ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB)) -- PRINT AND ONLINE EDITION
Business expenditure --Disallowance--Payments liable to deduction of tax at source--Payment to foreign company for advertising services rendered through search engine--Business profits--Foreign company having no permanent establishment in India--Payment not taxable in India and no tax deductible at source--Payment allowable--Income-tax Act, 1961, ss. 9(1)(vi), 40(a)(i)-- Pinstorm Technologies P. Ltd. v. ITO (Mumbai) . . . 146
Non-resident --Taxability in India--Permanent establishment--Assessee entering into three contracts in India--Duration of each contract less than 9 months--No permanent establishment of assessee in India--Assessee not taxable in India--Double Taxation Avoidance Agreement between India and Mauritius, arts. 5, 7 -- Deputy CIT v. J. Ray McDerrmott Eastern Hemisphere Ltd. (Mumbai) . . . 141
Business expenditure --Assessee having arrangements with suppliers for purchasing a predetermined number of parts and components--Compensation paid to vendors for deficiency in lifting contracted quantum--Compensation related to purchase of raw material, which was to become a part of running stock of assessee--Revenue expenditure and allowable-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
----Fines and penalties--Penalty paid under Central excise and service tax law--Nothing to show payments were not for infringement of law--Payments to be disallowed--Income-tax Act, 1961, s. 37, Expln. -- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
Business loss --Provision towards doubtful advances written off as irrecoverable--Nothing to prove actual write-off--Mere provision in accounts not equivalent to write-off--Addition rightly made-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
Capital gains --Cost of acquisition--Cost of improvement--Small construction consisting of two rooms made of hollow bricks--No evidence of making any improvement after purchase--No mention of existing house in sale deed--No deduction for cost of improvement to be allowed--Income-tax Act, 1961, s. 48-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
----Long-term capital gains--Exemption--Purchase of residential house--House must be inhabitable--Unit should have had basic amenities like a place for cooking, toilet and bathroom, approach road within plot--No evidence of grant of electricity or telephone or water connection--Exemption cannot be granted--Income-tax Act, 1961, s. 54F-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
Capital or revenue expenditure --Software purchases--Disallowance as capital expenditure restricted pursuant to direction of Dispute Resolution Panel--Proper--Depreciation to be allowed-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
----Subsidy received under scheme clearly mentioning that it was given as special incentive for boosting mega investments in State--Capital receipt-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
Cash credits --Burden of proof--Is on assessee to prove genuineness of transaction and capacity of creditor--Merely establishing their identities and creditworthiness to some extent--Not sufficient--Income-tax Act, 1961, s. 68-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
Deduction of tax at source --Failure to deduct tax--Lease premium paid in four instalments--Is capital expenditure not falling under section 194-I--No liability to deduct tax--Not a case of default by assessee--Income-tax Act, 1961, s. 194-I-- ITO v. Indian Newspapers Society (Delhi) . . . 377
----Failure to deduct tax--Notice under sections 201 and 201(1A) by Assessing Officer for not deducting tax at source on lease premium--Period of limitation under section 201(3)--Finding by Commissioner (Appeals) that order passed beyond period of limitation--Proper--Income-tax Act, 1961, ss. 194-I, 201(1A)-- ITO v. Indian Newspapers Society (Delhi) . . . 377
Exemption --Export of computer software--Loss incurred by one unit--Assessee entitled to deduction in respect of profits of eligible units and set-off of loss sustained by other unit against normal business income--Provisions of section 14A not attracted--Income-tax Act, 1961, ss. 10B, 14A-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
International transaction --Arm's length price--Failure by assessee to report brand promotion exercise as international transaction--Transaction coming to notice of Transfer Pricing Officer only during proceedings before him--Transfer Pricing Officer can consider such transaction--Income-tax Act, 1961, ss. 92CA(2B), 92E-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
----Arm's length price--Determination-- Assessee, wholly owned subsidiary of U.S.A. company licensed to manufacture motor vehicles using technical know-how supplied by it--Assessee to pay royalty in consideration of grant of licence--Licensed products, motor vehicles, to carry logo--Department not showing what normal sales if normal advertising and sales promotion expenditure alone was incurred would have been and additional sales on account of excess advertising and sales promotion expenditure expenses--Not entitled to say there was separate brand building arising out of normal sales and arising out of additional sales--Nothing to show assessee incurred advertising and sales promotion expenditure over and above that by similarly placed other companies having no associated enterprise dealings--U. S. A. company not charging assessee royalty for use of its logo--Artificial split on marketing intangible in nature of brand building unwarranted--Objective criteria of excess advertising and sales promotion expenditure incurred by assessee when compared to its competitors not having a foreign brand or logo--Addition considering one per cent. of sales as brand development fee justified--Discounts given under schemes of sales promotion, remuneration to sales consultants, expenses incurred for customer survey, to be excluded from advertising and sales promotion expenditure--Sales expenditure, which had no connection with building of logo but directly in connection with sales to be excluded--Comparable domestic cases not using foreign brand alone to be considered--Transfer Pricing Officer to identify set of comparables--Both assessee as well as the U. S. A. company benefitted from product development expenditure incurred--U.S.A. company and assessee separate legal entities having separate legal existence--50 per cent. of advantage derived on account of product development spending to be treated as enuring to assessee and balance 50 per cent. to U.S.A. company--Income-tax act, 1961, ss. 92C(1), (2), prov., (3), 92CA-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
----Arm's length price--Determination--Most appropriate method--Transfer Pricing Officer adopting cost plus method but not taking second and third steps in determination of gross profit mark-up and applying it to results--Order not void ab initio--"Bright line" test applied by Transfer Pricing Officer falls within method prescribed--Income-tax Act, 1961, s. 92C--Income-tax Rules, 1962, r. 10B(1)(c)-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
----Arm's length price--Determination-- Selection of comparables--Transfer Pricing Officer selecting four comparables along with CRISIL--Dispute Resolution Panel selecting two comparables and computing new arithmetic mean--Exclusion of leading company as too large--One comparable company alone to be taken--Benefit of five per cent. variation not available where only one comparable chosen--Income-tax Act, 1961, s. 92C(2)-- IIML Asset Advisors Ltd. v. Assistant CIT (Mumbai) . . . 369
----Arm's length price--Determination-- Transactional net margin method--Assessee operating in four different independent segments--Submitting segmental accounts for each operation--Each segment to be considered with corresponding comparables after proper functions, assets and risks analysis--Weighted average method of arriving at profit margin not proper--Adjustment on entire turnover of assessee including transactions with non-associated enterprises not proper--No discussion in Transfer Pricing Officer's order why comparables of assessee were rejected or why other comparables accepted--Adjustments on reimbursements of expenditure part of segments already considered--Double addition--Order of Transfer Pricing Officer with consequential orders of Assessing Officer and Dispute Resolution Panel set aside and matter remanded to Assessing Officer for fresh transfer pricing analysis-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
----Arm's length price--Determination--Transfer Pricing Officer selecting eight comparables--Tribunal accepting only one of eight comparables for preceding year--For this year also, one comparable alone to be taken--Operating profit to cost ratio to be accordingly modified--Benefit of plus or minus five per cent. adjustment not available where only one comparable chosen--No facts brought by assessee for quantification of risk adjustment--No adjustment to be allowed--Income-tax Act, 1961, s. 92CA(3)-- General Atlantic P. Ltd. v. Assistant CIT (OSD) (Mumbai) . . . 389
----Definition--Assessee, wholly owned subsidiary of U.S.A. company licensed to manufacture motor vehicles using technical know-how supplied by it--assessee to pay royalty in consideration of grant of licence--Licensed products, motor vehicles, to carry logo--Total ownership and control exercised by U. S. A. company over assessee--Inference that advertising and sales promotion expenses incurred based on a corporate plan of U. S. A. company--International transaction for creating and improving marketing intangible comprised in logo by assessee for and on behalf of U.S.A. company--Transaction of brand building rightly treated as an international transaction--Income-tax Act, 1961, s. 92F(v)-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
Method of accounting --Valuation of closing stock--Increase on account of unutilised Modvat--Corresponding opening stock of that year to be increased-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
Rectification of mistakes --Return of income--Omission to claim exemption not a case of incorrect claim--Assessing Officer has no power under section 154 to correct return--Rectification application not maintainable--Income-tax Act, 1961, ss. 143(1), 154-- Jhansi Development Authority v. Deputy CIT (Agra) . . .338
S. 10B --Exemption--Export of computer software--Loss incurred by one unit--Assessee entitled to deduction in respect of profits of eligible units and set-off of loss sustained by other unit against normal business income--Provisions of section 14A not attracted-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
S. 14A --Exemption--Export of computer software--Loss incurred by one unit--Assessee entitled to deduction in respect of profits of eligible units and set-off of loss sustained by other unit against normal business income--Provisions of section 14A not attracted-- Sandoz P. Ltd. v. Deputy CIT (Mumbai) . . . 347
S. 37, Expln. --Business expenditure--Fines and penalties--Penalty paid under Central excise and service tax law--Nothing to show payments were not for infringement of law--Payments to be disallowed-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 48 --Capital gains--Cost of acquisition--Cost of improvement--Small construction consisting of two rooms made of hollow bricks--No evidence of making any improvement after purchase--No mention of existing house in sale deed--No deduction for cost of improvement to be allowed-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
S. 54F --Capital gains--Long-term capital gains--Exemption--Purchase of residential house--House must be inhabitable--Unit should have had basic amenities like a place for cooking, toilet and bathroom, approach road within plot--No evidence of grant of electricity or telephone or water connection--Exemption cannot be granted-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
S. 68 --Cash credits--Burden of proof--Is on assessee to prove genuineness of transaction and capacity of creditor--Merely establishing their identities and creditworthiness to some extent--Not sufficient-- Smt. Usharani Kalidindi v. ITO (Hyderabad) . . . 409
S. 92C --International transactions--Arm's length price--Determination--Most appropriate method--Transfer Pricing Officer adopting cost plus method but not taking second and third steps in determination of gross profit mark-up and applying it to results--Order not void ab initio--"Bright line" test applied by Transfer Pricing Officer falls within method prescribed-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 92C(1), (2), prov., (3) --International transactions--Arm's length price--Determination-- Assessee, wholly owned subsidiary of U.S.A. company licensed to manufacture motor vehicles using technical know-how supplied by it--Assessee to pay royalty in consideration of grant of licence--Licensed products, motor vehicles, to carry logo--Department not showing what normal sales if normal advertising and sales promotion expenditure alone was incurred would have been and additional sales on account of excess advertising and sales promotion expenditure expenses--Not entitled to say there was separate brand building arising out of normal sales and arising out of additional sales--Nothing to show assessee incurred advertising and sales promotion expenditure over and above that by similarly placed other companies having no associated enterprise dealings--U. S. A. company not charging assessee royalty for use of its logo--Artificial split on marketing intangible in nature of brand building unwarranted--Objective criteria of excess advertising and sales promotion expenditure incurred by assessee when compared to its competitors not having a foreign brand or logo--Addition considering one per cent. of sales as brand development fee justified--Discounts given under schemes of sales promotion, remuneration to sales consultants, expenses incurred for customer survey, to be excluded from advertising and sales promotion expenditure--Sales expenditure, which had no connection with building of logo but directly in connection with sales to be excluded--Comparable domestic cases not using foreign brand alone to be considered--Transfer Pricing Officer to identify set of comparables--Both assessee as well as the U. S. A. company benefitted from product development expenditure incurred--U.S.A. company and assessee separate legal entities having separate legal existence--50 per cent. of advantage derived on account of product development spending to be treated as enuring to assessee and balance 50 per cent. to U. S. A. company-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 92C(2) --International transactions--Arm's length price--Determination-- Selection of comparables--Transfer Pricing Officer selecting four comparables along with CRISIL--Dispute Resolution Panel selecting two comparables and computing new arithmetic mean--Exclusion of leading company as too large--One comparable company alone to be taken--Benefit of five per cent. variation not available where only one comparable chosen-- IIML Asset Advisors Ltd. v. Assistant CIT (Mumbai) . . . 369
S. 92CA --International transactions--Arm's length price--Determination-- Assessee, wholly owned subsidiary of U.S.A. company licensed to manufacture motor vehicles using technical know-how supplied by it--Assessee to pay royalty in consideration of grant of licence--Licensed products, motor vehicles, to carry logo--Department not showing what normal sales if normal advertising and sales promotion expenditure alone was incurred would have been and additional sales on account of excess advertising and sales promotion expenditure expenses--Not entitled to say there was separate brand building arising out of normal sales and arising out of additional sales--Nothing to show assessee incurred advertising and sales promotion expenditure over and above that by similarly placed other companies having no associated enterprise dealings--U. S. A. company not charging assessee royalty for use of its logo--Artificial split on marketing intangible in nature of brand building unwarranted--Objective criteria of excess advertising and sales promotion expenditure incurred by assessee when compared to its competitors not having a foreign brand or logo--Addition considering one per cent. of sales as brand development fee justified--Discounts given under schemes of sales promotion, remuneration to sales consultants, expenses incurred for customer survey, to be excluded from advertising and sales promotion expenditure--Sales expenditure, which had no connection with building of logo but directly in connection with sales to be excluded--Comparable domestic cases not using foreign brand alone to be considered--Transfer Pricing Officer to identify set of comparables--Both assessee as well as the U. S. A. company benefitted from product development expenditure incurred--U.S.A. company and assessee separate legal entities having separate legal existence--50 per cent. of advantage derived on account of product development spending to be treated as enuring to assessee and balance 50 per cent. to U. S. A. company-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 92CA(2B) --International transaction--Arm's length price--Failure by assessee to report brand promotion exercise as international transaction--Transaction coming to notice of Transfer Pricing Officer only during proceedings before him--Transfer Pricing Officer can consider such transaction--Income-tax Act, 1961, Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 92CA(3) --International transactions--Arm's length price--Determination--Transfer Pricing Officer selecting eight comparables--Tribunal accepting only one of eight comparables for preceding year--For this year also, one comparable alone to be taken--Operating profit to cost ratio to be accordingly modified--Benefit of plus or minus five per cent. adjustment not available where only one comparable chosen--No facts brought by assessee for quantification of risk adjustment--No adjustment to be allowed-- General Atlantic P. Ltd. v. Assistant CIT (OSD) (Mumbai) . . . 389
S. 92E --International transaction--Arm's length price--Failure by assessee to report brand promotion exercise as international transaction--Transaction coming to notice of Transfer Pricing Officer only during proceedings before him--Transfer Pricing Officer can consider such transaction-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 92F(v) --International transactions--Definition-- Assessee, wholly owned subsidiary of U.S.A. company licensed to manufacture motor vehicles using technical know-how supplied by it--assessee to pay royalty in consideration of grant of licence--Licensed products, motor vehicles, to carry logo--Total ownership and control exercised by U. S. A. company over assessee--Inference that advertising and sales promotion expenses incurred based on a corporate plan of U. S. A. company--International transaction for creating and improving marketing intangible comprised in logo by assessee for and on behalf of U.S.A. company--Transaction of brand building rightly treated as an international transaction-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456
S. 143(1) --Rectification of mistakes--Return of income--Omission to claim exemption not a case of incorrect claim--Assessing Officer has no power under section 154 to correct return--Rectification application not maintainable-- Jhansi Development Authority v. Deputy CIT (Agra) . . .338
S. 154 --Rectification of mistakes--Return of income--Omission to claim exemption not a case of incorrect claim--Assessing Officer has no power under section 154 to correct return--Rectification application not maintainable-- Jhansi Development Authority v. Deputy CIT (Agra) . . .338
S. 194-I --Deduction of tax at source--Failure to deduct tax--Lease premium paid in four instalments--Is capital expenditure not falling under section 194-I--No liability to deduct tax--Not a case of default by assessee-- ITO v. Indian Newspapers Society (Delhi) . . . 377
----Deduction of tax at source--Failure to deduct tax--Notice under sections 201 and 201(1A) by Assessing Officer for not deducting tax at source on lease premium--Period of limitation under section 201(3)--Finding by Commissioner (Appeals) that order passed beyond period of limitation--Proper-- ITO v. Indian Newspapers Society (Delhi) . . . 377
S. 201(1A) --Deduction of tax at source--Failure to deduct tax--Notice under sections 201 and 201(1A) by Assessing Officer for not deducting tax at source on lease premium--Period of limitation under section 201(3)--Finding by Commissioner (Appeals) that order passed beyond period of limitation--Proper-- ITO v. Indian Newspapers Society (Delhi) . . . 377
R. 10B(1)(c) --International transactions--Arm's length price--Determination--Most appropriate method--Transfer Pricing Officer adopting cost plus method but not taking second and third steps in determination of gross profit mark-up and applying it to results--Order not void ab initio--"Bright line" test applied by Transfer Pricing Officer falls within method prescribed-- Ford India P. Ltd. v. Deputy CIT, Large Taxpayer Unit (Chennai) . . . 456--
Posted By Rajkumar to ITR at 8/03/2013 12:04:00 AM
Service Tax Voluntary Compliance Encouragement Scheme, 2013 provides the service tax defaulters with a golden opportunity to pay all 'tax dues' from the period 01.10.2007 to 31.12.2012 without interest, penalty and other legal proceedings including prosecution. For which such Assessees can Apply on or before 31.12.2013 in the prescribed format.
Procedure for availing the VCES scheme
Step 1
If the declarant is not registered, then he is first required to get himself registered and then apply forthis scheme.
Step 2
After registration, the declarant shall make a declaration in Form VCES-1 to the designated authority (AC/DC Technical, Head quarter office) on or before 31.12.2013.
Step 3
On receipt of Form VCES- 1, the designated authority will issue acknowledgement of declaration in Form VCES-2 within 7 working days from the date of receipt of declaration.
Step 4
The declarant is required to pay not less than 50% of tax dues by 31st December 2013. Balance by 30th June 2014 and if not paid, can be paid by 31st December, 2014 alongwith interest from 1st July 2014.
Cenvat credit cannot be utilized for payment of dues (Rule 6(2)).
Amount paid shall not be refundable.
Step 5
On full payment of taxes, the designated authority will issue acknowledgement of discharge in VCES-3 within 7 working days from the date of furnishing of details of tax dues paid in full, along with interest if any. Last date for payment of first installment of 50% of total tax dues is 31.12.2013 and balance amount by 30.06.2014 or 31.12.2014 (with interest).
Persons not eligible for the scheme
I. Person cannot make declaration of tax dues for which
a) SCN (u/s 73 or 73A)
b) Order (u/s 72, 73, 73A)
has been issued on or before 01-03-2013. [section106(1)]
II. A person who has filed return, declared tax liability but not paid [106(1) proviso]
If a SCN or order has been issued on any issue (say taxability or valuation), declaration can not be filed on same issue for subsequent period [106 (1) proviso]
A. Where any inquiry or investigation has been initiated and is pending as on 01.03.2013 by way of
a) Search u/s 82 of FA 1994
b) Issue of summons u/s 14 of CEA 1944
c) Issue of notice requiring production of accounts or documents u/s 72 (for best judgment assessment) or under Rule 5A of STR 1994 [Section 106(2)]
B. Where audit has been initiated.
However, letters requiring production of documents, not mentioning sections 14 (CEA), 72(FA) and rule 5A(STR), would not be treated as covered under section 106(2). [ TRU Circular dated 13.05.2013]
| Excerptsfrom Hon'ble Finance Minister's Budget Speech | | [Notfn.10/2013-ST Dt. 13-05-2013] | 169/4/2013-ST Dt. 13-05-2013 |
IT : Where seller stated that he had not made any sales and given only bills to assessee and assessee had not chosen to cross-examine said seller, penalty under section 271(1)(c) was rightly levied upon assessee
■■■
[2013] 35 taxmann.com 358 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
Mahaveer Mirror Industries (P.) Ltd.*
ELIPE DHARMA RAO AND M. VENUGOPAL, JJ.
TAX CASE (APPEAL) NOS. 58 AND 59 OF 2008†
APRIL 26, 2011
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income [Wrong claim, effect of] - Assessment years 2000-01 and 2001-02 - Assessee claimed to have purchased goods from 'C' - Said 'C', however stated that he had supplied only bills and not made any sales of goods to assessee - Whether since there was clear finding that bills were only supplied and not goods and assessee had not chosen to cross examine said 'C', provisions of section 271(1)(c) were attracted - Held, yes - Whether, therefore, penalty levied upon assessee was valid - Held, yes [Paras 13 & 14] [In favour of revenue]
FACTS
| ■ | The assessee-company claimed to have purchased goods from various proprietary concerns of 'C' and his associates. | |
| ■ | To test the veracity of the purchase bills, the revenue examined the said 'C' who stated that he had supplied only bills and not made any sales of goods to the assessee. Accordingly, the books of account maintained by the assessee were rejected and assessment was completed on the basis of the difference in the gross profit ratio between the assessee and rate prevailing in the market. Further, the Assessing Officer levied penalty on the ground that the provisions of clause (B) of Explanation 1 to section 271(1)(c) are attracted since the assessee was not able to furnish particulars regarding the source of goods purchased and evidence in connection with the actual price paid. | |
| ■ | The Commissioner (Appeals) reversed the orders of the Assessing Officer thereby deleted the penalty holding that since the levy of penalty related to addition based on the profit ratio under the head 'Business income', there was no case for levy of penalty under section 271(1)(c). | |
| ■ | The Tribunal confirmed the order of the Commissioner (Appeals) and dismissed the appeals preferred by the revenue. | |
| ■ | On appeal: |
HELD
| ■ | From the facts of the case, the Court is unable to appreciate as to how the appellate authority and the Tribunal have come to a conclusion that the Assessing Officer has not made out sufficient case to establish that the assessee has intentionally and deliberately concealed the income or furnished inaccurate particulars of income warranting the levy of penalty under section 271(1)(c) as it relates to gross profit addition under the head 'Profits and gains of business'. It is crystal clear that the seller in his sworn statement has stated that he had not made any sales and had given only the bills and, for the reasons best known to the assessee, it has not chosen to even cross examine the seller. The Court does not know what also is required to attract the provisions of section 271(1)(c) when there is clear finding that bills were only supplied and not the goods. The Tribunal as well as the appellate authority have not controverted or distinguished this fact by relying on any statement or material documents produced on the side of the assessee. [Para 14] | |
| ■ | Therefore, the impugned order of Tribunal could not be sustained. [Para 21] |
CASES REFERRED TO
CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14/30 Taxman 546H (SC) (para 5), Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 (SC) (para 5) and Kamal Basha v. Dy. CIT [2009] 316 ITR 58 (Mad.) (para 20).
T. Ravikumar for the Appellant. N. Muralikumaran for the Respondent.
JUDGMENT
Elipe Dharma Rao, J. - Since the issue involved in both these tax appeals are one and the same and they are inter-connected, they were heard together and disposed of by this common judgment.
2. The facts and the case culled out from the statement of facts filed by the Revenue goes as follows :
The assessee is a dealer in glass, mirror and plywood. The assessment for the relevant assessment years under consideration were taken up for scrutiny and after survey under section 133 of the Income-tax Act, 1961 (in short "the Act"), and the same was completed under section 143(3) of the Act on March 26, 2003. During the assessment year 1999-2000, the assessee made purchases from various proprietary concerns of Shri Chandrakant T. Shah and his associates. The said Chandrakant T. Shah in his sworn statement has stated that he had not made any sale on goods or supplied any materials to the assessee. On the other hand, he had supplied only the bills. In view of the statement made of Chandrakant T. Shah and in view of the claim of the assessee that the purchases and sales are quantitatively verifiable, the books of account maintained by the assessee were rejected and assessment was completed on the basis of the difference in the gross profit ratio between the assessee and rate prevailing in the market. Finally, the Assessing Officer by two separate orders dated August 28, 2003, had levied penalty on the ground that the provisions of clause (B) of Explanation 1 to section 271(1)(c) of the Act are attracted since the assessee was not able to furnish particulars regarding the source of goods purchased and evidence in connection with the actual price paid. Aggrieved by the orders passed by the Assessing Officer, the assessee preferred appeals in I. T. A. Nos. 230 of 2003-04 and 231 of 2003-04 before the Commissioner of Income-tax (Appeals) (in short "the CIT(A"), who by a common order dated June 29, 2005, reversed the orders of the Assessing Officer thereby deleted the penalty holding that since the levy of penalty relates to addition based on the profit ratio under the head "Business income", there is no case for levy of penalty under section 271(1)(c) of the Act. Against the said order, the Revenue preferred appeals in I. T. A. Nos. 2148 and 2149 of 2005 before the Income-tax Appellate Tribunal (in short "the Tribunal"), which, by order dated April 27, 2007, confirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals preferred by the Revenue. Aggrieved by the common order passed by the Tribunal, the Revenue has come with the present appeals.
3. These appeals were admitted on the following substantial question of law :
"Whether, in the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) in deleting the penalty under section 271(1)(c) of the Income-tax Act in respect of the gross profit addition under the head 'Profits and gains of business' for the assessment years 2000-01 (T. C. No. 58 of 2008) and 2001-02 (T. C. No. 59 of 2008) ?"
4. Learned standing counsel appearing for the Revenue would submit that the assessee has not furnished the details of parties from whom the purchases were made and though an opportunity was given to cross-examine Mr. Chandrakant T. Shah from whom the assessee claimed to have purchased goods, the assessee had not availed of the opportunity and this vital fact was not taken into consideration by the Tribunal before passing the impugned order. He also submitted that the Tribunal failed to note that adoption of the gross profits ratio by the Assessing Officer to arrive at the taxable income of the assessee does not absolve the assessee from the liability to penalty leviable under section 271(1)(c) of the Act for having concealed the particulars of his income by resorting to the method of obtaining invoice of the goods at the higher price than the actual cost.
5. In support of such contention, the learned standing counsel relied on the decisions of the Supreme Court reported in CIT v. Mussadilal Ram Bharose[1987] 165 ITR 14/30 Taxman 546 and Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 (SC).
6. Learned counsel appearing for the assessee supported the decision of the appellate authority as well as the Tribunal. He would submit that the Tribunal, on assessment of the facts of the case, has rightly deleted the penalty and the order does not require any interference from this court.
7. Heard the learned counsel appearing for the parties and perused the materials on record.
8. According to the Revenue, the assessee has produced various bills towards the purchases made from various proprietary concerns of Shri Chandrakanth T. Shah and his associates for the year 1999-2000. To test the veracity of the bills, the Revenue examined the said Shri Chandrakanth T. Shah, who in his sworn statement, stated that he had supplied only the bills and not made any sales of goods/materials to the assessee. Because of the inability on the part of the assessee to produce the confirmation from the suppliers concerned at the time of assessment proceedings and under the impression that the assessee-company would have purchased the materials without bills elsewhere and utilised the bills supplied by Shri Chandrakanth T. Shah as a substitute and since the assessee has not chosen to cross-examine Shri Chandrakanth T.Shah, the Assessing Officer proceeded to levy penalty under section 271(1)(c) of the Act on the footing that there is concealment of income and non-furnishing of particulars by the assessee. In appeal, the appellate authority following his earlier order, deleted the penalty holding that the assessee has not intentionally and deliberately concealed the income or furnished inaccurate particulars of income warranting the levy of penalty under section 271(1)(c) of the Act.
9. The point for consideration in these appeals is as to whether the assessee has concealed the particulars of his income or furnished in accurate particulars of such income ?
10. Before delving the question of concealment of particulars, it would be profitable to note down the relevant provisions of the Act. Chapter XXI of the Act relates to penalties imposable. Section 271 deals with failure to furnish returns, comply with notices, concealment of income, etc., which is as follows :
"271.(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-. . .
(b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or 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), or section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or
(d) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits,
he may direct that such person shall pay by way of penalty. . .
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."
11. A reading of the aforesaid section along with Explanation 1(A) and (B) makes it clear that if the Assessing Officer in the course of assessment proceedings, is satisfied that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income, he is empowered to levy penalty subject to the explanation given by the assessee found to be false or not bona fide.
12. In the present case, admittedly, for the relevant assessment years, the assessee in his assessment has stated that purchases have been made from one Shri Chandrakanth T. Shah. In order to test the veracity of the statement made by the assessee and purely relying on the sales of the company, the Assessing Officer examined the proprietor of the concern, namely, Shri Chandrakanth T. Shah, who, not only denied the sale of goods but also admitted that he has furnished the bills and not the materials. In order to give an opportunity to the assessee, he was allowed to cross-examine Shri Chandrakanth T. Shah, but the assessee has not chosen to do the same. Therefore, the Assessing Officer has come to the conclusion that the action of the assessee comes within the meaning of concealment and that the explanation offered is inadequate and accordingly, passed the order levying penalty under section 271(1)(c) of the Act. One has to see whether the attitude of the assessee in obtaining only the bills and not the materials/goods from Shri Chandrakanth T. Shah would amount to concealment of particulars of income or furnishing of inaccurate particulars in order to attract the provisions of section 271(1)(c).
13. All the three authorities, viz., the Assessing Officer, the first appellate authority and the Tribunal, have not disputed the fact that the assessee had not purchased any material from Shri Chandrakanth T. Shah and it has not chosen to cross-examine the said Shri Chandrakanth T. Shah, though a specific opportunity was given by the authorities. When the Assessing Officer proceeded on the footing that the aforesaid attitude of the assessee tantamounts to concealment of particulars of income, the appellate authority and the Tribunal have proceeded on the footing that the attitude of the assessee is not an intentional and willful one and, therefore, the question of imposing penalty does not arise.
14. From the facts of the case, we are unable to appreciate as to how the appellate authority and the Tribunal have come to a conclusion that the Assessing Officer has not made out sufficient case to establish that the assessee has intentionally and deliberately concealed the income or furnished inaccurate particulars of income warranting the levy of penalty under section 271(1)(c) of the Act as it relates to gross profit addition under the head "Profits and gains of business". It is crystal clear that the seller in his sworn statement has stated that he had not made any sales and had given only the bills and, for the reasons best known to the assessee, it has not chosen to even cross-examine the seller. We do not know what also is required to attract the provisions of section 271(1)(c) of the Act, when there is clear finding that bills were only supplied and not the goods. The Tribunal as well as the appellate authority have not controverted or distinguished this fact by relying on any statement or material documents produced on the side of the assessee. The appellate authority has simply rejected the case of the Assessing Officer by following its earlier decision. It is not even discussed in the appellate order as to how the facts are similar. The Tribunal, without going into the facts of the case and the documents produced, has simply confirmed the decision of the appellate authority. A reading of the impugned order would show that no cogent reason was given by the Tribunal to come to a conclusion that the Assessing Officer has failed to establish that the assessee has intentionally and deliberately concealed the income.
15. In this context, the learned counsel for the respondent submitted that the Assessing Officer has erred in ignoring the facts and the legal position that the additions made on the grounds of reduction in the gross profit ratio, ought not to be taken for levy of penalty as the additions to income are eventually due to estimation of profit and the estimate made by the Assessing Officer without taking cognizance of composition of materials sold, volume of transactions for specified items, volume of wastage incurred and price competitiveness due to locational factors, etc., and the income estimated being much higher than that returned by the appellant, would not come under concealment on the part of the appellant.
16. We are unable to accept this contention of the assessee. The rebuttal on the said of the assessee must be on materials relevant and cogent. It is for the fact finding body to judge the relevancy and sufficiency of the materials. If such a fact finding body bearing the aforesaid principles in mind comes to the conclusion that the assessee has discharges the onus, it becomes a conclusion of fact. Admittedly, in the present case, the assessee has not produced evidence/materials to the satisfaction of the authority. On the other hand, the Assessing Officer has found that actually no purchases were made and only bills were got from one Shri Chandrakanth T. Shah.
17. Before coming to a conclusion, we deem it appropriate that it would also be relevant to find out the legal position. The Revenue has relied on two decisions of the Supreme Court, which were referred to above, in order to establish that the assessee has concealed the income and furnished inaccurate particulars warranting penalty under section 271(1)(c).
18. In Dharamendra Textile Processors (supra), the Supreme Court while considering the Explanations to section 271(1)(c), held as follows (headnote) :
"The Explanations appended to section 271(1)(c) of the Income-tax Act, 1961, indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The object behind the enactment of section 271(1)(c) read with the Explanations indicates that the 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."
19. The Supreme Court in Mussadilal Ram Bharose (supra), while dealing with the onus of the assessee in producing the relevant materials before the authorities concerned, in paragraph 18, observed as follows (page 22) :
"The position, therefore, in law is clear. If the returned income is less than 80 per cent. of the assessed income, the presumption is raised against the assessee that the assessee is guilty of fraud or gross or wilful neglect as a result of which he has concealed the income but this presumption can be rebutted. The rebuttal must be on materials relevant and cogent. It is for the fact-finding body to judge the relevancy and sufficiency of the materials. If such a fact-finding body, bearing the aforesaid principles in mind, comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact. No question of law arises. In this case, the Tribunal has borne in mind the relevant principles of law and has also judged the facts on record. It is not a case that there was no evidence or there was such evidence on which no reasonable man could have accepted the explanation of the assessee. In that view of the matter, in our opinion, the Tribunal rightly rejected the claim for reference under section 256(1) and the High Court correctly did not entertain the application for reference under section 256(2) of the Act. The appeal, therefore, fails and is accordingly dismissed with costs."
20. Following the aforesaid judgment of the Supreme Court, this court in Kamal Basha v. Dy. CIT [2009] 316 ITR 58 (Mad) observed that the object behind the enactment of section 271(1)(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.
21. In the light of the aforesaid decisions of the Supreme Court and this court and the factual conclusion arrived at in the preceding paragraphs, we are inclined to interfere with the order of the Tribunal. Accordingly, the substantial question of law is answered in favour of the Revenue.
22. In the result, the tax case appeals are allowed. No costs.
USP IT: Charges paid to depositories, i.e., NSDL/CDSL by share transfer agent fall under professional managerial services and, therefore, tax is deductible at source on such payment
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[2013] 35 taxmann.com 403 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
Assistant Commissioner of Income-tax
v.
Karvy Computershare (P.) Ltd.*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
IT APPEAL NO. 328 (HYD.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
MARCH 28, 2013
Section 194J, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services [Charges paid to depositories] - Assessment year 2008-09 - Assessee company, a registrar and share transfer agent, paid certain sum to depositories, NSDL/CDSL, without deducting tax at source - Assessee, while clarifying about such expenditure, had submitted that such payment were made to NSDL/CDSL for providing access to their database and such payment were not in nature of contract nor professional or technical services - Whether assessee was availing of managerial services from NSDL/CDSL for which assessee paid fees and as assessee had not deducted tax at source on impugned payment, same was liable to be disallowed - Held, yes [Para 13] [In favour of revenue]
FACTS
| ■ | The assessee was a company, which derived income as a Registrar and share transfer agent to various companies. It claimed an amount paid to NSDL/CDSL towards 'settlement and custody fees', shown under 'operative expenses'. | |
| ■ | The Assessing Officer noted that the assessee-company had availed of professional services of NSDL/CDSL and as per the assessee's specification the work was being carried out by NSDL/CDSL, for which they charged the assessee-company. Stating that such payment made to NSDL/CDSL was in the nature of professional services, he held that the provisions of section 194J were attracted to such payment and tax was deductible at source on such payment. | |
| ■ | The Commissioner (Appeals) was of the view that such payment made by the assessee to NSDL and CDSL, shown under 'settlement and custody fees', could not considered as falling under professional services, as defined under section 194J. Therefore, no tax was deductible at source on such payments made by the assessee to those depositories, i.e., NSDL and CDSL. | |
| ■ | On second appeal: |
HELD
| ■ | In view of the Bombay High Court judgment in the case of CIT v. Kotak Securities Ltd. [2012] 340 ITR 333/20 taxmann.com 846, the assessee is availing of managerial services from NSDL/CDSL for which the assessee paid the fees. Being so, the assessee is liable to deduct tax at source on the payment made to the NSDL/CDSL and as the assessee has not deducted tax deducted at source on the impugned payment, the disallowance made by the Assessing Officer is justified. [Para 13] |
CASE REVIEW
CIT v. Kotak Securities Ltd. [2012] 340 ITR 333/20 taxmann.com 846 (Bom.) (para 13) followed.
CASES REFERRED TO
CIT v. Kotak Securities Ltd. [2012] 340 ITR 333/20 taxmann.com 846 (Bom.) (para 8), Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Bom) (para 9), CIT v. Virgin Creations [I.T Appeal No. 302 of 2011, dated 23-11-2011] (para 11), R.B. Jodha Mal Kuthialav. CIT [1971] 82 ITR 570 (SC) (para 11) and Kotak Securities Ltd. v. Addl. CIT [2008] 25 SOT 440 (Mum) (para 12).
Smt. Amisha S. Gupt for the Appellant. P. Muralikrishna for the Respondent.
ORDER
Chandra Poojari, Accountant Member - This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-III, Hyderabad dated December 15, 2011 for the assessment year 2008-09.
2. The Revenue raised the following grounds :
| (i) | The learned Commissioner of Income-tax (Appeals) has erred in facts and circumstances of the case for not considering the technical services provided by the NSDL and CDSL under the head of "Settlement and custody fees" as professional/ technical services under section 194J. | |
| (ii) | The learned Commissioner of Income-tax (Appeals) erred in facts and circumstances of the case by not sustaining the disallowances made by the Assessing Officer under section 40(a)(ia) for failure to deduct TDS by the assessee-company on professional/technical services rendered by the NSDL and CDSL. | |
| (iii) | The learned Commissioner of Income-tax (Appeals) has erred in not upholding the disallowances made by the Assessing Officer under section 40(a)(ia). |
3. The brief facts of the issue are that the only issue in this case relates to the disallowance of an amount of Rs. 1,39,78,121 made under section 40(a)(ia) of the Act in the assessment. The assessee is a company, which derives income as a Registrar and share transfer agent to various companies. For the assessment year 2008-09, it has filed the return on September 30, 2008 showing income of Rs. 40,89,42,680. During the assessment proceedings, the Assessing Officer noticed that the assessee has claimed an amount of Rs. 1,39,78,121 towards "settlement and custody fees", shown under "operative expenses". On query raised by him regarding tax deducted at source on such payment, while explaining about their activities and the nature of interaction with NSDL/CDSL, the assessee has submitted that the companies whose shares are listed in stock exchange are interested to know the movement of shareholding periodically. For this purpose, they request NSDL/CDSL to provide a database. On receiving such request, the NSDL/CDSL extend access to retrieve such data from their website. For providing access, the NSDL charges the client on each occasion. It was stated that the charges paid to NSDL/CDSL are debited to the account, called "settlement and custody fees". Stating that such activity of NSDL/CDSL is neither in the nature of contract nor professional/technical services, it was submitted that such expenditure do not attract tax deducted at source. However, the Assessing Officer has not accepted such submissions of the assessee. He noted that the assessee-company has availed of professional services of NSDL/CDSL and as per the assessee's specification the work is being carried out by NSDL/CDSL, for which they charge the assessee-company. Stating that such payment made to NSDL/ CDSL is in the nature of professional services, he held that the provisions of section 194J are attracted to such payment and tax was deductible at source on such payment. Since no tax deducted at source has been made on such expenditure, invoking the provisions of section 40(a)(ia) of the Act, the Assessing Officer disallowed the said amount, while completing the assessment vide order dated December 31, 2010 passed under section 143(3) of the Act.
4. Before the Commissioner of Income-tax (Appeals), it was submitted by the assessee that the Assessing Officer has disallowed the said amount of Rs. 1,39,78,121 shown as "settlement and custody fees", after holding that such payment was in the nature of professional services, under the provision of section 194J of the Act and the assessee was liable to deduct tax at source on the same. During the course of assessment proceedings, the assessee, while clarifying about such expenditure, has submitted that such payment were made to NSDL/CDSL for providing access to their database. It was stated that such payment were not in nature of contract nor professional or technical services. The assessee submitted before the Commissioner of Income-tax (Appeals) that NSDL and CDSL, which are depositories do not provide any professional service requiring intellectual or manual skills. On request made by them to the depositories to provide access to the database maintained by them in respect of their client companies, those depositories provide access to the assessee to their database and the assessee downloads the data electronically. It was stated that the depository has charged fee to the assessee, for providing access to the assessee to their database. It is further stated that by providing access to the database, the depository has not rendered any professional services to the assessee, who is acting as a Registrar and share transfer agent.
5. The assessee further clarified before the Commissioner of Income-tax (Appeals) that on such payment made to those depositories, i.e., NSDL and CDSL, it has been submitted that such amounts charged by those depositories are referred to as "Benpos", i.e., beneficiary position. From the said FAQ (12) extracted from the website of NSDL, submitted by the assessee, referred to above, the Commissioner of Income-tax (Appeals) observed that while clarifying on download of beneficiary position, it is stated that for such type of downloads NSDL charges a flat fee of Rs. 5,000, where number of records are less than 10,000 and a fee of Rs. 10,000 for records exceeding Rs. 10,000.
6. After considering the above detailed explanation by the assessee clarifying that such payment has been made by them to NSDL and CDSL for providing access to their database for downloading the data electronically and from the manner of charging for the same by the depository, known as "Benpos", at flat rates of Rs. 5,000 or Rs. 10,000 depending upon the number of records, the Commissioner of Income-tax (Appeals) was of the view that such payment made by the assessee to NSDL and CDSL, shown under "settlement and custody fees", cannot be considered as falling under professional services, as defined under section 194J of the Act. Therefore, no tax was deductible at source on such payments made by the assessee to those depositories, i.e., NSDL and CDSL. Under these circumstances, the Commissioner of Income-tax (Appeals) was of the opinion that the disallowance of the said amount of Rs. 1,39,78,121 made by the Assessing Officer under section 40(a)(ia) of the Act, in the assessment, cannot be sustained. Hence, the Commissioner of Income-tax (Appeals) deleted the same. Against this, the Revenue is in appeal before us.
7. The learned Departmental representative submitted that in this case the assessee got rendered services relating to transactions in securities, viz., dematerialisation, i.e., converting physical certificate to electronic form, rematerialisation, i.e., conversion of securities in demat form into physical certificates, facilitating purchase/redemption of units of mutual funds ; electronic settlement of trades in stock exchanges connected to NSDL ; pledging/hypothecation of dematerialised securities against loan ; electronic credit of securities allotted in public issues, rights issue ; receipts of non-cash corporate benefits such as bonus, in electronic form ; freezing of demat accounts, so that the debits from the accounts are not permitted ; nomination facility for demat accounts ; services related to change of address ; effecting transmission of securities ; instructions to Departmental representative over internet through SEED-e facility, account monitoring facility over internet for clearing members through SPEED facility and other facilities, viz., holding debt instruments in the same account, availing stock lending/borrowing facility, etc.
8. Thus, according to the Departmental representative the impugned sum paid by the assessee to NSDL/CDSL is nothing but for providing technical services and the provisions of section 194J of the Act are applicable and if a person pays any sum as fee for technical services, it has to deduct tax at source on such payment ; if a person fails to deduct tax at source which he was bound to deduct tax under any provisions of the Income-tax Act where he claims a deduction of any fees for technical services in computing his income and where he has not deducted TDS on such fees for technical services then no deduction of such expenditure will be allowed while computing the total income under section 40(a)(ia) of the Act. According to the Departmental representative a sum of Rs. 1,39,78,171 cannot be allowed as deduction while computing the income of the assessee in view of the provisions of section 40(a)(ia) as the assessee failed to deduct TDS on the impugned amount. She drew our attention to the recent judgment of Bombay High Court in the case of CIT v. Kotak Securities Ltd. [2012] 340 ITR 333/20 taxmann.com 846 where their Lordships disagreed with the findings of the Tribunal.
9. On the other hand, the learned authorised representative submitted that "Benpos" charges levied and collected by NSDL and CDSL is only to provide access to beneficiary position of shareholding of a particular company on a particular date and there is no application of mind or the provision of service of any nature. Hence, it cannot be classified as managerial/technical services of any nature or kind whatsoever. The authorised representative submitted that the beneficiary position of shareholders holding shares in demat form in each company is available with depositories (NSDL and CDSL) as all DP upload the data regarding transfer of shares between various shareholders. Hence there is no monitoring and management of the same by NSDL and CDSL while the assessee is merely downloading such information. Benpos charges levied and collected by NSDL and CDSL is only to provide access to beneficiary position of shareholding of a particular company on a particular date and no managerial services of any nature are provided. It is merely accessing a system which is in existence and has been set-up NSDL/CDSL as in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) which is referred to and distinguished by the Bombay High Court.
10. Further he submitted that the judgment of the Bombay High Court relied on by the Departmental representative is not applicable to the facts of the present case for the following reasons :
| 1. | There is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The Bolt system provided by the Bombay Stock Exchange is a complete platform containing the entire spectrum of trading in securities. The Bolt system not merely provides the live connection between prospective purchasers and prospective sellers of the respective securities/derivatives together with the rates at which they are willing to buy or sell the securities, but also provides a mechanism for concluding the transaction between the two parties. The Bolt system withholds the identity of the two contracting parties, namely, the buyer and the seller of the respective securities/derivatives. | |
| 2. | Under the screen-based Bolt system the entire trading system is managed and monitored right from the stage of providing the platform for the prospective buyers/sellers of the securities/derivatives till the date the deal struck between the two parties are finally settled in all respects. The very object of establishing the stock exchanges is to regulate the transactions in securities and to prevent undesirable speculation in the transactions. To achieve this goal, the stock exchange continuously upgrades its Bolt system so that the transactions carried on through that system inspire confidence in the general public and that the transactions are settled smoothly and expeditiously. Thus, the entire trading in securities is managed by the Bombay Stock Exchange through the Bolt system provided by the stock exchange. | |
| 3. | In other words, whatever be the measure for levying the transaction charges, the fact remains that the stock exchange regulates and manages the entire trading activities on the exchange till the transactions are finally settled. Unless the stock exchange constantly monitors the transactions relating to the sale or purchase of the securities right from the stage when the two contracting parties interact through the Bolt system, it would be impossible to ensure safety of the market. When there is considerable variation in the price of the securities offered to be sold or purchased the in-built system alerts and remedial measures are taken immediately so that no panic situation arises in the stock market. | |
| 4. | With a view to regulate the trading in securities, the stock exchange provides risk management and surveillance to the stock brokers to ensure the safety of the market. The surveillance function involves price monitoring, exposure of the members, rumour verification on a daily basis and take remedial actions like reduction of filters, imposition of special margin, transferring scrips on a trade to trade settlement basis, suspension of scrips/members, etc. These are some of the identified managerial services rendered by the stock exchange for which transaction charges are levied. The stock exchanges have to manage the entire trading activity carried on by its members and accordingly managerial services are rendered by the stock exchanges. | |
| 5. | In the case of beneficiary position, i.e., shareholding in a particular company on a particular date there is no monitoring or management unlike trading in shares. The Benpos is the result of transactions which have been undertaken by the brokers through NSE/BSE. It is merely a system of updation of transactions by the DPs and NSDL/CDSL are merely centralised system of updation of the records of the DPs. Hence, the question of provision of service of any nature to the appellant does not even arise for consideration. The payment is in the nature of licence fees and not in the nature of fees for technical/managerial services as argued by the Department. |
11. According to the authorised representative, there is no rendering of technical services. The assessee only got access to the data. He relied on the judgment of Madras High Court in the case of Skycell Communications Ltd. (supra) wherein it was held that providing of cellular mobile telephone services to subscribers does not come within the definition of technical services as in section 194J read with section 9(1)(vii), Explanation 2 of the Income-tax Act and the firms and companies subscribing to the network are not required to deduct tax at source on the payments made by them for use of such facility. Further he relied on the judgment of Calcutta High Court in the case of CIT v. Virgin Creations (ITA No. 302 of 2011 dated 23-11-2011) wherein their Lordships relied on the judgment of the Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 and observed that the provisions, which have inserted the remedy to make the provisions workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well, decided the issue whether section 40(a)(ia) having retrospective operation or not.
12. We have heard both parties and perused the material on record. First of all the Commissioner of Income-tax (Appeals) observed that there is no rendering of services to the assessee and he has only access to the database for downloading the data electronically for which the assessee paid fees so that the provisions of section 194J are not applicable. The same issue was subject-matter of dispute before this Tribunal, Mumbai Bench in the case ofKotak Securities Ltd. v. Addl. CIT [2008] 25 SOT 440 which was decided in favour of the assessee. This matter travelled to the hon'ble Bombay High Court. The hon'ble Bombay High Court considered issue and also gone through the Madras High Court judgment relied on by the assessee's counsel in the case of Skycell Communications Ltd. (supra) and it was observed in para 24 that the Madras High Court judgment is not applicable to the facts of the case. Further, the Bombay High Court in paras 25 to 28 held as follows (page 341 of 340 ITR):
"25. The argument that in the present case there was no contract for rendering technical/managerial service is without any merit, because, the very object of providing the BOLT system is to provide a complete platform for carrying on the trading in securities/derivatives. If a member of the stock exchange does not enter into any transaction under the BOLT system he is not required to pay the transaction charges. It is only if the member trades through the BOLT system the member is required to pay transaction charges depending upon the volume of trading because, once the trading through the BOLT system takes place the member is assured that the other contracting party is a genuine buyer or seller, as the case may be, and that the price offered by the opposite party would be in consonance with the norm laid down by the stock exchange and that the transaction would be settled efficiently and expeditiously. The fact that the stock exchange levies or collects lesser transaction charges where the value of the transaction is higher, cannot be a ground to hold that no managerial services are rendered by the stock exchange, because, what should be the criteria for levying the transaction charges is left to the discretion of the stock exchange. The fact that the transaction charge is based on the value of the transaction and not the volume of transaction is not determinative of the fact as to whether managerial services are rendered or not. In other words, whatever be the measure for levying the transaction charges, the fact remains that the stock exchange regulates and manages the entire trading activities on the exchange till the transactions are finally settled.
26. Unless the stock exchange constantly monitors the transactions relating to the sale or purchase of the securities right from the stage when the two contracting parties interact through the BOLT system, it would be impossible to ensure safety of the market. When there is considerable variation in the price of the securities offered to be sold or purchased the in-built system alerts and remedial measures are taken immediately so that no panic situation arises in the stock market. With a view to regulate the trading in securities, the stock exchange provides risk management and surveillance to the stock brokers to ensure the safety of the market. The surveillance function involves price monitoring, exposure of the members, rumour verification on a daily basis and take remedial actions like reduction of filters, imposition of special margin, transferring scrips on a trade-to-trade settlement basis, suspension of scrips/members, etc. These are some of the identified managerial services rendered by the stock exchange for which transaction charges are levied.
27. The fact that the BOLT system provided by the stock exchange has in-built automatic safeguards which automatically gives alert signal if the fluctuation in the prices of the securities exceed a particular limit prescribed by the stock exchange does not mean that the managerial services are not rendered, because, firstly, the in-built mechanism in the BOLT system itself is a part of the managerial service rendered by the stock exchange and secondly, even the in-built mechanism provided in the system is varied or altered by the stock exchange depending upon the circumstances encountered during the course of rendering managerial services.
28. The argument that the BOLT system is like a ATM system provided by the banks is also without any merit, because through the ATM system, no trading activity is carried on, whereas, through the BOLT system trading activity is carried on which is monitored/ regulated/managed by the stock exchange. Therefore, in our opinion, the Tribunal was in error in holding that no technical or managerial services are rendered by the stock exchange by providing the BOLT."
13. The facts considered by the Bombay High Court on this issue are similar to the facts of the assessee's case before us. Being so, the Bombay High Court judgment in the case of Kotak Securities Ltd. (supra) squarely applies to the facts of the assessee's case and the assessee is availing of managerial services from NSDL/CDSL for which the assessee paid the fees. Being so, in conformity with the judgment of the Bombay High Court, we are of the opinion that the assessee is liable to deduct tax deducted at source on the payment made to the NSDL/CDSL as the assessee has not deducted tax deducted at source on the impugned payment. The disallowance made by the Assessing Officer at Rs. 1,39,78,121 is justified.
14. The authorised representative submitted before us that in para 32 of the Bombay High Court judgment cited supra, it was held that since both the Revenue and the assessee are of bona fide belief for merely a decade that tax is not deductible at source on payments on transaction charges, no fault can be found with the assessee in non-deduction of tax at source in the assessment year under consideration and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of transaction charges cannot be sustained. This finding of the hon'ble High Court in that case is on the basis of peculiar facts of that case. In the case at hand, those peculiar facts are missing. Being so, we are inclined to observe as above as held by the hon'ble Bombay High Court.
15. In the result, the Revenue's appeal is allowed.
IT : First proviso to section 2(15) as amended by Finance (No. 2) Act, 2009 is applicable in cases of carrying on charitable purpose covered by residuary clause i.e., 'advancement of any other object of public utility' and not to charitable purposes like relief to poor, education, medical relief etc.,
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[2013] 35 taxmann.com 314 (Delhi)
HIGH COURT OF DELHI
Hamdard Laboratories India
v.
Director General of Income-tax (Exemption)*
SANJIV KHANNA AND SIDDHARTH MRIDUL, JJ.
WRIT PETITION (C) NO. 3598 OF 2012
APRIL 11, 2013
Section 2(15) of the Income-tax Act, 1961 - Charitable purpose [First proviso] - Assessment year 2004-05 - Whether first proviso to section 2(15) amended by Finance (No. 2) Act, 2009 is applicable in cases where an assessee claims that it is carrying on charitable purpose covered by residuary clause i.e., 'advancement of any other object of public utility', and proviso is not applicable in case an assessee or institution claims that it is carrying on charitable purposes like relief to poor, education, medical relief etc., i.e., purposes which have been specifically enumerated and stated in earlier part of section 2(15) - Held, yes - Whether where question of application of income, quantum of surplus available or whether activities undertaken by third party to whom more than 85 per cent surplus was donated could be treated as charitable activity under section 2(15) had not been examined while rejecting registration under section 10(23C)(iv), matter was to be remitted to decide issue afresh - Held, yes [Paras 10, 16 & 18] [Matter remanded]
FACTS
| ■ | The petitioner was engaged in business of manufacture and sale of unani and ayurvedic medicines. It was granted registration under section 10(23C)(iv) with effect from assessment year 1984-85. Even prior thereto, it had been treated and regarded as a charitable institution under section 2(15). | |
| ■ | The petitioner filed an application for renewal of approval under section 10(23C)(iv) for the assessment year 2004-05 onwards. It was granted renewal. The Director General (Exemption), however, relied upon certain conditions stipulated in the said order and submitted that there was violation of the same. | |
| ■ | By the impugned order, the earlier order granting renewal was rescinded for the following reasons: |
| (i) | The petitioner was engaged in business and its primary and main activities were manufacture and sale of unani and ayurvedic medicines on commercial lines. | |
| (ii) | The petitioner was not engaged in charitable activities set out in section 2(15) but donated a part of its surplus to a foundation HNF and that does not meet the requirements of section 2(15). | |
| (iii) | The petitioner did not maintain proper books of account for charitable activities and business activities and, therefore, there was violation of clause (c) of the notification under section 10(23C)(iv) dated 28-12-2007 and section 11(4A). |
HELD
| ■ | The first proviso to sub-section 2(15) was amended by Finance (No. 2) Act, 2009 with retrospective effect from 1-4-2009. The said proviso is applicable in cases where an assessee claims that it is carrying on charitable purpose covered by the residuary clause i.e., 'advancement of any other object of public utility'. The proviso is not applicable in case an assessee or institution claims that it is carrying on charitable purpose like relief to poor, education, medical relief etc., i.e. purposes which have been specifically enumerated and stated in the earlier part of section 2(15). [Para 10] | |
| ■ | There was no specific finding or statement in the impugned order that the charitable activities or purposes in the case of the petitioner fall under the residuary head and not under the enumerated heads mentioned in section 2(15). The impugned order in this regard is completely silent. On the said aspect, the petitioner has filed number of orders passed by Commissioner (Appeals) relating to assessment years 1965-66 onwards upto assessment year 1994-95 and orders of the Tribunal from 1966-67 upto 1976-77 in which findings have been recorded that the petitioner was undertaking charitable activities covered under the clauses; relief to poor, education and medical relief. It is, therefore, clear that the impugned order has applied the first proviso to section 2(15) without elucidating the scope and ambit of the said proviso and whether it would be applicable. The revenue has proceeded on assumption that charitable purpose undertaken by the petitioner is covered by the residuary clause, without recording any such specific finding. [Para 12] | |
| ■ | The petitioner submitted that application of money for charitable purposes takes place when the petitioner transfers his surplus or the entire income or substantial portion thereof, i.e. 85 per cent or more, to a third person who is also using the funds for charitable purpose. This is also application of the money for charitable purpose. It is good and valid application of money unless the transferor i.e. the assessee know or ought to have know that the money will be mis-applied by the transferor. This contention of the petitioner has not been dealt with or examined in the impugned order. [Para 14] | |
| ■ | On the question of surplus, application of income and accumulation, the petitioner submits that the amount of accumulative reserve is less than 15 per cent of the general reserve and therefore, the petitioner meets the prescribed parameters. This aspect has been ignored in the impugned order by recording that the surplus has been given to HNF or surplus/income has been passed on and given to HNF. The effect thereof and whether objects/use of funds by HNF can be determinative and relevant for deciding the applicable head under section 2(15) in the case of the petitioner is an aspect which requires examination/consideration. [Para 16] | |
| ■ | Looking at the aforesaid situation, writ petition is to be allowed and the writ of certiorari is to be issued quashing the impugned order passed by the Director General (Exemptions). The Director General will pass a fresh order dealing with all the contentions and issues raised by the petitioner keeping in mind the case law on the subject. | |
| ■ | The reason why the matter is being remitted is that there are several issues and questions, which have been partially adverted to in the impugned order and this cannot form a firm view. The legal contentions raised had been discussed and the legal position on certain aspects had also been referred to but application of legal ratio is dependent upon the facts. | |
| ■ | Difference in facts can materially affect the final outcome and the legal position applicable; whether it be books of account, question of application of income, quantum of surplus available or the activity undertaken by HNF. For example whether activities of HNF can be treated as charitable activity of the petitioner for the purpose head under section 2(15) as claimed by the petitioner. No firm/final opinion can be given on issues/contentions, which may have been touched but not elaborated in the impugned order and/or examined without appreciating the correct legal position. | |
| ■ | The petitioner has also disputed some factual assertions stated in the impugned order. Fairness and justice demands that the matter should be examined threadbare, first factually and then by applying the applicable legal ratio. [Para 18] |
CASES REFERRED TO
Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC) (para 8), Addl. CIT v. Hamdard Dawakhana [1986] 157 ITR 639/25 Taxman 185 (Delhi) (para 8), CIT v. Hamdard Dawakhana [2001] 249 ITR 601/120 Taxman 186 (Delhi)(para 8), CIT v. Mehta Charitable Prajnalay Trust [2013] 214 Taxman 88/[2012] 28 taxmann.com 73 (Delhi) (para 8), CIT v. Sarladevi Sarabhai Trust No. 2 [1988] 172 ITR 698/40 Taxman 388 (Guj.) (para 14), CIT v. Nirmala Bakubhai Foundation [1997] 226 ITR 394/91 Taxman 236 (Guj.) (para 14), CIT v. Hindustan Charity Trust [1983] 139 ITR 913/[1982] 11 Taxman 135 (Cal.) (para 14), CIT v. M. Ct. Muthian Chettiar Family Trust [2000] 245 ITR 400/[2001] 114 Taxman 69 (Mad.) (para 14), CIT v. Trustees of the Jadi Trust [1982] 133 ITR 494 (Bom.) (para 14), CIT v. Shri Ram Memorial Foundation [2004] 269 ITR 35/140 Taxman 263 (Delhi) (para 14) and Inland Revenue Commissioner v. Helen Slater Charitable Trust Ltd. [1980] 83 WLR 157 (para 14).
Parag P. Tripathi, Simran Mehta, R.M. Mehta and Ms.Yogita for the Petitioner. Sanjeev Rajpal for the Respondent.
ORDER
Sanjiv Khanna, J. - The petitioner No.1 Hamdard Laboratories (India), stated to be a trust, has filed the present writ petition for issue of writ, order or direction in the nature of certiorari for quashing order dated 22.02.2012 passed by respondent No.1/Director General of Income Tax (Exemptions) under Section 10(23C)(iv) of the Income Tax Act, 1961 ('Act' for short).
2. The petitioner Nos.1 claims that it is governed by a Constitution dated 28.8.1948 and were/are dedicated to business of manufacture of sale of unani medicines for the purpose of charity. They rely upon clauses 44 to 47 of the deed dated 28.8.1948, which read as under:-
"44. The 'Qaumi Income' of the Wakf, shall be spent only within the territories of the Union of India and only on objects of public charity, which satisfy the following two cumulative tests:
| (a) | They must be objects of public charity for the benefit of all persons irrespective of caste, colour or creed, such as relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity of profit, and | |
| (b) | They must be consistent with the principles of the true teachings of Islam. Provided, however, that in spending the income on objects of public charity, priority shall be given to the collective needs of the country or to such needs as may benefit the largest number of persons or their generations. |
45. Priority may be given to the following:
| (1) | To establish and run an Institute for the promotion of medical education and research with emphasis on indigenous systems of medicine. | |
| (2) | To establish and successfully conduct a Tibbia College in conformity with the recognized standards. | |
| (3) | To establish and run charitable hospitals and clinics where poor patients are given free treatment. |
46. Qaumi Income may also be spent on the following:
| (1) | To establish and run educational institutions, and/or to aid those which are already in existence. | |
| (2) | To build schools, laboratories, wells, or such other buildings of a public nature as may benefit the largest number of people in the country. | |
| (3) | To publish books, pictures, maps or literature or to aid in publication of the same by the publication of which the object of Wakf are fulfilled or achieved. |
47. Help may also be given to needy orphans, needy widows or helpless persons, needy authors and research scholars and victims of unforeseen calamities without restriction of caste, colour or creed."
3. The petitioner No.1 has stated that vide declaration of the founder Wakif Mutawalli dated 10.10.1985, the original deed in respect of "khandani" or family "income" was irrevocably abolished and no "khandani" income has ever been distributed or paid.
4. It is an undisputed position that the petitioner No.1 was granted registration under Section 10(23C)(iv) of the Act w.e.f. assessment year 1984-1985. Even prior thereto, they have been treated and regarded as a charitable institution under Section 2(15) of the Act and the applicable provisions. The earlier dispute between the Income Tax Department and the petitioner No.1 on the said aspect is referred to and examined below.
5. The petitioner No.1 filed an application for renewal of approval under Section 10(23C)(iv) for the assessment year 2004-05 onwards vide application in Form No.56 dated 31.03.2003. Queries were raised and several letters were exchanged and written between the respondent and petitioner No.1. By order dated 28.12.2007, the petitioner No.1 was granted renewal w.e.f. 2004-05. The respondents, however, rely upon certain conditions stipulated in the said order and submit that there was/is violation of the same.
6. By the impugned order dated 22.02.2012, the earlier order granting renewal i.e. order dated 28.12.2007 has been rescinded. Accordingly, the petitioner No.1 is not to be treated as an approved assessee under Section 10(23C)(iv) of the Act w.e.f. assessment year 2004-05.
7. The impugned order dated 22.02.2012 has set out and given the following reasons for recall/rescinding the earlier order dated 28.12.2007:-
| (1) | Petitioner No.1 was/is engaged in business and its primary and main activities were/are manufacture and sale of unani and ayurvedic medicines on commercial lines and not charity or charitable purposes. | |
| (2) | The petitioner No.1 is not engaged in any charitable activities set out in Section 2(15) but donates a part of its surplus to Hamdard National Foundation ('HNF' for short). This does not meet the requirements of Section 2(15). | |
| (3) | The petitioner No.1 does not maintain proper books of accounts for charitable activities and business activities and therefore, there is violation of Clause (c) of the notification under Section 10(23C)(iv) dated 28.12.2007 and Section 11 (4A) of the Act. |
8. The petitioner No.1 has impugned the said order/the aforesaid reasons on the following grounds:-
| (i) | Section 2(15) does not prohibit a charitable institution from undertaking business or commercial activities but the income generated or the surplus earned should be used for charitable purpose. Business held under trust can fund and provide finance for conducting and doing charity. [see Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC)] | |
| (ii) | Amendment made to Section 2(15) of the Act w.e.f. assessment year 2009-10 is applicable only to the last limb i.e. when an assessee carries on activities under the clause 'advancement of any other object of public utility'. | |
| The last limb is not applicable to petitioner No.1. The objects and purpose of charity undertaken by the petitioner No.1 are relief to poor, education and medical relief. It is accordingly submitted that the said amendment is not applicable to petitioner No.1. | ||
| (iii) | The impugned order dated 22.2.2012 does not specifically state or quote that the petitioner No.1 was/is carrying on charitable activities under the residuary head. The impugned order does not disturb the findings recorded in the earlier appellate proceedings/orders that the charitable activities in the case of petitioner No.1 relate to the first three heads i.e. relief to poor, education and medical relief. | |
| (iv) | The impugned erroneously records that the Income Tax Department does not accept the decisions of the Delhi High Court in Addl. CIT v.Hamdard Dawakhana [1986] 157 ITR 639/25 Taxman 185 and CIT v. Hamdard Dawakhana [2001] 249 ITR 601/120 Taxman 186 (Delhi) to cancel/recall the earlier order. | |
| (v) | The assertion that the petitioner No.1 did not maintain separate books of accounts of business and charitable activities should not be accepted as the entire income or surplus or business was/is being used for charitable purpose and in such cases Section 11(4) is applicable and Section 11(4A) is not applicable. Reliance is placed on CIT v. Mehta Charitable Prajnalay Trust [2013] 214 Taxman 88/[2012] 28 taxmann.com 73 (Delhi) wherein it has been held that Section 11(4A) is applicable where the business is not held under trust. |
9. Section 2(15) of the Act defines 'charitable purpose' and at present reads as under:-
"(15) 'charitable purpose' includes relief of the poor, education, medical relief,preservation of environment (including watersheds, forests and wildlife) 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 of 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 a cess or fee or any other consideration, irrespective of the 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 ten lakh rupees or less in the previous year;"
10. We may note here that the first proviso to sub Section was amended by Finance (No.2) Act, 2009 with retrospective effect from 01.04.2009. The said proviso is applicable in cases where an assessee claims that it is carrying on charitable purpose covered by the residuary clause i.e. "advancement of any other object of public utility". The proviso is not applicable in case an assessee or institution claims that it is carrying on charitable purpose like relief to poor, education, medical relief etc., i.e. purposes which have been specifically enumerated and stated in the earlier part of Section 2(15).
11. We have gone through the impugned order dated 22.02.2012, but do not find any specific finding or statement in the said order that the charitable activities or purposes in the case of the petitioner No.1 fall under the residuary head and not under the enumerated heads mentioned in Section 2(15) of the Act. The impugned order in this regard is completely silent On the said aspect, we may record that the petitioner No.1 has filed before us number of orders passed by CIT(Appeals) relating to assessment years 1965-66 onwards upto assessment year 1994-95 and orders of the Income Tax Appellate Tribunal from 1966-67 upto 1976-77 in which findings have been recorded that the petitioner No.1 was undertaking charitable activities covered under the clauses; relief to poor, education and medical relief. It is, therefore, clear that the impugned order has applied the first proviso to Section 2(15) of the Act without elucidating the scope and ambit of the said proviso and whether it would be applicable. The respondents have proceeded on assumption that charitable purpose undertaken by the petitioner is covered by the residuary clause, without recording any such specific finding.
12. Our attention has also been drawn to the observations made in the impugned order with regard to earlier decisions of the High Court in the case the assessee. The two decisions went in favour of the petitioner No.1. It is not understandable on what basis the author of the impugned order can ignore or disregard the said decisions by observing that; "with due respect I differ with the decision". The two decisions are binding precedents but can certainly be distinguished on facts and in case there is any change in law in view of the amendments or altered statutory provision. The decisions can also be distinguished or observed as not applicable or good law, in case there is a decision of the Supreme Court which takes a contrary view.
13. On a question whether or not the assessee must himself undertake charitable activities, petitioner No.1 has pointed out observations in the impugned order that the petitioner No.1 was running two state of the art dispensaries in Delhi where free medical prescription was provided to the patients; it has also been stated in the impugned order that petitioner No.1 was maintaining two state of the art laboratories for R & D in Ghaziabad and Manesar factories and was providing financial help to Hakims and Vaids by paying monthly allowance to them.(Quantum of expenditure incurred or application made is not stated in the writ petition). It is stated in the impugned order that this financial help was being given to selected Hakims and Vaids of repute. However, no details of Hakims and Vaids and their incomes have stated or mentioned in the impugned order. On what basis did the author of the order reach the conclusion that financial aid was being given to already well of Hakims and Vaids is not indicated or averred to.
14. The petitioner No.1 has referred to decisions of this Court and other High Courts in CIT v. Sarla devi Sarabhai Trust No. 2 [1988] 172 ITR 698/40 Taxman 388 (Guj.), CIT v. Nirmala Bakubhai Foundation [1997] 226 ITR 394/91 Taxman 236 (Guj.), CIT v. Hindustan Charity Trust[1983] 139 ITR 913/[1982] 11 Taxman 135 (Cal.), CIT v. M. Ct. Muthian Chettiar Family Trust [2000] 245 ITR 400/[2001] 114 Taxman 69 (Mad.), CIT v. Trustees of the Jadi Trust [1982] 133 ITR 494 (Bom.), CIT v. Shri Ram Memorial Foundation [2004] 269 ITR 35/140 Taxman 263 (Delhi). It is submitted that these decisions have accepted the view that application of income for charitable purposes includes transfer of funds to a third person for the said purposes. Decision in Inland Revenue Commissioner v. Helen Slater Charitable Trust Ltd. [1980] 83 WLR 157 has been referred to. It is accordingly submitted that application of money for charitable purposes takes place when the petitioner No.1 transfers his surplus or the entire income or substantial portion thereof, i.e. 85% or more, to a third person who is also using the funds for charitable purpose. This is also application of the money for charitable purpose. It is good and valid application of money unless the transferor i.e. the assessee know or ought to have know that the money will be mis-applied by the transferor. At this stage, we record that this contention of the petitioner No.1 has not been dealt with or examined in the impugned order. We record that the petitioner No.1 has relied upon a decision of the Delhi High Court in Shri Ram Memorial Foundation (supra) which is the jurisdictional of High Court. The petitioner has in addition also referred to instruction No. 1132 dated 05.01.1978 issued by the CBDT which states that charitable trust will not lose exemption under the Act, if it passes a sum of money to another charitable trust for utilization for charitable purpose . It is submitted that as per the Board this constitutes shall be proper utilization of money by the donor for the charitable purposes. It is pointed out to us that the petitioner No.1 has set up no less than 25 medical, educational, literary, scientific and cultural organizations, the All India Unani Tibbi Conference, Institute of History of Medicine and Medical Research, Indian Institute of Islamic Studies, Ghalib Academy, Rabea Girls Public School, Hamdard Education Society, Majeedia Hospital, Jamia Hamdard (University), Rufaida Nursing School, Hamdard Study Circle, Hamdard Coaching Centre, Hamdard Primary School, Hamdard College of Pharmacy etc.
15. HNF, it is claimed, was set up by late founder Wakif Mutawalli on 12.5.1964 as a special purpose vehicle to implement charitable purposes which are identical to the charitable purposes of the petitioner No.1. Our attention was specifically drawn to the objects of HNF, a philanthropic society registered under the Societies Registration Act, 1860 and the objects and functions referered to in the Constitution of HNF. It is stated that HNF is registered under Section 12A read with Section 12AA of the Act and throughout they have been granted exemption. For assessment year 2007-08, the Assessing Officer had denied exemption to HNF under Section 11 of the Act but the said decision was reversed by the appellate authority vide decision dated 31.1.2012 i.e. before the date of the present order dated 22.2.2012. The impugned order however, does refer to the order of the Assessment Officer but does not notice the appellate order passed on 31.01.2012 reversing the findings of the Assessing Officer.
16. On the question of surplus, application of income and accumulation, our attention was drawn to the chart mentioned in Paragraph 8.3 of the impugned order. It is pointed out that the gross surplus is mentioned in the first column. The second column refers to 15% of the general reserve and the last column mentions the accumulative reserve. Petitioner No.1 submits that the amount mentioned in last column accumulation is less than 15% of the general reserve and therefore, the petitioner meets the prescribed parameters. This aspect has been ignored in the impugned order by recording that the surplus has been given to HNF or surplus/income has been passed on and given to HNF. The effect thereof and whether objects/use of funds by HNF can be determinative and relevant for deciding the applicable head u/s 2(15) in the case of the petitioner No.1 is an aspect which requires examination/consideration.
17. On the question of books of accounts, we have already noticed the contention of petitioner No.1 relying upon the decision of Delhi High Court inMehta Charitable Prajnalay Trust (supra).
18. Looking at the aforesaid situation, we allow the present writ petition and issue the writ of certiorari quashing the impugned order dated 22.2.2012 passed by the Director General of Income Tax (Exemptions). The Director General of Income Tax (Exemptions) will pass a fresh order dealing with all the contentions and issues raised by the petitioner No.1 keeping in mind the case law on the subject. The reason why we are remitting the matter is that we find that there are several issues and questions, which have been partially adverted to in the impugned order and we cannot in this writ petition form a firm view. We have discussed the legal contentions raised and also referred to the legal position on certain aspects but application of legal ratio is dependent upon the facts. Difference in facts can materially affect the final outcome and the legal position applicable; whether it be books of accounts, question of application of income, quantum of surplus available or the activity undertaken by HNF. For example whether activities of HNF can be treated as charitable activity of the petitioner for the purpose head under Section 2(15) as claimed by the petitioner No.1. We find ourselves handicapped and unable to give any firm/final opinion on issues/contentions, which may have been touched but not elaborated in the impugned order and/or examined without appreciating the correct legal position. The petitioner No.1 has also disputed some factual assertions stated in the impugned order. Fairness and justice demands that the matter should be examined threadbare, first factually and then by applying the applicable legal ratio. We refrain from elucidating and going into the greater details on these aspects, least it causes prejudice to any side, in view of the remand order.
19. In order to curtail delay, it is directed that the petitioner No.1 through his authorized representative will appear before the Director General (Exemptions) on 2nd May, 2013, when a date of hearing will be fixed.
20. By order dated 01.06.2012, it was directed that the assessment proceedings can continue and even assessment orders can be passed but demands will not be enforced by the Revenue without leave of the Court. The said interim order was applicable to all assessment years except assessment year 2005-06.
21. In another writ petition W.P.(C) No.3599/2012 relating to AY 2005-06, an interim order was passed on the same day that the assessment proceedings can continue but no final assessment order can be passed.
22. The interim order in W.P.(C) 3598/2012 will continue for a period of three months. We hope and expect that the respondent-Director General of Income Tax (Exemptions) will be able to decide and dispose of the remand expeditiously and within the said period. Similarly, it will be open to the Commissioner of Income Tax (Appeals) to dispose of the appeals within the said time. The assessee is expected to cooperate and in case there is any laxity and failure, it will be open to the authority to take action and decide the matter in accordance with law.
23. We clarify that this decision does not deals with the interim order for the assessment year 2005-06 passed/operating in W.P.(C) No.3599/2012.
24. The writ petition No.3598/2012 is accordingly disposed of with no order as to costs.
IT : Contract to effect repairs to infrastructure by construction of protection wall on canals would be mere works contract not eligible for deduction under section 80-IA
■■■
[2013] 35 taxmann.com 408 (Karnataka)
HIGH COURT OF KARNATAKA
Yojaka Marine (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle 1(1)*
N.KUMAR AND B. MANOHAR, JJ.
IT APPEAL NOS. 428-429 OF 2012†
APRIL 22, 2013
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings [Infrastructure facility] - Assessment year 2005-06 - Assessee had entered into an agreement with Inland Waterways Authority of India to undertake work of construction of permanent banks of two canals in Kerala - It claimed deduction under section 80-IA for maintenance of infrastructure facility - Whether agreement in question was a mere works contract to effect repairs to infrastructure by construction of permanent bank protection measures to two canals and maintaining same for a period of three years and, therefore, assessee was not entitled to deduction under section 80-IA - Held, yes [Para 5] [In favour of revenue]
FACTS
| ■ | The assessee was a contractor for marine, mechanical, civil, underwater works and supplier of machinery and equipment on hire. It had entered into an agreement with Inland Waterways Authority of India under which it had undertaken work of construction of permanent banks/protection wall of two canals in Kerala. | |
| ■ | It claimed deduction under section 80-IA for maintenance of infrastructure facility. | |
| ■ | The Assessing Officer held that the contract in question was a works contract and, therefore, the assessee was not entitled to the benefit under section 80-IA. | |
| ■ | The Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | The Tribunal upheld the orders of lower authorities holding that contract in question was a mere works contract in the form of repairs to the already existing canals, rather than the creation of any infrastructure. | |
| ■ | On appeal to the High Court: |
HELD
| ■ | All the three fact finding authorities, on a careful examination of the terms of the contract and taking note of the nature of the work executed by the assessee, have held that it is a works contract. It is not a case where the assessee has made any investment in an infrastructure project. The authority owning the infrastructure project has entered into a contract with the assessee for repair and maintenance for a period of three years. In fact, terms of the agreement show that the assessee has to furnish the bank guarantee and the assessee has been paid mobilization advance and, therefore, it is not a case of assessee investing its money in development of infrastructure or operating and maintaining an infrastructure, which is already developed or developing and maintaining of any infrastructure development. It is an agreement entered into to effect repairs to infrastructure by construction of permanent bank protection measures to two canals maintaining the same for a period of three years. Therefore, it is a works contract as held by the three authorities. There is no merit in these appeals. Accordingly, appeals are dismissed. [Para 5] |
CASE REVIEW
Yojaka Marine (P.) Ltd. v. Asstt. CIT [2012] 54 SOT 293/25 taxmann.com 260 (Bang.) (para 5) affirmed.
Smt. Sheetal Borkar and S. Parthasarathi for the Appellant. K.V. Aravind for the Respondent.
JUDGMENT
N. Kumar, J - These appeals are filed challenging the order dated 25.07.2012 passed by the Tribunal which has affirmed the findings recorded by the Authorities holding that the Contract in question is a Works' Contract and therefore, the assessee is not entitled to the benefit under Section 80-IA of the Income Tax Act, 1961.
2. The assessee is a Contractor for Marine, Mechanical, Civil, under-water works and supplier of machinery and equipment on hire. The assessee is also engaged in the business of marine products. During the previous year relevant to the Assessment Year 2005-06, the assessee has claimed a deduction of Rs. 18,21,641/-under Section 80-IA being the maintenance of infrastructure facility. During the course of hearing, the assessee was asked to produce the supporting evidence for claiming deduction under Section 80-IA. They produced the agreement entered into with the Inland Waterways Authority of India. It shows the assessee has undertaken the work of construction of permanent banks of Champakara Canal and Udyogmandal Canal in NH-3, Kerala. It is a project related to inland water way and allotted by Inland Waterways Authority of India. After going through the agreement, the assessing authority held that it is only the work contract granted to the assessee for the work of construction of protection wall to the Champakara Canal and Udyogamandal Canal. In the work order it is stated that the assessee's offer for the bank protection work in Champakara Canal and Udyogamandal Canal has been accepted by the authority for providing 10,100 mtrs. Of pipe and slab type bank protection and 3,500 mtrs rip/rap Masonary type protection and maintenance of the same for 36 months after the defects liability period at a cost of Rs. 3,28,56,406.85ps. The above cost includes mobilization/demobilization charges and shipping charges of the equipment from place to place as per the directions of Engineering In-charge. The assessee claimed deduction for maintenance of infrastructure facility. On appreciation of the aforesaid material, the assessing authorities held that there is no element of developing or operating and maintaining or developing, operating and maintaining of any infrastructure facility. Maintenance of Infrastructure facility is to be combined with operating or developing and operating. 80-IA deduction is not allowable for only maintenance of infrastructure facility. Hence, the claim of the assessee for deduction is dis-allowed.
3. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). On re-appreciation of the entire material on record and after referring to various judgments, the Appellate Commissioner held that the assessee is a mere contractor executing Civil Works for an Infrastructure Enterprise and is covered under the Explanation to Section 80-IA and therefore, the assessee is not eligible to claim deduction and dismissed the appeal. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal also re-appreciated the entire evidence on record, looked into the decisions cited by the parties and held that the assessee has been engaged to do only the repair work and maintenance thereof at the relevant period, which is a mere Works' Contract in the Form of repairs to the already existing canals, rather than the creation of any infrastructure. What the assessee had executed in the relevant period in respect of the embankments of the Champakara and Udyog Mandal Canals and the Tapi River Banks was merely a works project and not the creation or development of any new infrastructure as claimed. Therefore, it declined to interfere with the orders passed by the Assessing Authorities. It is against the said order the appeal is filed.
4. The learned counsel appearing for the appellant assailing the impugned order contends that the nature of work entrusted to the assessee included not only repair and maintenance of the existing canal but also included construction of protection wall of the canals. In respect of the same, the assessee has invested money and therefore, Section 80-IA is attracted.
5. We do not see any merit in the said contention. All the three fact finding authorities, on a careful examination of the terms of the contract and taking note of the nature of the work executed by the assessee have held that it is a Works' Contract. It is not a case where the assessee has made any investment in an infrastructure project. The authority owning the infrastructure project has entered into a contract with the assessee for repair and maintenance for a period of three years. In fact terms of the agreement shows that the assessee has to furnish the Bank Guarantee and the assessee has been paid mobilization advance and, therefore, it is not a case of assessee investing its money in development of infrastructure or operating and maintaining an infrastructure, which is already developed or developing and maintaining of any intrastructure development. It is an agreement entered into to effect repairs to infrastructure by construction of permanent bank protection measures to Udyog Mandal canal and Champakara canal and maintaining the same for a period of three years. Therefore, it is a works contract as held by the three authorities. We do not see any merit in these appeals. No substantial question of law also arises for consideration in these appeals. Accordingly, appeals are dismissed.
VARSHARegards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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