IT: Approval of Commissioner to suggestions given by audit party could not be taken as substantial compliance under section 151 for reopening of assessment after expiry of four years from end of relevant assessment year
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[2013] 35 taxmann.com 338 (Gujarat)
HIGH COURT OF GUJARAT
Adani Ports And Special Economic Zone Ltd.
v.
Deputy Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 17184 OF 2012
MAY 7, 2013
Section 151, read with section 148, of the Income-tax Act, 1961 - Income escaping assessment - Sanction for issue of notice [Conditions precedent] - Assessment year 2005-06 - Whether proviso to section 151(1) requires that no notice for reopening of assessment shall be issued after expiry of four years from end of relevant assessment year, unless Chief Commissioner or Commissioner is satisfied on reasons recorded by Assessing Officer, that it is a fit case for issue of such notice - Held, yes - Certain aspects of matter in case of assessee were brought to notice by audit party and suggestions with respect to remedial measures were also made by them - Whether, where Commissioner approved suggestions made by audit party, such approval could not be seen as substantial compliance of section 151(1) where notice for reopening was issued after period of four years from end of relevant assessment year - Held, yes [Paras 9,10 & 11] [In favour of assessee]
FACTS
| ■ | After completion of scrutiny assessment, notice was issued by the Assessing Officer for reopening of assessment beyond the period of four years from the end of relevant assessment year on ground that excess depreciation was allowed to the assessee in the relevant assessment year. | |
| ■ | The assessee filed the writ petition against the notice and contended that since the Assessing Officer had not obtained approval from the Chief Commissioner or the Commissioner before issuing of such notice, same was invalid. Also, notice for reopening was issued at the instance of the Audit Party. | |
| ■ | On the other hand, the revenue contended that the suggestions of the audit party with respect to the remedial measure were perused and approved by the Commissioner. Therefore, such action of the Commissioner should be taken as substantial compliance of the requirement of section 151. |
HELD
| ■ | Sub-section (1) of Section 151; as can be seen, requires that in a case where the assessment under section 143(3) or section 147 has been made for a particular assessment year, no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issuance of such notice. Proviso to sub-section (1) requires that no such notice, after the expiry of period of four years from the end of relevant assessment year, shall be issued unless the Chief Commissioner or the Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice. [Para 8] | |
| ■ | The present being a case of issuance of notice after four years from the end of relevant assessment year, and therefore, proviso to sub-section (1) of Section 151 would apply. In such a case, irrespective of the level of Assessing Officer issuing notice for reopening a pre condition of the Chief Commissioner or the Commissioner being satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issuance of such notice must be satisfied. This additional safe guard not only involves the application of mind on the part of the Chief Commissioner or the Commissioner but his satisfaction, which would be based on the reasons recorded by the Assessing Officer, and such satisfaction should be that it is a fit case for issuance of the notice. [Para 9] | |
| ■ | Admittedly, in the present case, these requirements have not been fulfilled. What the Revenue however argues is that when the Commissioner had perused the suggestions of the audit party, the same should be seen as substantial compliance of such a requirement. [Para 10] | |
| ■ | Such a contention cannot be accepted. Sub-section (1) of Section 151 is an important procedural safeguard against arbitrary exercise of power of issuing a notice for reopening of assessment previously framed after scrutiny. Proviso to sub-section (1) of Section 151 is applicable, where such notice is issued after expiry of four years from the end of relevant assessment year. In such a case, the requirement of satisfaction to be recorded is that of the Chief Commissioner or Commissioner. Such requirement cannot be seen as technical. Compliance of such requirement is therefore, necessary before issuance of notice under section 148. [Para 11] | |
| ■ | Under such circumstances, impugned notice is quashed. [Para 12] |
CASES REFERRED TO
CIT v. SPL's Sidhartha Ltd. [2012] 345 ITR 223/204 Taxman 115 (Mag.)/17 taxmann.com 138 (Delhi) (para 11).
B.S. Soparkar for the Petitioner. Mrs. Mauna M. Bhatt for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
Petitioner has challenged a notice dated 21st March 2012 [Annexure "A" to the petition] issued by the respondent-Assessing Officer under Section 148 of the Income-tax Act, 1961 ["Act" for short]. The petition arises in the following background.
2. The petitioner is a company registered under the Companies Act, 1956. For the Assessment Year 2005-06, the petitioner had filed its return of income on 30th October 2005 declaring its total income at "NIL". Such return was accompanied by documents, such as Tax Audit report under section 44AB of the Act, etc.
Such return was taken by the Assessing Officer in scrutiny. He framed scrutiny assessment under section 143 (3) of the Act on 2nd April 2007. It is this scrutiny assessment which the respondent desires to reopen beyond the period of four years from the end of relevant assessment year.
3. At the request of the petition, respondent supplied the reasons recorded by him for issuing such a notice. Such reasons read as under :-
"It is also noticed that during the previous year the assessee company has purchased one Ship/Tug called "MV Dolphin" valued at Rs. 20,66,76,400/- and Rs. 5,16,69,100/- [@ 25% on Rs. 206676400/-]. On verification of the invoice bill and Customs Bill of entry no. 468 dated 11-11-2004. It has revealed that bill of entry was presented to Customs authority on 11-11-2004 for clearance of Tug and the relevant customs duty was debited in the DFCLC Lie No. 0810042703 dated 12.10.2004. This clearly indicates that the assessee company got custody to Tug in November 2004 and thereafter, it was put to use for business. Thus, the assessee was eligible to get 50% depreciation [12.5%] on Tug which was cleared from Customs authority in November 2004. This has resulted in excess allowance of depreciation of Rs. 25834550/- [50% of 51669100/-]."
4. Upon receipt of the reasons, the petitioner under a communication dated 8th November 2012, raised detailed objections before the Assessing Officer. Such objections were, however, dismissed by an order dated 19th November 2012. Hence, this petition.
5. Learned counsel for the petitioner raised following contentions :
| (i) | that there was no failure on the part of the assessee to declare truly and fully all material facts. The notice for reopening issued beyond the period of four years from the end of the relevant assessment year was therefore without jurisdiction; | |
| (ii) | The Assessing Officer was acting under the directions of the audit party. The notice for reopening was issued at the instance of audit party, and therefore also, the same was bad in law; | |
| (iii) | He lastly contended that in terms of proviso to sub-section (1) of Section 151 of the Act, the Assessing Officer had not obtained approval from the Chief Commissioner or Commissioner before issuing the notice, and therefore also, notice was invalid. |
6. On the other hand, learned counsel Ms. Mauna Bhatt appearing for the Department opposed the petition and raid the following contentions :
| (i) | There was no true and full disclosure on the part of the petitioner with respect to purchase of the Ship/Tug called "M.V Dolphin" particularly in context of the petitioner's claim for full depreciation of Rs. 5,16,69,100/- @ 25% of the total value. | |
| (ii) | She pointed out that from the Invoice bills from the Customs Department, it was revealed that the bill of entry was presented on 11th November 2004 for the clearance of Tug and the relevant customs duty was debited on 12th October 2004, which would indicate that the petitioner got the custody of Tug only in the month of November 2004 and that therefore, full depreciation @ 25% could not have been claimed during the year under consideration. She submitted that these facts were not emerging from the return or other documents produced during the course of assessment. The Assessing Officer having independently examined the issue was convinced that the assessment was required to be reopened. Merely because certain aspects of the matters were brought to his notice by the audit party would not per se mean that he was acting under the directions of the audit party. | |
| (iii) | The suggestions of the audit party with respect to the remedial measures that could be taken, was perused and approved by the Commissioner. It was thereupon that the Assessing Officer, after recording his reasons, issued a notice for reopening. She, therefore, submitted that the foundational grounds for issuing the notice for reopening being common, the action of the Commissioner in approving the proposal for reopening the assessment should be seen as substantial compliance of the requirement of Section 151 (1) of the Act. |
7. In the present case, we are inclined to decide only the question of necessary approval to be obtained for issuance of notice. Section 151 (1) of the Act pertains to sanction for issuance of notice and reads as under :-
"151. Sanction for issue of notice - (1) In a case where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 by an Assessing Officer who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice.
Provided that after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice.
(2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Joint Commissioner, after the expiry of four years from the end of relevant assessment year, under the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice."
8. Sub-section (1) of Section 151; as can be seen, requires that in a case where the assessment under section 143 (3) or section 147 has been made for a particular assessment year, no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issuance of such notice. Proviso to sub-section (1) requires that no such notice, after the expiry of period of four years from the end of relevant assessment year, shall be issued unless the Chief Commissioner or the Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice.
9. The present being a case of issuance of notice after four years from the end of relevant assessment year, and therefore, proviso to sub-section (1) of Section 151 would apply. In such a case, irrespective of the level of Assessing Officer issuing notice for reopening, a pre-condition of the Chief Commissioner or the Commissioner being satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issuance of such notice must be satisfied. This additional safe-guard not only involves the application of mind on the part of the Chief Commissioner or the Commissioner but his satisfaction, which would be based on the reasons recorded by the Assessing Officer, and such satisfaction should be that it is a fit case for issuance of the notice.
10. Admittedly, in the present case, these requirements have not been fulfilled. What the Revenue however argues is that when the Commissioner had perused the suggestions of the audit party, the same should be seen as substantial compliance of such a requirement.
11. We are afraid, such a contention cannot be accepted. Sub-section (1) of Section 151 of the Act is an important procedural safeguard against arbitrary exercise of power of issuing a notice for reopening of assessment previously framed after scrutiny. Proviso to sub-section (1) of Section 151 is applicable, where such notice is issued after expiry of four years from the end of relevant assessment year. In such a case, the requirement of satisfaction to be recorded is that of the Chief Commissioner or Commissioner. Such requirement cannot be seen as technical. Compliance of such requirement is therefore, necessary before issuance of notice under section 148 of the Act. Delhi High Court in case of CIT v. SPL's Sidhartha Ltd. [2012] 345 ITR 223/204 Taxman 115 (Mag.) 17 taxmann.com 138 (Delhi) held and observed as under :-
"Thus, if authority is given expressly by affirmative words upon a defined condition, the expression of that condition excludes the doing of the Act authorised under other circumstances than those as defined. It is also established principle of law that if a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be "independent" and not "borrowed" or "dictated" satisfaction. Law in this regard is now well-settled. In Sheo Narain Jaiswal v. Income-tax Officer [1989] 176 ITR 352 (Patna), it was held :
"Where the Assessing Officer does not himself exercise his jurisdiction under section 147 but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non-satisfaction of the condition precedent."
12. Under the circumstances, only on this ground, impugned notice dated 21st March 2012 is quashed. We express no opinion on the other two contentions of the petitioner.
Petition stands disposed of accordingly.
IT: Where accounts were audited by Chartered Accountants on basis of books of account and assessee's books were not rejected during assessment, assessing authority should rely upon auditor's report
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[2013] 35 taxmann.com 168 (Allahabad)
HIGH COURT OF ALLAHABAD
Pragati Engineering Corpn.
v.
Income-tax Officer, Raebareli*
RAJIV SHARMA AND SEED-UZ-ZAMAN SIDDIQI, JJ.
IT APPEAL NO. 11 OF 2012†
APRIL 5, 2013
Section 144, read with section 44AD, of the Income-tax Act, 1961 - Best judgment assessment [Civil construction business] - Assessment year 2005-06 - In scrutiny assessment, assessee, a construction contractor, failed to produce its books of account - It submitted that its books were impounded by police in criminal proceeding against husband of one of its directors - It offered to be assessed at rate of 8 per cent net rate – Its accounts were audited by Chartered Accountant on basis of books of account and on that basis, return was filed moreover said books were not rejected in assessment proceedings - Whether authorities ought to rely upon auditor's report to compute its income - Held, yes - Whether, therefore, matter was to be remanded to decide it afresh - Held, yes [Para 17] [Matter remanded]
FACTS
| ■ | In scrutiny assessment, the assessee , a construction contractor, failed to produce some of its books of account. | |
| ■ | It submitted that its books were impounded by the police in the criminal proceedings initiated against the husband of one of the partners and when the same were released by the Court's order, the entries made on the books of account got erased on account of being placed/kept in a jute bag in an open area and it agreed to be assessed at 8 per cent net rate. | |
| ■ | The Assessing Officer noticed that turnover of the assessee was beyond the prescribed limit of Rs. 40,00,000 whereby he had to maintain books and, therefore, held that adoption of flat rate of 8 per cent under section 44AD was not permissible in law and he made addition to assessee's income. | |
| ■ | The Commissioner (Appeals) confirmed the said addition. | |
| ■ | The Tribunal concurred with the Commissioner (Appeals). | |
| ■ | On further appeal: |
HELD
| ■ | Section 44AD was inserted by the Finance Act, 1994 with effect from 1-4-1994. Sub-section (1) of section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8 per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in sections 28 to 43C. This income is to be deemed to be the profits and gains of said business chargeable to tax under the head 'Profits and gains of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs.40 lakhs. | |
| ■ | It is not in dispute that accounts of the assessee were audited by the Chartered Accountant on the basis of books of account and on that basis, return of income was filed by the assessee, showing income as Rs.4,43,630. It is also not in dispute that the assessment under section 143(3) was completed and the books was not rejected under section 144. Therefore, the auditors' report can be relied upon by the revenue authorities in the absence of the books of account. [Para 16] | |
| ■ | In the instant case also upto the assessment year under consideration, the account books for earlier assessment years were accepted and the appellant's firm was assessed accordingly but in the assessment year under consideration, certain expenditures were disallowed without any basis in an arbitrary manner. The Tribunal has also fell into a serious error in not taking into consideration its earlier view relied upon by the appellant, wherein the Tribunal had applied a net profit rate at the rate of 5.25 per cent as against the net profit at the rate of 8 per cent on the gross receipts of Rs.3,06,71,363 applied by the assessing authority. Not following earlier decision on the same issue is against all settled judicial discipline. When the judgment was brought to the notice of the Tribunal, it was the onerous duty of the Tribunal either to follow it in its letter and spirit or to record reasons for disagreement. [Para 17] | |
| ■ | For the reasons aforesaid, in the absence of books of account, the assessing authority ought to have considered the other documents i.e., auditor's report. [Para 18] | |
| ■ | Accordingly, the impugned judgment and order dated 25-5-2012 passed by the Tribunal was set aside and the matter remitted back to the Tribunal to decide it afresh, in accordance with law. [Para 19] |
CASE REVIEW
Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389 (Delhi) (para 16) followed.
Pragati Engineering Corporation v. ITO [2012] 137 ITD 355/24 taxmann.com 94 (Luck)(TM) (para 19) reversed.
CASES REFERRED TO
CIT v. Eastern Medi Kit Ltd. [2011] 337 ITR 56/202 Taxman 572 (Delhi) (para 10), Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389 (Delhi)(para 15), Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 17), Sardar Kehar Singh v. CIT [1992] 195 ITR 769/55 Taxman 416 (Raj.) (para 17) and Lachhiram Puranmal v. CIT [2001] 119 Taxman 1 (MP) (para 17).
Pradeep Agarwal for the Appellant. Prashant Kumar for the Respondent.
ORDER
1. Heard Sri Pradeep Agarwal, learned Counsel for the appellant and Sri Prashant Kumar, learned Counsel for the respondents.
2. This instant income tax appeal under Section 260-A of the Income Tax Act has been filed by Pragati Engineering Corporation-appellant against the judgment and order dated 25.5.2012 passed by the Income Tax Appellate Tribunal, Lucknow Bench 'B', Lucknow [hereinafter referred to as the"Tribunal"] in I.T.A. No. 304/LKW/2011 for the Assessment Year 2005-2006, whereby the Tribunal has dismissed the appeal.
3. Shorn off unnecessary details the facts of the case are as under :
Pragati Engineering Corporation-appellant is a partnership firm and is engaged in the business of civil contractors in district Raibareli. During the Assessment Year 2005-2006, the appellant had received gross payment from various Government department to the tune of Rs.1,33,76,545/-, which was audited by the Chartered Accountants on the basis of books of accounts. Thereafter, on 30.10.2005, appellant had filed its return of income for the Assessment Year 2005-2006, showing income of Rs.4,43,630/-.
In compliance to a notice issued under Section 143 (2), various details asked from time to time, were furnished by the appellant. Since the case was selected for scrutiny, the appellant/assessee was asked to produce the books of account but it failed to produce the cash book etc. and only ledger copies of purchase, labour charges, salary payable etc. were produced on 9.7.2007. Thereafter, appellant/assessee was repeatedly asked to produce the vouchers etc. in support of its claim of incurring respective expenses but the same were not made available before the Assessing Authority.
4. According to the appellants, the husband of one partner, namely, Smt. Vaishali Singh, erstwhile Member of Legislative Assembly, who was challaned under Sections 147, 148, 149, 323, 506, 364, 384 I.P.C. in Case Crime No. 136 of 2003 at Police Station Kotwali, Raebareli, was absconding and as such, a proceedings under Section 82/83 Cr.P.C. were initiated against him. In the said proceeding, the police has taken away all the books of accounts including other household items pertaining to the Financial Year 2004-2005 (Assessment Year 2005-2006). Subsequently, vide order dated 24.1.2006 passed by the Special Judge, Lucknow in Criminal Misc. Case No. 22 of 2006, the books of accounts, which were impounded by the police, were returned but by that time, all the entries made therein had practically washed away and no part of the books of accounts was in a position to be produced before the Assessing Authority concerned on the grounds that books of accounts were kept in an open area in a jute bag. In these backgrounds, the appellant had filed a written submission dated 20.11.2007 before the Assessing Authority, stating therein that in the absence of the books of accounts, the assessee is agreeable for estimation of income and agreed for a net profit of 8% of the gross receipts.
5. On receipt of the said written submission dated 20.11.2007, the Assessing Authority observed that the turnover of the assessee was beyond the prescribed limit of Rs.40,00,000/-, whereby he has to maintain book and, therefore, adoption of flat rate of 8% under Section 44AD of the Act is not permissible in law. Accordingly, the Assessing Authority, vide order dated 6.12.2007, while making additions in the expenditure account ranging from 10% to 20% and making total addition to the tune of Rs.12,55,520/- determined the total income at Rs.16,99,150/- against the returned income of Rs.4,43,630/- for the Assessment Year 2005-2006.
6. Feeling aggrieved by the Assessment Order dated 6.12.2007, assessee/appellant preferred an appeal before the Commissioner of Income Tax (Appeal)-II, Lucknow, who, vide order dated 1.2.2011, dismissed the appeal and confirmed the addition of Rs.12,55,520/- made by the Assessing Authority.
7. Not being satisfied with the above orders dated 6.12.2007 and 1.2.2011, the assessee/appellant preferred second appeal, bearing No. ITA No. 304/LKO/2011, before the Tribunal. Vide order dated 24.11.2001, Judicial Member of the Tribunal allowed the appeal partly, whereas Accountant Member of the Tribunal dismissed the appeal. Accordingly, the following point of difference was referred to the third Member of the Tribunal under Section 255 (4) of the Act by the Tribunal:
"Whether the Tribunal being the last fact finding body can estimate the net profit from the business of the assessee in the absence of books of account instead of confirming the disallowances sustained by the ld. CIT (A) under various heads?"
8. On reference, the Third Member of the Tribunal decided the above issue and concurred his opinion with the Accountant Member vide order dated 14.5.2012 and as such, a separate order was passed by the Bench on 25.5.2012, dismissing the appeal.
Hence the instant appeal.
9. Sri Pradeep Agarwal, learned Counsel for the assessee/appellant submits that Section 44 AD was brought on the statute book only with an intention that in case of a civil contractor, who does not maintain books of accounts, then, he shall be assessed by applying a net rate of 8%. In the present case, though the books of accounts are maintained, the tax audit report was submitted but the Assessing Authority erred in not applying net rate of 8% under Section 44 AD of the Act as offered by the appellant.
10. Sri Agarwal further submits that while adjudicating the appeal, learned Commissioner of Income Tax (Appeal), has stated that appellant agreed to be assessed at the rate of 8% of net profit as against the net profit of 3.31% and had also requested to allow salary to the partners, interest on partners capital under Section 40 (b) and to allow depreciation on fixed assets but learned Commissioner did not appreciate the facts and the submissions made by the appellant and dismissed the appeal vide order dated 1.2.2011. He submits that the Accountant Member and the Third Member had dismissed the appeal of the appellant on placing reliance upon a case in the case of CIT v. Eastern Medi Kit Ltd. [2011] 337 ITR 56/202 Taxman 572 (Delhi). He submits that Eastern Medi Kit Ltd. (supra) is not applicable in the instant case as two decisions of Allahabad High Court were not considered and the facts of the present case are entirely different. Thus, the findings arrived by the Tribunal in the impugned order are highly perverse and illegal and against the facts of the case.
11. Elaborating his submission, Sri Agarwal submits that under identical situation i.e. in I.T.A. No. 289/LUC/2009 :M/s Universal Construction, B-2, Balaji Houses, Birbal Sahani Marg, Lucknow v. I.T.O., Raebareli, for the Assessment Year 2005-2006, decided on 15.6.2010, the Tribunal had applied a net profit rate at the rate of 5.25% as against the net profit at the rate of 8% on the gross receipts of Rs.3,06,71,363/- applied by the Assessing Authority. The appellant had placed a copy of the said judgment before the Tribunal but the same has neither been considered nor it disagreed with the aforesaid decision. Thus, the impugned order is liable to be set-aside.
12. Per contra, Sri Prashant Kumar, learned Counsel for the respondents submits that the tribunal after hearing the parties and going through the material on record has rightly dismissed the appeal of the assessee. While dismissing the appeal, the Tribunal has recorded findings of facts and laws relating to the present facts and circumstances of the case in detail. Thus, the appeal is liable to be dismissed.
13. We have heard learned Counsel for the parties and perused the records.
14. Section 44AD of the Act was inserted by Finance Act, 1994 w.e.f. 1.4.1994. Sub-section (1) of Section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8% of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in Sections 28 to 43C of the Act. This income is to be deemed to be the profits and gains of said business chargeable to tax under the head "profits and gains" of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs.40 lacs.
15. In the case of Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389, Hon'ble Delhi High Court has held that when the books of accounts have been destroyed in fire, then, the learned Tribunal should mainly rely upon the audit report because the said evidence is admissible under the Evidence Act, 1872.
16. In the instant case, the stand of the assessee before Commissioner of Income-tax (Appeal) and the ITAT was that though he had prepared the books of accounts but books of accounts and vouchers were impounded by the police in the proceedings under Section 82/83 Cr. P.C., which were initiated against the husband of one of the partner and when the same was released by the Court's order, the entries made on the books of accounts erased on account of being placed/kept in a jute bag in an open area and, as such, the assessee agreed to assess 8% net rate, in the absence of books of accounts. The Assessing Authority rejected the plea of the assessee on the grounds that the assessee failed to submit the books of accounts. It is not in dispute that accounts of the assessee was audited by the Chartered Accountant on the basis of books of accounts and on that basis, return of income was filed by the assessee, showing income as Rs.4,43,630.00. It is also not in dispute that the assessment under Section 143 (3) of the Act was completed and the books was not rejected under Section 144 of the Act. Therefore, the auditors report can be relied upon by the Revenue authorities in the absence of the books of accounts in view of Jay Engineering Works (supra).
17. In Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC), Sardar Kehar Singh v. CIT [1992] 195 ITR 769/55 Taxman 416 (Raj.) and Lachhiram Puranmal v. CIT [2001] 119 Taxman 1 (MP), it has been held that when a fundamental aspect permitting through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be altered in a subsequent year i.e. year under consideration. In the instant case also upto the assessment year under consideration, the account books for earlier assessment years were accepted and the appellant's firm was assessed accordingly but in the assessment year under consideration, certain expenditures were disallowed without any basis in an arbitrary manner. The Tribunal has also fell into a serious error in not taking into consideration its earlier view expressed in I.T.A. No. 289/LUC/2009:M/s Universal Construction, B-2, Balaji Houses, Birbal Sahani Marg, Lucknow v. I.T.O., Raebareli, for the Assessment Year 2005-2006, decided on 15.6.2010, which was relied upon by the appellant, wherein the Tribunal had applied a net profit rate at the rate of 5.25% as against the net profit at the rate of 8% on the gross receipts of Rs.3,06,71,363/- applied by the Assessing Authority. Not following earlier decision on the same issue is against all settled judicial discipline. When the judgment was brought to the notice of the Tribunal, it was the onerous duty of the Tribunal either to follow it in its letter and spirit or to record reasons for disagreement.
18. For the reasons aforesaid, we are of the view that in the absence of books of accounts, the Assessing Authority ought to have considered the other documents i.e. auditor's report.
19. Accordingly, we set-aside the impugned judgment and order dated 25.5.2012 passed by the Tribunal and remit the matter back to the Tribunal to decide it afresh, in accordance with law.
POOJA[2013] 35 taxmann.com 299 (Article)
Section 14A disallowance saga in light of judicial precedents
V.P. GUPTA
Advocate
Introduction
1. Provisions of section 14A were inserted in the Income-tax Act vide Finance Act, 2001 with retrospective effect from 1-4-1962 with a view to provide specific provision in the Act for disallowance of an expenditure incurred in relation to exempt income. The provisions of the aforesaid section were inserted for the reason that in some of the judgments the Supreme Court had taken a view that wherever activities of an assessee giving rise to exempt income as well as taxable income are indivisible no expenditure can be disallowed on the ground of earning of exempt income. [CIT v. Indian Bank Ltd. [1965] 56 ITR 77(SC); CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC) and Rajasthan State Warehousing Corpn. v. CIT [2000] 109 Taxman 145 (SC)]. Initially only sub-section (1) was inserted which provided for disallowance of an expenditure incurred by the assessee in relation to income, which did not from part of total income. On the basis of the above provision a controversy had arisen that no disallowance could be made unless there was direct nexus between the exempt income and the expenditure incurred. Since in most of the cases there would be no direct nexus, it was held that no disallowance was called for.
In view of the aforesaid controversy provisions of sub-sections (2) and (3) of section 14A were inserted in the Income-tax Act vide Finance Act, 2006 w.e.f. 1-4-2007. It was provided vide sub-section (2) that the expenditure disallowable shall be determined in accordance with such method, as may be prescribed. Pursuant to above provision made in the Act, Rule 8D of the Income Tax Rules was notified by the Government on 25-3-2008. In view of insertion of sub-sections (2) and (3) and Rule 8D of the Income Tax Rules a controversy had arisen. Whether above referred to sub-sections as well as Rule 8D was retrospective or prospective? It was claimed on behalf of the Department that Rule being a procedural provision was retrospective and, accordingly, would apply to earlier assessment years as well. This controversy, however, has now been settled vide decisions of the Hon'ble High Court of Mumbai in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203and of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390. Accordingly, now the admitted position is that upto A.Y. 2007-08 the disallowance has to be made only on the basis of sub-section (1) of section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred. Disallowance is to be calculated on a reasonable basis. The prescribed method in Rule 8D has no application in respect of the assessment years upto 2007-08. The provisions of sub-sections (2) and (3) of section 14A and the Rule 8D of Income Tax Rules have to be considered for the purpose of determining the disallowance in respect of A.Y. 2008-09 onwards.
2. Relevant provisions
2.1 Sub-sections (2) and (3) of section 14A -These read as under:
"(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act"
2.2 Rule 8D of the Income-tax Rules - In view of specific language of sub-section (2), the prescribed method of Rule 8D is to be applied by the Assessing Officer only if he having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of an expenditure incurred in relation to exempt income. Sub-section (3) also provides that provisions of sub-section (2) would apply where an assessee claims that no expenditure has been incurred in relation to exempt income. Accordingly, in the cases where either the assessee claims that no expenditure has been incurred or the assessee makes disallowance on the basis of his own calculations or determinations, Rule 8D can be applied by the Assessing Officer only if he is not satisfied as regards the claim of the assessee. It may further be stated that Rule 8D of Income Tax Rules also uses the same language as has been mentioned in sub-section (2) of section 14A of the Act. It also provides that the basis provided therein will be applied only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Further, the basis provided in Rule 8D for determination of an expenditure is that apart from expenditure incurred directly in relation to exempt income, proportionate disallowance on account of interest is to be made with reference to average investments to average total assets and in addition thereto, an amount equal to 0.5% of average investment is disallowable on account of administrative expenses.
Controversies in the determination of an expenditure incurred in relation to exempt income
3. In the light of provisions of section 14A of the Income-tax Act and also Rule 8D of Income Tax Rules various controversies have arisen in the context of determination of an expenditure incurred in relation to exempt income. An attempt is being made in this article to list the controversies and discuss the views expressed thereon by the appellate authorities. Major controversies have been as under:—
3.1 No interest disallowance, if investment is out of own funds or own funds are more than investments - As regards the direct expenditure incurred by an assessee in relation to exempt income, there is no controversy whether it is in the nature of interest or otherwise is disallowable. The controversy, however, is in respect of the expenditure which is not directly relatable to the investments or to the exempt income. Most important controversy in this regard is on account of disallowance of interest expenditure incurred by an assessees. In a case where the assessee has incurred interest expenditure, the Assessing Officers are invariably taking a view that proportionate disallowance in the ratio of average investments and average assets is to be made. The assessees, however, are claiming that no disallowance on account of interest is called for where the assessee is having its own sufficient funds to make investments. In such a case it becomes necessary for an assessee to prove on facts that investments have been made out of his own funds. In case an assessee is able to prove on the basis of his facts and bank statements that investments have undoubtedly been made out of own funds and no borrowed funds have been utilized, there would no case of disallowance. The controversy, however, arises in the circumstances where there are mixed funds. The Assessing Officer in such a case holds that proportionate disallowance is to be made. There are, however, following decisions of Supreme Court and High Courts wherein it has been held, in the context of interest free loans given to sister concerns, that where an assessee is having own funds more than interest free loans it should be presumed that interest free loans have been given out of own funds and no disallowance of interest is called for:—
| - | Munjal Sales Corpn. v. CIT [2008] 168 Taxman 43 (SC). | |
| - | CIT v. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135 (Bom.). | |
| - | CIT v. Tin Box Co. [2004] 135 Taxman 145 (Delhi) | |
| - | CIT v. Motor Sales Ltd. [2008] 304 ITR 123 (All.) | |
| - | CIT v. Bharti Televenture Ltd. [2011] 200 Taxman 39 (Mag.)/11 taxmann.com 356 (Delhi) | |
| - | J.K. Industries Ltd. v. CIT [2011] 11 taxmann.com 72 (Cal.) | |
| - | CIT v. Indian Sugar Exim Corpn. Ltd. [2012] 206 Taxman 242/19 taxmann.com 158 (Delhi). |
In the light of the aforesaid legal position an assessee can very well argue that since he has sufficient own funds to make investments, even if he is not able to match entries of investments to interest free funds, no disallowance on account of interest is called for. Relying on above decisions, the claim of the assessee is likely to succeed. In certain cases this issue has already come up before the Courts in the context of disallowance under section 14A also and view has been taken by the High Courts and the Tribunals that no disallowance is called for where the assessee has made investments out of his own funds or the own funds available with the assessee are quite sufficient to make investments, which have given rise to exempt income. In this regard following decisions can be referred to:—
| - | CIT v. Winsome Textile Industries Ltd.[2009] 319 ITR 204 (Punj. & Har.) | |
| - | CIT v. Suzlon Energy Ltd. [Tax Appeal No. 223 of 2013, dated 3-4-2013] | |
| - | Yatish Trading Co. (P.) Ltd. v. Asstt. CIT [2011] 129 ITD 237/9 taxmann.com 164 (Mum.) | |
| - | CIT v. K. Raheja Corpn. (P.) Ltd. [IT Appeal No. 1260 of 2009, dated 8-8-2011] | |
| - | Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi.) | |
| - | Paranjape Autocast (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 1090 & 1091 (Pune) of 2010, dated 25-6-2012] | |
| - | ITO v. Strides Arcolab Ltd. [2012] 138 ITD 323/24 taxmann.com 89 (Mum.) | |
| - | Yamuna Prasad Peshwa v. Dy. CIT [IT Appeal No. 416 (Jodh.) of 2009, dated 9-12-2011] | |
| - | Dy. CIT v. Maharashtra Seamless Ltd. [2011] 48 SOT 160 (URO)/16 taxmann.com 97 (Delhi) | |
| - | Balarampur Chini Mills Ltd. v. Dy. CIT [2012] 20 taxmann.com 117 (Kol.) |
It has also been recently held by the ITAT Delhi Bench in the case of Asstt. CIT v. Keshav Shares & Stocks Ltd. [IT Appeal No. 4394/Delhi/2011, decided on 26-4-2013] that in a case where interest income is also there which has been taxed under the head Business Income, same should be set off against the interest expenditure and only the net amount of interest should be considered for determining the disallowance under Rule 8D.
3.2 Interest on loans taken for the purpose of business to be excluded for the purpose of proportionate disallowance - In the context of calculating proportionate disallowance on account of interest the Kolkatta Bench of the Tribunal in the case of Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 139 ITD 108/26 taxmann.com 342 has held that interest expenditure which is directly attributable to loan taken for the purpose of earning taxable income is to be excluded from the amount of interest to be proportionately allocated. Above holding of the Tribunal is in consonance with the language of clause (ii) of sub-rule (2) of Rule 8D of the Income Tax Rules. The aforesaid clause provides for proportionate allocation of the expenditure incurred by way of interest, which is not directly attributable to any particular income or receipt. Accordingly, any interest which is directly attributable to loan taken for the purpose of earning taxable income is to be excluded. An assessee can claim and prove on the basis of fact in respect of a loan that loan had been taken for the specific purpose and had been utilized accordingly. For example, if a term loan has been taken for the purpose of purchase of plant and machinery of a particular manufacturing unit, the assessee will be able to prove on the basis of loan agreements as well as on the basis of bank statements that the amount of loan had been utilized only for the purpose of purchase of plant and machinery for the manufacturing unit and, therefore, interest relating thereto had been incurred only for the purpose of earning taxable income. Similarly, if an assessee has taken vehicle loan for purchase of vehicles no disallowance out of interest paid on such loan can be made. There would be other cases of loans also where an assessee can prove that the loan has been taken and utilized only for the purpose of business. Hence, disallowance of interest on proportionate basis is to be determined with reference to interest paid on loans commonly used for the purpose of business and investments.
3.3 Disallowance where shares are held as stock-in-trade - Special Bench of the ITAT Mumbai had taken a view in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 that disallowance is to be made in respect of shares held as stock-in-trade also. The aforesaid view has been subject matter of controversy and discussion in other cases. It is being claimed by the assessees that since shares held as stock-in-trade are held as part of its business asset and income arising on sale and purchase of shares is in the nature of business income, which is taxable, no disallowance on account of interest as well as other expenditure in relation to such holding can be made. Dividend income is only incidental income in such cases. This controversy has been considered by the Courts and various Benches of the Tribunals and almost a consistent view is now emerging that no disallowance can be made under section 14A of the Income-tax Act where shares are held as stock-in-trade. In this regard reference can be made to decisions in the following cases:—
| - | CIT v. Smt. Leena Ramachandran [2011] 199 Taxman 122 (Mag.)/10 taxmann.com 109 (Ker.) | |
| - | CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.) | |
| - | Apoorva Patni v. Addl. CIT [2012] 54 SOT 9 (URO)/24 taxmann.com 223 (Pune.) | |
| - | Dy. CIT v. India Advantage Securities Ltd. [IT Appeal No. 6711 (Mum.) of 2011, dated 14-9-2012] | |
| - | Esquire (P.) Ltd. v. Dy. CIT [IT Appeal No. 5688 (Mum.) of 2011, dated 29-8-2012] | |
| - | Dy. CIT v. Gulshan Investment Co. Ltd. [2013] 31 taxmann.com 113 (Kol.) | |
| - | Ethio Plastic (P.) Ltd. v. Dy. CIT [IT Appeal No. 848 (Ahd.) of 2012, dated 10-12-2012] | |
| - | Asstt. CIT v. Keshav Shares & Stocks Ltd. [IT Appeal No. 4394/Delhi/2011, dated 26-4-2013] |
In the context of above controversy language of Rule 8D of the Income Tax Rules is also very important. The language used in Rule 8D for the purpose of disallowance is "Investments". Investments cannot include shares held as stock-in-trade. Investments would imply only the shares which have been held as investments. Accordingly, the language of Rule 8D also supports the proposition that no disallowance is called for in a case where shares are held as stock-in-trade.
3.4 Disallowance under section 14A on account of depreciation - A controversy has also come up before the Special Bench of the ITAT, Ahmedabad in the case of Vishnu Anant Mahajan v. Asstt. CIT [2012] 137 ITD 189/22 taxmann.com 88 in the context of disallowance of depreciation in respect of car maintained by the assessee. The Tribunal has held that depreciation is not in the nature of an expenditure, being a statutory allowance as per section 32 of the Income-tax Act and, accordingly, same is not covered under section 14A of the Income-tax Act.
3.5 Disallowance is to be made even if no income is earned during the year - A controversy has arisen in certain cases to the effect that disallowance can be made even if no income has been earned by an assessee which has been claimed as exempt during the year. If we look at the language of section 14A of the Income-tax Act, it provides for disallowance of an expenditure incurred in relation to income which does not form part of total income. In case there is no exempt income during the year, it can very well be argued that no disallowance is called for, as no expenditure can be said to be incurred in relation to income which does not form part of total income. The Rule, 8D, however, provides for disallowance of an expenditure in respect of an income, which does not or shall not form part of total income. Accordingly, the language of the Rule goes beyond the language of section 14A of the Income-tax Act and also provides for disallowance with reference to income which shall not form part of the total income. Further, in the light of the intention of the Legislature one can say that an expenditure which has been incurred by an assessee which is likely to give rise to exempt income, irrespective of the fact whether income has been earned during the year or not, such expenditure is not allowable. For example, if an assessee has incurred an expenditure on agriculture activities, same cannot be claimed as deduction even if there is no income from agriculture activities during the year. View, to the effect that disallowance is to be made even if there is no income earned during the year, has been taken by the Tribunal in the cases ofCheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB)and Sanchayita Mercantile (P.) Ltd. v. Asstt. CIT [2008] 25 SOT 57 (Mum.). Recently the Chandigarh Bench of the Tribunal, however, has taken a view in the case of Gurdas Mann v. Dy. CIT [2013] 31 taxmann.com 392 that no disallowance was to be made since there was no dividend income. Notwithstanding above controversy, the fact whether exempt income has been received during the year or not can definitely be one of the important factors to decide the quantum of an expenditure incurred.
3.6 Expenses incurred on statutory compliances in case of company are allowable - Another claim which can justifiably be raised by an assessee is to the effect that the expenditure incurred by an assessee, which is a company, for the purpose of statutory compliances, cannot be subject matter of disallowance for the reason that a company is mandatorily required to incur such an expenditure, irrespective of the fact that any activity has been undertaken by it or not. Accordingly, such an expenditure cannot be said to be incurred in relation to exempt income. In regard to legal proposition that in case of companies expenditure incurred on statutory compliances is in the nature of allowable expenditure, reference can be made to decisions made in the following cases:—
| - | CIT v. New Savan Sugar & Gur Refining Co. Ltd.[1991] 55 Taxman 189 (Cal.) | |
| - | CIT v. Ganga Properties Ltd. [1992] 62 Taxman 285 (Cal.) | |
| - | CIT v. Rampur Timber & Turnery Co. Ltd. [1981] 6 Taxman 241 (All.) | |
| - | Daljeet Export (Ind.) (P.) Ltd. v. ITO [1991] 36 ITD 305 (Delhi) |
3.7 Revision under section 263 on the issue of disallowance under section 14A of the Income-tax Act - This issue had come up for consideration before the Hon'ble Delhi High Court in the case of CIT v. DLF Ltd. [2013] 214 Taxman 91/31 taxmann.com 158. In the facts of above case the assessee had made certain disallowance, which was accepted by the Assessing Officer. The CIT passed the order under section 263 of the Income-tax Act holding that the disallowance under section 14A was not examined. The High Court held that issue was debatable and, therefore, CIT could not exercise the powers under section 263 of the Income Tax Act. The Hon'ble Calcutta High Court, however, in the case of CIT v. RKBK Fiscal Services (P.) Ltd. [2013] 214 Taxman 89/32 taxmann.com 153 took a view that it was the responsibility of the assessee to give one-to-one co-relation between the funds available and funds deployed in the investments for the purpose of determining the disallowance on account of interest. Since the Assessing Officer had not examined the same, CIT was justified in passing the order under section 263 of the Income-tax Act.
3.8 No adjustment under section 115JB for disallowance on notional basis as per rule 8D - It has been held by the different Benches of the Tribunals in the following cases that adjustment under section 115JB of the Act cannot be made for disallowance determined on a notional basis. The argument in this context is that language of clause (f) of the Explanation to section 115JB is pari materia to language of sub-section (1) of section 14A of the Act. Accordingly, the expenditure incurred in relation to exempt income can only be adjusted under section 115JB of the Act and disallowance made on a notional basis cannot be adjusted.
| - | Goetze India Ltd. v. CIT [2009] 32 SOT 101 (Delhi.) | |
| - | Quippo Telecom Infrastructure Ltd. v. ACIT [IT Appeal No. 4931/Delhi/2010, dated 18-2-2011] | |
| - | Essar Teleholdings Ltd. v. Dy. CIT [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011] | |
| - | Asstt. CIT v. Spray Engineering Devices Ltd. [2012] 53 SOT 70 (URO)/23 taxmann.com 267 (Chd.) |
3.9 Disallowance on account of administrative expenses in respect of assessment year 2008-09 onwards - The issue regarding disallowance on account of administrative expenses w.e.f. A.Y. 2008-09 has become very important for the reason that technically Rule 8D is held to be applicable from A.Y. 2008-09 and as per the Rule 0.5% of average investments is disallowable on account of administrative expenses. It goes without saying that in such cases there can be no definite basis for determination of an expenditure incurred in relation to exempt income by an assessee for the obvious reason that in most of the cases there are multifarious activities and no separate identifiable expenditure would be incurred in relation to investment activity, which has given rise to exempt income. Therefore, the issue arises that on what basis the assessee should offer the disallowance on account of administrative expenses in terms of section 14A of the Income-tax Act and what are the parameters for an Assessing Officer to hold that he is not satisfied as regards the correctness of the claim made by an assessee in regard to quantum of an expenditure disallowable? In this context it can very well be argued by the assessees that in terms of sub-section (1) of section 14A of the Act an expenditure incurred in relation to exempt income is disallowable. Therefore, the assessee is required to determine and quantify the expenditure disallowable applying the reasonable parameters. The Assessing Officer can disregard the basis adopted by the assessee only when there are strong reasons available with him to hold that the quantification made by the assessee is not correct. Further, it is also worth mentioning that in many cases amount disallowable, keeping in view the specific facts of an assessee, may be small amount whereas applying formula of 0.5% provided in Rule 8D would result in a substantial amount of disallowance. In such a case holding by the Assessing Officer, that he is not satisfied as regards the quantum of disallowance made by the assessee and, accordingly, he has powers to determine the disallowance in terms of Rule 8D, cannot be said to be correct and justified stand of the Assessing Officer.
Assessing Officer is required to record as to why disallowance offered by assessee is not correct before invoking Rule 8D
4. As matter of clear legal mandate it has already been held by the Tribunals in a number of cases that the Assessing Officer is required to record satisfaction as to why the disallowance offered by an assessee is not correct before invoking Rule 8D. In this regard recent decision of the Hon'ble Mumbai Bench of the Tribunal in the case of Kodak India (P.) Ltd. v. Addl. CIT [IT Appeal No. 7349/Mum./2012, dated 30-4-2013] can be referred to wherein the Hon'ble Bench has observed as under:—
"106. In our opinion, Rule 8D is not automatic, it is for the AO to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to give a definite finding, as to how the claim of the assessee is unacceptable. If, on examination, it is found that such expenditure is lower than the disallowance, as computed under Rule 8D, then actual expenditure, as estimated by the AO would have to be disallowed. If, on the other hand, the assessee is able to substantiate on facts, that the exempt income does not bear any cost/expenditure, in such cases, disallowance under section 14A, may become invalid.
107. As observed above, Rule 8D cannot be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement, made by the AO that he has referred to the accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible."
In the light of above holding of the Tribunal and also the logical interpretation of section 14A and Rule 8D of the Income Tax Rules, it is stated that it is the requirement of the law that facts of each case have to be examined by the Assessing Officer and the expenditure, as is relatable to the exempt income, is to be disallowed. Sub-section (1) of section 14A is the basic and primary provision, which provides for disallowance of an expenditure incurred in relation to exempt income. Sub-section (2) is only supplementary to provisions of sub-section (1) and cannot override the same. In any case language of sub-section (2) also makes it clear that Rule 8D can be invoked only if the Assessing Officer is not satisfied as regards the claim of the assessee. In these circumstances it becomes necessary for an assessee as well as for the Assessing Officer that disallowance should be determined on a reasonable basis. Therefore, the assessees should make the disallowance in the return of income on account of administrative expenses on a reasonable basis, duly supported by the facts of the case and the expenditure incurred. The disallowance should be duly authenticated by the auditors in the Tax Audit Report after giving the basis and calculations thereof. As and when the Assessing Officer raises the query during the course of the assessment proceedings a detailed explanation should be given alongwith full facts justifying the disallowance offered in the return. In case the assessee is able to justify the amount of disallowance with reference to facts, the Assessing Officer will have no power to invoke the basis provided in Rule 8D and the disallowance as offered by the assessee has to be accepted by the Assessing Officer. In case the Assessing Officer is not satisfied as regard the quantum of disallowance, the expenditure, as is estimated by him, will only be disallowable, if same is less than the amount disallowable as per the Rule 8D of the Income Tax Rule. This is the clear holding of the Mumbai bench in the above-mentioned case of Kodak India Pvt. Ltd. (supra). In other words, it is stated that the Assessing Officer cannot make disallowance as per Rule 8D disregarding the quantum of actual expenditure incurred.
4.1 Relevant case laws - It cannot be said that Assessing Officer has no power to determine the amount of disallowance with reference to actual expenses incurred and he has to mandatorily follow the basis provided for in Rule 8D of I.T. Rules. In regard to determination of quantum of expenses disallowable under section 14A of the Act on a reasonable basis, which can be adopted by an assessee or by the Assessing Officer, reference can be made to the following decisions:—
4.1.1 Asstt. CIT v. Oriental Structural Engineers (P.) Ltd. [IT Appeal No. 4245 (Delhi) of 2011, dated 2-12-2011] – affirmed by Delhi High Court in ITA No. 605/2012 decided on 15-1-2013 - In the facts of this case the Assessing Officer had made the disallowance by applying Rule 8D. The CIT(A) apart from the interest disallowance, had restricted the disallowance on account of administrative expenses to the extent of 2% of dividend income earned during the year. The Tribunal had also upheld the basis adopted by the CIT(A). The Department had also gone in appeal before the Hon'ble Delhi High Court against the order of the Tribunal. It was argued before the Hon'ble High Court that Rule 8D of the Income Tax Rules had not been applied in this case and it was a case for A.Y. 2008-09. The Hon'ble High Court, however, upheld the order of the Tribunal wherein disallowance was restricted to 2% of dividend income, disregarding Rule 8D of the Income Tax Rules.
4.1.2 J.K. Investors (Bombay) Ltd. v. Asstt. CIT [IT Appeal Nos. 7851 & 7858/Mum./2011, dated 13-3-2013] - In the facts of the above case the assessee apart from expenditure incurred on account of interest and DEMAT charges had offered disallowance of Rs. 10,000 on account of administrative expenses. The contention of the assessee was that there were only six dividend receipts, though the dividend income was of Rs. 8.14 crores and one of them was transfer through ECS. Further, there was also income of Rs. 25 lakhs on mutual fund which was earned through re-investments. Therefore, there was hardly any administrative expenditure incurred. The Assessing Officer, however, had made disallowance of Rs. 83.58 lakhs. The Hon'ble Tribunal after a detailed discussion upheld the disallowance made by the assessee of Rs. 10,000 on account of administrative expenses, keeping in view the facts of the case. This was also a case related to A.Y. 2008-09.
4.1.3 Escorts Ltd. v. Asstt. CIT [2007] 104 ITD 427 (Delhi) - In the facts of this case relating to an earlier year, the assessee had earned dividend income of Rs. 8.9 crores and interest income of Rs. 10.13 crores which were claimed as exempt. The Assessing Officer determined the disallowance at Rs. 2.01 crores. It was claimed by the assessee that it had primarily incurred administrative expenses only for the purpose of carrying on the business and not for the purpose of earning exempt income. After examining the details the CIT(A) had restricted the disallowance to Rs. 21.70 lakhs. The Tribunal while considering the case had observed that estimate was inevitable, the estimate could not be made by the Assessing Officer on thumb rule basis and the assessee had primarily incurred expenditure for the purpose of carrying on its business. Accordingly, the Tribunal held that an ad hoc disallowance of Rs. 2 lakhs would meet the ends of justice.
4.1.4 Jt. CIT v. Pilani Inv. & Ind. Corpn. Ltd. [IT Appeal No. 653/Kol./2012, dated 4-2-2013] - The case related to the assessment year 2008-09. The facts of the case as discussed in the order of the Tribunal revealed that the Assessing Officer had himself adopted the basis of tax exempt receipts to gross total receipts for determining the administrative expenses disallowable.
Conclusion
5. The assessees should make disallowance under section 14A of the Act on a reasonable basis in the light of actual expenses incurred. The basis should be duly disclosed in the return and it should be such a disclosure which the assessee will be able to substantiate when a question is raised by the Assessing Officer. In the light of facts and the holdings in the various decisions mentioned above, the basis can be volume and the frequency of the transactions. It can be the receipts of exempt income to the receipts/turnover of other activities or any other basis as may be suitable in the facts of the case. The Assessing Officer, while examining the claim of the assessee, should carefully go into the facts of the case and also the basis adopted by the assessee. In case the basis and the quantum of disallowance made by the assessee are justified in the light of the facts of the case, same should be accepted. In case the basis adopted by the assessee is not correct in view of the Assessing Officer, he should give a holding as regards the facts as to why the basis adopted by the assessee is not correct and how another basis would be more appropriate. Further, he should also determine the quantum of an expenditure as has been incurred in his view, either on the basis adopted by the assessee or on another basis, which is appropriate in his view. In case quantum of expenditure incurred, as is estimated by the Assessing Officer, is more than the amount of disallowance offered by the assessee, the Assessing Officer should make the disallowance on the basis of his estimate of actual expenditure, in case same is lower than the disallowance as per Rule 8D. If estimated actual expenditure is more than the disallowance as per Rule 8D, the Assessing Officer should make the disallowances as per Rule 8D. It is also suggested that the CBDT, in the interest of avoiding litigations, should clarify the position and also suitably modify Rule 8D. Further, it is also suggested that since determination of an expenditure on an estimated basis is practically difficult, the Rule should provide for the disallowance, based on a percentage of exempt income, limited to the disallowance as per Rule 8D.
IT : Where Assessing Officer in reassessment proceedings treated share application money received by assessee as unexplained cash credit under section 68 and added same to its income, since in reasons recorded there was no specific allegation that assessee had failed to truly disclose any material facts at time of assessment, reassessment proceedings were illegal and without jurisdiction
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[2013] 35 taxmann.com 398 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax - III
v.
Suren International (P.) Ltd.*
BADAR DURREZ AHMED AND VIBHU BAKHRU, JJ.
IT APPEAL NO. 289 OF 2012†
MAY 7, 2013
Section 147, read with section 68, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To tax cash credits] - Assessment year 2002-03 - During previous year assessee received a sum of Rs. 4.82 crores as share application money from various persons - It furnished all particulars relating to share application money including confirmation from share applicants - Assessing Officer conducted an inquiry and concluded that a sum of Rs. 42 lakhs on account of share application money was liable to be taxed as unexplained cash credit under section 68 - He, therefore, made addition of Rs. 42 lakhs to income of assessee - Commissioner (Appeals) deleted addition made by Assessing Officer to extent of Rs. 37 lakhs and sustained addition of Rs. 5 lakhs - In meantime Assessing Officer after expiry of four years from end of relevant assessment year reopened aforesaid assessment for reasons that (i) during certain investigation proceedings a statement of one 'D' was recorded and he had allegedly admitted that during assessment year 2002-03 assessee had taken accommodation entries amounting to Rs. 3.65 crores from accounts operated by him, (ii) information had been received that assessee's goods had been seized by DRI and also penalty of Rs. 2 crores was levied by Commissioner of Customs, and (iii) under circumstances he had reason to believe that an amount of Rs. 3.65 crores had escaped assessment within meaning of section 147 - In reassessment proceedings Assessing Officer concluded that identity, creditworthiness of share applicants and genuineness of transactions in relation to share application money totalling a sum of Rs. 4.75 crores was not established and, accordingly, added said amount to income of assessee - He made a further addition of Rs. 3.46 crores to income of assessee on alleged ground of concealment of goods - Whether since aforesaid accommodation entries disclosed that same entries had been repeated multiple times to arrive at figure of Rs. 3.65 crores, reasons had been recorded without any application of mind - Held, yes - Whether since in reasons recorded there was no specific allegation that assessee had failed to truly disclose any material facts at time of assessment nor could one readily infer same from reasons itself, reassessment proceedings were illegal and without jurisdiction - Held, yes - Whether mere statement that DRI had seized certain goods of assessee and levied a penalty also could not be stated to be a reason for reopening of assessment - Held, yes [Paras 14 to 16] [In favour of assessee]
FACTS
| ■ | During the previous year relevant to the assessment year 2002-03, the assessee-company had received a sum of Rs. 4.82 crores as share application money from various persons and the same was outstanding pending allotment of shares. It furnished all particulars relating to the share application money including confirmations from the share applicants as well as other evidence in relation to those persons. | |
| ■ | The Assessing Officer conducted an inquiry to determine the genuineness and creditworthiness of the share applicants and concluded that a sum of Rs. 42 lakhs on account of share application money was liable to be taxed as unexplained cash credit under section 68. He, therefore, made an addition of Rs. 42 lakhs to the income of the assessee as unexplained cash credit under section 68 and passed the assessment order on 30-3-2005. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the addition made by the Assessing Officer to the extent of Rs. 37 lakhs and sustained the addition of Rs. 5 lakhs. | |
| ■ | In the meantime the Assessing Officer after expiry of four years from end of the relevant assessment year reopened the aforesaid assessment and served on the assessee a notice under section 148 on 25-3-2009. He recorded the reasons to the effect that (i) during certain investigation proceedings a statement of one 'D' was recorded and he had admitted that during the assessment year 2002-03 the assessee had taken accommodation entries amounting to Rs. 3.65 crores from the accounts operated by him, (ii) information had been received that the assessee's goods had been seized by DRI and also penalty of Rs. 2 crores was levied by the Commissioner of Customs, and (iii) under the circumstances he had reason to believe that an amount of Rs. 3.65 crores had escaped assessment within the meaning of section 147. In reassessment proceedings the Assessing Officer once again commenced inquiries with regard to the amount received by the assessee as share application money and concluded that the identity, creditworthiness of the share applicants and the genuineness of the transactions in relation to share application money totalling a sum of Rs. 4.75 crores was not established and accordingly made an addition of the said amount to the income of the assessee. He made a further addition of Rs. 3.46 crores to the income of the assessee on the alleged ground of concealment of goods. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | On second appeal, the Tribunal held that no omission or failure to disclose all material facts fully and truly on the part of the assessee was alleged and consequently the reassessment proceedings were illegal and without jurisdiction. It also held that the statement of 'D' was recorded on 25-3-2004 i.e., prior to the framing of the first assessment and subsequently the matter had traversed its course in appeal before the Commissioner (Appeals). It further held that a sum of Rs. 3.59 crores had also been stated to be refunded by the assessee to the share applicants. It, therefore, concluded that the conditions for reopening the assessment under section 147 were not satisfied. Hence, it quashed the reassessment proceedings initiated pursuant to the notice dated 25-3-2009. | |
| ■ | On appeal to High Court: |
HELD
| ■ | The alleged accommodation entries totalling Rs. 3.65 crores formed the basis of initiating the reassessment proceedings. The Assessing Officer recorded that he had reason to believe that the amount of Rs. 3.65 crores has escaped assessment. It is relevant to state that the reasons as furnished by the Assessing Officer did not disclose any allegation that the assessee had failed to make any disclosure for the purposes of the assessment. Further a bare perusal of the entries listed in the table forming a part of the reasons indicate that most of the entries have been repeated six times to form the total of Rs. 3.65 crores. The Assessing Officer has thus made an addition on the basis of certain set of alleged entries which ex facie include the same entries, which have been repeated multiple times to arrive at the figure of Rs. 3.65 crores. [Para 8] | |
| ■ | Although the reasons furnished by the Assessing Officer contain a statement that information had been received that certain goods of the assessee had been seized by DRI and penalty had been levied by the Commissioner of Customs, there is no allegation that any income had escaped assessment on that count. Thus the only reason for initiating proceedings under section 147/148 is the alleged accommodation entries purportedly totalling Rs. 3.65 crores. [Para 9] | |
| ■ | The revenue contended that even though there is no specific allegation that the assessee had failed to disclose all the material facts but the same can be gleaned from the reasons itself. There is no merit in the said contention. In the first instance, the Bench does not find the reasons as recorded by the Assessing Officer to be reasons in law at all. A bare perusal of the alleged accommodation entries included in the reasons as recorded discloses that the same entries have been repeated six times. Thus the reasons have been recorded without any application of mind. Hence no belief that income has escaped assessment can be stated to have been formed based on such reasons as recorded. [Para 14] | |
| ■ | The Bench is also unable to accept the contention that there has been failure on the part of the assessee to disclose all material facts in the return. Firstly, there is no such allegation in the reasons as furnished to the assessee. Secondly, the enquiry into the share application money had been conducted in detail by the Assessing Officer in the first round of assessment. Having framed the assessment after enquiry into the identity, genuineness and the creditworthiness of the share applicants, it would not be open for the Assessing Officer to re-examine the same without there being any material allegation of failure on the part of the assessee to make a full and true disclosure. It is well settled that in order to invoke the provisions of section 147, after a period of four years from the end of the relevant assessment year, in addition to the Assessing Officer having reason to believe that any income has escaped assessment, it must also be established that the income has escaped assessment on account of the assessee failing to make returns under section 139 or on account of failure on the part of the assessee to disclose, fully and truly, the necessary material facts. [Para 15] | |
| ■ | In the reasons as furnished by the Assessing Officer, there is neither any allegation that the assessee had failed to truly disclose any material facts at the time of assessment, nor can one readily infer the same in view of the fact that a detailed enquiry had been conducted by the Assessing Officer with regard to the identity and creditworthiness of the share applicants and genuineness of the transactions in relation to the share application money received by the assessee. Further the mere statement that the DRI has seized certain goods of the assessee and levied a penalty also cannot be stated to be a reason for reopening of assessment of the assessee, as the said statement made is neither followed by recording of a belief that the income escaped on that count or that the assessee has failed to disclose all relevant material, fully and truly, at the stage of the first assessment. [Para 16] | |
| ■ | Therefore, the appeal preferred by the revenue was liable to be dismissed. [Para 17] |
CASES REFERRED TO
Wel Intertrade (P.) Ltd v. ITO [2009] 308 ITR 22/178 Taxman 27 (Delhi) (para 15) and Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38/ [2008] 175 Taxman 262 (Delhi) (para 15).
Amol Sinha, Deepak Anand, Anshum Jain and Rahul Kochar for the Appellant. S. Krishnan for the Respondent.
JUDGMENT
Vibhu Bakhru, J. - This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the said Act") has been filed on behalf of the revenue challenging the order dated 23.12.2011 passed by the Income Tax Appellate Tribunal, in ITA No. 2941/D/2010, pertaining to the assessment year 2002-03. The Tribunal has, by its order dated 23.12.2011, quashed the proceedings initiated, by the Assessing Officer, on the basis of a notice under Section 148 of the said Act issued for reopening the assessment pertaining to the said assessment year 2002-03. The notice under Section 148 of the said Act was issued on 25.03.2009 which is beyond the period of 4 years from the end of the relevant assessment year. The Tribunal held that as there has been no failure on the part of the assessee to disclose material facts and the same is also not alleged either in the notice under Section 148 or in the reasons recorded for initiating reassessment proceedings, the reassessment proceedings are illegal and without jurisdiction. In absence of failure, on the part of the assessee, to disclose fully and truly all material facts necessary for the proceedings, the Assessing Officer would lack the jurisdiction to initiate reassessment proceedings. Consequently, the Tribunal has quashed the reassessment order.
2. The challenge on the part of the revenue to the order passed by the Tribunal has to be considered in light of the following facts.
3. The assessee filed its return of income on 31.03.2003 declaring an income of Rs. 30,18,779/-. The said return was initially accepted under Section 143(1) on 30.05.2003. However, subsequently on 20.10.2003, the same was taken up for scrutiny. The balance sheet and the books of account of the assessee disclosed that, during the relevant previous year, the assessee had received an aggregate sum of Rs. 4,82,01,000/- as share application money from various persons and the same was outstanding, pending allotment of shares. The Assessing Officer issued a detailed questionnaire to inquire into the said share application money and sought details of the share applicants who had paid the share application money to the assessee company. The Assessing Officer thereafter conducted an inquiry to determine the genuineness and creditworthiness of the transactions relating to the share applications. The assessee produced confirmations from the concerned share applicants during the course of the assessment proceedings. In order to make further inquiries, the Assessing Officer issued summons under Section 131 of the Act to 25 parties from whom the share application money had been received. Initially, some of the summons were received back unserved and the assessee was asked to furnish fresh addresses, which were provided by the assessee. However even thereafter summons to certain persons were received back and the assessee again provided a fresh set of addresses with respect to those persons. The hearings for examining the noticees under Section 131 were fixed on 07.03.2005, 22.03.2005 and 23.03.2005. One of the persons examined under Section 131 declined to acknowledge any relationship with the assessee and consequently the amount of share application money deposited by the said party amounting to Rs. 5,00,000/- was added as income in the hands of the assessee, as unexplained credit in the books of accounts, in terms of Section 68 of the Income Tax Act. Whilst some of the parties to whom summons under section 131 were issued remained unserved, in certain other cases the share-applicants did not come forward on the scheduled dates of hearing for being examined. The Assessing Officer, thereafter, concluded that a sum of Rs. 42,00,000/- on account of share application money was liable to be taxed as unexplained credit in the books of accounts under Section 68 of the Income Tax Act.
4. The assessment made by the Assessing Officer by the order dated 30.03.2005 was carried in appeal by the assessee. The assessee contested the assessment made by the Assessing Officer and in support of his contentions furnished letters of confirmation, photocopies of share application forms, photocopies of income tax returns, balance sheets, pan cards and bank statements of the share applicants in respect of whom the additions were made in the assessment order dated 30.03.2005. The assessee further produced evidence to show that in some cases, the share application money had since been refunded. The CIT (Appeals) forwarded the additional evidence produced by the assessee to the Assessing Officer for examining the same and furnishing a report thereon. The Assessing Officer submitted a report dated 07.10.2005 reiterating the issues mentioned in the assessment order. The CIT (Appeals) concluded that some of the persons to whom summons had been issued could not appear before the Assessing Officer due to paucity of time and, in the light of the subsequent evidence, deleted the additions made by the Assessing Officer to the extent of Rs. 37 lacs. The addition of Rs. 5 lacs in relation to the share applicant who had categorically stated that she had no link with the assessee was upheld by the CIT(A).
5. It can be seen from the above facts that the assessee furnished all particulars relating to the share application money including confirmations from the share applicants as well as other evidence in relation to those persons, who the Assessing Officer had found to be suspect.
6. It is the case of the revenue that during certain investigation proceedings, a statement of one Shri Deepak Gupta was recorded on 25.09.2004 (that is, while the assessment proceedings were still pending). Shri Deepak Gupta has allegedly admitted that he was providing accommodation entries to the assessee. It has been contended on behalf of the revenue, that based on the statement made by the said Deepak Gupta, the Assessing Officer came to believe that income during the relevant previous year had escaped assessment and the Assessing Officer issued the notice dated 25.03.2009 under Section 148 of the Act, seeking to reassess the income of the assessee under Section 147 of the Act. The assessee requested for the reasons for issuance of notice under Section 148 of the said Act which were furnished by the Assessing Officer. The assessee objected to the reasons, however the same were rejected by the Assessing Officer.
7. The reasons for issuance of the notice under Section 148, inter alia, alleged that the assessee had taken certain accommodation entries. The reasons for reopening of the assessment proceedings furnished by the Assessing Officer are as under :-
"12.03.2009 Reasons for issue of notice u/s 148 in the case of M/s Suren International Pvt. Ltd AY 2002-03
Return in this case was filed at an income of Rs. 10,74,990 on 29.10.2002
Enquiries were conducted by the Investigation Wing of the Dept. In this inquiry it was found that one Mr Deepak Gupta S/o Late Shri J.N. Gupta R/o Shastri Nagar, Delhi 110052 was indulging in providing accommodation entries. In his statement recorded on 25/09/2004, he has admitted that he takes cash from various parties and gives them DD/Cheque by charging his commission. This DD/Cheque is then introduced by these parties as share Capital or Loan in their books of accounts.
M/s Suren International Pvt Ltd has taken following accommodation entries from the accounts operated by Deepak Gupta which have been credited in its account with BOP, Karol Bagh Branch in A.Y 2002-03, THE DETAILS ARE GIVEN BELOW:
| VALUE OF ENTRY TAKEN | INSTRUMENT NO BY WHICH ENTRY TAKEN | DATE ON WHICH ENTRY TAKEN | NAME OF ACCOUNT HOLDER OF ENTRY GIVING ACCOUNT | BANK FROM WHICH ENTRY GIVEN | BRANCH OF ENTRY GIVING BANK | A/C NO ENTRY GIVING ACCOUN T | |
| 500000 | 26-JUL-01 | B.I.C. CONSULT ANT S P LTD | SBP | DG | 50088 | ||
| 500000 | 26-JUL-01 | --DO-- | --DO-- | --DO-- | 50088 | ||
| 500000 | 26-JUL-01 | --DO-- | --DO-- | --DO-- | 50088 | ||
| 500000 | 26-JUL-01 | --DO-- | --DO-- | --DO-- | 50088 | ||
| 500000 | 26-JUL-01 | --DO-- | --DO-- | --DO-- | 50088 | ||
| 500000 | 26-JUL-01 | --DO-- | --DO-- | --DO-- | 50088 | ||
| 500000 | 495673 | 21-JUL-01 | DINANAT H LAHURIW ALA | OBC | MINTO ROAD | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO-- | --DO-- | --DO- | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO- | --DO- | DO- | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO- | --DO- | --DO- | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO- | --DO- | --DO- | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO- | --DO- | --DO- | 19 | |
| 500000 | 495673 | 21-JUL-01 | --DO- | --DO- | --DO- | 19 | |
| 250000 | 142208 | 30-JUN-01 | DINESH GUPTA | JAILAXMI COOP BANK | FATEHP URI | 11246 | |
| 250000 | 142208 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 11246 | |
| 250000 | 142208 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 11246 | |
| 250000 | 142208 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 11246 | |
| 250000 | 142208 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 11246 | |
| 250000 | 142208 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 11246 | |
| 500000 | 257601 | 6-JUL-01 | ENPOL(PVT) | --DO-- | --DO-- | 3340 | |
| 500000 | 257601 | 6-JUL-01 | --DO-- | --DO-- | --DO-- | 3340 | |
| 500000 | 257601 | 6-JUL-01 | --DO-- | --DO-- | --DO-- | 3340 | |
| 500000 | 257601 | 6-JUL-01 | --DO-- | --DO-- | --DO-- | 3340 | |
| 500000 | 257601 | 6-JUL-01 | --DO-- | --DO-- | --DO-- | 3340 | |
| 500000 | 257601 | 6-JUL-01 | --DO-- | --DO-- | --DO-- | 3340 | |
| 450000 | 499344 | 24-MAY-01 | LANDMARK COMMUNI CATION PVT LTD | --DO-- | --DO-- | 3194 | |
| 450000 | 499344 | 24-MAY-01 | --DO-- | --DO-- | --DO-- | 3194 | |
| 450000 | 499344 | 24-MAY-01 | --DO-- | --DO-- | --DO-- | 3194 | |
| 450000 | 499344 | 24-MAY-01 | --DO-- | --DO-- | --DO-- | 3194 | |
| 450000 | 499344 | 24-MAY-01 | --DO-- | --DO-- | --DO-- | 3194 | |
| 450000 | 499344 | 24-MAY-01 | --DO-- | --DO-- | --DO-- | 3194 | |
| 500000 | 145084 | 02-JUL-01 | LEELA DHAR | --DO-- | --DO-- | 8644 | |
| 500000 | 145084 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 8644 | |
| 500000 | 145084 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 8644 | |
| 500000 | 145084 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 8644 | |
| 500000 | 145084 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 8644 | |
| 500000 | 145084 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 8644 | |
| 500000 | 329725 | 30-JUN-01 | MANOHA R LAL MANISH KUMAR | --DO-- | --DO-- | 1556 | |
| 500000 | 329725 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 1556 | |
| 500000 | 329725 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 1556 | |
| 500000 | 329725 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 1556 | |
| 500000 | 329725 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 1556 | |
| 500000 | 329725 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 1556 | |
| 480000 | 269479 | 18-MAY-01 | PROFAN FINANCE & INVESTMENT LTD | IND BAK | CH CHOK | 5035 | |
| 480000 | 269479 | 18-MAY-01 | --DO-- | --DO-- | --DO-- | 5035 | |
| 480000 | 269479 | 18-MAY-01 | --DO-- | --DO-- | --DO-- | 5035 | |
| 480000 | 269479 | 18-MAY-01 | --DO-- | --DO-- | --DO-- | 5035 | |
| 480000 | 269479 | 18-MAY-01 | --DO-- | DO-- | --DO-- | 5035 | |
| 480000 | 269479 | 18-MAY-01 | --DO-- | --DO-- | --DO-- | 5035 | |
| 500000 | 311122 | 18-JUL-01 | SUMA FINANCE INVESTMENT LTD. | CORPN | KB | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 500000 | 311122 | 18-JUL-01 | --DO-- | --DO-- | --DO-- | 2919 | |
| 250000 | 135415 | 30-JUN-01 | SUSHIL GOYAL | JAILAXMI COOP BANK | FATEHPURI | 10081 | |
| 250000 | 135415 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 10081 | |
| 250000 | 135415 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 10081 | |
| 250000 | 135415 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 10081 | |
| 250000 | 135415 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 10081 | |
| 250000 | 135415 | 30-JUN-01 | --DO-- | --DO-- | --DO-- | 10081 | |
| 500000 | 503258 | 27-JUL-01 | SWETU STONE P. LTD | OBC | MINTO ROAD | 33 | |
| 500000 | 503258 | 27-JUL-01 | --DO-- | --DO-- | --DO-- | 33 | |
| 500000 | 503258 | 27-JUL-01 | --DO-- | --DO-- | --DO-- | 33 | |
| 500000 | 503258 | 27-JUL-01 | --DO-- | --DO-- | --DO-- | 33 | |
| 500000 | 503258 | 27-JUL-01 | --DO-- | --DO-- | --DO-- | 33 | |
| 500000 | 503258 | 27-JUL-01 | --DO-- | --DO-- | --DO-- | 33 | |
| 500000 | 25-JUL-01 | TECNOCOM ASSOCIAT ES PVT. | SBP | DG | 50060 | ||
| 500000 | 25-JUL-01 | --DO-- | --DO-- | --DO-- | 50060 | ||
| 500000 | 25-JUL-01 | --DO-- | --DO-- | --DO-- | 50060 | ||
| 500000 | 25-JUL-01 | --DO-- | --DO-- | --DO-- | 50060 | ||
| 500000 | 25-JUL-01 | --DO-- | --DO-- | --DO-- | 50060 | ||
| 500000 | 25-JUL-01 | --DO-- | --DO-- | --DO-- | 50060 | ||
| 500000 | 145067 | 02-JUL-01 | VIPIN KUMAR | JAILAXMI COOP BANK | FATEHP URI | 9378 | |
| 500000 | 145067 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 9378 | |
| 500000 | 145067 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 9378 | |
| 500000 | 145067 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 9378 | |
| 500000 | 145067 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 9378 | |
| 500000 | 145067 | 02-JUL-01 | --DO-- | --DO-- | --DO-- | 9378 | |
| 3,65,80, 000 | TOTAL AMOUNT |
In this case information have been received that their goods have been seized by DRI and also penalty of Rs 2 Crores is levied by Commissioner Customs (ICD).
From the above details and the Statement of Mr. Deepak Gupta who has admitted that he has not carried out any business activity accept that of providing accommodation entries as described above that of providing accommodation entries as described above, it is seen that the assessee has diverted its own money into the business by way of taking accommodation entries. Thus the amounts stated in table above taxable u/s 68 of the Act and hence, I have reason to believe that an amount of Rs 3,65,80,000/- has escaped assessment within the meaning of section 147 of the IT Act 1961.
Since 4 years have been elapsed, the assessment record is being submitted for kind perusal and approval of the Commissioner of Income-Tax, Delhi-III, New Delhi according to section 151 (1) of the IT Act, 1961 for issuance of notice u/s 148 of I.T. Act.
-sd/-
(D.D. YADAV)
Asstt. Commissioner of Income Tax
Circle 9(1), New Delhi"
8. The alleged accommodation entries, tabulated in the reasons for issuance of the notice under section 148, totaling Rs. 3,65,80,000/- formed the basis of initiating the reassessment proceedings. The Assessing Officer recorded that he had reason to believe that the amount of Rs. 3,65,80,000/- has escaped assessment. It is relevant to state that the reasons as furnished by the Assessing Officer, first of all, did not disclose any allegation that the assessee had failed to make any disclosure for the purposes of the assessment. Secondly, it would be pertinent for us to mention that a bare perusal of the entries listed in the table forming a part of the reasons indicate that most of the entries have been repeated six times to form the total of Rs. 3,65,80,000/-. The Assessing Officer has thus made an addition on the basis of certain set of alleged entries which ex facie include the same entries which have been repeated multiple times to arrive at the figure of Rs. 3,65,80,000/-. This is clearly evident from the fact that the details of instruments through which payments are alleged to have been made are also similar.
9. We may also add that although the said reasons as furnished by the Assessing Officer contain a statement that information had been received that certain goods of the assessee had been seized by DRI and penalty had been levied by Commissioner Customs (ICD), there is no allegation that any income had escaped assessment on that count and thus the only reason for initiating proceedings under Section 147/148 are the alleged accommodation entries purportedly totaling Rs. 3,65,80,000/-.
10. The Assessing Officer once again commenced inquiries with regard to the amount received by the assessee as share application money, in the reassessment proceedings and concluded that the identity, creditworthiness of the share applicants and the genuineness of the transactions in relation to share application money totaling a sum of Rs. 4,75,01,000/- was not established and accordingly made an addition of the said amount. The Assessing Officer made a further addition of Rs. 3,46,00,000/- to the income of the assessee on the alleged ground of concealment of goods. The order of reassessment dated 24.12.2009 was carried in appeal by the assessee, however the same was dismissed by the CIT (Appeals) by an order dated 25.03.2010.
11. The assessee thereafter preferred an appeal before the Tribunal against the order dated 25.03.2010 passed by the CIT (Appeals), inter alia, on the ground that the reassessment proceedings were based on change of opinion and the same were initiated without there being a reason to believe that income had escaped assessment. The Tribunal allowed the appeal holding that no omission or failure to disclose all material facts, fully and truly, on the part of the assessee, was alleged and consequently the reassessment proceedings were illegal and without jurisdiction.
12. The Tribunal also noted that the statement of Shri Deepak Gupta was recorded on 25.03.2004 that is, prior to the framing of the first assessment and subsequently the matter had traversed its course in appeal before the CIT(A). The Tribunal also noted that a sum of Rs. 3,59,85,000/- had also been stated to be refunded by the assessee to the share applicants. The Tribunal concluded that the conditions for reopening the assessment under Section 147 were not satisfied and hence, the reassessment proceedings initiated pursuant to the notice dated 25.03.2009 were illegal and quashed the same by the impugned order.
13. We have heard counsels for the parties at length.
14. The learned counsel for the appellant contended that even though there is no specific allegation that the assessee had failed to disclose all the material facts but the same can be gleaned from the reasons itself. We are unable to accept this contention. In the first instance, we do not find the reasons as recorded by the Assessing Officer to be reasons in law, at all. A bare perusal of the table of alleged accommodation entries included in the reasons as recorded, discloses that the same entries have been repeated six times. This is clearly indicative of the callous manner in which the reasons for initiating reassessment proceedings are recorded and we are unable to countenance that any belief based on such statements can ever be arrived at. The reasons have been recorded without any application of mind and thus no belief that income has escaped assessment can be stated to have been formed based on such reasons as recorded.
15. Having stated the above, we are also unable to accept the contention that there has been failure on the part of the assessee to disclose all material facts in his return as, first of all, there is no such allegation in the reasons as furnished to the assessee; secondly, we cannot ignore the fact that the enquiry into the share application money had been conducted in detail by the Assessing Officer in the first round of assessment. Having framed his assessment after enquiry into the identity, genuineness and the creditworthiness of the share applicants, it would not be open for the Assessing Officer to re-examine the same without there being any material allegation of failure, on the part of the assessee, to make a full and true disclosure. It is well-settled that in order to invoke the provisions of Section 147 of the Act, after a period of four years from the end of the relevant assessment year, in addition to the Assessing Officer having reason to believe that any income has escaped assessment, it must also be established that the income has escaped assessment on account of the assessee failing to make returns under Section 139 or on account of failure on the part of the assessee to disclose, fully and truly, the necessary material facts. This Court in the case of Wel Intertrade (P.) Ltd v. ITO [2009] 308 ITR 22/178 Taxman 27 and Haryana Acrylic Manufacturing Co.v. CIT [2009] 308 ITR 38/ [2008] 175 Taxman 262 (Del) held that it would not be open for the Assessing Officer to reopen the assessment already done beyond the period of four years unless the income has escaped assessment on account of failure, on the part of the assessee, to disclose all the material facts. In the case of Wel Intertrade (P.) Ltd (supra) it has been held as under :
"A plain reading of the said proviso makes it more than clear that where the provisions of section 147 are being invoked after the period of four years from the end of the relevant assessment year, in addition to the Assessing Officer having reason to believe that any income chargeable to tax has escaped assessment, it must also be established as a fact that such escapement of assessment has been occasioned by either the assessee failing to make a return under section 139, etc., or by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. In the present case, the question of making of a return is not in issue and the only question is with regard to the second portion of the proviso, which relates to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Insofar as this pre-condition is concerned, there is not a whisper of it in the reasons recorded by the Assessing Officer. In fact, as indicated above, the Assessing Officer could not have made this a ground because the Assessing Officer had required the petitioner to furnish details with regard to loss occasioned by foreign exchange fluctuation which the petitioner did by virtue of the reply dated February 5, 2002. Since the petitioner had fully and truly disclosed all the material facts necessary for the assessment, the pre-condition for invoking the proviso to section 147 of the said Act had not been satisfied.
In this connection, it may be relevant to note one decision, although there are several others. The said decision is that of the Punjab and Haryana High Court in the case of Duli Chand Singhania v. Asstt. CIT : [2004] 269 ITR 192. In the said decision, the High Court of Punjab and Haryana was faced with a similar situation. The court noted that there was not even a whisper of an allegation that the escapement in income had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. The court observed that absence of this finding, which is the sine qua non for assuming jurisdiction under section 147 of the Act in a case falling under the proviso thereto, makes the action taken by the Assessing Officer wholly without jurisdiction. We agree with these observations of the Punjab and Haryana High Court and are of the view that in the present case also, the Assessing Officer has acted wholly without jurisdiction. The invocation of section 147, the issuance of the notice under section 148 and the subsequent order on the objections are all without jurisdiction. The impugned notice as well as the proceedings pursuant thereto are quashed."
16. In the reasons as furnished by the Assessing Officer, we find that there is neither any allegation that the assessee had failed to truly disclose any material facts at the time of assessment, nor can we readily infer the same in view of the fact that a detailed enquiry had been conducted by the Assessing Officer with regard to the identity and creditworthiness of the share-applicants and genuineness of the transactions in relation to the share application money received by the assessee. Further the mere statement that the DRI has seized certain goods of the assessee and levied a penalty also cannot be stated to be a reason for reopening of assessment of the assessee as the said statement made is neither followed by the recording of a belief that the income escaped on that count or that the assessee has failed to disclose all relevant material, fully and truly, at the stage of the first assessment.
17. We, accordingly, do not find any merit in the present appeal and no substantial question of law has been raised for our consideration. The present appeal is, accordingly, dismissed. Parties are left to bear their own costs.
Tribunal and Revenue in battle over interpretation of term 'payable' in section 40(a)(ia)
An analysis of CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Guj.)& CIT v. Md. Jakir Hossain Mondal [2013] 33 taxmann.com 123 (Cal.)
D.C. AGRAWAL
Advocate (Former CIT & Accountant Member of ITAT )
Introduction
1. Section 40(a)(ia) of the Income-tax Act provides, while computing income under the head "business or profession", for disallowance of an expenditure of the nature of "interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), (Let us call it specified expenditure in short) on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139"... A controversyhas arisen on the interpretation of the expression "payable" used in section 40(a)(ia). Special Bench of the ITAT inMerilyn Shipping & Transports v. Asstt. CIT [2012] 20 taxmann.com 244/136 ITD 23 (Visakhapatnam) by majority had taken a view that the word "payable" used in section 40(a)(ia) of the Act would make the provision applicable only to expenditure payable on 31st March of a particular year and that such provision cannot be invoked to disallow the amounts which had already been paid during such year, even though tax may not have been deducted at source. The Hon'ble Accountant Member in that case expressing a dissenting view held that "The provisions of section 40(a)(ia) of the Income-tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year." Thus, the majority view was in favour of the taxpayers resulting into allowance of specified expenditure paid during the financial year without deduction of tax, which tax was otherwise deductible under Chapter VII-B. Such allowance of specified expenditure was also held permissible, if after deduction such tax is not paid to the Govt. The revenue took up the matter before the High Courts in other cases where such disallowance of expenditure paid without deduction of tax was deleted by the Tribunal following the decision of the Special Bench in Merilyn Shipping & Transports (supra). The Hon'ble Calcutta High Court in CIT v. Md. Jakir Hossain Mondal [2013] 33 taxmann.com 123 and in CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Kol.) and the Hon'ble Gujarat High Court in CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 disapproved of the majority view in Merilyn Shipping & Transports (supra) and held that expression "payable" used in the section does not mean that only the amount of expenditure pending for payment at the end of the Financial year alone is subject to disallowance and that which is already paid during the Financial Year without deduction of tax can be allowed. The two High Courts took the common view that section 40(a)(ia) would cover not only the amounts which are payable as on 31st March of a particular year, but also which are payable at any time during the year. In essence they approved of the view of the Hon'ble Accountant Member in Merilyn Shipping & Transports (supra). In this article all the four judgments have been analysed and salient points and reasoning have been highlighted.
2. Comments
2.1 As per ruling in Merilyn Shipping & Transports v. Asstt. CIT - Any amount of expenditure under section 40(a)(ia) cannot be disallowed if it is not found payable at the end of the F.Y.
In Merilyn Shipping & Transports (supra) the Special Bench of the tribunal by majority had taken the view that disallowance of an expenditure of the nature of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services as envisaged in section 40(a)(ia) can be done only when such expenditure is payable at the end of the accounting period and on which tax is not deducted or where the tax is deducted but the same is not paid within the time allowed. As a consequence to this view any amount of expenditure of the nature as described in section 40(a)(ia) cannot be disallowed for non-deduction of tax, or after deduction, for non-payment thereof to the Govt. within the time allowed, if such specified amount is actually paid during the F.Y., i.e., if it is not found payable at the end of the F.Y. While taking this view the special bench gave following reasonings:
| (a) | A comparison of the draft of the provision as introduced in the Parliament and the Act which was finally passed showed that the expression earlier proposed was "amount credited or paid" which was replaced in the final enactment by the word "payable". The Legislature knew that if the amount is already paid TDS cannot be deducted. Therefore, only outstanding amount or the provision for expenses liable for TDS is sought to be disallowed in the event when there is a default of TDS. | |
| (b) | It was only after receiving the representation from professional bodies that the Legislature replaced the words from "credited or paid" to "payable". | |
| (c) | When the language of the Statute is clear the intention of the Legislature is to be gathered from the language used. | |
| (d) | As per dictionary meaning "Paid" means actually paid or incurred according to the method of accounting, whereas "Payable" means which is required to be paid. It means a debt to be discharged, legally due, collectable. Thus, where amount is already paid the provisions of this section will not apply. | |
| (e) | While interpreting the word "Payable" in section 40(a)(ia) the words of the Statute must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning and such construction should not lead to absurdity. As per literal interpretation of the statute the word used should be read as it is without doing any violence to the language. | |
| (f) | Section 40(a)(ia) creates a legal fiction by virtue of which even the genuine and admissible expenses are disallowed from the computation of income under the head "Business and Profession", if TDS is not made or after deduction such tax is not paid to the Govt. The legal fiction cannot be extended any further for taxing the amount already paid and has to be limited to the area for which it is created, i.e., for the amounts outstanding or remaining payable at the end of every year as on 31st March. |
2.2 Dissenting view by Accountant Member – The intention of the Legislature must be seen from the Statute passed by the Parliament - On the other hand the Hon'ble Accountant Member expressing dissenting view gave following reasoning for his conclusion:
| (a) | The intention of the Legislature must be seen not from the draft of the proposed bill but from the Statute which is passed by the Parliament. Therefore, the comparison of the draft with the final enactment cannot help to find out intention of the Legislature. | |
| (b) | The difference between the terms "credited" or "paid" or "payable" is relevant for the purposes of TDS provisions under Chapter XVII-B but has no relevance for making disallowance under section 40(a)(ia) and, therefore, the Legislature has dropped the word "credited" or "paid" from the final enactment. | |
| (c) | Section 40(a)(ia) was inserted in order to ensure a scrupulous adherence to the TDS provisions. If narrow interpretation was assigned to the word "payable" as suggested by the assessee then the very object of incorporation of section 40(a)(ia) would be defeated. | |
| (d) | Therefore, the contention that amount contemplated for tax deduction under Chapter XVII-B has been segregated in two parts - one part which has been paid within the F.Y. without making TDS and the other part which is payable at the end of the year would only be covered for disallowance was never intended by the Legislature. | |
| (e) | Section 40(a)(ia) is applicable irrespective of method of accounting followed by an assessee, therefore, the word "payable" includes within its ambit entire accrued liability. In mercantile system of accounting the TDS is required to be made the moment amount is credited to the account of the payee on accrual of liability. In cash system of accounting TDS is required to be made the moment amount is paid to the payee. | |
| (f) | The insertion of expression "on which tax is deductible at source under Chapter XVII-B" in the final enactment clearly shows the intention of the Legislature that deductibility is to be seen from the point view of Chapter XVII-B. | |
| (g) | Had the intention of the Legislature been to disallow only items outstanding as on 31st March, then the term "payable" would have been qualified by the phrase as outstanding as on 31st March. In the absence of such qualification the same cannot be read in the section. | |
| (h) | When one goes through the provisions of TDS as contained in Chapter XVII-B, there is use of the term "shall". It makes it clear that these are mandatory provisions and are applicable to the entire sum contemplated under the respective sections. These sections do not give any leverage to the assessee to make the payment without making the TDS. | |
| (i) | As per principle of ejusdem generis the term "payable" in section 40(a)(ia) has to be interpreted in the light of the sums referred to in various sections contained in Chapter XVII-B. Therefore, emphasis is on liability to pay on which tax is deductible and not on actual payment. | |
| (j) | If the contention of the assessee was accepted then section 40(a)(ia) would become otiose in respect sums paid during the F.Y. | |
| (k) | Rule 30 merely contemplates the procedure for deposit of the TDS amount and merely because different time-limits are prescribed, it would not follow that different considerations would apply while considering the term "payable" under section 40(a)(ia). Further, it is only a procedural provision which cannot override the substantive provisions of the Act. |
2.3 Rationale of the decision of the Calcutta High Court against the majority view in case of Merilyn Shipping & Transports v. Asstt. CIT - In the case of Crescent Export Syndicate (supra)theHon'ble Calcutta High Court held against the majority view of the Special Bench of the ITAT in Merilyn Shipping & Transports (supra). The rationale of the decision was as under:
| (a) | Comparison between the pre-amendment and post-amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. This is precisely what was done by the Apex Court in the case of CIT v. Kelvinator [2010] 187 Taxman 312. But the same comparison between the draft and the enacted law is not permissible, nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the Legislature. | |
| (b) | What the Tribunal by majority (in Merilyn Shipping & Transports (supra)) did was to supply the casus omissus (by way of reading into the section 40(a)(ia) that it cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid) which was not permissible and could only have been done by the Supreme Court in an appropriate case. | |
| (c) | Only Hon'ble Supreme Court may supply the casus omissus, but it would be in the rarest of the rare case when such supplying ofcasus omissus would be extremely necessary due to the inadvertent omission on the part of the Legislature. | |
| (d) | The key words used in section 40(a)(ia), are "on which tax is deductible at source under Chapter XVII–B". What is to be disallowed is those expenses on which tax is deductible at source under Chapter XVII–B. Once this is realized nothing turns on the basis of the fact that the Legislature used the word 'payable' and not 'paid or credited'. Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. | |
| (e) | There can be no denial that the provision in question is harsh, but that is no ground to read the same in a manner which is not intended by the Legislature. The law is deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error. |
2.4 Another decision of the Calcutta High Court in CIT v. Md. Jakir Hossain Mondal reaffirming non-acceptance of ITAT's decision in Merilyn Shipping Transport (supra) - Decision in case of Crescent Export Syndicate was followed by Hon'ble Calcutta High Court in Md. Jakir Hossain Mondal (supra) while holding that the decision of the SB of ITAT in Merilyn Shipping & Transports(supra) was not acceptable.
2.5 Gujarat High Court in CIT v. Sikandarkhan N Tunvar also holds decision in Merilyn Shipping & Transports v. ACIT as erroneous - Hon'ble Gujarat High Court in Sikandarkhan N Tunvar (supra) considered the issue in further details while holding that the view in Merilyn Shipping & Transports (supra) was erroneous. Their Lordships gave following reasons:
| (a) | As section 40(a)(ia) of the Act creates an artificial charge on an amount which is otherwise not an income of the assessee, it cannot be construed liberally. The provision makes disallowance of an expenditure which has otherwise been incurred and is eligible for deduction, on the ground that, though tax was required to be deducted at source it was not deducted or if deducted, had not been deposited before the due date. | |
| (b) | The terms "payable" and "paid" are not synonymous. In the context of section 40(a)(ia) they are not used interchangeably. Word "paid" as defined in section 43(2) of the Act means actually paid or incurred according to the method of accounting. The word "payable" has been described in Webster's Third New International Unabridged Dictionary as requiring to be paid: capable of being paid. | |
| (c) | In the context of section 40(a)(ia), the word "payable" would not include "paid". In other words, an amount which is already paid ceases to be payable and conversely, what is payable cannot be one that is already paid. Term "payable" cannot be seen to be including the expression "paid". | |
| (d) | The provisions contained in Chapter VII-B nowhere require that the amount which is payable must remain so payable throughout the year. | |
| (e) | The language used in section 40(a)(ia) is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the Legislature has not used. | |
| (f) | The Legislature could not have intended to bring about any such distinction nor does the language used in the section bring about any such meaning. If the interpretation as advanced by the assessees is accepted, it would lead to a situation where the assessee who thought he was required to deduct the tax at source but no such deduction was made or more flagrantly deduction, though made was not paid to the Government, would escape the consequence only because the amount was already paid before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year. The Legislature would not have desired to bring about incongruous and seemingly irreconcilable consequences. | |
| (g) | Merely because accounts are closed on the last date of the accounting year and the computation of profit and loss is to be judged with reference to such date, it does not mean whether an amount is payable or not in the context of section 40(a)(ia) must be ascertained on the strength of the position emerging on 31st March. | |
| (h) | The proceedings in the Parliament, its debates and even the speeches made by the proposer of a bill are ordinarily not considered as relevant or safe tools for interpretation of a Statute. The debates in the Parliament at best indicate the opinion of the individual members and are ordinarily not relied upon for interpreting the provisions, particularly when the provisions are plain. | |
| (i) | The reason why a certain language was used in a draft bill and why the provision ultimately enacted carried a different expression cannot be gathered from mere comparison of the two sets of provisions. There may be variety of reasons why the ultimate provision may vary from the original draft. | |
| (j) | The principle of casus omissus is applied mainly when an existing provision is amended and a change is brought about. While interpreting such an amended provision, the Courts would immediately inquire what the statutory provision was before and what changes the Legislature brought about and compare the effect of the two. | |
| (k) | The other occasion when this principle of casus omissus is applied is when the language of the Legislature is compared with some other analogous Statute or other provisions of the same Statute or with expression which could apparently or obviously be used if the Legislature had different intention in mind, while framing the provision. | |
| (l) | The Tribunal in Merilyn Shipping & Transports (supra) committed an error in applying the principle of casus omissus . Firstly, there is serious doubt whether such principle can be applied by comparing the draft presented in the Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear. |
Analysis of the language used in section 40(a)(ia)
3. For appreciating the views expressed by the Hon'ble Calcutta and the Gujarat High Court let us analyse the language used in section 40(a)(ia). The relevant part for the purposes of present controversy is as under:
"Notwithstanding anything to the contrary in sections 30 to 38 the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession' ... Section 40(a)(ia):- any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid ......... "
3.1 The basic ingredients of section 40(a)(ia)-
| (i) | It applies to interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services. | |
| (ii) | The aforementioned amounts are payable to a resident. | |
| (iii) | The amounts are payable to a contractor or sub-contractor being resident. | |
| (iv) | Tax is deductible at source under Chapter XVII-B in respect of amounts payable in respect of aforementioned items. | |
| (v) | Tax has not been deducted as per requirement of Chapter XVII-B. | |
| (vi) | After deduction of tax, amount has not been paid. |
3.2 Crucial words used in section 40(a)(ia) - The crucial words used in the section 40(a)(ia) are "................payable to a resident, or amounts payable to a contractor ..... on which tax is deductible at source under Chapter XVII-B......." One should not read the word "payable" in isolation or on standalone basis. The amount "payable" is qualified by the expression "on which tax is deductible at source under Chapter XVII-B". In fact, this expression qualifies the word "amount", or the sums of the specified nature claimed as deduction from the business profits, that is, if the specified sum is the one on which tax is deductible under Chapter VII-B then it will be subject to disallowance, if tax is not deducted or after deduction is not paid to the Central Govt. Conversely, if no tax is required to be deducted under Chapter VII-B on an amount of expenditure claimed, no disallowance need be made. Before relying on the interpretation given by majority in Merilyn Shipping & Transports (supra) one has to examine whether tax was deductible: (i) only on the amount paid, or (ii) only on the amount payable at the end of the financial year, or (iii) on both. If tax was deductible on both the amounts "paid" and "payable", then the distinction made by the Special Bench to the effect that section 40(a)(ia) is applicable for disallowance only on the amount "payable" as on the last day of the F.Yr. and not what is already paid during the financial year without deduction of tax is only artificial and has been rightly held as erroneous. Further, the meaning of the term "payable" as construed in Merilyn Shipping & Transports (supra) is not sustainable for another reason. Though the dictionary meaning of the term "payable" has been rightly explained by the Tribunal as what is required to be paid; a debt to be discharged, legally due, or collectable, but further presumption that it means "payable" at the end of the Financial Year is not warranted. It actually means "a liability or debt created or an amount has legally become due to someone else". When a transaction is completed, the other party has completed his part of the performance in the contract, an amount legally becomes due to him and an enforceable claim of the other party crops up and then the amount becomes "payable" to him. The specified sum becomes "payable" at any time during the financial year, depending upon the accrual of the enforceable claim.
3.2.1 The term 'payable' – It clearly indicates an amount that has crystallized - The term 'payable' is not defined in the Act. The ordinary meaning of the word 'payable' is a sum/money to be paid. The term can also be understood as liability to be discharged because of the statute or by virtue of contract, though the liability to pay may have accrued at any time [Shanmugam Narayanaswami v. ITO [2005] 97 ITR 1(Hyd.)(SMC)]. This word is used with reference to the payer. It expresses an existing obligation or simply indebtedness. It also indicates a certain and fixed sum, though payable in future [CIT v. Upnishad (P.) Ltd.[2003] 131 Taxman 20 (Guj.)]. Thus, the word 'payable' used in section 40(a)(ia) can be seen to mean some amount which has become due to be paid by virtue of contract for services rendered but it still to be paid. It certainly indicates execution of work/services for which assessee is required to make the payment to the other party. It clearly indicates an amount that has crystallized.
3.3 The term 'payable' is transaction-specific - The interest accrues and is payable at the end of the specified period of the deposit. Commission or brokerage is payable when the underlying contract or transaction is completed on behalf of the assessee by the claimant of commission or brokerage. Rent or royalty becomes payable at the end of the specified period in the contract. Fee for professional or technical services becomes payable on rendering of requisite services in the contract. An amount becomes payable to a contractor when he completes the work assigned to him. Thus, the ambit of the term "payable" is not circumscribed by any particular date. It is transaction-specific. Its creation or cropping up is simultaneous to the accrual of liability. For appreciating the scope of the term "payable", one may also refer to Chapter VII-B. The tax under the provisions of Chapter VII-B is deductible in both the situations when such amount as specified in that Chapter is paid or is credited. Thus, first step is to know whether the specified amount as per section 40(a)(ia) is "payable". Second step is whether tax is deductible thereon under relevant provision of Chapter VII-B. Third step is to know as to when that amount is paid or credited to the payee. It is only at the time of third step when the specified amount which is payable and on which tax is deductible is paid or credited to the account of the payee that tax has to be simultaneously deducted from the payment or credit and the last step is to make the payment of the tax so deducted to the Central Govt. If tax is not deducted from the specified amount "paid" or "credited", or after deduction of such tax it is not paid to the Central Govt., then section 40(a)(ia) is invoked to disallow the amount paid or credited to the payee. Thus, the scope of expression "payable" is anterior in effect to the application of the terms "paid" or "credited". It is incorrect to compare "paid" with "payable", as "payable" precedes the "paid" or "credited". "Payable' here really means "accrual of liability". It is for this reason that the Legislature substituted "paid" or "credited" by the term "payable" in the final enactment.
3.4 More reasons to hold interpretation in Merilyn Shipping & Transports v. ACIT as erroneous - There is yet another reason to hold the interpretation given by the Special Bench of ITAT in Merilyn Shipping & Transports (supra) as erroneous. If we exempt those taxpayers who have paid the specified amount during the financial year from the rigours of section 40(a)(ia), then in addition to it becoming discriminatory between two class of taxpayers for similar default, it further keeps the protected class of those taxpayers who have paid the specified sum without deduction of tax, (by the decision of Merilyn Shipping & Transports (supra)) to additional advantage. They can retain the govt. money, being the tax deducted by them at the time of payment of the specified sum during the financial year without subjecting the concerned amount to disallowance under section 40(a)(ia). No interpretation which dilutes or makes the collection or recovery provisions otiose can be acceptable. It is not relevant that interest or penalty can be charged for this default. But mere thought of protecting a taxpayer for retaining the govt. money will not be acceptable.
There is another reason to disagree with the interpretation given by the Special Bench of the ITAT in Merilyn Shipping & Transports(supra). Merely because a sum is payable at the end of the year, it cannot be disallowed from the computation of income. It has to be further shown that it has been claimed as an expenditure in the profit and loss account while computing business income at the end of the year. This means that such amount is either credited to the account of the payee or actually paid to him, creating a simultaneous entry by debiting the P/L account. If no claim in the P/L account is made, no disallowance of such amount can be made under section 40(a)(ia). Therefore, crucial event for deciding the disallowability of specified sum is claim in the P/L account with simultaneous payment or credit thereof to the payee. It is not sufficient to know whether an amount is payable to decide invoking of section 40(a)(ia). One has to further decide about claim thereof in the P/L account. However, the impact of provisions of section 201/201(1A) and penalty provisions under section 271C are independent of section 40(a)(ia). They can be simultaneously invoked with section 40(a)(ia) or independent of it (if conditions laid down in section 40(a)(ia), like not making any claim in the P/L account are not satisfied). If tax is not deducted, though otherwise deductible under Chapter VII-B then section 201/201(1A) and penalty provisions under section 271C can be invoked, but if claim is not made in the P/L account then section 40(a)(ia) cannot be invoked.
Conclusion
4. The decision of the Special Bench of the ITAT in Merilyn Shipping & Transports (supra) centres around the interpretation of the term "payable" used in section 40(a)(ia). It is held therein that if specified amount is paid during the F.Yr., then it is not payable and, therefore, it cannot be disallowed even if tax has not been deducted or after deduction it has not been paid to the Govt. However, the Calcutta High Court and the Gujarat High Court did not approve of this view. In brief, their view was: (i) Section 40(a)(ia) creates a fiction by which the genuine payment of a specified sum claimed in the P/L account is disallowed for either not deducting the tax or after deduction for not paying to the Govt., therefore, the provision should be interpreted strictly; (ii) the debate in the Parliament does not reflect the intention of the Legislature, but it is only the final enactment which reflects the intention behind the legislation; (iii) 'Payable' means amount which has accrued in favour of payee; (iv) the assumption that it should be shown at the end of the Financial Year is like putting another condition in the provision which is not intended by the Legislature; (v) paid comes after an amount becomes payable. A sum cannot be paid unless it first becomes payable. The moment agreed work is completed, agreed services are rendered and the other party has performed its part of contract the sum would become payable. It is anterior in time as compared to term paid. Whatever is paid prior to completion of agreed work/services would only be in the nature of advance to be adjusted against final payment on completion of work/service. Therefore, it is not fair to compare "paid" and "payable" by keeping them at par and then hold that only time of payment differentiates them.
The view of the ITAT, that by not putting the expression after the word "payable" to the effect that the sum is pending/payable at the end of the accounting year is only a casus omissus is not acceptable because the casus omissus is generally supplied by the Hon'ble Apex Court and only in rare cases when the language of the Legislature is compared with some other analogous statute or if the Legislature had different intention in mind, while framing the provision.
Thus, for the above reasons the decision of the Special Bench in MerilynShipping & Transports (supra) does not lay down a correct law and it was rightly disapproved by the Hon'ble High Courts in Md. Jakir Hossain Mondal (supra); Crescent Export Syndicate (supra) &Sikandarkhan N Tunvar (supra).
Charging of interest under section 234B and 234D and rate of depreciation differ asset to asset
| Posted on 08 August 2013 by Diganta Paul | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefThe Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition to the extent of Rs. 3,83,76,374/- to the income of the appellant out of the total addition of Rs.5,49,44,194/- as proposed by the Ld. TPO/A.O. in its draft assessment order u/s 143(3) read with section 144C by holding that its international transactions do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action – including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed and doing so has selected certain companies whose activities are in no way similar to appellant's characterization (as business support Services/ Marketing Support Services Provider) by the Ld. TPO himself." CitationActis Advisers Pvt. Ltd. Mira The Corporate Suites, Block D, Ground Floor 1 & 2, Ishwar Nagar, New Delhi-110065. PAN/ GIR No. AAACC 5281 G ( Appellant ) Vs. Addl. Commissioner of Income-tax, Range-1, New Delhi. ( Respondent ) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "I" NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA No. 6390/Del/2012 Asstt. Yr: 2008-09 Actis Advisers Pvt. Ltd. Mira The Corporate Suites, Block D, Ground Floor 1 & 2, Ishwar Nagar, New Delhi-110065. PAN/ GIR No. AAACC 5281 G ( Appellant ) Vs. Addl. Commissioner of Income-tax, Range-1, New Delhi. ( Respondent ) Appellant by : Shri Pawan Kumar CA Shri Rohit Tiwari CA Respondent by : Shri Peeyush Jain CIT(DR) O R D E R PER R.P. TOLANI, J.M: This is assessee's appeal against the assessment order dated 3-10- 2012, passed by the Add. Commissioner of Income-tax, Range-1, New Delhi u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 relevant to assessment year 2008-09. 2. Various grounds are raised, out of which assessee's following grounds are pressed; rest of the grounds being not pressed are accordingly dismissed. 1. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition to the extent of Rs. 3,83,76,374/- to the income of the appellant out of the total addition of Rs.5,49,44,194/- as proposed by the Ld. TPO/A.O. in its draft assessment order u/s 143(3) read with section 144C by holding that its international transactions do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action – including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed and doing so has selected certain companies whose activities are in no way similar to appellant's characterization (as business support Services/ Marketing Support Services Provider) by the Ld. TPO himself." 2. The Ld. DRP and the Ld. AO erred in law in disallowing an amount of Rs. 7,00,000/- on account of club entrance charges. 3. The Ld. DRP and the Ld. AO erred in law in reducing depreciation allowance by Rs. 63,787/- during the year on items such as Docking stations and Rack 42u by holding that such items form part of 'plant and machinery' depreciable @ 15% and not 'Computers' which are depreciable @ 60%. The Ld. DRP and the Ld. AO erred in facts and in law by arbitrary disallowing the depreciation amounting to 45% of the opening written down value of the block computers without any basis and without appreciating that the depreciation claim of the appellant on computers has been duly accepted and allowed by his predecessors in earlier years. 4. That the Ld. AO erred on facts and in law in charging interest under section 234B and 234D of the Act." 3. Brief facts are: Actis Advisers Private Limited, ('AAPL') was incorporated on March 26, 1998. During FY 2007-08, the Assessee was engaged in the provision of non binding financial advisory support services to its Group Companies i.e. Actis Capital LLP (now known as Actis LLP) and International Venture Capital Management Ltd., Mauritius (collectively referred to as Actis Group). In return for rendering these services, the Assessee was remunerated at a 10% cost plus mark up, which is claimed to be in accordance with the global transfer pricing policy of Actis Group. 3.1. It is claimed that while operating as a contract service provider for Group Companies, and in being compensated on a cost plus revenue model basis, the assessee is completely shielded from risks such as cost variance/ cost escalation risk, rework/ correction risk, price risk and capacity utilization risk. The customers are Group Companies only and as they undertake all the marketing and business development functions overseas, with no involvement of the assessee, it is also claimed to be not exposed to other critical risks such as credit risk/ debt collection risk and market risk. 3.2. During the relevant FY, the assessee undertook the following international transactions with its Associated Enterprises ('AEs'), which were duly reported in the Accountant's Report ('Form No 3CEB') filed along with the assessee's return of income: S.No Nature of Transactions Value (Rs.) 1. Provision of Advisory and Consultancy Services 383,783,645 2. Reimbursement of expenses 76,449 The above transactions being closely interrelated, have been aggregated for the purpose of analysis from a Transfer Pricing perspective. 3.3. Assessee thus claims that it provides non binding financial advisory support services in the nature of research activity services to its AEs. As per the Advisory agreement dated May 05, 2005entered between Actis LLP and Actis India, the latter provides various services to its AEs which are mentioned in Schedule 1 of the said agreement are as under: (i) Identify, create, evaluate, screen, review, conduct duediligence, carry out investment analysis and research, report on new opportunities for the possible investment by the funds managed by the AE, and advise on such particular factors relating thereto as Actis India considers relevant for consideration by the AE; (ii) In its capacity as advisor, recommend for consideration by the AE from time to time, the purchase or sale of particular investments or proposed investments, and recommend to the AE from time to time regarding the amount and the terms for the proposed purchase/ sale; (iii) Monitor and evaluate the progress of all investments and report on such progress to AE as Actis India may consider appropriate; (iv) Advise in relation to any guarantees, indemnities, covenants, or undertakings in favour of third parties as may be given by the funds managed by the AE in connection with or for the purposes of the acquisitions, holding or disposal of any investment; (v) Advise and report to the AE, on any rights exercisable in relation to any investment; (vi) Provide such other services to the AE as may reasonably be required in order to preserve and promote the interests of the funds managed by the Group; and (vii) Advise on the negotiations of the terms of any purchase or sale of an investment or proposed investment. 3.4. The assessee submitted its TP study for the relevant year on the basis of detailed Function, Asset and Risk ('FAR') analysis and Economic analysis. While conducting the economic analysis, the Assessee applied the TNMM with Operating Profit ('OP')/ Total Cost ('TC') as the relevant Profit Level Indicator ('PLI') in accordance with the Indian Transfer Pricing legislation in order to confirm the arm's length nature of its international transactions pertaining to the provision of back office financial advisory support services, the same is placed on the paper book. 3.5. At the time of preparation of the TP report for FY 2007-08, it is claimed that the assessee was unable to find Indian companies comparable to it while carrying out its search on Indian databases. However, the Assessee conducted a search for the global comparable companies from OneSource.com (Asia Pacific Database) and the same was included in the TP report for the year. The final comparable companies and the results considered in the TP report are as follows:  3.6. As against, the final comparables' set adopted by the Ld. TPO in the TP Order is as under: TP ORDER COMPARABLES  3.7. This resulted in final TP Adjustment by averaging the e mark-up on cost of 23.08% after adjusting for working capital difference, it was higher than the mark up on cost of 9.25%1 earned by the assessee during FY 2007- 08. Ignoring objections, the Ld. TPO proposed an adjustment of Rs. 54,944,194 to the income of the assessee on the basis whereof the draft assessment order u/s 144C(1) of the Act was issued by assessing officer. 3.8. Assessee carried the matter before DRP which overruled the assessee's objections and confirmed the TPO's adjustments. Aggrieved, assessee is before us. 4. Ld. Counsel for the assessee contends that the entire controversy about transfer pricing adjustments can be resolved if the two comparables adopted by the TPO and approved by DRP viz. no. 9 Vapi Waste & Effluent Management Co. Ltd.; and no. 10 WAPCOS, as mentioned above, which are not appropriate comparables, are excluded. If these two comparables are excluded then transfer pricing results are acceptable to the assessee which by and large will meet with its transfer pricing report. 4.1. Assessee being a non risk bearing financial support service entity, should not be compared with these companies which are engaged in rendering marketing/ business support services. Alternatively, if the characterisation of AAPL is a accepted as a business/ market support services provider (as characterised by the TPO/ DRP in the order), even then based on the review of the activities of these two comparables added by the Ld. TPO i.e. Vapi Waste & Effluent Management Co. Limited and Water and Power Consultancy Services Limited ('WAPCOS Limited') cannot be compared. Details of Consultancy and Engineering projects segments as emerging from the annual reports of these companies, the activities performed by them cannot in any manner be considered similar to the activities performed by assessee as business/ market support services provided by it. 4.2. It is submitted that analysis of Vapi Waste & Effluent Mgmt. Co Limited ('Vapi') and WAPCOS (Segment) will make it evident that they operate in altogether very different lines of business (primarily activities including high end technical services, engineering services, infrastructure project engineering/ implementation, etc). They can in no way be considered similar to even the activities performed by a Business support services company or a marketing support services provider, which are briefly tabulated as under:  (i) Vapi Waste & Effluent Management Co. Limited: It is a functionally different comparable. The company deals in the infrastructure sector and is engaged in undertaking high end technical services and project implementation on varied nature of infrastructure projects. The company's revenue streams include effluent treatment, common solid waste treatment and management, etc. This is evident from the annual report of the company for the FY 2007-08. The relevant extract of the annual report of the company is as under: Operations: During the year under review your company has successfully continued with its activities of effluent treatment and common solid waste management Cluster projects: The Ministry of Commerce & Industries, Government of India, though Department of Industries Policy & Promotion ('DIPP') has approved the Vapi Chemical Cluster Project cost at Rs. 5431 crores under the Industrial Infrastructure Upgradation (IIUS)Scheme of 2003 and the government of India ha sanctioned a Grant in aid of Rs. 40.49 crores against this project. The Company, i.e. Vapi Waste & Effluent Management Co. Ltd., has been approved as the Special Purpose Vehicle (SPV) for the implementation of these projects. Thus, there is committed liability of Rs. 13.82 crores towards this project. Road upgradation project: The Road Upgradation Project is one of the project components under Industrial Infrasture Upgradation (HUS) Scheme, which is undertaken by the Company on behalf of Notified Area Authority (NAA). Whatever, expenses incurred by the Company on Road Upgradation Project on and above Grant in aid received or to be received from Central Govt. would be recoverable from the Notified Area Authority from time to time. The company ahs already received the initial contribution of Rs. 180.00 lacs (previous year Rs. 180.00 lacs) from the Notified Area Authority. 4.3. Ignoring these glaring differences, TPO however, held that Vapi Waste and Effluent Management Company Limited is functionally comparable to the appellant. It is pleaded that the comparable is involved in peculiar type of consultancy regarding management of waste, environmental impact assessment, etc. The verticals of the proposed comparables are less important than the quantitative aspects, which is why there is a wide spread of comparables. 4.4. Before the Ld. DRP, it was lucidly explained that the functions performed by the appellant which pertain only to financial advisory support services are in the nature of research activity services to its AEs which cannot be compared with the activities performed by the Vapi which are totally uncomparable and unlike assessee the nature of high end technical and project implementation services. 4.5. The Ld. DRP in its directions has neither given any comments against the contentions of the Appellant for excluding Vapi from the final comparable set nor given cogent reasons for holding it to be a fit comparable. 4.6. 'Vapi' is not only engaged in rendering consultancy services but deals in the infrastructure sector and is engaged in undertaking high end technical services and project implementation on varied nature of infrastructure projects and stands miles apart from assessee's activities. In this behalf assessee placed reliance on the Delhi ITAT order in the case of Verizon India Private Limited, wherein the ITAT has specifically held that a company engaged in rendering engineering consultancy is exposed to higher risks because of its nature of business and cannot be compared with routine marketing support service, by following observations: "We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies and provide end-to-end solutions and whereas the appellant company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable." ii) WAPCOS 4.7. The Assessee submits that WAPCOS Limited is a "MINI RATNA" Public Sector Enterprise and is engaged in providing high end technical consultancy services mainly in the nature of the engineering services in the field of water resources, power and infrastructure sectors in India and Abroad. 4.8. The facts of foreign projects handled by the company clearly indicate that the company in involved in design, engineering kind of activities. These facts emerge from the public domain information i.e. website and annual report of the company for the FY 2007-08. It is claimed by this information that that the WAPCOS ensures quality and time bound services to the clients which is the very essence of WAPCOS operations. WAPCOS drives its strength from its human resources, which form the backbone of the organisation. The consultancy services are carried out in 3 main areas of Water Resources, Power and Infrastructure. WAPCOS' spectrum of servicescovers a wide range of activities that includes: - Preliminary Investigations/Reconnaissance - Feasibility Studies/Planning/Project Formulation - Field Investigations and Testing - Engineering Designs, Drawings and Tendering Process - Contract Management and Construction Supervision - Operation and Maintenance - Institutional/Human Resources Development" 4.9. The Ld. TPO has held that WAPCOS Limited is functionally comparable to the appellant by following observations: "As stated in the show cause this is a support service provider and its services are similar to those provided by the assessee in terms of technical support, technical know-how valuations and assistants in development/ upgradation of potential supplier, advice on business procedures and practices advice on applicable laws and regulations, etc. The segmental data in respect of consultancy services will be used for the purpose of comparison". 4.10. Before the Ld. DRP, the appellant reiterated the submissions taken before the Ld. TPO that the functions performed by the appellant pertaining to financial advisory support services are in the nature of research activity services to its AEs. Such services cannot be compared to the activities performed by the WAPCOS which are in the nature of high end technical consultancy services mainly in the nature of the engineering services. 4.11. Even going by the business support services provider characterization by the Ld. TPO in the order, the activities performed of WAPCOS cannot be in any way considered similar to the activities performed by assessee as a business support service provider. 4.12. The Ld. DRP in its directions with respect to WAPCOS (Segmental) also has not provided its comments on the contentions raised by the Appellant during the proceedings. On the contrary, the Ld. DRP has provided its comments against the contention of the Appellant which were not raised at any point of time during the course of the DRP proceedings. The relevant extract of the DRP order is provided below for ready reference: "According to the Assessee "WAPCOS is a "Mini Ratna" public sector enterprise under the aegis of the Union Ministry of Water Resources. WAPCOS has been providing consultancy services in 4 centres i.e. water resources, power and infrastructure. Apart from India, the company is providing its consultancy services in 40 other countries. Broadly functionally similar being in services sector. According to the assessee economic factors pending a pay revision is effecting its results. We have examined the issue and find pay revision occurs in normal course and cannot be treated as an extraordinary circumstance affecting comparability analysis. Hence in view of DRP it can be retained as a comparable." 4.13. Assessee contends that its submissions before the Ld. TPO and DRP were unambiguous to the effect that WAPCOS cannot be functionally compared to a Company engaged in rendering business/ marketing support services since the revenue generated by them through the consultancy and engineering projects segment includes revenue from high end technical consultancy services mainly in the nature of the engineering services in the field of water resources, power and infrastructure sectors. Thus, the observations of DRP are clearly contrary to the record and on wrong assumption of assessee's contentions. The ITAT Delhi order in the case of Verizon India Private Limited, wherein the ITAT has specifically held that WAPCOS is engaged in rendering engineering consultancy and is exposed to higher risks because of its nature of business. The relevant extract of the Tribunal judgment is given below for your ready reference: "We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies and provide end-to-end solutions and whereas the appellant company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable." 4.14. TPO & DRP have incorrectly rejected the search strategy adopted by assessee in its Transfer Pricing documentation maintained as prescribed under section 92D of the Income Tax Act 1961 Act read with Rule 10D of the Income Tax Rules 1962. The fresh search conducted by TPO is in contravention of set parameters of comparability. The assessee relies on the order of Delhi Bench of the ITAT in the cases of M/s Mentor Graphics (Noida) Pvt. Ltd., ITA No. 1969/D/2006 (Mentor Ruling), wherein it is held that the TPO could have carried out a fresh search only if the comparables drawn by the taxpayer were insufficient or deficient in other respects. 4.15. It is pleaded that Rule 10C(2) of the Income-tax Rules, 1962 provides that in selecting the most appropriate method, the following factors shall be taken into account: "the class or classes of associated enterprises entering into the transaction and the functions performed by them, taking into account assets employed or to be employed and risks assumed by such enterprises…" 4.16. The OECD Transfer Pricing Guidelines ('Review of Chapters I-III of the Transfer Pricing Guidelines, July 22, 2010) also emphasize the importance of functional comparability as a factor for comparability analysis, paragraph 1.42 of the OECD Guidelines states: "In transactions between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or entities are comparable, a functional analysis is necessary." 4.17. The Special Bench of the ITAT on the similar type of issue in the case of Aztec (I.T.A. No.584/Bangalore/2006) held as under: "Before we go into each one of these methods, the fundamental requirement in any of the method selected, is the selection of "comparables", for benchmarking international transactions. This selection of a comparable should be based on functional, asset, and risk analysis of both the parties and transactions." 4.18. The ld. AR submitted that DRP with respect to WAPCOS (Segment) has not controverted its contentions raised during the course of the DRP proceedings. 4.19. The resultant arithmetic mean of the comparable companies (after excluding WAPCOS (Segmental) and Vapi comes to as under:  4.20. The results of the OP/TC margin of the comparable companies (after exclusion of the WAPCOS (Segment) and Vapi for being functionally different for the FY 2007-08 is 13.38% which falls within the +/- 5 percent range around the Appellant's OP/ TC margin of 9.25% earned by the Appellant during the AY 2008-09. Thus, the international transactions of the Appellant during this year would come within the range of ALP. 4.21. Ld. Counsel then adverted to the ITAT Delhi Bench 'H' order in the case of DCIT Vs. M/s MCI Corn India P. Ltd. (ITA no. 4187/Del/2010 & others), which is a consolidated order dated 30-8-2012, wherein on the aspect of functional comparability it has been held that engineering companies including WAPCOS who provide end to end engineering solutions cannot be compared with routine marketing support services entity by following observations: "23. A perusal of the above demonstrates that the assessee has not conducted a proper T.P. study and has wrongly chosen these 4 comparables. When on facts, we are of the opinion that the T.P. study wherein these 4 comparables taken were wrong as apparently there is no functional comparability, we cannot approve such T.P. study, even if the TPO has accepted it. Wrong facts have to be corrected. There can be no estoppel in such factual situation. The Ld. CIT(A) has the power to accept fresh claim of the assessee. Marketing support services cannot be compared with turn key Engineering services. We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies that provide end to end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profit is vastly different and hence on this count also they are not comparable." 4.22. The difference between capital finance/ market consultancy provider and independent high-tech engineering end to end solutions provider have been explained in detail before the TPO/DRP and in written submissions. In view of the above submissions and case laws it is pleaded that these two comparables deserves to be excluded from T.P. working. 4.23. Apropos addition on account of excess depreciation on computer peripherals – Rs. 258,110, ld. Counsel contends: 4.23.1. Assessee as earlier claimed depreciation on computer and peripherals @ 60%. Assessing officer however made disallowance of Rs. 258,110/- on 45% of the total opening written down value of the block of computers as on April 1, 2007 on the premise that the same contain items in nature of plant and machinery entitled for depreciation @ 15% only. 4.23.2. Further, DRP has reduced depreciation allowance by Rs. 63,787/- during the year on items such as Docking stations and Rack 42u by holding that such items form part of 'Plant and machinery' depreciable @ 15% and not 'Computers' which are depreciable @ 60%. It is pleaded that depreciation on the same items has been allowed by the Ld. AO himself in the Assessment Year 2005-06 and 2006-07. 4.24. Apropos addition on account of club entrance fees – Rs. 700,000, ld. Counsel contends: 4.24.1. Apropos the club entrance fees amounting to Rs. 700,000 in respect of entrance fee paid by the Appellant company to 'The Belvedere Oberoi', assessee claimed it as allowable expenditure. Assessing officer however held that membership was advantage of enduring nature and is an expenditure of capital nature. The AO/DRP has failed to appreciate the business expediency of the one time expenditure so incurred. The allowability of club entrance fee stands squarely covered by the recent Hon'ble Supreme Court decision in the case of CIT vs United Glass Mfg Co. Ltd (TS 798 SC 2012) and Delhi High Courts in the case of CIT vs. Samtel Color Ltd. (180 Taxman 82) ,CIT vs. Nestle India Ltd. (296 ITR 682) 5. Ld. CIT (DR) Shri Peeyush Jain apropos transfer pricing additions, contends that ITAT Delhi Bench 'B' in assessee's own case for A.Y. 2006/07 & 2007-08 (ITA nos. 958/Del/12 & 5277/Del/2011) vide consolidated order dated 12-10-2012, on the aspect of 'risks' has observed that: "There are large number of factors which effect the business such as function performed, assets employed and risk assumed The concept of risk in itself provides various types of risks. Learned TPO in his order on page no. 24 has considered 17 types of risks in a tabular form, namely, market risk, customer's credit risk and foreign exchange risk. The assessee in its TP study report has also accepted that through it is a captive service provider and not exposed with various risks, but, it is not a totally risk free enterprises. The nature of risk in the case of assessee are different. We have made a analysis of the assessee's TP study report a swell as the findings recorded by the learned TPO and the DRP. We have extracted the filters applied by the assessee for eliminating the non-comparable companies or adjusting their profit margin, the assessee has not pplied the filter i.e. the companies who have incurred expenses of more than 5% of its sales on advertisement and marketing which required to be excluded. At this stage, in the absence of any finding, at the level of the TPO or of the learned DRP, it is difficult to verify the version put forth by the learned counsel for the assessee." 5.1. Thus, the claim of the assessee that it carried no risk is not a correct argument. It is to be borne in mind that it carries elements of risk. 5.2. Coming to the issue of exclusion of these two comparables, ld. CIT (DR) relies on the following judgments: (i) M/s Bayer Material Science P. Ltd. Vs. Addl. CIT – ITA no. 7977/Mum/2010 – order dated 16-12-2011. (ii) ITA no. 7894/Mum/2010 – M/s Symantec Software Solutions Pvt. Ltd. Vs. ACIT – order dated 31-5-2011. (iii) ITA no. 1082/Hyd/2010 – DCIT Vs. M/s Deloitte Consulting India Pvt. Ltd. – order dated 22-7-2011. for the proposition that the comparables cannot be excluded merely on the basis of turn over or some marginal difference of functionality. Determination of ALP is a work of estimate and the assessee is in marketing consultancy, so are the functions of Vapi and WAPCOS, which have been held as comparables on reasonable basis. Therefore, the TPO and DRP rightly applied these comparables. 5.3. Apropos corporate additions, reliance is placed on the orders of lower authorities. 6. We have heard rival contentions and perused the material available on record. Apropos assessee's contention that assessee is in merely functional advisory consultancy service without any risk cannot be accepted as in preceding two years the ITAT has held that it is in marketing services which carry elements of risk and the assessee's services are to be treated as marketing services. 6.1. Coming back to the issue of comparability the inclusion/ exclusion of Vapi and WAPCOS, the ITAT in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. (supra) has held that companies like EIL, Rites, Wapsos and TCE are engineering companies and provide end to end solutions and therefore they cannot be compared with those assessee who were into providing marketing support services to the parent company. They were held to be functionally not comparable with thee engineering companies. The case of Vapi also falls on the same footing. Therefore, respectfully following the order of the ITAT in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. (supra) and Estel in ITA no. 584/Banglore/06 we are of the view that Vapi and WAPCOS are functionally not comparable to the assessee. Therefore, they are to be excluded. The issue of turn over does not arise in this case. In view of these facts, the matter will go back to the file of AO /TPO who will determine the T.P. adjustments by excluding Vapi and WAPCOS comparables. This ground of the assessee is accordingly allowed. 6.2. Apropos corporate additions, - the issue about depreciation, it is now well settled that computers and peripherals are eligible for depreciation @ 60%. Besides assessee's opening WDV cannot be disturbed. In view thereof, we direct the assessing officer to allow assessee the depreciation on the computers and peripherals @ 60% without disturbing the opening WDV. 6.3. Apropos club entrance fees, respectfully following the Hon'ble Supreme Court judgment in the case of United Glass Mfg. Co. Ltd. And Hon'ble Delhi High Court judgment in the case of Samtel Color Ltd. & Nestle India Ltd. (supra)this claim of the assessee is allowed. 6.4. Charging of interest u/s 234B & 234D are consequential. 7. In the result, assessee's appeal is partly allowed. Order pronounced in open court on 05-07- 2013. Sd/- Sd/- (SHAMIM YAHYA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 5th July, 2013. MP Copy to: 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR |
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