues related to promotion of entertainment industry in the State of Goa, to create entertainment hub and to give global visibility, to spread film education and film culture, to build multiplexes, cinema halls, auditoriums etc. and to develop infrastructure to meet the ends of IFFI, to set up international film city and to establish film and T.V. institute etc. It was contended that the assessee is a regulatory arm and body of the Government of Goa in hosting IFFI. Our attention was drawn towards the main sources of income of the society which consists of licence fee from multiplexes, hire of auditoriums, usage of premises charges and miscellaneous income. For the details of miscellaneous income, attention was drawn towards page 37 of the audited Balance Sheet. Thus, it was contended that the main sources of income of the society is income from housing property and income from other sources. The society does not derive any income from business or profession. Mere owning and letting out of the building property will not amount to carrying on activity in the nature of a trade, commerce or business. It was stated that the assessee is a nodal agency and has been incorporated in accordance with the agreement between the Central Government and the State Government but the copy of the agreement was not provided. It was stated that as per the Memorandum of Understanding entered into between the Director of Film Festival, Ministry of Information and Broadcasting, Government of India and the State Government of Goa, the society is bound to create an atmosphere of mutual sharing and co-operation to share the invitation for opening and closing ceremonies between the Directorate of Film Festival and Goa Government including the labels for VIP parking for these events. The society is primarily controlled by the Ministry of Information and Broadcasting, Government of India and the Government of Goa and therefore it cannot be denied that it is not a charitable organization. Both, the Director, DFF and the State Government can invite film producers, directors, actors/actresses, film professionals, journalists both from India and abroad and decide upon the travel and hospitality to be extended to these guests. The society is bound to incur the expenditure on travelling as well as hospitality extended to these invitees. To meet out the costs of holding the International Film Festival as well as travelling and hospitality costs of the delegates, the society has to get the receipt by selling tickets in respect of films and the events being organized in auditoriums and multiplexes. The receipt, in fact, is not in the nature of carrying on any business. The learned AR did not deny that our charges for auditoriums and charges for usage of the premises and the receipt from the stalls as well as by way of sponsorships are also receipt but all these receipts are incidental and ancillary to the main objects of the assessee society. The assessee has not constructed the multiplexes but temporary possession of these multiplexes are regularly given to the assessee society as per the orders issued by the Government of Goa and these multiplexes are in their possession since October, 2004 till October, 2016. Even the Goa Government has given temporary possession of some property in Maquinez Palace Grounds comprising of Old GMC Complex, art gallery, two auditoriums (232 seater and 81 seater) and office space. Except for the office space, the balance premises are utilized only during the month leading to International Film Festival. During the rest of the year, the premises are given on hire almost exclusively to various Government Departments. The auditoriums are hired out at very nominal rent to encourage film culture. The assessee does not own any immoveable property. For this, attention was drawn towards the audited Balance Sheet. The purpose of various receipts is only to defray the costs incurred in organizing and holding the film festival. In respect of the various receipts given under the head miscellaneous receipts, following written submission were made :-
"1. Sponsorship & contributions
ESG receives sponsorship from various parties on the occasion of the film festival in return for deliverables such as branding their company via logo presence or advertising their services.
The receipt is directly connected with the film festival and the only object is to defray the expenses of the film festival.
2. Authorization charges for conducting shooting
As per the directives of the Goa Government, ESG issues NOC for film shooting in Goa. The amount collected is towards the same. For convenience, ESG acts as the agency of Government to collect these charges in form of single window system. 30% of the amount is remitted to the concerned panchayat where the shooting is done. Remaining 70% is retained by ESG for defraying its film festival and film promotion expenses.
3. Hire of Auditorium
Goa Government has given temporary possession of some of the property in Maquinez Palace ground to ESG which includes Old GMC Complex, Art Gallery, two auditoriums (232 seater and 81 seater) and office space. Except for the office space, other premises are utilized only during film festival. Since there premises remain idle during the rest of the year, the same are given on hire, mainly to Government Departments in need of office space. The auditoriums are hired out at nominal rent to encourage a film culture. Some of the expenses incurred on the complex are (refer Schedule "L" of accounts) :
| Rs. | |
(a) Security and cleaning | 20,07,513 | |
(b) Water charges | 5,12,522 | |
(c) Electricity charges | 22,54,970 |
On an average, revenue is received of Rs. 12-15 lakhs per annum. The average maintenance expenditure of Maquinez Palace, Old GMC building etc. is in the region of Rs. 40-50 lakhs per annum.
4. Web Tender Forms Receipts
ESG tenders various works for film festival. The tender forms are available in the office of ESG and on the ESG website. Whenever any bidder downloads the form directly from the website, they have to pay the cost of the tender form with the bid. The amount is towards cost of tender forms. This is a receipt directly connected with the film festival. The receipts only compensate partially towards administrative charges and stationery utilized to prepare the tender documents.
5. License fees from multiplex
The multiplex is a Goa Government property, the temporary possession of which is given to ESG, only with an intention to meet the expenses of the film festival by earning rent.
6. Film screening receipts
The amount collected is towards entry fees for screening film in the festival hosted by ESG - directly connected with the film festival.
7. Short films receipts
ESG has a segment called "Short Film Centre" during film festival where entries were invited from the producers producing short films/fillers with duration from 6 minutes to 60 minutes. The best film was then awarded with trophy and cash prize. These receipts are again towards entrance fees directly connected with film festival. For the A.Y. 2009-10 receipts from short film was Rs. 2,60,486 whereas the expenses was Rs. 56,94,205. (Refer Schedule "K" of accounts).
8. Usage of premises
Identical to Item 3 above. The buildings require a huge expenditure every year prior to monsoon for upkeep and maintenance. A Committee from Delhi visits each year prior to film festival and makes suggestions for further improvements/repairs to the premises.
9. Membership fees - Cinephile
ESG runs a club called "Cinephile" where film lovers can become a member. The object is to encourage the culture of watching films. A nominal amount is collected as membership fees. The membership is to be renewed annually by paying stipulated charges. The members are entitled to passes for the film festival. Further, they are also entitled, free of charge, to watch some other movies during the year. The expenditure to screen films is much more than the annual fees collected from the members. Annual Membership fee is approximately Rs. 1300/- per member. A single film screening costs Rs. 7000-8000.
10. Administrative charges
A.Y. 2009-10 - ESG had installed Projection system at Ravindra Bhavan for Directorate of Art & Culture (Govt. of Goa) and the amount was received as Administrative charges purely as a reimbursement of cost.
A.Y. 2010-11 - Directorate of Social Welfare (Govt. of Goa) had asked one producer to produce filler for their Department and the ESG was assigned job of verifying the same. Administrative charges were received towards the same purely as a reimbursement cost.
These are occasional receipts. No receipts of such nature have occurred in future years.
The above are one-off reimbursements.
11. Receipt towards listing of hotels on ESG website
In order to give ready reference of accommodation available to the delegates participating in film festival, ESG upload list of hotels along with their rates on the ESG website. The amount was received from different hotels as charges for listing their name on ESG website. However, the amount was collected for only one year. After that, the listing has been done free of cost till date. In any event, the receipt was directly connected with the film festival.
12. Receipts from stalls
ESG erects stalls during film festival. The same are given on hire. The receipts are towards the same. It is directly connected with film festival. The object is to enable guests/delegates to be catered easily at the venues at reasonable prices. The expenditure to install the stall is borne by the ESG - many times this expenditure is not fully recovered. Further an amount of approximately Rs. 10.00 lakhs has to be paid to CCP for waste management.
13. Films appreciation course receipts
ESG organizes Film Appreciation course every year in association with Film & Television Institute of India. During the course, faculty from FTII & National Film Archive of India are invited to deliver the lectures. The receipts are towards fees from the participants and is intended to cover the expenses of lecturers, whose travel expenses and boarding/lodging are paid for. This is part of education and general development of film industry. The expenditure is incurred on this course is much more than the receipts collected. The course is conducted to create an awareness among the masses regarding the film production and its allied activities. A total amount of Rs. 3500/- is charged for a 11 day program including lunch and snacks & tea for all 11 days.
14. Receipts from Portuguese film festival
ESG had organized Portuguese film festival during the Financial Year 2009-10. The amount is towards entry fees for screening film in the Portuguese Film Festival which is negligible. For A.Y. 2010-11 - expenditure of Rs. 39763/- is incurred against receipts of Rs. 3800/-."
4. It was contended that the assessee has been created for carrying on the object of general public utility. Reliance was placed towards decision of Chandigarh Bench in the case of Himachal Pradesh Environment Protection & Pollution Control Board v. CIT [2010] 42 SOT 343. The activities and objects carried on by the society at the time of grant of registration under Section 12A are same and there is no change in the activities as well as objects of the society. The registration under Section 12A(3) can be withdrawn when the CIT is satisfied that (i) activities of assessee are not genuine or (ii) activities of the assessee are not being carried on in accordance with the objects of the Trust or institution. The activities of the assessee cannot be regarded to be not genuine and the assessee is pursuing the objects for which it was established. Attention was drawn in this regard towards decision inH.P. Govt. Energy Development Agency v. CIT [2010] 134 TTJ(Chd) (U.O) 33 in which it was held that the CIT has power to cancel the registration only on being satisfied about either of the two points mentioned in section 12AA(3) and not for any other reason. Since in the case of the assessee, neither of the conditions is fulfilled, therefore, the registration cannot be cancelled. Reliance was also placed in this regard towards the decision of Ahmedabad Bench as well as Mumbai Bench of the Tribunal also which has been discussed by us subsequently. Reliance was also placed on the decision of Hon'ble Madras High Court in the case of CIT v. Sarvodaya Ilakkiya Pannai [2012] 343 ITR 300/20 taxmann.com 546/206 Taxman 115 (Mag.) in which it was held that in the absence of any activity carried out by the assessee contrary to the objects, the registration could not be revoked. This bench's attention was drawn to the decision of this bench in the case of Goa Industrial Development Corporation in which the registration granted under Section 12A was cancelled by the CIT was upheld by this tribunal. The Learned AR pointed out that the case of the assessee is distinguishable from the case of Goa Industrial Development Corporation as the dominant object in the case of the assessee is to conduct international film festival and there is no direct receipt for organizing the said festival, the assessee is permitted by the Government of Goa to defray its expenses by earning some receipts from temporary hire, sponsorship, incidental receipts of the film festival etc. Even after earning such receipts to meet its costs by way of reimbursement, the assessee yet needs to receive grant from the Goa Government each and every year in order to make its ends meet. The Goa Government, in fact, from F.Y. 2004-05 onwards has given grant in excess of Rs. 58.31 crore to the assessee. There is substantial deficit in each and every year right from inception in case of the assessee while the Goa Industrial Development Corporation was earning substantial income. The assessee does not carry out any trading or commercial activity. In the case of the assessee, there is no allegation in the notice for the withdrawal of the registration and that the assessee is engaged in trading activities. The assessee is engaged in holding international film festival and the said object is one of general public utility. All the receipts of the assessee are directly connected with the international film festival and are received only to enable the assessee to defray its expenses or as a reimbursement of its costs. The assessee has no real earning from organizing and holding of film festival. If receipts would not have been there, the Goa Government would have been compelled to give higher grants to the assessee. Reliance was placed on the decision of Addl. CIT v. Surat Art Silk Cloth Mfg. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC). It was submitted that in that case, while considering the expression "activity for profit" for the purpose of Section 2(15) of the Income Tax Act, the Hon'ble Supreme Court held that the test that must be applied is not whether, as a matter of fact, the activity results in profit but whether the activity is carried on with the object of earning profit. In other words, profit making must be the end to which the activity is directed or the pre-dominant object of the activity must be making of profit. In case of the assessee, there is no objective of making profit. When a person incurs expenditure far in excess of its receipts each year it is indicator of charitable activity and not a business activity.
5. The Learned DR, on the other hand, vehemently contended that the case of the assessee is covered by the decision of this bench in the case of Goa Industrial Development Corporation v. CIT [IT Appeal /26/PNJ/2012 dtd. 22.6.2012]. This tribunal has in that case dealt with all the arguments of the assessee. It is a case where the CIT has rectified his order passed for registration under Section 12A as Section 2(15) has been amended by insertion of proviso to Section 2(15) by the Finance Act, 2008. In view of the amendment in law, the assessee no more continues to be one created for charitable purpose. Referring to Section 2(15) of the Income Tax Act, it was stated that the proviso nowhere talks of whether the assessee is engaged for earning profit from the activities or not. The assessee is not denying that it was engaged in advancement of any other objects of general public utility which was a charitable purpose when the registration was granted. But since now the assessee is getting income/receipt by carrying out activity in the nature of trade/commerce or business, the assessee is getting fees for exhibiting films, the assessee is getting charges towards sponsorships, letting out of multiplexes, auditoriums, entertainment hubs, even getting charges for letting out stalls, may be temporary during the holding of international film festival, all these activities prove that the assessee is engaged in carrying on activities in the nature of commercial activity/business activity. All these activities are carried out by the assessee for consideration, may be in the nature of fees or otherwise. Due to the amendment being made to Section 2(15), the CIT found that a legal mistake has occurred in its order from the date from which the proviso under Section 2(15) was inserted and accordingly, CIT rectified its order passed under Section 12A by withdrawing the registration from the date when the proviso was inserted.
6. We have heard the rival submissions and carefully considered the same alongwith the order of tax authorities below. The assessee society was incorporated under the Societies Registration Act, 1860 vide registration no. 103/Goa/2004 dtd. 6.5.2004 for following aims and objectives :-
(i) | "to frame entertainment policy for the State of Goa and implement the same with the help of various agencies. | |
(ii) | to advise the Government of Goa on various policy issues related to promotion of entertainment industry in the State of Goa on a long term basis. | |
(iii) | To make the State of Goa the International Entertainment Hub and to give global visibility and recognition to the State of Goa. | |
(iv) | To leverage the International Film Festival as an anchor point to create permanent facilities that will enable the State of Goa to create a niche for itself in the realm of World Film Festivals and become known for its uniqueness and distinct character. | |
(v) | To organize and host International Film Festival in the State of Goa, on par with the leading film festivals of the world and host and organize world class entertainment events, exhibitions and expositions, etc. | |
(vi) | To earn revenue on a long term basis from ventures in film entertainment and leisure projects and also to suggest measures to increase revenue through direct and indirect taxes, levies and foreign exchange inflows and to bring about world wide recognition to the State of Goa as an ultimate tourism and entertainment destination and maximize the State of Goa's potential in this regard. | |
(vii) | To develop infrastructure to meet the needs of International Film Festival and bring in global investment, to create an environment which will lead to increased employment opportunities for the locals like cameramen, T.V. technicians, trolley operators, curators, musicians, singers, dancers, dramatists, etc. | |
(viii) | To build multiplex, cinema halls, media-centres, screening rooms, auditoriums, comprehensive infrastructure facilities, maintain them and provide services for telecommunications, transportation, parking, banking, internet connectivity, power supply, water, sewerage, sanitation, etc. for holding other International Event/Festival and other similar type of events. | |
(ix) | To set up international film city, studios, auditoriums with suitable capacities and training centers or a film institute to provide training to the prospective film makers, artists, directors, technicians and other related trades and set up film market or bazaar. | |
(x) | To renovate the existing buildings, houses and residential accommodation to meet the requirements of the film festival and to conceptualize and develop properties for the Government of Goa for the purpose of entertainment industry by bringing in best companies for facilitation of investment and land development programmes and leisure development projects. | |
(xi) | To conserve the improve the heritage buildings, to develop the water front, pedestrians plaza. | |
(xii) | To conduct publicity campaigns through print media, internet, videos and films and other new medium of communication that integrates information and marketing on a global level. | |
(xiii) | To involve in networking and relation building in the interest of entertainment industry in the State of Goa and to adopt innovative ideas for improving the organization of film festival every year. | |
(xiv) | To give awards, prizes and certificates to selected firms and artists in various categories like directors, producers, photographers, lyrics, musicians, acting artists etc. | |
(xv) | In general to do such things or undertake to do such other things from time to time as shall be deemed necessary for the promotion of the ideas and attainment of the objectives of the Society to do all such acts and things, whether incidental to the power aforesaid or not, as may be required in order to further the objectives of the Society. | |
(xvi) | The income and property of the Society, however, shall be used for the promotion of the objectives of the Society. | |
(xvii) | The Society shall maintain a fund to which shall be credited :- |
(a) | all moneys received from the local or Central Government; | |
(b) | all moneys received in any other manner or from any other source; |
(xviii) | To receive grants from the State and the Central Government or any other Institutions for maintenance and administrative set up of the Society, incur expenditure for the overall development related to development of infrastructure connected with entertain industry. | |
(xix) | To accept donations/contributions from any sources and utilize them for achieving the objectives of the Society and to strengthen its financial position." |
7. The society was granted registration under Section 12A(a) by the Commissioner of Income-Tax, Panaji, Goa vide order dtd. 13.4.2006. The registration was granted when Section 2(15) defined "charitable purpose" as under :
"Charitable purpose includes relief to the poor, education, medical relief, and the advancement of any other object of general public utility."
8. Subsequently this section was amended by the Finance Act 2008 by adding the proviso thereto and thereafter, this section reads as under: -
"Charitable purpose includes relief of the poor, education medical relief, preservation of environment (including water shades, forest and wild life) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility:
Provided that the advancement of any other object General Public Utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for cess or fee or any other consideration, irrespective of nature of use or application, or retention, of the income from such activity:
Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is 10 Lakh rupees or less in the previous year."
After insertion of the proviso to Section 2(15), the CIT issued a notice to the assessee dtd. 12.12.2011 stating therein the subject for review of the registration granted under Section 12A of the Income Tax Act. This letter reads as under :
"In view of the amendment to Section 2(15) of the I.T. Act 1961 of definition of "Charitable Purpose", it has been brought to my notice that your institution has not fulfilled the conditions laid down u/s 2(15) of IT Act 1961. Therefore, please explain why the registration granted to the institution u/s 12A(a) of the IT Act, 1961 should not be withdrawn."
9. Subsequently, after receiving reply of the assessee vide letter dt. 21.12.2011, CIT again issued so cause notice for withdrawal of the registration granted under Section 12A analyzing the receipts of the assessee and asking for explanation of the assessee society in view of the various receipts which are regarded to have been derived from carrying out the activities in the nature of trade, commerce and business. The assessee society vide its letter dtd. 16.12.2011 made the following submissions :-
"i. From the above details of sources of income, your Hon. will observe that our main source of income are "Income from House Property and Income from Other Sources" and there is no income assessable under the head "Income from Business or Profession".
In the case of Andhra Chamber of Commerce (1980) 130 ITR, 184 (SC) and High Court decisions reported in 140 ITR, 795 (1982 MP), 147 ITR, 468 (1982 MP), and 246 ITR, 188 (2000 GUJ), it has been held that mere owning and letting out building property will not amount to carrying on of activity in the nature of trade, commerce or business.
It has been held in the case of H.P. Environment Protection Control Board v. CIT (Chd) (2009) 125 TTJ 98 that "There is no conflict in an assessee being a regulatory body and its pursuing an "object of general public utility" which qualifies to be a Charitable activity u/s. 2(15). The scope expression "any other objects of general public utility" is indeed very wide, though it would indeed exclude the objects of private gains such as an undertaking for commercial profit even as the undertaking may sub-serve general public utility."
"It has been further held that in any case, insertion of proviso to s.2(15) does not mean that an assessee would be hit by the proviso in case it is to receive any payment for anything done for trade, commerce or business - Where an object of General Public Utility is not a mere mask to hide true purpose or rendering of any service in relation thereto, and where such services are rendered as purely incidental to or as subservient to the main object of "General Public Utility", the carrying on of bona fide activities in furtherance of such objects is not hit by the proviso to sec. 2(15) - Since the expression 'Rendering of any Service to business, trade or commerce' is used in conjunction with the words 'business, trade or commerce', these 2 expressions must be interpreted in their cognate sense - Thus, in order to invoke second limb of proviso to sec. 2(15), rendering of service to trade, commerce or business must be such that it has a profit motive - Activities performed by the assessee are regulatory function for the public good, and any collection of fees or charges in the course of discharging these regulatory functions cannot be viewed as a consideration for rendering these services - There is no substance in the CIT's stand that the income earned by the assessee as licence fees, consent fees and testing charges are receipts in consideration of rendering the services to trade, commerce or business - These are not the services with the profit motive - Assessee is admittedly pursuing the objects for which it was established and it cannot be said that its activities are not genuine." Copy of said decision is enclosed hereto as 'ANNEXURE - I'
In view of the above, we submit that ESG is not carrying on any activity in the nature of trade, commerce or business as envisaged under amended proviso to Sec. 2(15) of the Income Tax Act, 1961.
ii. Without prejudice to the above, assuming but without admitting that ESG is carrying on business, still the same are protected under exceptions contained in the provisions of Section 4(A) of Section 11 of the Income Tax Act, 1961. In this connection, it is interesting to note that the provisions of sub-section (4) and (4A) of section 11 have not been amended. Sub-section (4) clarifies that "property held under trust" includes a business undertaking so held. Sub-section (4A) enables exemption to be availed in respect of profits and gains of business if the business is incidental to the attainment of the objectives of the trust and separate books of accounts are maintained in respect of such business. While the intention of the new proviso is to deny exemption to income from business and similar other related activities, the purpose of sub-section (4A) is to grant exemption to income from business subject to fulfillment of certain conditions.
Since the proviso does not contain a non-obstinate clause, it cannot override the provisions of sub-sec. (4A). Therefore, the newly inserted proviso should be read subject to the exception contained in the provisions of sub-section 4(A) of section 11.
In this connection it is worth noting the recent decision in the case of Gujarat Industrial Development Corporation v. ACIT , ITAT, AHMEDABAD 'C' BENCH (2011) 138 TTJ (Ahd) 714. Copy of the said decision is enclosed hereto as 'ANNEXURE - II'.
iii. It is observed from the Show Cause notice of your Hon. Under reference that it has not stated under which provisions of Income Tax Act, the Registration granted to ESG u/s 12A(a) of the Income Tax Act, 1961 is proposed to be withdrawn. However, considering the earlier letters about Review of Registration and personal discussion in the matter during the course of hearing, it is presumed that the proposed action of withdrawal is u/s. 12AA(3) of the Income Tax Act, 1961.
In connection with the above proposed action u/s. 12AA(3), it is submitted that the activities and objects carried on by ESG at the time of grant of Registration u/s. 12A are the same and there are no changes in its activities or its objects till this date.
A plain reading of Sec. 12AA(3) would indicate that a Registration granted u/s. 12AA can only be withdrawn when the CIT is satisfied that -
(a) | The activities of the Trust or Institution are not 'genuine' or | |
(b) | The activities of the assessee are not being carried out in accordance with the objects of the Trust or the Institution. |
There cannot be any other legally sustainable reasons for canceling or withdrawing the registration granted u/s. 12AA.
In the light of the above, if activities carried on by ESG are verified and reviewed since its inception till this date then one can not say by any stretch of logic to be not genuine and ESG is admittedly pursuing the objects for which it is established. When ESG is engaged in bona fide activities, within the frame work of law, to pursue its objective, it can not be said that the activities of ESG are not genuine.
In connection with the above, recently in the case of H.P. Govt. Energy Development Agency V/s Commissioner of Income-Tax, ITAT, Chandigarh 'A' Bench, (2010) 134 TTJ (Chd) (UO) 33, it has been held at para 8 of page 39 as under -
"It is evident that Power of the CIT to cancel the Registration is not unfettered. It is circumscribed by the conditions prescribed in Section 12AA(3) of the Act. It is also clear that such power does not permit wholesale review of the ingredients which have been considered by the CIT while granting Registration u/s. 12AA of the Act. To illustrate, we may point out that at the time of evaluating the application of Registration u/s. 12AA(1) of the Act, the CIT is to satisfy himself on the two conditions i.e. that activities are genuine and that the objects of the applicant fall within the meaning of 'Charitable Purpose' as per Section 2(15) of the Act. In contrast at the time of cancelling of Registration u/s. 12AA(3) of the Act the CIT has to satisfy himself about either of the two conditions prescribed therein, namely that the activities not genuine or that the activities are not being carried out in accordance with the objects of the Trust or Institution, as the case may be. Pertinently, the satisfaction about the objects of the Trust or Institution being as per Section 2(15) of the Act, is not condition mentioned in Section 12AA(3) of the Act to cancel the Registration already granted u/s. 12AA(3) of the Act. The only ground available with the CIT to cancel the Registration is to either establish that the activities of the Trust or Institution are not genuine or same are not being carried out in accordance with the objects of the trust or institution as the case may be. In our considered opinion the CIT is bound to function strictly in accordance with the provisions of the Act. A Statutory Authority has no power, jurisdiction or discretion to go beyond the Statutory Provisions. No power can be assumed in the absence of any specific provision. It is quite clear that as per Sub-Section (3) of Section 12AA of the Act, CIT has power to rescind the registration only on being satisfied about either of the two points mentioned therein, and not for any other reason. We may conclude here that the registration already granted u/s. 12AA(1)(b) of the Act can be cancelled only on the fulfillment of the conditions mentioned in Section 12AA(3) of the Act and not for any other reasons."
Copy of the above decision is enclosed herewith as 'ANNEXURE-III'
In view of the above facts and legal submissions we sincerely believe that ESG has fulfilled the conditions as laid down u/s.2(15) of the Income Tax Act, 1961 and your Hon. may be satisfied with the above explanations, and hence we request your Hon. not to withdraw the Registration granted to ESG u/s. 12A(a) of the Income Tax Act, 1961."
10. After analyzing the various receipts of the assessee alongwith the reply of the assessee, the CIT withdrew the registration already granted to the assessee under Section 12A of the Income Tax Act, 1961. Now, the question before us is whether the assessee is regarded to have been established for charitable purpose even after insertion of proviso to Section 2(15) of the Income Tax Act, 1961. The proviso regarding the registration and procedure for registration are given under the Income Tax Act, 1961 under Section 12A, 12AA and Rule 17 which are re-produced as under :
"Section 12A
The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:-
(a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution is registered under section 12AA] :
Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution, -
(i) | From the date of the creation of the trust or the establishment of the institution if the Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period aforesaid for sufficient reasons; | |
(ii) | From the first day of the financial year in which the application is made, if the Chief Commissioner or Commissioner is not so satisfied: |
Provided further that the provisions of this clause shall not apply in relation to any application made on or after the 1st day of June, 2007.
(a) The person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June 2007 in the prescribed form and manner to the Commissioner and such trust or institution is registered under section 12AA
(b) Where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of the trust or institution for that year have been audited by an accountant as defined in the explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
(c)** | ** | ** |
(2) where an application has been made on or after the 1st day of June, 2007 the provisions of sections 11 and 12 shall apply in relation to the income of such year in which such application is made"
Procedure for registration
"Section 12AA
12AA. (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) [or clause (aa) of sub-section (1)] of section 12A, shall—
(a) | call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and | |
(b) | After satisfying himself about the objects of the trust or institution and the genuineness of its activities, he— |
(i) | Shall pass an order in writing registering the trust or institution; | |
(ii) | shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant : |
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.
[(1A) All applications, pending before the Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Commissioner and the Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.]
(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) [or clause (aa) of sub-section (1)] of section 12A.]
[(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)]] and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.]"
"Application for registration of charitable or religious trusts, etc.
17A. An application under [clause (aa) of sub-section (1)] of section 12A for registration of a charitable or religious trust or institution shall be made in duplicate in Form No. 10A and shall be accompanied by the following documents, namely :—
(a) | where the trust is created, or the institution is established, under an instrument, the instrument in original, together with one copy thereof; and where the trust is created, or the institution is established, otherwise than under an instrument, the document evidencing the creation of the trust or the establishment of the institution, together with one copy thereof : | |
Provided that if the instrument or document in original cannot conveniently be produced, it shall be open to the [***] Commissioner] to accept a certified copy in lieu of the original; | ||
(b) | where the trust or institution has been in existence during any year or years, prior to the financial year in which the application for registration is made, two copies of the accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up.]" |
11. From the provision of the section 12A, it is clear that this section states that provision of Section 11 and 12 are not applicable unless condition for registration of the Trust or institution is fulfilled. Section 12(1)(a) requires making of an application for registration; in the prescribed form and in the prescribed manner to the Commissioner before the expiry of 01 year from the date of the constitution of the Trust or institution. In case application is made after the expiry of the period of 01 year the provisions of section 11 & 12 are not applicable. For an application made prior to 1st day of June 2007, the commissioner has the power to condone the delay, if he satisfied that the person was prevented from making the application before the expiry of aforesaid period for sufficient reason. Such Trust or institution has also to get its account audited by an accountant as defined in the explanation below Section 288(2) in the case the total income of the Trust or institution without considering the provision Section 11 & 12 exceeds the maximum amount not chargeable to tax in any previous year. Such Trust or institution was bound to furnish such audit report in the prescribed form duly signed and verified by such accountant. Explanation to section 288(2) defines accountant to mean a Chartered Accountant and who is competent to act as an auditor u/s 226(2) of the Company's Act.
12. The provisions of section 11 are applicable only to the persons deriving income from property held under Trust for charitable or religious purposes. They are not applicable if the person is not in receipt of the income derived from property held for charitable or religious purposes. Section 12AA lays down the procedure for the registration of such Trust or institution. Rule 17A of the IT Act lays down how an application for registration of charitable or religious Trust is to be made. It also prescribes form No. 10A and also requires that the application for registration can be made only by a charitable or religious Trust or institution. This rule also prescribes the various documents which are to be enclosed along with the application. The copy of the instrument by which the trust is created or institution is established has to be filed. If the Trust or institution was in existence prior to the year in which the application is made, two copies of the accounts of the Trust such prior year being not more than 3 years has to be filed. Accounts in our opinion here means the audited accounts in case the provision of section 12 (1) (b) are applicable.
13. Therefore, in our opinion, it is essential for the assessee for the purpose of the registration under the Income Tax Act to prove that it has been established for charitable or religious purpose. It is not the case of the assessee society that it is a religious society. Section 2(15) defines the charitable purpose. This section was amended by the Finance Act 2008. The CIT vide his order dt. 13/04/2006 granted registration to the assessee institution as its objects were within the term "the advancement of any other object of General Public Utility". Subsequently, the definition of the charitable purpose has been amended by adding the following proviso: -
"Provided that the advancement of any other object General Public Utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for cess or fee or any other consideration, irrespective of nature of use or application, or retention, of the income from such activity:
Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is 10 Lakh rupees or less in the previous year."
14. Since the definition of charitable purpose got amended, it is incumbent on the part of the assessee to prove that it is not hit by the proviso to section 2(15). The contention of the department is that the assessee is carrying on activity in the nature of trade, commerce or business for a consideration, while the assessee contents that it is not hit by the proviso. The assessee is not carrying on any trade, commerce or business.
15. From the perusal of Section 2(15) after the insertion of the proviso which is applicable only in case where the assessee is engaged in the advancement of any other object of general public utility, the definition of charitable purpose got amended. The proviso as is apparent clearly states that the advancement of any other object of general public utility shall not be charitable purpose and subsequent to that it gives certain conditions if the institution fulfils those conditions as are stipulated in the proviso, the institution will not be regarded to have been engaged for the advancement of any other object of general public utility for the purpose of Section 2(15) of the Income Tax Act and will no longer remain to have been engaged in charitable purposes. In fact, this proviso puts an embargo on the institution that in case the institution falls within the proviso, it will no longer be regarded to have been engaged for charitable purpose even if it is engaged in the advancement of any other object of general public utility. The embargo states that if the institution is engaged in carrying on of any activity in the nature of trade, commerce or business or any activity or rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, the institution shall not be regarded to have been involved in carrying on charitable purpose. This proviso in the last sentence further states that nature of use or application or retention of the income by the institution from such activity will not be a relevant consideration. In view of this specific provision, we are not concerned to look into how an institution has used, applied or retained its income, if the said has been received by the institution from any activity carried out in the nature of trade, commerce or business or from any activity of rendering any service in relation to trade, commerce or business. The words used in the proviso are "carrying on of any activity in the nature of trade, commerce or business" not the words 'carrying on trade commerce or business'. Using of the words 'any activity in the nature of' prior to 'trade, commerce or business' in our opinion has a specific meaning while interpreting the proviso. These words cannot be ignored. This in our opinion mandates that the institution need not actually be carrying on trade, commerce or business but the activity carried on by him are similar to trade, commerce or business. The profit motive is required while an institution is carrying on trade, commerce or business. The use of words 'carrying on any activity in the nature of trade, commerce or business' in our opinion will mean that there need not be profit motive in carrying on the activity by the institution. If we will interpret the words 'carrying on of any activity in the nature of trade, commerce or business' equivalent to the words 'carrying on trade, commerce or business'. In our opinion, there was no need of incorporating in the proviso, the words 'of any activity in the nature of' prior to the words 'trade, commerce or business'. The legislature is fully aware of that an institution which is incorporated for charitable purpose cannot not have profit motive. Due to this reason, if we go to the background of Sec. 2(15), the Hon'ble Supreme Court interpreted Sec. 2(15) in the case of Surat Art Silk Cloth Mfg. Association (supra) when the Section 2(15) contained the words "not involving the carrying on of any activity for profit" after "advancement of any other object of general public utility". Profit motive in respect of an institution cannot be main object but it may be ancillary and incidental to the main objects due to which Sec. 11(4A) was also incorporated under the Income Tax Act initially by Finance Act, 1983 w.e.f. 1.4.1984. The Learned AR even though relied before us on the decision of Hon'ble Supreme Court in case of Surat Art Silk Mfg. Association (supra), but this decision is not applicable in the case of the assessee at all as it relates to the interpretation of Sec. 2(15) prior to its amendment by the Finance Act, 1983 when the words 'not involving any activity for profit' were there under Section 2(15) after the words 'advancement of any other objects of general public utility'. This decision does not define the words 'carrying on of any activity in the nature of trade, commerce or business or any activity or rendering any services in relation to any trade, commerce or business'. The Learned AR vehemently argued before us that whatever receipts or income the institution has received, that is for the purpose of holding of the film festival. This argument of the learned AR, in our opinion, does not have any leg to stand for deciding whether the proviso of Sec. 2(15) is applicable in the case of the assessee or not because the proviso clearly states that 'the nature of use or application or retention of the income from the activity carried on by the institution which are in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business' is not relevant.
16. Now, the question arises what activity the assessee institution is carrying on. The main activity of the institution as is apparent from its aims and objects is to organize and host international film festival, to promote the entertainment industry. The institution as per object (vi) is also entitled to earn revenue on long term basis from ventures in film entertainment and leisure projects. The institution is also entitled as per object (viii) to build multiplexes, cinema halls, media centres, screening rooms, auditoriums, comprehensive infrastructure facilities etc. for holding such events. We have gone through the Income & Expenditure of the Assessee on which our attention was drawn during the course of the hearing which is available at pg. 37 of the paper book. The details of the various income shown in the Income & Expenditure account under the head "Other Receipts" for the year ended 31.3.2009 and 31.3.2010 are as under :
Other Receipts | ||
| 31.03.2010 | 31.03.2009 |
Sponsorship & Contributions | 61,50,000 | 32,86,500 |
Authorization charges for conducting shooting | 35,49,000 | 18,93,500 |
Hire of Auditoriums | 36,42,892 | 12,60,288 |
Bank interest | 2,04,255 | 4,16,410 |
Tender Forms Receipts | 77,500 | 1,37,200 |
Licence fees from Multiplex | 3,79,00,008 | 3,79,00,008 |
Right to information | 1,374 | 642 |
Film Screening Receipts | - | 60,098 |
Short Film Receipts | 2,19,752 | 2,60,486 |
Usage of Premises | 13,653 | 2,23,741 |
Membership fees - Cinephile | 3,20,725 | 5,01,733 |
Administrative charges | 39,450 | 8,45,243 |
Interest on Income Tax Refund | 3,65,160 | - |
Receipt towards listing of Hotels on ESG | ||
Website | 41,000 | - |
Receipt from Stalls | 9,73,766 | - |
Film Appreciation Course Receipts | 72,500 | - |
Receipts from Portuguese Film Festival | 3,800 | - |
Total | 5,35,74,835 | 4,67,85,849 |
The nature of each receipt was duly explained by the Learned AR as has been reproduced hereinabove in the submissions of the AR. The institution itself accepts that so far as sponsorship and contributions are concerned, that it is directly connected with the film festival. It has received authorization charges for conducting the shooting, it has received hiring charges for hiring out the auditorium, it has received the licence fees for issuing licence to the multiplexes, even the premises usage charges has also been received and it has received charges for listing hotels in their website. This in our opinion represents activity of rendering the service in relation to film industry. It is not denied that all the services were rendered for a consideration. It has also received the film exhibit fees from the viewers for screening the film, it has received even short film receipts by way of entrance fees, Even the institution has given various stalls on hire and got receipt from that. This in our opinion involves the carrying on activities in the nature of commerce or business. The nature of the receipts, even though might have been shown under the head "Other Receipts" in the Income & Expenditure are, in our opinion, receipts received from carrying on activity in the nature of trade, commerce or business or from the activity of rendering any service in relation to commerce or business. The receipts by way of sponsorship, administrative charges, listing of hotels on their website, conducting film appreciation course clearly represents the receipts from the activity of rendering services in relation to trade, commerce or business. It is not denied by the learned AR that exhibiting of the films, providing multiplexes, auditoriums etc. are not for any fee or consideration. His main argument circled around on the utilization of these receipts, that the purpose of these receipts is to defray the expenses of the film festival and film promotion. The proviso as has been mentioned by us earlier, clearly states that for determining whether the assessee is engaged in charitable purpose, the use or application or retention of the consideration received is not relevant at all. The activities carried on by the institution by any stretch of imagination cannot be regarded not to be in the nature of trade, commerce or business. The contention of the learned AR before us is mainly that it is not carrying on any trade, commerce or business for earning profit but the proviso does not talk of so.
17. Now, we will deal with the next submission of the institution that it is a regulatory body to discharge the functions of the Government. The institution, in our opinion, cannot be regarded to be a regulatory body discharging the Government function and working as an arm of the Government. Had it been a regulatory body, it must have been authorized and incorporated under a separate Act of the Parliament as part of the Government Dept. for regulating the exhibition of film, hosting of film festival, shooting of the films and providing licence and control over the multiplexes and the picture theatres. The institution is not authorized under any law and not been incorporated as such. Even for the sake of argument if we accept that the institution is a regulatory body, Sec. 2(15) does not provide any exception under the proviso that the proviso will not apply to a regulatory body or a body incorporated by the State Government or Central Government. If the interpretation as suggested by the learned AR has to be accepted, in that case, all the public sector undertakings shall be regarded to have been created for charitable purpose i.e. advancement of objects of general public utility. The public sector undertakings have more strong case as they are enacted under the statute of Government. They are also financed and controlled by the Government. In this regard, the learned AR vehemently relied on the decision of Himachal Pradesh Environment Protection & Pollution Control Board (supra). This decision is also not applicable in the present case as in the case before us the institution is engaged in an activity in the nature of trade, commerce or business and also the activity of rendering service in relation to trade, commerce or business for a consideration while in that case, the assessee was not rendering any service in relation to any trade, commerce or business, rather it was discharging regulatory function for controlling pollution and collecting the fees or charges for that. The decision of the Gujarat Industrial Development Corpn. v. Asstt. CIT [2010] 8 taxmann.com 210/[2011] 129 ITD 73 (Ahd.) relates to A.Y. 2006-07 and is not concerned with the proviso to Sec. 2(15) of the Income Tax Act and the question involved therein relates to the applicability of the proviso of Sec. 11(4) of the Income Tax Act.
18. It is not rendering regulatory function only as Himachal Pradesh Environment Protection and Pollution Control Board is doing in the case before theChandigarh Bench (supra). They were not entertaining the people by charging the entry fee etc by exhibiting films. We do not find any force in the submission made by the Ld. AR specially relying on the decision of Himachal Pradesh Environment Protection and Pollution Control Board. We, therefore, are of the firm opinion that after the insertion of the proviso in section 2(15), the assessee cannot be regarded to have been established for charitable purpose. Our view is also supported by the decision of the Amritsar Bench of the ITAT in the case of Jalandhar Development Authority v.CIT [2010] 35 SOT 15.
19. The co-ordinate bench of this tribunal has also taken similar view in the case of Goa Industrial Development Corporation (supra). Thus, since due to the insertion of the proviso in section 2(15), we are of the view that the assessee society no longer remain to have been established or created for carrying out the charitable purposes. This, in our opinion, is a mistake of law apparent on record which has crept in to the order of the CIT passed u/s section 12A granting the registration to the assessee society from the date of insertion of the proviso in section 2(15) and the order so passed requires rectification. Our aforesaid view is supported by the following decision :-
M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143 (SC).
IAC of Agricultural Income Tax & Sales Tax (Special) V.M. Ravi Namboodiripad [1974] 96 ITR 73 (SC).
J.M. Bhatia, Appellate Asstt. CWT v. J.M. Shah [1985] 156 ITR 474/23 Taxman 58 (SC).
GTC Industries Ltd. v. Dy. CIT [2007] 104 ITD 86 (Mum.) (TM).
The decision of the third member in the case of GTC Industries Ltd. (supra) is binding on us.
20. No doubt, section 12AA(3), does empower the CIT to withdraw the registration under two circumstances only:-
(a) | CIT is satisfied that the activities of such trust are not genuine; or | |
(b) | The activities of the trust of institution are not being carried out in accordance with the objects of the trust. |
The case of the assessee is different. The CIT issued notice to the assessee as the definition of "charitable purpose" undergoes a change by the Finance Act, 2008. We have already held that it is a case where the eligibility of the assessee to get the registration undergoes a change due to the fact that the assessee no more remains being established for charitable purpose after the amendment being made in the definition of charitable purpose given u/s 2(15) of the Income Tax Act. The assessee when applied for registration was very much a charitable institution as per the definition of the charitable purpose given u/s 2(15) at that time, therefore entitled for the registration u/s 12A. Once, in our opinion, the assessee no more remains being established for charitable purpose after the insertion of proviso in section 2(15), the eligibility of the assessee for registration stands cancelled. The CIT is the law implementing authority u/s 12A and therefore, it has power to rectify its order by cancelling/withdrawing the registration by rectifying the Order passed u/s 12A from the date when the assessee no more remains to be charitable institution as is held by us in the preceding para. In our opinion, a legal mistake has occurred in the order of the CIT dtd. 13.4.2006 from the date when the proviso under Section 2(15) has been inserted as the institution no more remains to have been created/established for charitable purposes or religious purposes. It is not the case of the assessee institution that it has been created or established for religious purposes. If the registration will remain continued, the purpose of amendment made in section 2(15) will be defeated and injustice will be caused to those institutions having the similar objects as the assessee has but created or established after the amendment in section 2(15) of the Income Tax Act. We cannot read the proviso in this manner.
21. We have also gone through the decision of the Madras High Court in Sarvodaya Ilakkiya Pannai (supra). The issue before the Madras High Court relates to the power of the CIT given under Section 12AA(3) and under these facts, the Madras High Court has upheld the order of the I.T.A.T. cancelling the withdrawal of the registration by the CIT under Section 12AA(3) as Tribunal held that there was no violation of the provisions of Section 12AA(3). The question whether there had been a legal mistake in the order by which the registration was granted was not before the Hon'ble High Court. Even otherwise, the decision of the Madras High Court is not binding on us in view of the decision of the jurisdiction High court in the case of CITv. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom.) in which the Hon'ble Mumbai High Court has held as under :
"(b) The decisions of the High Court are binding on the subordinate courts and authorities or Tribunals under its superintendence throughout the territories in relation to which it exercises jurisdiction. It does not extend beyond its territorial jurisdiction……
(d) the decision of one High Court is neither binding precedent for another High Court nor for courts or Tribunals outside its territorial jurisdiction. (Head Notes)"
22. We have also gone through the decision of Chaturvedi Har Prasad Educational Society v. CIT [2011] 45 SOT 108 (Luck.) (URO). This decision, in our opinion, will not help the assessee as in this case also, the question before the Tribunal was not whether the CIT can rectify its order of granting the registration in view of the definition of charitable purpose being amended. We have also gone through the decision of Bombay Bench in ITA No. 1095/Mum/2012 in the case of Women India Trust relied on by the Learned AR. In this case, we noted the Hon'ble Tribunal has given a clear-cut finding under para 18 that the items of sales figuring in the Profit & Loss account are only of items made by the residents and companion ladies who are attached to the assessee trust and the sales are not in the nature of trading activity of the assessee trust. In view of this clear-cut finding, the Tribunal has set aside the order of CIT cancelling the registration. This decision, in our opinion, will also not assist the assessee. We have also gone through the decision of the Ahmedabad 'A' Bench relied by learned AR in the case of Gujarat Cricket Association v. DIT(E) [2012] 19 ITR (Trib.) 520 (Ahd.). In this case also, the Tribunal has not examined the issue whether a legal mistake apparent on the record has occurred in the order of CIT granting registration after the amendment being made in Section 2(15) by insertion of the proviso thereto.
23. In view of the aforesaid discussion and the decision of coordinate Bench in the case of Goa Industrial Development Corporation (supra), we are of the firm view that CIT has rightly cancelled the registration granted under Section 12A as a mistake apparent on record as occurred in the order due to the amendment in section 2(15) of the Income Tax Act and therefore no interference is called for in the order of the CIT.
24. We, accordingly, confirm the order of the CIT. In the result, the appeal of the assessee stands dismissed.
K
IT: Where during original assessment assessee's claim was processed at length and after calling for detailed explanation same was accepted, merely because a certain element or angle was not in mind of Assessing Officer while accepting such a claim, could not be a ground for issuing notice under section 148 for reassessment
■■■
[2013] 35 taxmann.com 61 (Gujarat)
HIGH COURT OF GUJARAT
Cliantha Research Ltd.
v.
Deputy Commissioner of Income-tax, Ahmedabad Circle - I*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 1547 OF 2013
APRIL 30, 2013
Section 147, read with sections 80-IB and 148, of the Income-tax Act, 1961 - Income escaping assessment - Non disclosure of primary facts [To disallow deduction under section 80-IB] - Assessment year 2007-08 - Whether where during original assessment assessee's claim was processed at length and after calling for detailed explanation from him same was accepted, merely because a certain element or angle was not in mind of Assessing Officer while accepting such a claim, could not be a ground for issuing notice under section 148 for reassessment - Held, yes - Assessing Officer framed original assessment of assessee under section 143(3) and disallowed its claim of deduction under section 80-IB(8A) partly - Subsequently he within period of four years from end of relevant assessment year issued on assessee a notice under section 148 seeking to reopen its assessment on ground that it was merely providing professional services (analysis of clinical samples) to various companies, therefore, condition for eligibility of deduction under section 80-IB(8A) had not been fulfilled by it - During original assessment, Assessing Officer raised several queries in connection with assessee's claim for deduction under section 80-IB(8A) and after detailed examination he had disallowed such claim partly - However, he did not raise specific query to allowability of claim on premise that assessee was doing scientific research for and on behalf of various companies - Whether merely failure of Assessing Officer to raise such a question would not authorise him to reopen assessment even within period of 4 years from end of relevant assessment year - Held, yes - Whether any such attempt on his part would be based on mere change of opinion - Held, yes - Whether, therefore, impugned notice issued under section 148 was liable to be quashed - Held, yes [Para 19] [In favour of assessee]
FACTS
■ | In the return of income filed for the assessment year 2007-08, the assessee-company claimed deduction under section 80-IB(8A) for having carried out research work. The Assessing Officer framed the assessment under section 143(3) and disallowed the assessee's claim of deduction partly. | |
■ | Subsequently the Assessing Officer within the period four years from the end of the relevant assessment year issued on the assessee a notice under section 148 seeking to reopen its aforesaid assessment. He recorded the reasons to the effect that the assessee was merely providing professional services (analysis of clinical samples) to its clients [pharmaceutical formulation manufacturers] for which it was being paid. Therefore, the condition for eligibility of deduction under section 80-IB(8A) had not been fulfilled by the assessee. | |
■ | Thereupon the assessee raised the objections to the notice for reopening contending that the entire claim was examined at length in the original assessment. Reopening, therefore, was not permissible, since the same would only be on the basis of change of opinion. | |
■ | The Assessing Officer dismissed the objections raised by the assessee. | |
■ | On writ : |
HELD
■ | During the original assessment, the Assessing Officer under his notice dated 21-10-2009 raised several queries in connection with the assessee's return of income. In response to such queries and further queries, which were raised by the Assessing Officer during the assessment proceedings, the assessee filed several replies on 2-11-2009. Under yet another communication dated 11-11-2009, the assessee, in the context of its claim of deduction under section 80-IB(8A), made a statement. Under another communication dated 27-11-2009, the assessee wrote to the Assessing Officer and further clarified its claim. Under yet another communication dated 22-12-2009, the assessee wrote to the Assessing Officer and conveyed that disallowance of its claim for deduction under section 80-IB(8A) was not warranted. [Paras 11,12,13,14 and 15] | |
■ | It was after such detailed examination of the assessee's claim for deduction that the Assessing Officer framed scrutiny assessment, in which he disallowed part of the assessee's claim of such deduction. The Assessing Officer was of the opinion that sample storage income generated by the assessee would not be eligible for deduction under section 80-IB(8A). He gave detailed reasons for coming to such a conclusion. [Para 16] | |
■ | By no stretch of imagination, can it be stated that the claim under section 80-IB(8A) was not examined by the Assessing Officer in the original assessment. Entire claim was thoroughly and painstakingly scrutinized. His queries were not restricted to sample storage income alone. For example, in his communication dated 21-10-2009 he called upon the assessee to furnish details of transactions with various companies, such as, Cadila Healthcare Ltd., Lupin Ltd., etc. These are the companies with whom the assessee had entered into detailed agreements for carrying out scientific research. [Para 17] | |
■ | In addition to such queries with respect to the entire claim, the Assessing Officer also raised queries with respect to sample storage income and miscellaneous income for which the assessee had claimed deduction. [Para 18] | |
■ | In response to such queries, the assessee had given detailed replies and produced voluminous material to support the claim of deduction. It cannot be stated by any stretch of imagination that such claim of deduction under section 80-IB(8A) was not examined by the Assessing Officer in the original assessment. It may be that he did not raise specific query to allowability of the claim on the premise that the assessee was doing scientific research for and on behalf of the companies. Merely failure of the Assessing Officer to raise such a question would not authorise him to reopen the assessment even within the period of 4 years from the end of the relevant assessment year. Any such attempt on his part would be based on mere change of opinion. To reiterate when a claim was processed at length and after calling for detailed explanation from the assessee the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice under section 148 for reassessment. [Para 19] | |
■ | Therefore, the impugned notice issued under section 148 was liable to be quashed. [Para 20] |
CASES REFERRED TO
CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 6), Gujarat Tea Processors & Packers Ltd. v. Dy. CIT[2012] 28 taxmann.com 187 (Guj.) (para 6), Parixit Industries (P.) Ltd. v. Asstt. CIT (OSD)[2012] 207 Taxman 140/20 taxmann.com 750 (Guj.) (para 6),Gujarat Power Corpn v. Asstt. CIT[2013] 350 ITR 266/[2012] 211 Taxman 63 (Mag.)/26 taxmann.com 51 (Guj.) (para 20) and CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/25 taxmann.com 200 (Delhi) (para 22).
R.K. Patel for the Petitioner. Mrs. Mauna M. Bhatt for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
2. Petitioner has challenged a notice dated 21.3.2012 annexed at Annexure-J to the petition issued by respondent No.1 under Section 148 of the Income Tax Act, 1961 ("the Act" for short).
3. Briefly stated the facts are as follows:-
3.1 The petitioner is a company registered under the Companies Act and is regularly assessed to tax. For the Assessment Year 2007-08, the petitioner filed a return of income. Such return was taken in scrutiny by the Assessing Officer. After detailed examination of various claims, he framed assessment under Section 143(3) of the Act on 23.12.2009. In the return the petitioner's principal claim of deduction was under Section 80-IB(8A) of the Act for having carried out scientific research. Such claim was substantially allowed after scrutiny. To the limited extent the Assessing Officer was not convinced, the claim was disallowed.
4. It is this scrutiny assessment, which respondent No.1 desires to reopen for which the impugned notice has been issued.
5. At the request of the petitioner the Assessing Officer supplied reasons recorded by him for issuing the impugned notice. Such reasons read as under:-
"The income of the assessee for A.Y. 2007-08 was assessed at Rs.38,89,053/- vide assessment order dated 23.12.2009 u/s 143(3) of the IT Act 1961. Initial assessment year from when deduction claimed under Section 80-IB(8A) of the Act is A.Y.2007-08.
On examination of the assessment record, it has been found that the assessee is engaged in providing services in the field of analysis of clinical samples for bioequivalence, bioavailability and clinical trial studies for the pharmaceutical industry. The company carried out research work on behalf of its clients which were pharmaceuticals formulation manufactures, on the formulations provided by them. Date of commencement of operation/activity by the company is 4.12.2004 at Ahmedabad and 14.3.2007 at Baroda. The assessee carried out the aforesaid studies mainly for the following clients (sponsors):-
M/s Cadila Healthcare Ltd., Lupin Ltd., Apotex Research Pvt. Ltd. IPCA Laboratories Ltd. and Dr. Reddy's Laboratories LTD.
It is seen that they are doing research work on behalf of their clients who were pharmaceuticals formulation manufacturers and the research work is carried out on the formulations provided by them. During the P.Y. relevant to A.Y.2007-08, the total turnover of the assessee is Rs.27,48,54,000/- out of which Rs.2734.15 lakh is from Bio Equivalence Study and the balance Rs.14.39 lakh is from 'Other income'.
Thus whatever research done by the assessee company is on behalf of leading pharmaceutical formulations manufactures. In fact, the manufacturers are contributing towards industrial development since they are developing the formulations investing entire funds and also making huge payments to the assessee company for bio equivalence study in connection with formulations under development. The risk of investing funds for development of formulation is taken by the manufacturers of formulation (Pharmaceutical Companies). The role of the assessee company is merely providing professional services (analysis of clinical samples) to the manufactures for which they are being paid. Therefore, the condition of eligibility of deduction under Section 80-IB(8A) that the assessee's main object should be scientific and industrial research and development, has not been fulfilled by the assessee Company. The irregular deduction resulted in under- assessment of Rs.11,64,52,937/-.
In view of above, I am satisfied that this is a fit case for 'income escaping assessment under Sec.147 of the I.T. Act.
Therefore, the undersigned has reason to believe that the income chargeable to tax for the year under consideration has escaped assessment as per the provisions of section 147 of the I.T. Act."
3. On examination of the assessment record, it is found that you are engaged in providing services in the field of analysis of clinical samples for bioequivalence, bioavailability and clinical trial studies for the pharmaceutical industry. You are carried out research work on behalf of its clients which were pharmaceuticals formulation manufactures, on the formulations provided by them. Date of commencement of operation/activity is 4.12.2004 at Ahmedabad and 14.3.2007 at Baroda. You are carried out the aforesaid studies mainly for the following clients (sponsors):-
1. | M/s Cadila Healthcare Ltd., | |
2. | M/s Lupin Ltd., | |
3. | M/s Apotex Research Pvt. Ltd., | |
4. | M/s IPCA Laboratories Ltd. And | |
5. | M/s Dr. Reddy's Laboratories Ltd. |
It is seen that they are doing research work on behalf of their clients who were pharmaceuticals formulation manufacturers and the research work is carried out on the formulations provided by them. During the P.Y. relevant to A.Y. 2007-08, the total turnover is Rs.27,48,54,000/- out of which Rs.2734.15 lakh is from Bio Equivalence Study and the balance Rs.14.39 lakh is from 'Other Income'.
Thus, whatever research done by you is on behalf of leading pharmaceutical formulations manufactures. In fact, the manufacturers are contributing towards industrial development since they are developing the formulations investing entire funds and also making huge payments to you for bio equivalence study in connection with formulations under development. The risk of investing funds for development of formulation is taken by the manufacturers of formulation (Pharmaceutical Companies). Your role is merely providing professional services (analysis of clinical samples) to the manufactures for which they are being paid. Therefore, the condition for eligibility of deduction under Section 80IB(8A) that your main object should be scientific and industrial research and development, has not been fulfilled by you.
In view of the above, you are given one more opportunity to justify your claim and explain as to why the disallowance of Rs.11,64,52,937/- under section 80IB(8A) of the Act should not be made as the condition laid down in Rule 18DA of the I.T. Rules, 1962 not fulfil by you.
In view of the above, you are requested to furnish you submissions/comments and attend the office of the undersigned on 24/12/2012 at 3.00 p.m. Failure to comply with the requirement of this notice may result in invoking the penal and other legal provisions of the I.T. Act, 1961. Authorized Representative without proper authorization of the assessee will not be allowed to represent the case. Adjournment will not be given in normal circumstances."
6. The petitioner thereupon raised the objections to the notice for reopening under a communication dated 4.1.2013. It was contended that the entire claim was examined at length in the original assessment. Reopening, therefore, was not permissible since the same would only be on the basis of change of opinion. The petitioner relied on the decision of the Apex Court in the case of CIT v.Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312besides other authorities of this Court in the case of Gujarat Tea Processors & Packers Ltd. v. Dy. CIT [2012] 28 taxmann.com 187 and in the case of Parixit Industries (P.) Ltd. v. Asstt. CIT (OSD)[2012] 207 Taxman 140/20 taxmann.com 750 (Guj.).
7. Such objections were, however, dismissed by an order dated 5.2.2013. Hence, the petition.
8. Taking us through the documents on record, counsel for the petitioner vehemently contended that the entire claim of deduction under Section 80-IB(8A) was examined by the Assessing Officer during the original assessment. Detailed queries were raised. Replies were given by the petitioner. After considering such reply, the claim was accepted barring a small portion where the Assessing Officer was not convinced. He, therefore, submitted that any attempt on the part of the Assessing Officer to reopen such assessment would be based merely on change of opinion.
9. On the other hand, learned counsel Ms. Bhatt appearing for the Department opposed the petition contending that in the original assessment, the question whether the petitioner's claim for deduction under Section 80-IB(8A) of the Act was valid, in view of the fact that the petitioner was carrying on research for and on behalf of other companies, was never gone into. She submitted that if such scientific research is carried out by the petitioner without its own involvement and investment only for and on behalf of other companies, such income would not be eligible for deduction under section 80-IB(8A) of the Act.
10. Though the reasons recorded by the Assessing Officer for issuing the impugned notice are quite elaborate, his central contention is that the assessee which carried on scientific research for and on behalf of other companies, cannot claim deduction under Section 80-IB(8A) of the Act. In context of this reason recorded by the Assessing Officer, we need to examine the petitioner's challenge to the impugned notice.
11. During the original assessment, the Assessing Officer under his notice dated 21.10.2009 raised several queries in connection with the petitioner's return of income. Following questions are relevant for our purpose:-
"1. Pl. furnish details of transaction with following entities.
a. | Cadila Healthcare Ltd. | |
b. | Lupin Ltd. | |
c. | Apotex Research Pvt. Ltd. | |
d. | Ipca Laboratories Ltd. | |
e. | Dr. Reddy's Laboratories Ltd. |
** | ** | ** |
4. Pl. furnish note on claim of deduction under Section 80-IB of the I.T. Act and produce necessary evidence in support of such claim. Also furnish a note on how all the conditions laid down under Rule 18DA have been adhered to.
** | ** | ** |
18. Pl. furnish details of simple storage income and state how the same is considered eligible for deduction under section 80-IB(8A) of the I.T. Act.
19. Pl. furnish details of misc. income of Rs.1.83 lacs and state how the same is considered eligible for deduction under Section 80-IB(8A) of the I.T. Act."
12. In response to such queries and further queries which were raised by the Assessing Officer during the assessment proceedings, the petitioner filed several replies on 2.11.2009. The petitioner conveyed to the Assessing Officer as under:-
"1. The details of transactions with the following parties are furnished herewith for your perusal:
a. | Cadila Healthcare Ltd-Annexure-1A. | |
b. | Lupin Ltd.- Annexure-1B. | |
c. | Apotex Research Pvt. Ltd.-Annexure-1C. | |
d. | Ipca Laboratories Ltd.-Annexure-1D. | |
e. | Dr. Reddy's Laboratories Ltd.-Annexure-1E. |
** | ** | ** |
4. The assessee company is engaged in the business of carrying out of scientific research and is approved by Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India vide its letter of approval No. TU/IV-R&D.Com/BAR/98/06 dtd. 1st February, 2007. Copy of the said letter is attached herewith in Annexure-3
It may be noted that the assessee company fulfills all the conditions laid down under Rule 18DA as are reproduced hereunder that:
(a) | is registered in India; | |
(b) | it has its main object the scientific and industrial research and development; | |
(c) | has adequate infrastructure such as laboratory facilities, qualified manpower, scale-up facilities and prototype development facilities for undertaking scientific research and development of its own; | |
(d) | has a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the projects or programme; | |
(e) | is engaged exclusively in scientific research and development activities leading to technology development, improvement of technology and transfer of technology developed by themselves; | |
(f) | submits the annual return alongwith statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority. |
It may also be noted that the DSIR has carried out its inspection and verification process and has renewed the approval for a further period of three years till A.Y. 2012-2013 vide its letter of approval NO.TU/IV- R&D.Com/BAR/98/06 dtd.19th February,2009. The main object of the Company is as hereunder:
"To engage in the business activities of carrying out scientific and industrial research and development by undertaking and providing clinical research, pharmacokinetic evaluation, bio analytical services and bio equivalence studies in the pharmaceutical products and to set up facilities for undertaking the activities of clinical and scientific research and development for the Company in India and elsewhere.
To carry on the business of development of methods for testing analysis such as Drugs and Pharmaceuticals, Bio-availability studies, Clinical research leading to Scientific and Industrial research, Technology development and transfer of technology developed.
To develop adequate infrastructure such as laboratory facilities, for carrying out diagnostic test, scale-up/ expansion of facilities for undertaking scientific and collaborative research."
The in-patient clinical operations are performed in its first clinical facility that accommodates up to 120 volunteers with state-of-the-art techniques provide methods, which allow for processing of large number of samples utilizing LC/MS/MS, HPLC and other analytical techniques. Analytical method development for the quantitation of drugs and metabolities in biological fluids is the backbone of BA Research India. The research chemists develop and validate analytical methods for pharmaceutical compounds and their metabolities using LC/MS/MS and HPLC with an emphasis on quality, accuracy and speed. BA Research India also develops and validates methods in various biological matrices.
It has started its second Centre at Baroda in March, 2007 in rental premises. This state of art centre at Baroda includes a 200-bedded facility spread across a single floor of approx 21000 square feet. There are four clinical wards. The clinic I and IV will have 30 bunk beds to accommodate 60 subjects while clinic II and III have 20 bunk beds to accommodate 40 subjects. There is an ICU next to the sleeping area of the subjects. The ICU is well equipped to handle any medical emergency. It has an ICU bed(s) with defibrillator, suction machine, emergency crash cart with oxygen cylinder, ambubag with laryngoscope & endotracheal tube, ECG machine, emergency tray with medicines, IV fluids, cardiac monitor, modules for medicines, BP instruments, stethoscope, CNS tray, medicines, etc. Emergency contact nos. are displayed in the ICU. The wards are designed in such a way that they can operate as independent clinics and if need arises for e.g. total number of subjects will be more than 40 then two clinics can be made to one.
It has an integrated uninterruptible power supply system and power generation in to the system ensuring continuation of services through uncontrollable situations at our both the branches at Baroda as well as new branch at Ahmedabad mentioned hereinabove. All instruments and computers are having backup capability to handle contingency concerns.
All clinical procedures, data management and reporting are conducted in accordance with current GCP guidelines. Every project initiated at our company is subject to inspections and audits by the internal Quality Assurance Unit.
The Assessee regularly files the annual return alongwith the statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority."
13. Under yet another communication dated 11.11.2009 the petitioner, in the context of its claim of deduction under section 80IB(8A) of the Act, stated as under:-
"12. The assessee is engaged in providing services in the field of analysis of clinical samples for bioequivalence, bioavailability and clinical trial studies for the pharmaceutical industry. The assessee carries research work on behal of its clients which are pharmaceuticals formulation manufacturers so as to carry out detailed for bioequivalence, bioavailability and clinical trial and analytical studies for them on the formulations provided by them.
Such studies are governed by "Guidelines for Bioavailability and Bioequivalence Studies" issued by the Central Drug Standard Control Organisation, Ditectorate General of Health Services under Ministry of Health and Family Welfare.
Moreover, the manufacturer of a new drug is required to get approval from the licensing authority under provisions of The Drugs and Cosmetics Act, 1945.
Sec. 122A(2) of The Drugs and Cosmetics Act,1945 provides as hereunder:
"S. 122-B. Application for approval of manufacture new drug other than the drugs classifiable under Schedules C and C(1).-
(1) .......................,
(2) The manufacturer of a new drug under sub-rule (1) when applying for approval to the Licensing Authority mentioned in the same sub-rule, shall submit data as given in Appendix 1 to Schedule Y including the results of clinical trials carried out in the country in accordance with the guidelines specified in Schedule Y and submit the report of such clinical trials in the same format given in Appendix II to the said Schedule.
(3) The Licensing Authority after being satisfied with the clinical trials, shall grant permission in Form 45 or Form 45-A or Form 46-A, as the case may be, subject to the conditions stated therein. Provided that the Licensing Authority shall, where the data provided on the clinical trials is inadequate, intimate the applicant in writing, within six months from the date of such intimation or such extended period, not exceeding a further period of six months, as the Licensing Authority may, for reasons to be recorded in writing, permit, intimating the conditions which shall be satisfied before permission could be considered."
Thus the pharmaceutical manufacturer is required to have data and results of clinical trials to the satisfaction of the approving authority as is mentioned above.
At times, the assessee is requested by the customers to hold/store the clinical samples collected in respect of volunteers/subjects for carrying out of research work till approval is granted by the approving authorities and required permission for manufacture of the respective drug is granted by the regulatory authority. If the clinical data submitted based on the first analysis are found inadequate, further study may also be required to be carried out and the clinical data are required to be re-submitted.
Since, these are biological samples, they are required to be stored in a peculiar storage conditions.
In such cases, the assessee charges the respective customers for holding and storage of such clinical samples which is nothing but income derived from research activities. Hence, such income is eligible for deduction under Section 80IB of the Income Tax, 1961. Details of Sample storage income already furnished as Annexure-12 vide our submission dated 2nd November, 2009."
14. Under communication dated 27.11.2009, the petitioner wrote to the Assessing Officer and further clarified its claim as under:-
"1. Regarding sample storage income of Rs.13,45,928, the assessee company is requested by the customers to hold/sotre the clinical samples collected in respect of volunteers/subjects for carrying out research work till approval is granted by the approving authorities and required permission for manufacture of the respective drug is granted by the regulatory authority. For the same, customers given "sample storage notification form" authorizing the assessee company to retain the samples. Illustrative copy of the same is attached herewith as Annexure 38.
In such cases, the assessee charges the respective customers for holding and storage of such clinical samples which is nothing but income from the business of research and development activities. As per sub-section 8A of Section 80-IB of the Income Tax Act, 1961, deduction is hundred per cent of the profits and gains of business of the company carrying on scientific research and development. Section 80IB(8A) of the Income Tax Act, 1961 is reproduced below for your honour's ready reference:
"(8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company-
(i) | is registered in India; | |
(ii) | has its main object the scientific and industrial research and development. | |
(iii) | is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000 but before the 1st day of April, 2007; | |
(iv) | fulfills such other conditions as may be prescribed." |
From the above mentioned facts and law, it become amply clear that sample storage income is part of the income earned by the assessee company carrying on the scientific research and development business and profit and gains of such business is eligible for deduction under Section 80IB(8A) of the Income Tax Act, 1961.
2. Regarding approval Baroda Unit, Assessee Company has made an application to Department of Scientific & Industrial Research, New Delhi on 23rd February, 2007 for approval under Section 80-IB(8A) of the Income Tax Act, 1961 along with required information and enclosures. Copy of such application and approval is attached herewith as Annexure 39A and Annexure39B for your honour's ready reference.
Further, as per section 80-IB(8A) of the Income Tax Act, 1961, deduction under the said sub-section is to the company carrying on scientific research and development subject to fulfillment of conditions mentioned therein. In other words, it is company specific. Extract of the aforesaid section is attached herein-in-below for your honour's ready reference.
"(8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company-
(i) | is registered in India; | |
(ii) | has its main object the scientific and industrial research and development; | |
(iii) | is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000 but before the 1st day of April, 2007; | |
(iv) | fulfils such other conditions as may be prescribed." |
On the basis of application dated 23rd February, 2007 by the assessee company, prescribed authority has given approval vide letter dated TU/IV-R&D.Com/BAR/98/06 dated 13th March, 2007 as extension of Ahmedabad unit. Copy of such letter of approval already submitted to your honour vide Annexure 3 of letter dated 2nd November, 2009."
15. Under yet another communication dated 22.12.2009 the petitioner wrote to the Assessing Officer and conveyed as under:-
"1.6 Considering the facts in each of the cases observed and found by your goodself to invoke the provisions of sec. 80IB(13) r.w.s.80IA(10) of the Income Tax Act, 1961, we humbly represent that such disallowance is not warranted in the case of the assessee as the above facts make it amply clear that the course of business between Assessee Company and Cadila Healthcare Ltd. Is at market rate and is not so arranged that the business transacted between them produced the Assessee Company more than the ordinary profit which might be expected to arise for the purposes of claiming deduction under Section 80-IB(8A)."
16. It was after such detailed examination of the petitioner's claim for deduction that the Assessing Officer framed scrutiny assessment in which he disallowed part of the petitioner's claim of such deduction. The Assessing Officer was of the opinion that sample storage income of Rs.13.45 lakhs generated by the petitioner would not be eligible for deduction under section 80IB (8A) of the Act. He gave detailed reasons for coming to such a conclusion. It is not necessary to reproduce the entire portion of his order in this respect. We may, however, briefly quote his conclusions in this regard:
"The above submissions of the assessee have been perused and the claim of the assessee regarding eligibility of sample storage income for the purpose of deduction under Section 80IB(8A) of the I.T. Act is not found acceptable. It is seen that sample storage income is of the nature of miscellaneous income arising to the assessee. The claim of the assessee that the storage of biological sample is necessary till the approval from the licensing authority is obtained. This submission of the assessee is however not material for the issue at hand.
In the case of the assessee, a client enters into an agreement with the assessee for undertaking clinical trial in respect of a certain molecule. Once the clinical trials are over, it is the obligation of such client to receive the samples prepared by the assessee and store such samples till the period the licensing authority grant approval. It is important to note here that it is the client which was to seek approval of licensing authority and is therefore under obligation to maintain the sample.
In the case of the assessee, not all clients request the assessee to store their samples. Only such clients who do not have the necessary facilities for storage of samples, by way of furnishing a sample storage notification form, authorized the assessee to retain their samples. It is therefore clear that, in storing the sample, the assessee is merely allowing the client to utilize its facilities for storage.
It is also seen that despite specifically being asked for, no such research agreement was furnished which could evidence that the sample storage was part of the overall research process. In view of the above, sample storage income of Rs.13,45,928/- is liable to be excluded in computation of deduction under Section 80IB(8A) of the I.T. Act."
17. From the above it can be seen that the petitioner's claim for deduction under Section 80IB(8A) of the Act came for detailed scrutiny by the Assessing Officer in the original scrutiny assessment. Series of queries were raised by the Assessing Officer. All such questions were answered at length by the assessee. He filed several replies before the Assessing Officer. Only after considering such replies and documents accompanying such replies, Assessing Officer framed the assessment in such assessment order. He disallowed only a small portion of the petitioner's claim for deduction. To the extent the petitioner had claimed deduction for sample storage income, the same was disallowed, rest of the claim was accepted. By no stretch of imagination, can it be stated that the claim under Section 80IB(8A) of the Act was not examined by the Assessing Officer in the original assessment. Entire claim was thoroughly and painstakingly scrutinized. His queries were not restricted to sample storage income alone. For example, in his communication dated 21.10.2009 he called upon the petitioner to furnish details of transactions with various companies, such as M/s Cadila Healthcare Ltd., Lupin Ltd. Etc. These are the companies with whom the petitioner had entered into detailed agreements for carrying out scientific research. In paragraph 4 of such notice, he called upon the petitioner to furnish note on claim of deduction under Section 80IB(8A) of the Act to produce necessary evidence in support of such claim. He also directed the petitioner to furnish note on how all the conditions laid down under Rule 18DA were fulfilled.
18. In addition to such queries with respect to the entire claim, he also raised pointed queries with respect to sample storage income and miscellaneous income for which the petitioner had claimed deduction.
19. In response to such queries, the petitioners had given detailed replies and produced voluminous material to support the claim of deduction. It cannot be stated by any stretch of imagination that such claim of deduction under Section 80IB(8A) of the Act was not examined by the Assessing Officer in the original assessment. It may be that he did not raise specific query to allowability of the claim on the premise that the petitioner was doing scientific research for and on behalf of the companies. However, merely for the failure of the Assessing Officer to raise such a question, in our opinion, would not authorize him to reopen the assessment even within the period of 4 years from the end of the relevant assessment year. Any such attempt on his part would be based on mere change of opinion. To reiterate when a claim was processed at length and after calling for detailed explanation from the assessee, the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice for reassessment.
20. This Court in case of Gujarat Power Corpn. Ltd. v. Asstt. CIT [2013] 350 ITR 266/[2012] 211 Taxman 63 (Mag.)/26 taxmann.com 51 (Guj.)observed as under:-
41. The powers under section 147 of the Act are special powers and peculiar in nature where a quasi-judicial order previously passed after full hearing and which has otherwise become final is subject to reopening on certain grounds. Ordinarily, a judicial or quasi-judicial order is subject to appeal, revision or even review if statute so permits but not liable to be re-opened by the same authority. Such powers are vested by the Legislature presumably in view of the highly complex nature of assessment proceedings involving large number of assessees concerning multiple questions of claims, deductions and exemptions, which assessments have to be completed in a time frame. To protect the interest of the revenue, therefore, such special provisions are made under section 147 of the Act. However, it must be appreciated that an assessment previously framed after scrutiny when reopened, results into considerable hardship to the assessee. The assessment gets reopened not only qua those grounds which are recorded in the reasons, but also with respect to entire original assessment, of course at the hands of the revenue. This obviously would lead to considerable hardship and uncertainty. It is precisely for this reason that even while recognizing such powers, in special requirements of the statute, certain safeguards are provided by the statute which are zealously guarded by the courts. Interpreting such statutory provisions courts upon courts have held that an assessment previously framed cannot be reopened on a mere change of opinion. It is stated that power to reopening cannot be equated with review.
42. Bearing in mind these conflicting interests, if we revert back to central issue in debate, it can hardly be disputed that once the Assessing Officer notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the Assessing Officer allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the Assessing Officer, over which the assessee beyond trying to persuade the Assessing Officer, would have no control whatsoever. Therefore, while framing the assessment, allowing the claim fully or partially, in what manner the assessment order should be framed, is totally beyond the control of the assessee. If the Assessing Officer, therefore, after scrutinizing the claim minutely during the assessment proceedings, does not reject such a claim, but chooses not to give any reasons for such a course of action that he adopts, it can hardly be stated that he did not form an opinion on such a claim. It is not unknown that assessments of larger corporations in the modern day, involve large number of complex claims, voluminous material, numerous exemptions and deductions. If the Assessing Officer is burdened with the responsibility of giving reasons for several claims so made and accepted by him, it would even otherwise cast an unreasonable expectation which within the short frame of time available under law would be too much to expect him to carry.
Irrespective of this, in a given case, if the Assessing Officer on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the revenue that the Assessing Officer can not be seen to have formed any opinion on such a claim. Such a contention, in our opinion, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinized by the Assessing Officer during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrary powers to the Assessing Officer.
43. We are, therefore, of the opinion that in a situation where the Assessing Officer during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition.
21. In case of Gujarat Tea Processors & Packers Ltd. (supra), it was observed as under:-
"18. We are conscious of the fact that this is not a case of reopening beyond four years where the only requirement would be that either the return of income is not filed, or that there is no true and full disclosure by the assessee in the original assessment, resulting into escapement of the income in the year under consideration. It is demonstrated by the petitioner assessee that at the time of original assessment, in reply to the specific query raised, specific reply had been furnished with regard to the amount of discount paid by way of trade incentive slab scheme and the query also was whether on the amount paid, tax was deducted at source or not. Having furnished all the requisite details, if the Assessing Officer chose not to deem it fit to reflect its consideration in the assessment order originally passed after scrutiny, on the very same grounds and materials when it seeks to reopen the assessment on the ground of escapement of income it is required of the respondent to point out as to how this is not a mere change of opinion and what are the cogent and relevant materials available with it to form an opinion that the said expenditure was required to be disallowed under Section 40(a) (ia) of the Act, for not having deducted TDS. With the satisfactory details furnished by the petitioner and with the discussion of provisions hereinabove, it is neither possible to uphold that the income is under-assessed or in-allowable reliefs were permitted."
22. In a full bench decision, the Delhi High Court in the case of CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/25 taxmann.com 200 observed as under:-
"13. It is, therefore, clear from the aforesaid position that: (1) Reassessment proceedings can be validly initiated in case return of income is processed under section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion.
(2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by the principle of "change of opinion".
(3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons."
23. In the result, the petition is allowed. Impugned notice dated 21.3.2012 is quashed. Disposed of accordingly.
arnataka HC lays down guidelines on imposition of concealment penalty
IT : Karnataka HC's guidelines for imposition of penalty under section 271(1)(c)
HELD
(a) | Penalty under section 271(1)(c) is a civil liability. | |
(b) | Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. | |
(c) | Wilful concealment is not an essential ingredients for attaching civil liability. | |
(d) | Existence of conditions stipulated in section 271(1)(c) is a sine qua non for initiation of penalty proceedings under section 271. | |
(e) | The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. | |
(f) | Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under section 271(1)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in section 271(1B). | |
(g) | The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. | |
(h) | The imposition of penalty is not automatic. | |
(i) | Imposition of penalty even if the tax liability is admitted is not automatic. | |
(j) | Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order. | |
(k) | Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. | |
(l) | If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. | |
(m) | The direction referred to in Explanation 1B to section 271 of the Act should be clear and without any ambiguity. | |
(n) | If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not by the Assessing Authority. | |
(o) | Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. | |
(p) | Sending printed form where all the ground mentioned in section 271 are mentioned would not satisfy requirement of law. | |
(q) | The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. | |
(r) | Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. | |
(s) | The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. | |
(t) | The findings recorded in the assessment proceedings in so far as 'concealment of income' and 'furnishing of incorrect particulars' would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings. |
In the light of what is stated above, it is clear that merely because the assessee agreed for addition and accordingly assessment order was passed on the basis of this addition and when the assessee has paid the tax and the interest thereon in the absence of any material on record to show the concealment of income, it cannot be inferred that the said addition is on account of concealment.
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[2013] 35 taxmann.com 250 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax
v.
Manjunatha Cotton & Ginning Factory
N. KUMAR AND ARAVIND KUMAR, JJ.
IT APPEAL NOS. 2564 & 2565 OF 2005, 5020, 5022 & 5023 OF 2009 AND 5025 & 5026 OF 2010
DECEMBER 13, 2012
Y.V. Raviraj for the Appellant. A. Shankar for the Respondent.
JUDGMENT
N. Kumar, J. - A batch of appeals where different facets of Section 271 of the Income Tax Act, 1961 are involved, were placed before us. Therefore, we heard all the learned counsel appearing in the batch of cases, considered all the arguments addressed and interpreted Section 271 in its different facets and have laid down the law.
FACTUAL MATRIX
FACTS IN ITA Nos. 2564 & 2565/2005
2. The facts of this case are as under:-
The assessee-firm in ITA No. 2564/2005 is in the business of purchasing kapas and converting it into cotton in the ginning factory owned by it and trades in cotton and cotton seeds. The assessee had filed the return of income for the assessment year 2000-01 declaring total income of Rs.2,29,520/-. A survey under Section 133A of the Income-tax Act (for short hereinafter referred to as 'the Act') was conducted in the business premises of the assessee on 23-11-2000. During the course of survey, a notebook was found in the business premises of the assessee, wherein certain transactions carried were noted. These transactions pertains to four cases showing names and amounts. The total of the transactions amounted to Rs.7,98,200/-. The partner of the assessee - firm explaining those entries stated that the transactions noted in the book relate to the book creditors for which there are no liability. The assessee was called upon to file confirmation letters of credit balance of certain creditors. The same was not filed by the assessee. The department obtained a letter from the creditor who stated that it had no transaction with the assessee during the financial year relevant to the assessment year 2000-01 and informed the department that no balance is receivable from the assessee. Therefore, the explanation offered by the assessee was not accepted, the said income was brought to tax. The assessee admitted the said sum of Rs.7,98,200/-as income by filing the revised return of income on 08-12-2000 for the assessment year 2000-2001, declaring the total income of Rs. 10,40,100/-.
3. Likewise in I.T.A.2565/2005, the assessee had filed the return of income for the assessment year 2000-2001 declaring total income of Rs. 1,49,250/-. The assessee during the course of survey declared Rs.17,03,731/- as income representing cessation of liabilities towards creditors. In the course of the assessment proceedings, the assessee was asked to file confirmation letter in respect of the creditor M/s. Sri. Gururaghavendra Cotton Ginning Factory, Bellary against whom Rs. 1,00,000/- credit balance was outstanding. The assessee was requested to get the confirmation letter, to which the assessee expressed its inability. The department directly wrote a letter to the said creditor. The creditor in his reply dated 14-02-2003 stated that there is no balance receivable from the assessee. When the assessee was confronted with the said letter, he asserted that the said amount was outstanding at the end of the accounting period ended on 31-03-2000 in the books and the creditor may have stated on the date of enquiry. His explanation was not accepted and an addition of Rs. 1,00,000/- was made. Thereafter the assessee filed a revised return of income on 8-12-2000 declaring the total income of Rs. 18,52,980/-.
4. In view of the assessees having admitted to declare the amounts above referred to as income representing cessation of liabilities towards creditors, these amounts were added as income of the assessee and tax demand was raised thereto vide assessment orders dated 26-02-2003. Assessee did not pursue the said orders and accepted the quantum proceedings. It is on the basis of the said revised return, the additions were made.
5. Therefore, notice under Section 274 read with Section 271(l)(c) of the Act was issued to the assessee to explain why penalty should not be levied for having concealed particulars of income/showing inaccurate particulars of income. The assessee contended that the said amounts were paid to the agriculturists towards purchase of Kappas, which was noted in the rough cash book and the entries were yet to be entered in the cash book at the time of survey. To buy peace with the Department, they have voluntarily agreed to declare the said sums towards cessation of the creditors liabilities and that accordingly as per the instructions of authorities, they filed revised return of income for the assessment year 2000-01 on 08-12-2000. Though the survey was made on 23-11-2000 during the financial year 2000-01 relevant to the assessment year 2001-02, they had paid taxes for the assessment year 2000-01 itself and co-operated with the department in Survey and assessment proceedings to keep good relations. Assessing Officer found that reply was not convincing and did not accept the same and as such minimum penalty of Rs. 3,14,370/- and Rs. 5,96,310/- was levied in terms of Section 271(l)(c) of Income-tax Act, 1961.
6. Aggrieved by the said order of levy of penalty, both the assessees filed appeals before CIT (Appeals), Gulbarga, in ITA Nos. 64-65/03-04/BLY. The Appellate Authority by separate orders dated 18-02-2004 confirmed the levy of penalty and dismissed the appeals filed by the assessees. Being aggrieved by these orders, assessees preferred further appeals in I.T.A. Nos. 1306 & 1307/BANG/03 before Income-tax Appellate Tribunal Bangalore Bench. The Tribunal accepted the explanation offered by the assessee and held penalty cannot be levied on inference and allowed the appeals filed by the assessees and deleted the levy of penalty. Thus, revenue has filed these two appeals questioning the orders of the Tribunal dated 21-12-2004.
FACTS IN ITA NO.5020 OF 2009
7. The assessee M/s. Veerabhadrappa Sangappa & Co., is a partnership firm carrying on the business of Mining & Processing of iron ore and sale and export. For the assessment year 2003-04, they filed a return declaring an income of Rs. l,17,53,980/-. The return filed was processed and the assessment was completed under Section 143(1) of the Act on 20-01-2005. On 01-02-2006, a survey was conducted under Section 133A of the Act and information was collected under Section 133(6) of the Act. The statutory returns, which were filed by the assessee, when compared with the stock position reflected in Form 3(c)(b) disclosed a difference of 3,01,240 metric tons. On 27-02-2006, a notice under Section 148 of the Act was issued for re-opening of the assessment. On 05-05-2006 the assessment was completed under Section 143(3) read with Section 147 of the Act. The assessee contended that it was handling bulk material and there were no facilities to weigh the ore in such quantity and stock records were maintained on estimate basis. Therefore, to ward off litigation and to buy peace in the Department, the assessee agreed that they had in stock, ores of such magnitude. Accordingly, an addition of Rs.4,98,38,000/- being the value of 3,98,704/- metric tons was made under Section 69 of the Act. Simultaneously, the proceedings under Section 274 read with Section 271(l)(c) of the Act was initiated on 01-01-2006.
8. The assessee preferred an appeal as against the assessment order. The Appellate Authority came to the conclusion that there was stock outside the books of account, the fact of which was accepted by the assessee also and the assessee has been producing more iron ore than what is being shown as produced in the books of account. Therefore, he held addition made under Section 69 of the Act is unsustainable. However, he made the addition as closing stock/suppressed stock of 3,98,704 metric tons. Thus he gave relief to the extent of Rs. 1,47,29,052/- and the value of the suppressed stock of ore, which was added was Rs. 3,51,08,948/-. To purchase peace, the assessee agreed to pay the tax and had not challenged the order of the Appellate Authority. Even after the said order of the Appellate Authority, the Assessing authority proceeded with the penalty proceedings initiated on 05-05-2006. The assessee filed his objections to the same on 26-02-2007 contending that the Assessing Officer has not recorded satisfaction about the assessee furnishing inaccurate particulars or concealing the income. Addition made under Section 69 of the Act at Rs. 4,98,39,000/- has not been accepted by the Appellate Authority, who also had not agreed with the valuation of stock done by the assessing authority. The assessing authority's satisfaction to impose penalty was on the basis of the additions made by him under Section 69 as investments made outside the books, which has been set-aside by the Appellate Authority and therefore, he contended that penalty proceedings have to be dropped. Overruling all the objections by an order dated 14.03.2007, imposing penalty of Rs. 1,22,88,132/- was passed. The assessing authority observed in his order that the Appellate Authority had confirmed the quantity of stock suppressed by the assessee, which was outside books of accounts based on the materials collected by the Assessing Authority. The only change suggested by the Appellate Authority was the method of computation of the concealed income. Aggrieved by the said order, the assessee preferred an appeal to the Appellate Authority. The Appellate Authority confirmed the said order of penalty by its order dated 22-07-2008.
9. Aggrieved by the said order, the Assessee preferred an appeal to the Tribunal. The Tribunal held that on perusal of the notice issued under Section 271(l)(c) of the Act, it is clear that it is a standard proforma used by the Assessing Authority. Before issuing the notice the inappropriate words and paragraphs were neither struck off nor deleted. The Assessing Authority was not sure as to whether she had proceeded on the basis that the assessee had either concealed its income or has furnished inaccurate details. The notice is not in compliance with the requirement of the particular section and therefore it is a vague notice, which is attributable to a patent non-application of mind on the part of the Assessing authority. Further, it held that the Assessing Officer had made additions under Section 69 of the Act being undisclosed investment. In the appeal, the said finding it set-aside. But addition was sustained on a new ground, that is under valuation of closing stock. Since the Assessing Authority had initiated penalty proceedings based on the additions made under Section 69 of the Act, which was struck down by the Appellate Authority, the initiated penal proceedings, no longer exists. If the Appellate Authority had initiated penal proceedings on the basis of the addition sustained under a new ground it has a legal sanctum. This was not so in this case and therefore, on both the grounds the impugned order passed by the Appellate Authority as well as the Assessing Authority was set-aside by its order dated 9th April, 2009. Aggrieved by the said order, the present appeal is filed.
In ITA Nos.5022 and 5023 of 2009
10. The assessee M/s. V.S. Lad & Sons is a partnership, firm carrying on the business of mining, processing of iron ore, its sale and export. For the assessment year 2003-04, the Assessing Officer made additions of Rs.55,74,02,205/- and for the assessment year 2004-05 a sum of Rs. 19,14,73,408/- under Section 69 of the Act being undisclosed stock and concluded the assessment accordingly. Thereafter, the Assessing Authority simultaneously initiated penal proceedings under Section 271(l)(c) of the Act. Against the aforesaid additions, the assessee preferred appeal to the Commissioner of Income-tax (Appeals). The Appellate Authority held that the Assessing Authority had not brought any evidence of any expenditure outside books of account, so as justify the additions under Section 69. Therefore, he set aside the said additions. However, he found that there is a stock outside books of account. It has to be valued and brought to tax. Therefore, held that the closing stock for assessment purpose should also be taken as 5.74,715 tons. When valued at a rate of Rs. 87.50 per ton, the value of closing stock would be Rs. 5,02,87,562/-. The value of closing stock disclosed in return of income is Rs. 80,87,110/-. Therefore, the total addition on account of un-accounted stock would be Rs. 4,22,00,452/-. This is the sum which should be brought to tax as the value of un-accounted stock. Likewise, even for the assessment year 2004-05, the Appellate Authority held that, all the factual/legal arguments for assessment year 2004-05 are exactly the same as discussed in detail for the assessment year 2003-04. His findings are also the same. Therefore, he held, even if a finding is given for assessment year 2003-04, there is no case for invocation of Section 69 is made out. There is no evidence that the assessee had invested un-accounted monies in acquiring the stock of 8,11,328 tons and after verifying and analyzing the pros andcons of the issue, the Appellate Authority held the total addition for un-accounted stock will amount to Rs.8,06,44,608/-, i.e., the sum which should be brought to addition as value of stock produced outside the books of accounts. Therefore, he directed the Assessing Authority to make the addition of Rs. 8,06,44,608/-, instead of sum of Rs. 19,14,73,408/-. Accordingly, the additions made by the Assessing Authority were deleted by the Appellate Authority. But under valuation of the closing stock has been brought to tax under a different head. In essence, the disallowances made by the Appellate Authority were on different grounds.
11. Acting on the said finding recorded by the Appellate Authority, the Assessing Authority in the penalty proceedings initiated under Section 271(1) (c) of the Act initially on the basis of the assessment order passed by him proceeded with the same proceedings and imposed the penalty on the basis of the order of the Appellate Authority. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority directed the cancellation of the penalty levied. Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal. The Tribunal held the initiation of the penal proceedings should have been made on the new grounds and that too by the Appellate Authority, Gulbarga who made the orders of disallowances by upholding the disallowances on different grounds for both the assessments years under dispute. This was not so. That being the situation, they declined to interfere with the order passed by the Appellate Authority who has cancelled the levy of penalty. Aggrieved by the said order, the Revenue has preferred this appeal.
ITA Nos. 5025 and 5026 of 2010
12. The assessee M/s. G.M. Exports is a partnership firm, which is engaged in the business of manufacture of trading of processed dimensional granite blocks. It is also engaged in the business of dealing in import of ceramic tiles. Return of income for the assessment year 2003-04 was filed on 28-11-2003 declaring a total income of Rs.3,62,590/-. For the assessment year 2004-05 the return was filed on 29-10-2004 declaring the total income of Rs.4,78,649/-. The returns were processed under Section 143(1) of the Act on 13-02-2004 for the assessment year 2003-04 and on 25-01-2005 for the assessment year 2004-05. Subsequently, the returns were taken up for scrutiny. The additional DIT Investigation Unit-I at Bangalore forwarded certain information on account of a search conducted under Section 132 of the Act at the assessee's premises on 10-04-2003 stating that the assessee - Firm was under-invoicing and mis-declaring their import of ceramic tiles. It is stated that the assessee had changed the invoice and description in the Bill of Entry after it was assessed by the Customs. The assessee was asked to submit his explanation. Thereafter, the assessing authority recorded a finding that the assessee received excess stock, the sources of which required to be explained by the assessee. The assessee filed his reply on 20-03-2006 offering his explanation. The assessing authority was not convinced and therefore, the assessing authority proceeded with the assessment order and added amounts of Rs. 16,35,726/- and 18,76,678/- to the total income of the assessee being the excess stock for the tiles imported by the assessee under two bills of entry during the year, treating the same as unexplained investment.
13. The said addition was challenged by the assessee in an appeal before the Commissioner of Income-tax (Appeals). In the meanwhile, the matter relating to valuation of the tiles imported by the assessee under Section 14 of the Customs Act came to be decided by the Customs Excise and Service Tax Appellate Tribunal, wherein a part relief was allowed to the assessee by reducing the valuation by Rs. 15,98,076/-, accepting the contention of the assessee that excess quantity was supplied by the foreign parties to adjust the higher value of American Dollar per square meters. In the invoice, against the actual rate, a higher value of US $8.50 per sq. ft. was charged as against US $6.50 per sq. ft. Relying on the aforesaid judgment, the appellate authority allowed relief of Rs. 15,98,076 to the assessee and restricted the addition to Rs. 35,12,404 made by the assessing authority to Rs. 19,14,328/-. The assessee accepting the said decision, did not prefer any appeal and paid the tax. Similar relief was granted for the subsequent years 2004-05.
14. Thereafter, a show cause notice was issued under Section 271(l)(c) based on the orders passed by the Appellate Authority. Penalty proceedings were initiated. Explanation was also sought from the assessee in respect of the addition of Rs. 2,92,448/- on account of difference in the credit balance appearing in the name of M/s. Mysore Minerals Limited in the books of account of the assessee-company and as shown by the assessee in its books of account. The assessee replied contending that the said addition was made in the assessment on agreed basis and therefore, there was no justification to impose penalty under Section 271(l)(c) in respect of the said addition. Insofar as the excess quantities are concerned it was contended that a notional valuation adopted under the customs valuation rules could not be taken as a basis to allege any concealment of his income from the assessee. There was nothing available on record to show that any extra payment either in the books or outside the books was made by the assessee against the imported tiles and in the absence of the same, it cannot be said that any unexplained investment was made on behalf of the assessee to attract levy of penalty under Section 271(l)(c). The said explanation was not accepted and penalty was imposed. Aggrieved by the said order imposing penalty, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). The Appellate Authority held that although the claim of the assessee has not been accepted by the Assessing authority, it did not out-rightly reject the assessee's contention there by implying that there is some bonafides in the assessee's contention. There was no evidence or material on record to suggest that the assessee has deliberately acted in defiance of law to conceal its income in the form of excess stock, since its explanation in regard to higher rate and lower rate has been accepted to a great extent. There was material to indicate that the assessee has actually paid higher rate for the said consignment and it has made payment in excess of any other mode. Therefore, they were of the view that the penalty is based on the valuation of excess stock and such valuation has been determined between the Bill of exchange rate and rate contended by the assessee. Addition to income may be justifiable, but levy of penalty on such valuation of excess stock is not necessary.
15. Insofar as the penalty relatable to the difference in the accounts of M/s. Mysore Minerals Limited to the tune of Rs. 4,92,448/- is concerned, the assessee accepted the said addition as he was not able to reconcile itself. Nothing is found as to prove that the assessee has consciously made the concealment or furnished inadequate particulars of his income. Thus, in the facts and circumstances of the case, no penalty is leviable on such agreed addition.
16. Insofar as, excess stock which was sent without including the quantity in the Bill of Exchange, the assessee has submitted its explanation, which was not accepted for want of evidence. Therefore, in this regard more than one view was possible on the basis of the assessee's explanation before the Customs Department. Hence, it cannot be said to be a pre-conceived devise to conceal income. Further, the assessee has pointed out that even till today, the materials are lying in the Customs Department godown since it was confiscated and the entire tiles is allowable loss and therefore, inference of concealment would not lie. Therefore, the Appellate Authority held that there could be no presumption of concealment or furnishing of inaccurate particulars since there was no malifide intention on the part of the assessee and therefore, the appellant has discharged the burden in explaining the circumstances of omission or negligence as discussed above. Therefore, they proceeded to delete the penalty levied on both the orders.
17. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal, on consideration of the aforesaid material held the valuation under Section 14 of the Customs Act is a sort of notional valuation inasmuch as the same is done without taking into consideration the actual payment made by the purchaser of imported goods. There was nothing brought on record to show that any payment outside the books of account was made by the assessee against purchase or import of tiles from the overseas supplements and in the absence of the same, the alleged under-invoicing of imported tiles on the basis of valuation made under the Customs Act would justify the addition to the total income of the assessee but not imposition of penalty under Section 271(l)(c) of the Act. The said addition made on the basis of the valuation made under the Customs Act was accepted by the assessee to buy peace of mind and to avoid extra litigation. Therefore, the Tribunal was of the view that no adverse inference can be drawn against the assessee on the basis of the same to impose penalty under Section 271(l)(c). Similarly, the addition made on account of difference in creditors' accounts was accepted by the assessee to avoid any further litigation as he could not reconcile the difference. Therefore, no penalty under Section 271(l)(c) could be imposed in respect of such agreed addition unless the explanation offered by the assessee for accepting such addition is found to be false. They were of the view that it was not a fit case to impose penalty under Section 271(l)(c) of the Act and therefore, they did not find any justification to interfere with the well considered order of the Appellate Authority deleting the penalty. Aggrieved by these orders, the Revenue has preferred this appeal.
18. We have heard the learned counsel appearing for the parties. The learned counsel fairly submitted that the substantial questions of law as framed at the time of admission required to be reframed. Accordingly, we recast the issues in all the appeals as under:
ITA Nos. 2564 and 2565 of 2005
"Whether the Tribunal was correct in holding that there was no concealment of income and there was no cessation of liability but it was on assessees agreement, additions have been made and therefore no penalty is attracted despite there being no evidence to substantiate such a conclusion and consequently recorded a perverse finding?"
ITA No. 5020 of 2009
1. | Whether the notice issued under Section 271(l)(c) in the printed form without specifically mentioning whether the proceedings are initiated on the ground of concealment of income or on account of furnishing of inaccurate particulars is valid and legal? | |
2. | Whether the proceedings initiated by the Assessing Authority was legal and valid? |
ITA Nos. 5022 and 5023 of 2009
(i) | Whether the Tribunal was justified in holding that the basis for initiation of the penalty proceedings is the satisfaction of the Appellate Authority in coming to a conclusion based totally on a different ground other than the ground on which the Assessing Authority had passed the assessment order? | |
(ii) | Whether the proceedings initiated by the Assessing Authority was legal and valid? |
ITA Nos. 5025 and 5026 of 2010
"When the two fact finding authorities have concurrently held that the explanation offered by the assessee is not false, though the assessee has failed to conclusively prove the explanation offered, does a case is made out for interference?"
RIVAL CONTENTIONS
19. Sri Raviraj, learned counsel for the revenue, submitted that in the original return of income, the assessee had not declared the income which came to be detected by the department during the course of survey. It is after the survey the assessees have filed the revised returns which itself would go to show that amount offered during the survey is concealed income. There is no finding by the Tribunal that there was cessation of liability of these amounts during the relevant financial year. Hence, he contends that levy of penalty is required to be sustained. For imposition of penalty mens rea is not a requirement. Once the conditions mentioned in Section 271(1)(c) is held to have been established the imposition of penalty is automatic and no discretion is left in the authorities.
20. Sri. Shankar, learned counsel appearing for the assessees contends that explanation offered by the assessees was not held to be false by the Tribunal. The payments recorded in a rough cash book which was found during the time of survey did not contain any dates against the payments made and entries were to be made by the accountant on the next working day and as such in order to buy peace with the department the assessees in quantum proceedings voluntarily declared the sum as income representing cessation of creditors liabilities. The additional income offered was in the nature of agreed addition and in penalty proceedings an independent finding has to be arrived at by conclusively holding that assessee owns the concealment and in the absence thereof penalty cannot be levied. Thereafter the order of Tribunal deleting levy of penalty would not call for interference.
21. Insofar as dis-allowance of expenses non-confirmation of balance from the creditor is concerned, they agreed to buy peace with the department by agreeing for addition and paying tax on and the said amount and interest thereof, however, the said explanation was not accepted. The assessing authority held that the assessee has concealed the particulars of income/furnished inaccurate particulars of income and imposed penalty. A similar order was passed in the connected matter also. The Appellate Authority affirmed the said order.
22. Aggrieved by the said order, the assessee preferred the appeal before the Tribunal. The Tribunal on careful examination of the entire material on record held that from the diary it is seen that no dates are mentioned as against the entries. Thus, it is not clear when the liability ceases. Even though the assessee agreed for the addition to income, it cannot be positively concluded that the liability ceased during the relevant year only. The assessee, no doubt agreed for addition but with a rider that no penalty would be initiated or levied. Had the assessee known that the penalty would be further levied, he would have been in a position to substantiate that cessations in the assessment proceedings was not during the year. Under Section 143(3) the revised return has been accepted as such without any finding that the additional income offered is the concealed income. On the contrary, it is mentioned that as agreed upon at the time of survey, the assessee had admitted the income in the revised return. This shows that without any further act of holding that the amount declared is the concealed income for the assessment year, the assessment has been completed. Thus, though it can be stated that the assessee agreed for addition, the assessee never agreed that the same amounts to concealment of particulars of income/furnishing of inaccurate particulars of income. Though adverse inference can be drawn in assessment proceedings that the assessee failed to substantiate the entry but in the penalty proceedings, penalty cannot be levied on inference. Therefore, they held the admission of an additional income do not lead to conclude that the assessee has failed to furnish the income/inaccurate particulars of income are furnished. Therefore, the Tribunal held the penalty under Section 271(l)(c) of the Act is not attracted in both the cases and accordingly ordered for its deletion.
STATUTORY PROVISIONS
23. Chapter XIV of the Income-tax, 1961 deals with procedure for assessment. Section 139 deals with return of income. Section 140 deals with return by whom to be signed. Section 140A deals with self assessment. Section 141 deals with provisional assessment. Section 142 deals with enquiry before assessment. Section 143 deals with assessment. Section 147 deals with income escaping assessment. Chapter XXI deals with penalties imposable. Section 271 deals with failure to furnish returns, comply with notices, concealment of income, etc., It reads as under:-
"271. FAILURE TO FURNISH RETURNS, COMPLY WITH NOTICES, CONCEALMENT OF INCOME, ETC.
(l) If the Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person -
(a) | Omitted | |
(b) | Has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142; or | |
(c) | Has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,- |
(i) | Omitted | |
(ii) | In the cases referred to in clause (b), in addition to any tax payable by him, a sum which shall not be less than one thousand rupees but which may extend to twenty-five thousand rupees for each such failure; | |
(iii) | In the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income: |
Explanation 1 : Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) | Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) to be false, or | |
(B) | Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, |
then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed.
24. Section 274 deals with procedure to be followed before imposing penalty under Chapter XXI. It reads as under:-
"274. Procedure. (1) No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has been given a reasonable opportunity of being heard.
(2) No order imposing a penalty under this Chapter shall be made-
(a) | by the Income- tax Officer, where the penalty exceeds ten thousand rupees; | |
(b) | by the Assistant Commissioner, where the penalty exceeds twenty thousand rupees, except with the prior approval of the Deputy Commissioner. |
(3) An income-tax authority on making an order under this Chapter imposing a penalty, unless he is himself the Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer".
25. Chapter XXII deals with offences and prosecutions. Section 276C deals with wilful attempt to evade tax, etc., It reads as under: -
Section 276C. WILFUL ATTEMPT TO EVADE TAX, ETC
(1) If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable, -
(i) | in a case where the amount sought to be evaded exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; | |
(ii) | in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine. |
(2) If a person wilfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and shall, in the discretion of the court, also be liable to fine.
Explanation :For the purposes of this section, a wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof shall include a case where any person-
(i) | Has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement; or | |
(ii) | Makes or causes to be made any false entry or statement in such books of account or other documents; or | |
(iii) | Wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or | |
(iv) | Causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof |
26. Chapter XXI enacts provisions for the levy, imposition and collection of penalty. It embodies a necessary purpose of the Act. In a taxing statute, the Legislature must envisage and provide for cases where the assessees attempt to contravene the provisions of the Act and to evade payment of the rightful taxes levied thereunder. If such contingencies are not visualised and such leaks are not plugged, no taxation law can be effectively and satisfactorily implemented. Without such a sanction, there is the danger of evasion of tax. Thus, provisions for levy and collection of penalties for contravening their requirements, has become an integral part of such enactment and one of their purposes. Sections 271 and 273 of the Act provide for imposition of penalties on recalcitrant and dishonest assessees who attempt to evade the proper incidence of taxation on their true income in the manner set out therein.
27. Section 271 is a specific provision providing for imposition of penalties, and is a complete code in itself, regulating the procedure for the imposition of penalties prescribed. The proceedings have therefore to be conducted in accordance therewith, subject always to the rules of natural justice. The provisions for the assessment and levy of tax will not apply as such for the imposition of penalty. In such a situation, i.e., when there is a specific provision, proceedings should be taken only thereunder and not under any other provision. Section 271 alone, therefore, governs the imposition of penalties for concealment of income or for furnishing inaccurate particulars of such income. The validity of penalty proceedings will have to be tested only from the perspective of Section 271.
28. Section 271(1) makes appropriate provision for levying penalties on assessee in different eventualities. One such eventuality is for concealment of income or furnishing of inaccurate particulars of such income. The penalty provisions has two distinct limbs. One limb deals with the condition precedent for initiating penalty action and assumption of jurisdiction of the authority concerned. This limb is separately enacted in Clause (c) of sub-section (1) of section 271. The other limb of the penalty provisions is the substantial part which deals with the actual imposition of the liability for penalty and the quantification thereof. This limb is found enacted, in clauses (iii) of sub-section (1) of Section 271. This however cannot mean that the two limbs have to be read disjunctively. Ordinarily, penalty can be imposed under clause (c) of Section 271(1) and the quantum of penalty is prescribed in clause (iii) of the same sub-section.
29. As is clear from Sec. 271(l)(c) the said provision is attracted only when the condition stipulated in Section 271(l)(c) are attracted. If those conditions are not fulfilled there is no question of exercising power under the said provision to impose penalty. Therefore, it is necessary to find out what are the conditions, which must exist before initiating the proceedings under Section 271.
30. Section 271(l)(c) makes it clear that if the Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Act is satisfied that any person has concealed particulars of his income or furnished inaccurate particulars of such income, then he may direct that such person shall pay by way of penalty stipulated in the aforesaid provision. Then the question is, when an income is said to be concealed so as to attract the penalty provisions. Explanation 1 sets out the circumstances which justifies levy of penalty. It reads as under:
"Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) | Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or | |
(B) | Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, |
then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed."
31. After insertion of Explanation 1 to Section 271(l)(c), the law on concealment and penalty has become stiffer. The explanation as it stands now is a complete code having the following features:
(1) | Every difference between reported and assessed income needs an explanation. | |
(2) | If no explanation is offered, levy of penalty may justified. | |
(3) | If explanation is offered, but is found to be false, penalty will be exigible. | |
(4) | If explanation is offered and it is not found to be false, penalty may not be leviable, - |
(a) | such explanation is bona fide. | |
(b) | the assessee had made available to the Assessing Officer all the facts and materials necessary in computation of income. |
32. Therefore the Explanation-I understood in the proper context, in particular, clause (c) of Sub-section (1) of Section 271 makes the intention of the Legislature manifest. It clearly sets out when penalty is leviable and when penalty is not leviable. The condition precedent for levying the penalty is the satisfaction of the authority that there is a concealment of the particulars of the income or inaccurate particulars are furnished to avoid payment of tax. Once the authority comes to such conclusion, the law mandates that before imposing penalty, the assessee must be heard. The assessee is given the opportunity to offer his explanation. Once such an opportunity is given and the assessee fails to offer the explanation or offers explanation which is found to be false, then the penalty will follow as prescribed under Clause (iii) of clause (c) of sub-section (1) of Section 271. Where the assessee offers an explanation and substantiate the explanation, the question of imposing penalty would not arise. Even in cases where he fails to substantiate the explanation, but if he proves that explanation offered is a bonafide one and all the facts relating to the same and material to the computation of his total income has been disclosed by him, then, in law, a discretion is vested with the authority not to impose penalty. In other words, if the assessee offers explanation, but fails to substantiate the same, but, if he proves that explanation offered is bonafide, but is not sufficient to substantiate the explanation and discloses all material for the computation of his total income, the question of imposing penalty would not arise.
33. The scope and ambit of clause (c) has got enlarged by the insertion of Explanations 1 to 6 to this sub-section. The provisions contained in clause (c) of sub-section (1) of section 271 lay down the conditions precedent for the Assessing Officer or other concerned authority assuming jurisdiction to initiate penalty proceedings for concealment of income. The concealment referred to in this 'clause' is a concealment from the Assessing Officer. The basis on which penalty for concealment is to be levied and quantified is indicated in sub-clause (iii) of sub-section (1) of section 271. For starting the penalty proceedings under this clause, the condition precedent is that the Assessing Officer must be satisfied that a person has concealed particulars of his income or furnished inaccurate particulars of such income. The ingredients which go to make up the conditions precedent to the infliction of penalty are:
(i) | the Assessing Officer or the Commissioner (Appeals) in the course of a proceeding before him must be satisfied that an assessee has concealed or furnished incorrect particulars of his income; | |
(ii) | there must be a determination by the Assessing Officer or the Commissioner (appeals) that the assessee has concealed or furnished inaccurate particulars of his income; and | |
(iii) | a refusal on the part of the taxing officer to accept the income returned, as correct. |
Then it takes us to the next question what is concealment.
CONCEALMENT
34. The word 'conceal' means to hide, to keep secret. The phrase 'conceal the particulars of his income' would include false deduction or exemptions claimed by the assessee in his return. The word 'conceal' involves a knowledge on the part of the assessee of the real income when giving the particulars. Concealment might arise even if the statement as to the income is a guarded one, as, for example, the enquiry should be made to ascertain the correct income. Concealment of income may arise in various ways. It may take various forms of manipulation of entries in accounts, non-disclosure of items of source that existed and income that has clearly been earned by the assessee in the previous year, claim of false deductions or losses, suppression of sales, camouflage of income as loans taken from third parties and claim of interest thereon as deduction, giving a colour of agricultural income to the otherwise taxable income, and unexplained investments that can be clearly attributed to concealed income. However, mere addition or estimates made on mere suspicion that there is something wrong with the book entries or their incompleteness, inadvertent omissions, debatable additions or disallowances, cash credits or investments not accepted as genuine, and rejection of a claim of expenses may not be themselves justify a penalty. The finding in assessment proceedings can be rebutted in the penalty proceedings to even demonstrate that the amount taxed was not income, or it has been taxed in the wrong year.
35. The condition precedent for inference of concealment of income is the intention to conceal income. This part of the clause earlier contained an adverbial prefix 'deliberately'. The word 'deliberately' in the above phrase was dropped by the Finance Act, 1964, with effect from 1 April, 1964. So, the element of mens rea was sought to be excluded from 1 April, 1964. However, notwithstanding the absence of the qualifying word 'deliberately' the furnishing of inaccurate particulars also has to be conscious and so a deliberate act, which is involved in the very expression 'concealed'. The Apex Court in the case of Reliance Petro Products reported in 322 ITR 165has explained the meaning of the words, furnish inaccurate particulars of income'. It is stated that reading the words in conjunction, they must mean the details supplied in the return which are not accurate, nor exact or correct, not according to truth or erroneous. When an item has not been shown at all, it would fall in the limb of concealment and an item which has been shown in the return but wrongly, would come under the limb of furnishing inaccurate particulars of income. Yet, broadly speaking, the effect of the amendment which has to be read along with the Explanation that was inserted by the Finance Act, 1964 has been that it is no longer necessary to establish that the assessee had deliberately concealed the particulars of his income or furnished inaccurate particulars of such income. It is sufficient to show that the furnishing of inaccurate particulars is the result of gross or wilful neglect. The expression 'particulars of such income' to cover a case where a false explanation is given as to the source of income. The word 'income' in clause (c) refers to positive income only. Evasion of tax is the sine qua non for imposition of penalty. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion and consequently penalty does not arise.
NOT AUTOMATIC
36. The levy of penalty is not a matter of course. It has to be found that the assessee concealed any income. Where there is no concealment, or no material for concealment, no penalty can be imposed. But where the assessee has concealed income, any subsequent act of voluntary disclosure would not affect the imposition of penalty. The mere addition to the taxable income would not automatically lead to an order of penalty. Further, the levy of penalty is not an automatic concomitant of the assessment. Therefore, safeguards have been provided for in the Act itself to see that penalties are levied only in appropriate cases. The Apex Court in the case of Sureshchandra Mittal 251 ITR 9, held that higher income offered after search would not lead to levy of penalty automatically. The Apex Court in the case of Dilip Shroff 291 ITR 529,at Page 547 at para 62 has observed that finding in assessment proceedings cannot automatically be adopted in penalty proceedings and the authorities have to consider the matter afresh from different angle. This Court in the case of Vasanth K Handigund reported in 327 ITR 233, has held that when addition has been accepted to buy peace and avoid litigation and the explanation was found reasonable by the appellate authorities the cancellation of penalty was justified. This Court in the case of Bhadra Advancing Pvt Limited 210 CTR 447,held that merely because the assessee has filed a revised return and withdraw some claim of depreciation penalty is not leviable. The additions in assessment proceedings will not automatically lead to inference of levying penalty. This Court in the case of Gujamgadi290 ITR 168, has held that every addition to income by the Income Tax Officer will not automatically attract levy of penalty. Similar view has also been taken by this Court in the case of Balaji Vegetable Products Private Limited 290 ITR 173.The facts of the addition has to be looked into and the conduct of the assessee may also be taken into consideration. Merely because addition has been accepted and taxes paid along with interest should mitigate the attitude of the Assessing Officer in not levying penalty rather than levy of penalty. The Punjab and Haryana High Court in the case of Suraj Bhan reported in 294 ITR 481, has held that when an assessee files revised return showing higher income penalty cannot be imposed merely on account of the higher income. There is no deeming fiction for survey similar to Explanation 5 or 5A which are in respect of search action only. There is no deeming fiction for higher income declared during survey and the assessing authorities cannot levy penalty automatically in case of survey cases where higher income is declared after survey. The Punjab and Haryana High Court in the case of Hukumchand Hari prakash 72 CTR 271, has held that additional income offered after survey cannot lead to imposition of penalty. In cases where the assessee have accepted the view of the department and have either filed revised return or letters accepting the addition and offered the additional income to tax and have not filed appeal or revision, the Assessing Officers are duty-bound in law to take these factors and also the facts leading to addition and use the discretion vested in them in the main provision of the Section.
37. It was contended that for imposing penalty under Section 271 (l)(c) of the Act, mens rea is not the requirement. Therefore, once the aforesaid conditions mentioned in the aforesaid provision is satisfied, the imposition of penalty is automatic. There is no discretion left with the authorities in the matter of imposing penalty. In support of the said contention, the revenue relied on the judgment of the Apex Court in the case of Union Of India v.Dharmendra Textiles Processors & Others [2008] 306 ITR 277 (SC).
38. The Supreme Court in the case of Gujarat Travancore Agency v. CIT [1989] 3 SCC 52, at page 55, paragraph 4 held as under:
".......... It is sufficient for us to refer to section 271(l)(a), which provides that a penalty may be imposed if the Income-tax Officer is satisfied that any person has without reasonable cause failed to furnish the return of total income, and to section 276C which provides that if a person wilfully fails to furnish in due time the return of income required under section 139(1), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine. It is clear that in the former case what is intended is a civil obligation while in the latter what is imposed is a criminal sentence. There can be no dispute that having regard to the provisions of section 276C, which speaks of wilful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established. In most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent. The creation of an offence by statute proceeds on the assumption that society suffers injury by the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence. In the case of proceeding under Section 27(l)(a), however, it seems that the intention of the legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. In this connection the terms in which the penalty falls to be measured is significant. Unless there is something in the language of the statute indicating the need to establish the element of mens rea it is generally sufficient to prove that a default in complying with the statute has occurred. In our opinion, there is nothing in section 271(l)(a) which requires that mens rea must be proved before penalty can be levied under that provision. .........."
39. Following the said judgment and other cases the Apex Court in the aforesaid Dharmendra's case summarised the principles as under:-
(a) | Mens rea is an essential or sine qua non for criminal offence. | |
(b) | A straitjacket formula of mens rea cannot be blindly followed in each and every case. The scheme of a particular statute may be diluted in a given case. | |
(c) | If from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature, in contradiction to criminal or quasi-criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word 'penalty' by its will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravener and the delinquency. | |
(d) | Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities. |
It further held that :
It is significant to note that the conceptual and contextual difference between section 271(l)(c) and section 276C of the Income-tax Act was lost sight of in the case of Dilip N. Shroffs [2007] 8 Scale 304 (SC)."
The Explanations appended to section 272(l)(c) of the Income-tax Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff's case [2007] 8 Scale 304 (SC) has not considered the effect and relevance of section 276C of the Income-Tax Act. The object behind the enactment of section 271(l)(c) read with the Explanations indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the Income-tax Act."
.......... Dilip N. Shroffs case [2007] 8 Scale 304 (SC) was not correctly decided but Chairman, SEBI's case [2006] 5 SCC 361 has analysed the legal position in the correct perspectives. The reference is answered."
40. In the Dharmendra's case the Apex Court was dealing with the penalty provisions contained in the Central Excise Act, 1944, Sec. 11AC. They have referred to penalty provision in the Income-tax Act 271(l)(c). After referring to various judgments on the point rendered by both the Apex Court as well as various High Courts it was held that Mens Rea is not an essential element for imposing penalty for breach of civil obligations. Further, it was held the judgment of the Apex Court in Dilip N. Sharoff's case, where it had been held Mens Rea is essential, it was sought to be distinguished by saying the conceptual and conspectual difference between Sec. 271(l)(c) and 276(c) of the Income-tax Act, was lost sight of in Dilip N. Sharoff's case. Further at para no. 27 they proceeded to hold that explanation appended to Sec. 272(l)(c) of the Income-tax Act entirely indicate the element of strict law on the assessee for concealment or for giving inaccurate particulars while filing a return. The judgment in Dilip N. Sharoffs case has not considered the effect and relevance of Sec. 276(c) of the Income-tax Act. The object described enactment of Sec. 271(l)(c) read with the explanation indicates that the said Section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability, wilful concealment is not an essential ingredient for attracting a civil liability as is the case in the matter of prosecution u/s 276(c) of the Income-tax Act.
41. In almost every case relating to penalty, judgment in Dharmendra's case was referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause could automatically get attracted and the authority has no discretion in the matter. Therefore the Apex Court had an occasion to interpret the law laid down in Dharmendra's case. After referring to the relevant portion of the Dharmendra's case. This is what the Apex Court held in Union of India v. Rajasthan Spinning & Weaving Mills [2009] 224 CTR (SC) 1 at paras 20, 21, 23 and 24 as under:
20. At this stage, we need to examine the recent decision of this Court in Dharmendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short-payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (aftab alam, J.) was a party to the decision inDharmendra Textile (supra ) and we see no reason to understand or read the decision in that manner........"
21. From the above, we fail to see how the decision in Dharmendra Textile (supra) can be said to hold that S. 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.
23. The decision in Dharmendra Textile (supra) must, therefore, be understood to mean that though the application of S. 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must he imposed equal to the duty determined under sub-sec. (2) of sec. 11A. That is what Dharmendra Textile (supra) decides.
24. It must, however, be made clear that what is stated above in regard to the decision in Dharmendra Textile (supra) is only insofar as sec. 11 (A)(C) is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in that decision."
42. In Dharmendra's case at para 28 and 29, the Court observed as follows:
"28. In Union Budget of 1996-97, sec. 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given.
29. Above being the position, the plea that the rr.96ZQ and 96ZO have a concept of discretion in built cannot be sustained. Dilip Shroff's case (supra) was not correctly decided but Chairman, SEBI's case (supra) has analysed the legal position in the correct perspectives. The reference is answered. .........."
43. From the aforesaid judgment of the Apex Court it is clear the decision in Dharmendra Textiles case is to be understood as a decision u/s 11AC of the Central Excise Act. Though Sec. 271(l)(c) of the Income-tax Act has been extensively quoted and some observations are made, it is not a decision where the interpretation of Sec. 271(l)(c) fell for consideration before the Court. Therefore in Rajasthan Spinning & Mills case, the Supreme Court has categorically held at para no. 24 that the decision in Dharmendra Textile's case is only insofar as Sec. 11 AC of Central Excise Act is concerned.
44. The Apex Court in the case of CIT v. Atul Mohan Bindal [2009] 317 ITR 1 (SC) relying on Rajasthan Mill's case explained the scope of Section 271 (l)(c) as under:
"A close look at section 271(1) (c) and Explanation 1 appended thereto would show that in the course of any proceedings under the Act, inter alia, if the Assessing Officer is satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income, such person may be directed to pay penalty. The quantum of penalty is prescribed in clause (iii). Explanation 1, appended to section 27(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, for the purposes of section 271(l)(c),the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in Section 271(l)(c) is neither criminal nor quasi-criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.
.......... The decision in Dharmendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A. That is what Dharmendra Textile decides.
Then the Apex Court held as under:
'It goes without saying that for applicability of section 271(l)(c), the conditions stated therein must exist."
45. Following the said judgment it was held that it goes without saying that for the applicability of Section 271(l)(c) conditions stated therein must exist.
46. In a recent judgment the Supreme Court after referring to the aforesaid Judgments in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) held as under:
"9. Therefore, it is obvious that it must be shown that the conditions under section 271(l)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that it is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint CIT [2007] 6 SCC 329, this Court explained the terms "concealment of income" and "furnishing inaccurate particulars". The court went on to hold therein that in order to attract the penalty under Section 271(l)(c), mens rea was necessary, as according to the Court, the word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of section 271(l)(c) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the Assessing Officer must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Joint CIT' was upset inUnion of India v. Dharmendra Textile Processors', after quoting from section 271 extensively and also considering section 271(l)(c), the court came to the conclusion that since Section 271(l)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The court went on to hold that the objective behind the enactment of section 271(l)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff v. Joint CIT was overruled by this Court in Union of India v. Dharmendra Textile Processors, was that according to this Court the effect and difference between section 271(l)(c) and section 276C of the Act was lost sight of in the case of Dilip N. Sharoff v. Joint CIT However, it must be pointed out that in Union of India v. Dharmendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, where the Court explained the meaning of the terms "conceal" and "inaccurate". It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the penalty under section 271(l)(c) that the decision in Dilip N. Shroff v. Joint CIT was overruled.
10. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster's Dictionary, the word "inaccurate" has been defined as:
"not accurate, not exact or correct; nor according to truth; erroneous; as an inaccurate statement, copy or transcript".
11. We have already seen the meaning of the word "particulars" in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. .........."
47. The object behind the enactment of section 271(l)(c) read with the Explanations indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the Income-Tax Act. The word 'penalty' by its nature will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. That the intention of the legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. There is nothing in section 271(l)(a) which requires that mens rea must be proved before penalty can be levied under that provision. Mens rea is an essential or sine qua non for criminal offence. Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities. It was only on the point of mens rea that the judgment in Dilip N. Shroffv. Joint CIT was upset in Union ofIndia v. Dharmendra Textile Processors. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the penalty under section 271(l)(c) that the decision in Dilip N. Shroff v. Joint CIT was overruled. For the applicability of Section 271(l)(c) conditions stated therein must exist. Therefore, it is obvious that it must be shown that the conditions under section 271(l)(c) exist before the penalty is imposed.
DEEMING PROVISION
48. As the opening words of Explanation 1 makes it clear where in respect of any facts material to the computation of the total income of any person under this Act such person fails to offer an explanation or offers an explanation which is found to be false or offers an explanation which is not able to substantiate and fails to prove that such explanation is bona fide, then the amount added or disallowed in computing the total income of such person as a result thereof shall for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed. Therefore, it is clear that aforesaid instances by itself do not constitute concealment. The Assessing Officers were just writing at the end of the assessment order that penalty proceedings are initiated or something to the effect. The Delhi High Court in the case of Ram Commercials has held that such a note alone in the assessment order does not satisfy the requirement of assuming jurisdiction in law in respect of the initiation of penalty proceedings. The satisfaction should be in the assessment order. The said view was also approved by the full Bench of the Delhi High Court in the case of Rampur Engineering 309 ITR 143.The said view has been approved by the Apex Court in the case of Dilip Shroff 291 ITR 591.That is the view the courts have consistently taken. After taking note of the judicial pronouncements in this regard, the Legislature thought it fit to insert Section 271(1)(B), which reads as under:
"271.(1)(B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-Section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c)."
49. By the aforesaid deeming provision a legal fiction is created. When the assessment order contains a direction for initiation of penalty proceedings such order shall deem to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under sub-clause (c) of Section 271 of the Act. As the language of Section 271 makes it clear before a direction is issued to pay penalty, the person issuing the direction must be satisfied about the condition mentioned in clause (c) of Section 271(1). The question is, whether such satisfaction should be in writing. As the satisfaction has to be in the course of any proceedings and it is at the time of computation of the total income of any person and as it results in an assessment order which has to be mandatorily in writing, the satisfaction should be found in the said order. The existence of these facts is a condition precedent for initiation of penalty proceedings under Section 271. This provision is attracted once in any such assessment orders, a direction for initiation of penalty proceedings under clause (c) of sub-section (1) is made. Thereby, it means even if the order does not contain a specific finding that the assessee has concealed income or he is deemed to have concealed income because of the existence of facts which are set out in Explanation 1, if a mere direction to initiate penalty proceedings under clause (c) of sub-section (1) is found in the said order, by legal fiction, it shall be deemed to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under said clause (c). The said provision came up for interpretation by the Delhi High Court in the case ofMadhushree Gupta 317 ITR 107,wherein the Delhi High Court held that the satisfaction should be discernible in the assessment order. Position post amendment is not in much variance with pre-amendment. They held that provisions will fall foul of Article 14 of the Constitution if the same is not read in the manner it has read and in fact has read down the provisions to hold it Constitutional. Therefore according to Delhi High Court, in post amendment and pre-amendment there is not much difference and the satisfaction is required to arrive in the course of assessment proceedings and should be discernible in the assessment order. Therefore, this provision makes it abundantly clear that satisfaction of the Assessing Officer before initiation of penalty proceedings is a must. The satisfaction should be that he has concealed particulars of his income or furnished inaccurate particular of such income and even in the absence of those expressed words or findings recorded in the Assessment proceedings, if a direction as aforesaid is mentioned, it constitutes satisfaction of the Assessing Officer.
DIRECTION
50. A reading of Section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(l)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word 'direction' has been interpreted by the decision of the Apex Court in the case of Rajendranath 120 ITR pg.14,where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the co-owners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.
51. Therefore, it is settled law that in the absence of the existence of these conditions in the assessment order penalty proceedings could not be proceeded with. The proceedings which are initiated contrary to the said legal position are liable to be set aside.
WHEN DEEMING PROVISION NOT APPLICABLE
52. Sub-section (1)(B) only deals with satisfaction of the Assessing Officer. However, under the scheme of Section 271, the persons who are authorised to compute income as well as initiate the proceedings or the Assessing Officer or the Commissioner of Appeals or Commissioner in the course of revisional jurisdiction, Explanation 1 applies to all these three Officers whereas the deeming provision (1)(B) refers only to the Assessing Officer. Therefore, if an order of assessment is passed by Commissioner of Appeals or Commissioner in the course of the said proceedings, if they are satisfied that there is any concealment of particulars of his income or he has furnished inaccurate particular of income the said satisfaction must be expressly stated in the said order. If that is not stated, at least, the order should state what is mentioned in Explanation 1. It is only if those facts are set out in the order, then the deeming provision in Explanation 1 applies and the concealment of income could be presumed and then they are entitled to initiate penalty proceedings under Section 271. If the said order do not disclose the facts set out in Explanation 1, they are not entitled to the benefit of deeming provision contained in provision (1)(B). The said deeming provision is confined only to the Assessing Officer.
53. From these discussion, it is clear that condition precedent for initiation of penalty proceedings under Section 271(l)(c) is existence of condition referred to in the said section. The person initiating penalty proceedings should be satisfied about the existence of said conditions which should be reflected in the assessment orders passed by them. In a given case, after appreciating the entire records, the Officer passing the order may categorically state that he is satisfied that the assessee has concealed income. Once such a finding is recorded that is sufficient to initiate penalty proceedings. Assuming such a categorical finding is not recorded in the order, at least, he has to record facts as contemplated in Explanation-1. If these facts are discernible from the assessment order, the deeming clause in Explanation 1 is attracted and the income is deemed to have been concealed. That gives the jurisdiction to the Officer passing the order to initiate the penalty proceedings. If the Officer passing the assessment order is the Assessment Officer, in the said order, the aforesaid facts are not discernible, at least he must direct initiation of proceedings under Section 271(l)(c). Then Section (1)(B) is attracted and these conditions deemed to exist which confers jurisdiction on him to initiate penalty proceedings. Section (1)(B) has no application to an order passed by Commissioner of Appeals or Commissioner.
WHO INITIATES PENALTY PROCEEDINGS
54. As is clear from the words in Section 271, if the Assessing Officer or the Commissioner of Appeals or the Commissioner in the course of any proceedings under this Act is satisfied that any person has concealed particulars of his income or furnished inaccurate particulars of his income, he may direct that such person shall pay by way of penalty the amount mentioned therein. Therefore, the penalty proceedings have to be initiated by the person who is satisfied about the concealment of income or furnishing of inaccurate particulars of income in the course of any proceedings under this Act. In a given case if the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal or in revision, the authority is satisfied regarding concealment and furnishing of inaccurate particulars, then it is that authority which is satisfied about the said concealment or furnishing of inaccurate particulars has to initiate penalty proceedings and then pass orders in respect of the penalty to be imposed. The imposition of penalty may be done at the stage of assessment or at the stage of an appeal. At the assessment stage, the Assessing Officer has to issue a notice to the assessee to show cause why a penalty should not be imposed and this notice has to be issued in the course of the assessment proceedings. The imposition of the penalty has also to be done by the Assessing Officer but this can be done within the time prescribed in section 275.
55. In the case of initiation of penalty proceedings during the course of appeal or revision proceedings, the authority who has to be satisfied is the authority in whose proceedings the issue is examined and not any other authority. The levy of penalty has also to be done by the same officer as the language used in the later part of Section 271 is that: "He may direct that such person shall pay by way of penalty". The authority in which proceedings, there is satisfaction of concealment or furnishing inaccurate particulars of income alone can levy the penalty and not any other authority. If the Commissioner (Appeals) in the course of appeal proceedings is satisfied then it is the Commissioner (Appeals) who have to initiate the penalty proceedings and also complete the same by levying the penalty. He cannot permit the assessing authority to levy penalty.
56. Provisions of Section 274(3) makes it clear that if an authority other than the Assessing Officer passes an order under Chapter XXI which deals with matters of penalties then such authority has to forthwith send the copy of the order to the Assessing Officer. This fortifies that it is the authority who is satisfied in the course of the proceedings before it has the jurisdiction to initiate and levy of penalty. The Allahabad High Court in the case of Motilal Shamsundar 84 ITR 183 held that when the amounts were discovered in the course of appellate proceedings before him, it was discovered by him. It was for him then to impose the penalty. If he was satisfied that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars of it.
57. The question of their recording satisfaction and then calling upon the Assessing Officer to initiate penalty proceedings would not arise. Penalty proceedings has to be initiated by the authority which is satisfied about the concealment of the particulars of the income or furnishing of inaccurate particulars of income.
PROCEDURE FOR IMPOSING PENALTY
58. It must be noticed that this finding recording concealment in the order to be passed by these authorities is only for the purpose of initiating. The said finding is not conclusive; it is in the nature of prima facie satisfaction, which authorises them to initiate the penalty proceedings. Once a penalty proceedings is validly initiated, then under Section 274(1) an obligation is cast on the person initiating the proceedings to issue notice to the assessee. When such a notice is issued, it is open to the assessee to contest the accusation against him that he has concealed income or he has furnished inaccurate particulars. As there is an initial presumption of concealment, it is for the assessee to rebut the said presumption. The presumption found in Explanation 1 is a rebuttable presumption. If the authority, after hearing the assessee and looking into the material produced in the said proceedings before him is satisfied that though the income is undisclosed there was no intent to avoid tax and therefore, if he holds there is no concealment of income, then question of imposing penalty would not arise. It may be a case of not disclosing income without any intent to avoid tax; it may be a case of furnishing particulars without any intention to avoiding tax. Both stand on the same footing. It is only when the authority is satisfied that non-disclosure of income or furnishing inaccurate particulars was with the intention of evading tax, then it amount to concealment, it amounts to furnishing inaccurate particulars. Then, at his discretion, he may impose penalty as provided under the Act. Therefore, merely because the assessee accepted addition or deletion and did not challenge the assessment order by way of appeal, it cannot be concluded that such addition or deletion amounts to concealment of income or furnishing of inaccurate particulars. When a plea is taken that in order to avoid litigation and purchase peace, the tax levied is paid with interest, if the assessee is able to demonstrate his bona fides and if the authority is satisfied about his bonafides, then the question of imposing penalty would not arise. Similarly, in cases where though the tax was not actually due but still the assessee pays tax with a hope of claiming deductions in the subsequent years, if the assessee is able to demonstrate there was no liability to pay tax at all, merely if assessee pays tax and he does not challenge order, that would not constitute concealment of income so as to enable the authorities to impose penalty. Similarly, in cases, where the legal position is not well settled, when few High Courts and Tribunals have taken a view in favour of the assessee and some High Courts and Tribunals have taken a view in favour of the Revenue and on legal advice if an assessee relies on the said legal position for not disclosing the income and for non-payment of tax, certainly, that is a fact which should weigh in the penalty proceedings after the assesee has paid tax with interest before imposing penalty.
NOTICE UNDER SECTION 274
59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in Section 271 should be made known about the grounds on which they intend imposing penalty on him as the Section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in Section 271(l)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.
60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(l)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable.
61. The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai 292 ITR 11at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of Manu Engineering 122 ITR 306 and the Delhi High Court in the case of Virgo Marketing 171 Taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.
INDEPENDENT PROCEEDING
62. The penalty proceedings are distinct from assessment proceedings, and independent therefrom. The assessment proceedings are taxing proceedings. The proceedings for imposition of penalty though emanating from proceedings of assessment are independent and separate aspects of the proceeding. Separate provision is made for the imposition of penalty and separate notices of demand are made for recovery of tax and amount of penalty. Also separate appeal is provided against order of imposition of penalty. Above all, normally, assessment proceedings must precede penalty proceedings. Assessee is entitled to submit fresh evidence in the course of penalty proceedings. It is because penalty proceedings are independent proceedings. The assessee cannot question the assessment jurisdiction in penalty proceedings. Jurisdiction under penalty proceedings can only be limited to the issue of penalty, so that validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that the reassessment is invalid in such penalty proceedings. Clearly, there is no identity between the assessment proceedings and the penalty proceedings. The latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. Though it is usual for the Assessing Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient, if there is some record somewhere, even apart from the assessment order itself, that the Assessing Officer has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases, it is possible for the Assessing Officer to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed. There is no statutory requirement that the penalty order should precede or be simultaneous with the assessment order. In point of fact, having regard to the mode of computation of penalty outlined in the statute, the actual penalty order cannot be passed until the assessment is finalised.
CONCLUSION
63. In the light of what is stated above, what emerges is as under:
(a) | Penalty under Section 271(l)(c) is a civil liability. | |
(b) | Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. | |
(c) | Wilful concealment is not an essential ingredient for attracting civil liability. | |
(d) | Existence of conditions stipulated in Section 271(l)(c) is a sine qua non for initiation of penalty proceedings under Section 271. | |
(e) | The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. | |
(f) | Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(l)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. | |
(g) | Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). | |
(h) | The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. | |
(i) | The imposition of penalty is not automatic. | |
(j) | Imposition of penalty even if the tax liability is admitted is not automatic. | |
(k) | Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order. | |
(l) | Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. | |
(m) | If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. | |
(n) | The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. | |
(o) | If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. | |
(p) | Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income | |
(q) | Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. | |
(r) | The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. | |
(s) | Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. | |
(t) | The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. | |
(u) | The findings recorded in the assessment proceedings insofar as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings. |
In ITA Nos. 2564 & 2565/2005
64. In the light of what we have stated above, it is clear that merely because the assessee agreed for addition and accordingly assessment order was passed on the basis of this addition and when the assessee has paid the tax and the interest thereon in the absence of any material on record to show the concealment of income, it cannot be inferred that the said addition is on account of concealment. Moreover, the assessee has offered the explanation. The said explanation is not found to be false. On the contrary, it is held to be bonafide. In fact in the assessment proceedings there is no whisper about these concealment. Under these circumstances, the entry found in the rough cash book could have been reflected in the accounts for the said financial year in which the survey took place as the last date for closing the account was still not over. The very fact that the assessee agreed to pay tax and did not challenge the assessment order, it is clear the conduct of the assessee cannot be construed as malafide. Therefore, the Tribunal was justified in setting aside the orders passed by the Appellate Authority as well as the Assessing Authority.
65. Insofar as the imposition of penalty is concerned, it is not in accordance with law. No fault could be found with the Tribunal for deleting the penalty. Thus, we answer the substantial question of law in favour of the assessee and against the Revenue.
In ITA No. 5020/2009
66. In view of the aforesaid law, we are of the view that the Tribunal was justified in holding that the entire proceedings are vitiated as the notice issued is not in accordance with law and accordingly justified in interfering with the order passed by the Appellate Authority as well as the Assessing Authority and in setting aside the same. Hence, we answer the substantial questions of law framed in this case in favour of the assessee and against the Revenue.
In ITA Nos. 5022 & 5023/2009
67. In the instant case, the penalty proceedings are initiated by the Assessing Authority initially on the basis of his assessment order. During the pendency of the said penalty proceedings, the assessment order was challenged by way of an appeal. In appeal, the Appellate Authority deleted the additions made under Section 69 of the Act by the Assessing Authority. Instead, he sustained additions under new grounds, i.e., under valuation of the closing stock, i.e., the finding recorded by the Appellate Authority, for the first time on being satisfied by the material available on record. However, the Assessing Authority in the penalty proceedings took note of the Appellate order and suitably amended the penalty proceedings and proceeded further in the matter and then imposed penalty. Therefore, it is clear, that the subject matter of the penalty proceedings is the order of the Appellate Authority and not the order passed by the Assessing Authority. If the Appellate Authority was satisfied with the addition it has to be made on the ground of under valuation of the closing stock, which was not the finding recorded by the Assessing Authority, which was not the basis for the initiation of the penalty proceedings by the Assessing Authority then in view of the law aforesaid, it is the Appellate Authority who should have initiated penalty proceedings and issued notice to the assessee to show cause why penalty should not be imposed. The said procedure is not followed and therefore though for different reasons, the first Appellate Authority set aside the order levying penalty, the Tribunal correctly appreciated the facts and in a proper perspective and was justified in not interfering with the order passed by the Appellate Authority setting aside the penalty order. In that view of the matter, we do no see any justification to interfere with the well considered order passed by the Tribunal. Thus, the substantial questions of law are answered in favour of the assessee and against the Revenue.
In ITA Nos. 5025 & 5026/2010
68. In view of the aforesaid legal position, when two fact finding authorities were satisfied that the explanation offered by the assessee is not false and it is a bonafide one though the assessee has failed to conclusively prove the explanation offered, we do not find any justification to interfere with the well considered order passed by the Tribunal. Accordingly, the substantial question of law is answered in favour of the assessee and against the Revenue.
Hence, we pass the following:-
ORDER
(a) | All the appeals are dismissed. | |
(b) | No costs. |
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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