[aaykarbhavan] Judgments Received from C A Sandeep kanoi, Judgment reveived from Pavan Singlaji

Frequently Asked Questions: Tax Audit Related Problems

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CA NITESH MORE

NO. OF TAX AUDIT A CA CAN SIGN

Q1. Will Tax Audit Report u/s 44AD, 44AE, 44AF be counted in the specified limits of 45 Tax Audits? What are the limits on signing of Tax Audit Report?

Ans. As per Council Guidelines No.1-CA(7)/02/2008, dated 8th August,2008:

a) A CA can sign up to 45 Tax Audit.

b) In case of Partnership Firm, limit will be 45 / Partner.

c) Audit U/S 44AD, 44AE, 44AF will not be included in the limit. (FROM FY 2012-13, SEC 44AF IS NOT APPLICABLE)

ONLINE FILLING, DATE OF SIGNING AND DATE OF FILLING

Q2. What are the Tax Audit Reports which are to be compulsorily filed online? Should we sign Tax Audit Report on 30^th September?  Where audit is to be conducted u/s 92E & 44AB, what is the last date of filling online Tax Audit Report?

Ans. As per Notification No. 34/2013 dated 01/05/2013, & Notification No. 42/2013 dated 11/06/2013, Audit reports under Sections 10 (23C) (iv), (v), (vi) or (via), 10A, 12A (1)(b), 44AB, 80-IA, 80-IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E or 115JB are to be filed electronically. (It covers audit report u/s 44AD, 44AE, 44AF also) (FROM FY 2012-13, SEC 44AF ISNOT APPLICABLE). As the word "before" has been used in sec. 44AB, we should not sign Tax Audit Report on 30^th September. You should sign Tax Audit Report before 30^th September, since the assessee is required to "obtain" Tax Audit Report before the due date i.e. 30^th September.  Where audit is to be conducted u/s 92E & 44AB, 3Oth sep. is the last date of filling online.

CAN A PARTNER SIGN ON BEHALF OF OTHER PARTNERS

Q3. Please advice in case of partnership firm can only one partner sign all the reports?

Ans.

a) Clause 12 Of Part I of Schedule I of C. A. Act allow a partner to sign on behalf of (i) Other Partner (ii) Firm

b) Sign can be either digital or physical

c) In my view, one partner can sign form 3CD etc. keeping in view the limit of 45 audits per partner.

[Clause 12 of Part I of Schedule I of Chartered Accountants Act states that "A CA in practice will be guilty if he allows a person not being a member of the institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, P&L a/c, report or financial statements"]

PROBLEM OF TWO TAX AUDITORS OF SAME ASSESSEE

Q4. An individual has two businesses audited by two different tax auditors. How to submit Tax Audit Report?

Ans. In my view, you can follow the below mentioned steps:

a) Combine data of two Tax Audit Reports and submit as one

b) If tax audit conducted by two CAs, any CA can submit.

c) It is advised to attach physical copies of both Tax Audit Reports too, for disclosure of the fact.

CAN RETURN BE FILED AFTER DUE DATE

Q5. Can Income tax Return be e-filed after 30^th September? However we will file Tax Audit Report within 30^th September?

Ans. Yes, Online Tax Audit Report is to be filed by 30^th September to avoid penalty of Rs. 1.5 Lakhs or ½% of Turnover, whichever is lower. However, return may be filed later. However, such return will be treated as belated return.

STEPS FOR FILLING ONLINE TAX AUDIT REPORT

Q6. What are the steps to be followed for E-filling of Tax Audit Report?

Ans. Step 1- One Time Registration of Chartered Accountant at E-filling website

Step 2 – Login to Assessee account at e-filling website and Add CA

Step 3 – Downloading, Preparing Tax Audit Report Utility & Generating XML file.

Step 4 – Uploading XML file at E-filling website from CA's Login Id

Step 5 – Approval of form uploaded by CA at E-filling website from Assessee's Login Id

Step 6 – Do not forget to file Income Tax Return in Relevant ITR separately

SOFTWARE REQUIREMENTS

Q7. What are operating system and runtime environment requirement for E-filling of Tax Audit Report?

Ans. Operating System – Windows XP with Service Pack 3/ Windows 7/ Windows 8.

Runtime Environment – JRE 1.7 Update 6 and above, 32 Bit is required to run applets for offline forms to work.

PROBLEM IN SLOWDOWN OF SYSTEM

Q8. Our system becomes very slow during working on e-utility. What should we do?

Ans. Remove all old versions of Java to improve performance. Better use Google chrome. You can  use Mozilla Firefox.

PROBLEM OF MISMATCH IN NAME & DOB AS PER ICAI AND PAN DATA

Q9. I am unable to register as CA as there is difference in name/date of birth as per ICAI and PAN data. What to do?

Ans. It is requested to file form 49 amendment and get data rectified in PAN immediately. Kindly also note that the day you receive a SMS that your pan amendment has been approved, you will be able to register at site whether you actually receive PAN or not. Alternatively, please follow instructions given by ICAI in such case which are available at icai.org.

ATTACHMENTS

Q10. What are the documents to be attached to Tax Audit Report?

Ans. B/S, P&L, Annexures, Notes, Cost Audit Report and Excise Audit and Other Report, if any, scanned in pdf format after being duly signed by Assessee and CA, whether digital or physical. Kindly note that word/excel file can also be digitally signed.

PROBLEM OF NEGATIVE FIGURES

Q11. System is not accepting negative figures in brackets i.e. "()". What should we do?

Ans. Use negative sign. i.e. minus "-"

PROBLEM OF PROVIDING QUANTITATIVE DETAILS OF INVENTORY

Q12. Due to nature and complexity of the business of the assessee, we do not have quantitative information about the stock. The software is not accepting any comment and it is accepting only numeric value. What should we do?

Ans. Kindly note that Quantitative details of only principle items is to be given. However, in my opinion, if details are not available, 

a) Write nil in online form 3CD &

b) Report why quantitative details is not provided in the following two places:

i) In paper form 3CD &

ii) Notes to accounts

c) The Following Statement Should Be Written In Paper Form 3CD As Well As Notes: "Due To Nature & Complexity of Business of Assessee, It Is Not Possible To Provide Quantitative Details"

PROBLEM IN ENTRY OF LARGE NO. OF FIXED ASSETS

Q13. An assessee had purchased, say 5000 assets. His details of purchase are there in schedule. Online form 3CD again requires filling each purchase. It is a huge task resulting duplicity of work.

Ans. In view of our time constraint, such fixed assets may be grouped into different blocks of assets and each of these groups can be further divided into 2 parts.

i. Assets put to use on or before 2^nd October: For ease of entry in online form 3CD, we will argue that all assets were put to use on 2^nd October, wherever possible.

ii. Assets put to use after 2^nd October (eligible for half of depreciation): For ease of entry in online form 3CD, we will argue that all assets were put to use on 31^st March, wherever possible.

It is also advised to attach the working of calculation of depreciation under the Income Tax act, 1961 as a schedule so that breakup of each group is easily visible to the IT department.

The above can be summarized in the following steps:

Step 1 – All fixed assets may be grouped into different blocks of assets.

Step 2 – Each of these groups can be further divided into 2 parts. (i) Assets put to use on or before 2^nd October (ii) assets put to use after 2^nd October (eligible for half of depreciation)

Step 3 - For assets brought on or before 2^nd October, we can argue that those assets were put to use on 2^nd October and accordingly relevant entries can be made in the online form 3CD.

Step 4 - For assets brought after 2^nd October, we can argue that those assets were put to use on 31^st March and accordingly relevant entries can be made in the online form 3CD.

Step 5 - It is also advised to attach the working of calculation of depreciation under the Income Tax act, 1961, as a schedule, so that breakup of each group is easily visible to the IT department.

PROBLEM IN VIEWING STOCK FIGURES

Q14. I filled stock details in point 28A. When after validating and saving, I reopen the form; only one stock figure is displayed.

Ans. It is the inherent problem of the software but your xml file contains the correct data. Open the xml file in Internet Explorer and check it. You can edit xml file, however you have to adopt unceremonious way to edit the xml file for the necessary correction for the item in subsequent rows of point 28A. Therefore it is advised to fill up point 28A before filling any other point from point 7 onwards.

PROBLEM OF DEPRECIATION IN WEBTEL SOFTWARE

Q15.  We have received demand relating to AY 2012-13, for almost for all companies for which income tax return were filled using Webtel software. The demand pertains to non-deduction of deprecation u/s. 32 in the return processed u/s 143(1) by CPC Bangalore, as claim by us in ITR 6. I just want to know if any other user of Webtel are also facing same problem.

Ans: The Problem Was Faced Many CA Using Webtel Software Due To Non Updation. I Suggest Submitting Revised Return or Making Rectification U/S 154.

PROBLEM OF BLANK FIELDS IN SAVED DRAFT XML FILE

Q16. When we reopen draft saved xml file, many fields which we had already entered is showing blank.

Ans. The software has some inherent errors as a result when we reopen draft saved xml file, it shows blank i.e. we have to re-enter the fields again. These fields are 7(B), 8(B), 9(A), 10, 11(D), 12(B), 21(Notes), 22(A), 22 AND 23.

PROBLEM OF VIEWING DATA OF XML BEFORE UPLOADING

Q17. How we can view data of XML before uploading?

Ans. You can view the xml file of tax audit report prepared in e utility of department. The process is as follows:

Go to Programme → Microsoft Office → Microsoft Office Access 2003/2007 → New blank data base →Click blank data base → A window with file name database1.accdb will appear on the right hand side pane → Click on create →Your new date base is saved by default in my Documents. (You may save the same to your choice folder)

A new data base is opened. Go to and click External data → Click XML file>Browse the xml file for which you want to create/view or save the data → Click OK → Import XML → Click OK → Check the box "Save import steps"→  Close.

Your data base is ready, on the left hand side pane the indexes for "All Tables" do appear. By clicking any Table/ any point you can easily view and save its contents presently appearing in the XML file. Once the xml file is saved and the data base is reopened it will show the updated entries lying in the XML file. If some member finds any error in the tables he can easily make corrections opening the utility.

PROBLEM OF PRINTING/SAVING UPLOADED XML FILE

Q18. There is no provision for saving or printing downloaded Forms 3CB-3CD, or XML file.

Ans.  You can save the work in middle by using "Save Draft" Button. To view the print option opens the xml file in Microsoft Access 2007 using new projects. U can find the Data in tabular form.

PROBLEM OF FAKEPATH

Q19. When we are uploading the 3CA and 3CD online one error is coming cannot read fake path file. I have placed the XML file in c drive fakepath folder and using Google chrome for that. Please help on the issue.

Ans. Kindly check the name of folder is "fakepath" and not as fake path, in C drive.

PROBLEM IN VIEWING XML FILE FROM CLIENT'S LOGIN

Q20. We uploaded form 3CD of a client. When it is viewed from the client's login (i.e. for approving or rejecting), the dates in point no. 16(b) of form 3CD is getting interchanged (i.e. in the due dates column actual dates are seen and vice versa). But there is no mistake at our end. We have filled in the data in the income tax offline utility correctly and generated xml.

Ans. Your XML File contains the right data. Do not worry, upload it.

HOW TO PRINT UPLOADED XML FILES

Q21. CA has no option to print uploaded xml files. How to print?

Ans. CA has no option to print uploaded xml files. However, it can be printed from assessee's login id, even before approval by assessee as the said xml file can be downloaded, from assessee's login id, in the pdf format by default.

REVISION OF TAX AUDIT REPORT ONCE FILED

Q22. Can online filed Tax Audit Report be revised?

Ans. A Tax Audit Report which has not been approved by assessee can be revised. However after it has been approved by the assessee, it should not be revised. However, there is no restriction by the utility, as of now, to upload revised xml. So we should take due care, so that correct data is uploaded in the first instance itself. However, members may kindly note that, all the xml files uploaded will be there in their domain.

OFFLINE FILED TAX AUDIT REPORT TO BE SUBMITTED ONLINE AGAIN?

Q23. I have uploaded 5 returns without uploading tax audit as it was required to submit offline at that time. Should we submit these again online?

Ans. No, you are not required to submit IT Return online again. However, kindly ensure that Tax audit Report is duly uploaded within due date.

RESPONSIBILITY OF TAX AUDITOR FOR DELAY IN UPLOADING

Q24. Is tax auditor responsible for delay in uploading of Tax Audit Report?

Ans.  Guidance Note on Tax Audit states that normally, it is the professional duty of the CA to ensure that the audit accepted by him is completed before the due date. Hence, yes, if delay is attributable to his part.

PENALTY FOR NON FURNISHING OF REPORT & WAIVER OF PENALTY FOR NON FURNISHING

Q25. What are the penalties for non furnishing a Tax Audit Report? What are the circumstances under which penalty cannot be imposed for non furnishing of Tax Audit Report?

Ans. Sec 271B states that, if any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred fifty thousand rupees, whichever is less.

As per section 273B, no penalty is imposable under section 271B on the assessee for the above failure if he proves that there was reasonable cause for the said failure. The onus of proving reasonable cause is on the assessee. Some of the instances where Tribunals/Courts have accepted as "reasonable cause" are as follows:

(a) Resignation of the tax auditor and consequent delay;

(b) Bona fide interpretation of the term `turnover' based on expert advice;

(c) Death or physical inability of the partner in charge of the accounts;

(d) Labour problems such as strike, lock out for a long period, etc.;

(e) Loss of accounts because of fire, theft, etc. beyond the control of the assessee;

(f) Non-availability of accounts on account of seizure;

(g) Natural calamities, commotion, etc.

FORMAT OF MAINTENANCE OF RECORDS OF TAX AUDIT

Q26. What is the format for maintaining records of Tax Audit Assignments?

Ans. Record of Tax Audit Assignments

1. Name of the Member accepting the assignment

2. Membership No.

3. Financial year of audit acceptance

4. Name and Registration No. of the firm/ firms of which the member is a proprietor or partner.

Sl. No.	Name of the Auditee	AY of the Auditee	Date of Appointment	Date of acceptance	Name of the firm on whose behalf the member has accepted the assignment	Date of communication with the previous auditor (applicable)
1	2	3	4	5	6	7

COMMUNICATION WITH PREVIOUS AUDITOR  &  ACCEPTANCE  IF UNDISPUTED FEES OF PREVIOUS AUDITOR NOT PAID

Q27. Is communication with the previous tax auditor necessary? Should a CA accept Tax audit where undisputed fees of previous auditor have not been paid?

Ans. Yes, communication with the previous tax auditor necessary. As per Council Guidelines No.1-CA(7)/02/2008, dated 8th August,2008, "a member of the Institute in practice shall not accept the appointment as auditor of an entity in case the undisputed audit fee of another CA for carrying out the statutory audit under the Companies Act, 1956 or various other statutes has not been paid"

PROBLEM IN GETTING ACTIVATION LINK/SMS FOR COMPLETING REGISTRATION

Q28. A Chartered Accountant in practice registered himself with his DSC in the e-filing website. But he neither received any sms nor any activation link in his e-mail. When he tried again to register himself, the message was that he is already registered. But when he tried to log in, it was informed that the link is not activated. What should he do now?

Ans. Go to login page and enter your User ID i.e.  ARCA(Mem. No.) e.g. ARCA300700 and enter your Password as given then click on "Resend Activation Link". You will get a mail from the site. If it does not work then reset your Password by sending mail at validate@incometaxindia.gov.in.

Author can be reached at moreassociate@gmail.com

 CONCEALMENT PENALTY - CONCURRENT ACT OF CONCEALMENT - GOLDEN RULE ON DOCTRINE OF CONTINUITY - ADVANTAGE ASSESSEE

 

Introduction

1. Penalty is a hot subject. The AO can initiate penalty in one stroke by issuing such direction in the assessment order and that shall be sufficient to denote his satisfaction after insertion of sub-section (1B) in section 271 w.r.e.f. 1.4.1989. There are situations where the concealment could be collective or universal in nature, meaning thereby that the assessment order may showcase identical addition or disallowance in more than one year or successive years. Whether in such cases it would be possible to levy penalty in each of the years on a continuing basis or only in the initial year? More importantly, whether it is possible to levy penalty for concurrent offense of concealment under the Income-tax law? The doctrine of continuity offers an answer to this.

Chennai Bench of the ITAT applied the doctrine of continuation in the case of Dr. Bapuji Cherukuri v. Dy. CIT

2. In an interesting ruling of the Hon'ble Chennai ITAT in Dr. Bapuji Cherukuri v. Dy. CIT [2013] 33 taxmann.com 406 the bench applied the fundamental general rule on the doctrine of continuity to get advantage to the assessee, who in this case was slapped with concealment penalty in the six assessment years in concurrence for concealment on identical nature of undisclosed income. In this case the assessees being more than one doctor working in the Apollo Hospitals Ltd., were found to have not disclosed certain amounts received from the Hospital. In other words, the source of income was not doubted in this case but it was the fact of not accounting for such amounts in the returns of income.

Brief facts of the case

3. The department during the survey in respect of the hospital found that it had collected moneys from the patients and had not accounted for the same in their books. The hospital clarified that it had retained 10% of the unaccounted money in the form of provision for infrastructural facilities and the balance of 90% had been paid to the concerned doctors, including the assessees. This statement from the hospital led to reopening of the cases of the doctors who admitted of such non-declaration of incomes.

On the subject of penalty they pleaded that they had omitted to add such sums in their returned incomes as they were led by the genuine impression that all the amounts received by them from the hospital were included in the certificate issued by the hospital. In other words, these were sums on which the hospital did not deduct tax. Against alleged non-deduction of tax at source the hospital stated that it only acted as a collecting agent on behalf of the doctors.

The department failed to tax the hospital as per the decision of the Delhi Bench of the ITAT in Asstt. CIT v. Indraprastha Medical Corpn. Ltd. [2009] 33 SOT 261 (Delhi). In this case it had been the claim of the assessee that it provided only secretarial and chamber services (similar to infrastructural services) to the doctors and the hospital merely collected the fees on behalf of the respective doctors/consultants and that such fee was paid to doctors on a daily basis without any retention. Further, the hospital only charged Rs. 100 for the new patient's registration. It was also found that the cash receipts as professional fee were issued in the name of the doctors. The judgment went on to hold that there was no relationship of the service provider and service recipient between the consultants and the assessees. One wonders how facts could differ in the two cases, viz, one before Chennai Bench and the other before the Delhi Bench where one was citing some retention of 10% and the other was not retaining anything. Nonetheless, the doctor's statement in Chennai case played a role sufficient to nab the hospital under the law for non-deduction of tax at source.

Analysis of the case of Dr. Bapuji (supra)

4. The present facts in the case of Dr. Bapuji (supra) almost point to the fact that the doctors never did account for their share of income in their original returns of income, for which reason it was most desirable to impose a liability upon the hospitals for non-deduction of tax at source, especially on the basis of statement given by the doctors stating the genuine impression held by them of such amounts forming part of the certificate of tax deduction issued by the hospital. Had the hospital considered such amounts for tax withholding there would have been no concealment. Hope that in the next stage of litigation wisdom will prevail over technicalities in the matter of tax deduction at source.

On the subject of penalty in Dr. Bapuji case (supra) the Bench observed that the assessees-doctors who had been continuing with the practice of concealing identical nature of income for six years in concurrence could not be subjected to penalty in all the six assessment years. Taking note of the common rule on the Doctrine of Continuity in this case the Bench held that it was a case of collective concealment and confirmed penalty for the first year instead of for all six years involved. Conceptually, continuity implies some kind of unity in distinction to plurality, for which reason the act of concealment of identical income in six years is considered as one and the same act and more precisely, is referred to as collective concealment in all the six assessment years.

Conclusion

5. The principle of continuity (PC) is a rule of universal application. Therefore, in case of repeated additions of the same type of income an assessee can press for invoking of Doctrine of Continuity and Concurrence and get over with penalty in the successive years. This decision is laudable one and is going to unburden the task of revenue as well as of the assessee in general and save precious time and efforts of the Courts. At the same time it is expected of the CBDT to issue a direction in this regard to the AOs not to press demands in cases of concealment of a collective nature.

IT: Merely because there is an exemption order under section 10(23C), assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted

■■■

[2013] 36 taxmann.com 81 (Karnataka)

HIGH COURT OF KARNATAKA

Commissioner of Income-tax, Mangalore

v.

Manipal Academy of Higher Education (MAHE)*

N. KUMAR AND B. MANOHAR, JJ.

IT APPEAL NO. 1344 OF 2006†

APRIL  1, 2013 

Section 10(23C), read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Educational institutions [Conditions precedent] - Whether merely because there is an exemption order under section 10(23C), assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted - Held, yes - Assessee, a deemed university, claimed that its income was exempt under section 10(23C) and, consequently, claimed exemption under section 11 - But it failed to produce notification exempting tax under section 10(23C) - Assessing Officer proceeded to compute its income on premise that assessee did not have any exemption -He noticed that assessee had advanced a sum for purchase of property but during year no purchase was made and it remained as advance and held that said sum could not be treated as utilized for educational purpose and thus, assessee had violated section 11(5) - Meanwhile, CBDT extended exemption to assessee - Appellate Authority held that assessee was entitled to exemption under section 10(23C) but as regards infringement of section 11, he agreed with Assessing Officer - However, Tribunal held that exclusive jurisdiction to decide infringement of section 11 was with Board - Order granting exemption revealed that it was an conditional approval dependent upon assessee applying its income towards charitable objects - Moreover, two fact-finding authorities had recorded that assessee had violated section 11 - Whether since Tribunal committed serious error by ignoring said findings, approach of Tribunal could not be sustained and matter was to be set aside to Assessing Officer for re-adjudication - Held, yes [Para 13] [In favour of revenue]

FACTS

 

■		The assessee, a deemed university, claimed that its income was exempt under section 10(23C)(vi), consequently, it claimed exemption under section 11 but it failed to produce Notification granting exemption under section 10(23C).
■		The Assessing Officer proceeded with assessment on ground that assessee did not have exemption under section 10(23C)(vi).
■		Further, the Assessing Officer noticed that assessee had advanced a sum to a party for purchase of property but during year no purchase against advance had been made and said sum remained as advance and was not utilized towards any educational purpose and he rejected assessee's claim for exemption under section 11 and raising demand against assessee.
■		Meanwhile, CBDT granted exemption under section 10(23C) to assessee.
■		The Commissioner (Appeals) noticed that the Assessing Officer had not brought anything adverse to his notice regarding the fulfilment of the conditions as laid down in the order of exemption. Therefore, he proceeded to hold that the Assessee qualified for exemption under section 10(23C)(vi). But he agreed with the Assessing Officer in respect of infringement of provisions of section 11.
■		However, the Tribunal held that only the prescribed authority had the power to withdraw approval in case there was violation of the condition in approval provided by them. It did not give any finding regarding infringement of section 11(5) and held the assessee was entitled to the exemption under section 10(23C)(vi) and not liable to pay tax.
■		On further appeal:

HELD

 

■		In computing the total income of a previous year of any person, any income falling under section 10(23C)(vi) shall not be included. Before the assessee could claim the benefit of the said provision, the assessee should obtain an approval by the prescribed authority. In the instant case, the approval has been accorded by the prescribed authority. [Para 10]
■		As is clear from the said order, it is not an unconditional approval. It is subject to the conditions mentioned therein. The proviso to the said provision makes it clear that after obtaining the approval from the prescribed authority, if the assessee has not applied its income in accordance with the provisions contained in the third proviso then, the approval granted to such assessee is liable to be rescinded. However, before the prescribed authority rescinds such an approval, the assessee is entitled to a reasonable opportunity of showing cause against the proposed acts.
■		The third proviso to section 10(23) makes it very clear that if the assessee does not invest or deposit its funds, other than in the manner set out therein for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11, then the assessee is not entitled to the benefit of the said exemption.
■		If an assessee invests its funds in immovable property and satisfies one of the requirements of law, then he is entitled to the exemption as per the notification issued. Whether the assessee has complied with the conditions stipulated in the exemption order, before it could claim exemption is a matter, which has to be investigated by the assessing authority. It is only on the assessee satisfying the conditions stipulated in the exemption order, that it would be entitled to exemption. In the event there is a violation of the terms and conditions of the exemption order, the assessing authority would be justified in not extending the benefit of exemption but at the same time the assessing authority cannot ignore the order of exemption. Therefore, on enquiry if he is satisfied that the assessee is not entitled to exemption as he has violated the terms and conditions of exemption order, he has to bring the said fact to the notice of the prescribed authority. Thereafter, the prescribed authority is under an obligation to issue a show cause notice to the assessee to show cause, why the order of exemption should not be rescinded. After hearing the assessee, if the prescribed authority decides to rescind the exemption granted, they are at liberty to pass such an order and a copy of the said order is to be communicated both to the assessee as well as the assessing authority. It is on receipt of such an order rescinding the exemption order, that the assessing authority could proceed to assess the assessee and raise a demand for payment of tax. This is the procedure prescribed under the scheme of the Act. Therefore, merely because there is an exemption order, the assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted; question whether such conditions are fulfilled or not is a matter to be investigated by assessing authority. [Para 11]
■		In the instant case, on the day the assessment order was passed, this order of exemption was not there. Therefore, the Assessing Authority did not have the opportunity to bring the violations as recorded by them under section 11(5) of the Act. On that day, the assessing authority was justified in proceeding with the assessment. However, during the pendency of the appeal, the order of exemption was passed. The jurisdiction of the First Appellate Authority being continuation of the jurisdiction of the assessing authority, though the First Appellate Authority concurred with the finding recorded by the Assessing Authority with the continuation of jurisdiction under section 11(5), it committed a serious error in extending the benefit of exemption on the ground that it has not yet been rescinded. The First Appellate Authority had a duty to bring the said fact to the notice of the Prescribed Authority and await decision of the prescribed authority before passing an order on appeal. That was not done. On the contrary, ignoring the said violation, without waiting for the prescribed authority to look into the matter, it granted the exemption. In appeal, the Tribunal could have gone into the correctness of the finding recorded by both the authorities under section 11(5), but the Tribunal was of the view that it has no jurisdiction to go into the same. The reason given is, as long as the order of exemption stands and not rescinded, is the assessee is entitled to the said benefit. This approach is also erroneous. An assessee is entitled to exemption subject to the conditions stipulated in the said order. When two fact finding authorities recorded a categorical finding that there is violation of section 11(5), the Tribunal committed a serious error by ignoring the same holding that the assessee is entitled to the benefit. If the Tribunal was not inclined to go into the merits of the case, the proper course would have been to set-aside the order of the authorities, remit the matter back to the Assessing Authority to take note of the exemption and then to see whether the violation of section 11(5) is recorded by it earlier, still holds good and then pass appropriate orders in the light of the aforesaid provisions of law. Therefore, the approach of the Tribunal cannot be countenanced and sustained. Therefore, the appropriate course would be to set aside the order passed by all the authorities and remit the matter back to the assessing authority. [Para 12]

CASE REVIEW

 

Asstt. CIT v. Manipal Academy of Higher Education (MAHE) [2006] 9 SOT 284 (Bang) (para 12) reversed.

E.R. Indrakumar and E.I. Sanmathi for the Appellant. S. Parthasarathi and S.Gopalkrishna for the Respondent.

JUDGMENT

 

N. Kumar, J. - This appeal is by the Revenue against the order dated 21.04.2006 passed by the Tribunal declining to go into the question whether there is an infringement of Section 11(5) of the Income Tax Act, 1961 (for short, hereinafter referred to as 'the Act') as the Board has already approved the Assessee under Section 10(23C)(vi) of the Act.

2. The Assessee M/s. Manipal Academy of Higher Education (MAHE) filed a return of income on 31.10.2001. The assessee claimed a sum of Rs. 212,74,25,714/- as exempt from income tax under Section 10(23C)(vi) of the Act. The Government Notification exempting the assessee's income under Section 10(23C)(vi) of the Act was not produced before the Assessing Officer. Therefore, he proceeded with the assessment on the premise that the Assessee is not having any exemption. He assessed the total income at Rs. 47,03,58,078/- and raised a demand for Rs. 24,32,30,437/- including interest and surcharge. In the said Assessment Order, he recorded a finding that. the assessee had advanced a sum of Rs. 37 crores to Sri. Dayananda Pai for purchase of property. During the year no purchase of property had been made and it remained as advance. Therefore, the said advance amount paid cannot be treated as utilized for educational purpose. Aggrieved by the said order, the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Though the Appellate Authority agreed with the said finding of fact, in view of the notification under Section 10(23C)(vi) of the Act, he held the assessee is entitled to exemption and therefore, allowed the appeal. Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal. The assessee also preferred a Cross-objection.

3. The Tribunal held that as the Board has already approved the Institution under Section 10(23C)(vi) of the Act, its income is exempted under that Section. Since the Income Tax Authorities directed the prescribed authority to withdraw the approval in case there is violation of the condition by them while granting, approval, it is not necessary for them to record a finding that there has been any violation of the conditions mentioned while giving approval. Therefore, the Tribunal refrained from giving any finding regarding infringement of Section 11(5) of the Act as the exclusive jurisdiction to decide such infringement is with the Board. Accordingly, the Tribunal held that the Institution is exempted under Section 10(23C)(vi) as approved by the Board and not liable to tax. In view of the said finding, the Cross-objection was also dismissed. Aggrieved by the said order of the Tribunal, the Revenue is in appeal.

4. Sri. E.R. Indrakumar, learned Senior Counsel appearing for the Revenue assailing the order of the Tribunal contended that the approval is given by the Board subject to the terms and conditions mentioned in the said order of approval. There is a violation of those terms and conditions. Section 11(5) of the Act has been contravened. There is a concurrent finding recorded by the Assessing Authority as well as the First Appellate Authority regarding the contravention. Under those circumstances, the Tribunal was not justified in ignoring the said concurrent finding and granting exemption solely on the ground of notification issued by the Board, which has not been withdrawn. Therefore, he submits that a case for interference is made out.

5. Per contra, Sri. Parthasarathi, learned counsel appearing for the Assessee supported the impugned order.

6. At the time of admission, this Court had framed three substantial questions of law. After hearing the learned counsel appearing for the parties, with their consent, the substantial question of law is refrained as under:

"Whether the Tribunal was justified in declining to go into the correctness of the finding regarding infringement under Section 11(5) of the Act on the ground that the notification issued granting exemption under Section 10(23C)(vi) of the Act is not withdrawn?"

7. The Assessee is a deemed University and it runs several Educational Institutions. The Assessee claims that its income is exempted under Section 10(23C)(vi) of the Act. They did not produce the Notification exempting tax under Section 10(23C)(vi) of the Act. Therefore, the Assessing Authority proceeded with the Assessment on the ground that the Assessee does not have exemption under Section 10(23C)(vi) of the Act. The Assessee also claimed computation of income under Sections 11 and 12 of the Act. The Assessing Authority noticed that the Assessee has made an advance of Rs. 37 crores to one P. Dayananda Pai for purchase of property. During the year, no purchase as against the advance has been made. The Assessee claimed that the advance for purchase of property is an admissible investment under Section 11(5) of the Act. During the year, neither the property was registered nor possession of the property was taken over by the Assessee. In the circumstances, he held the Assessee cannot claim ownership rights with respect to this property and that the amount continues to be an advance only as on 31.03.2001. Therefore, the claim of the Assessee for computation of income under Sections 11 and 12 of the Act was also rejected. Therefore, he proceeded to pass an order under Section 143(3) of the Act and raised a demand for Rs. 24,32,30,437/-. Aggrieved by the said order, the Assessee preferred an appeal to the Commissioner of Income Tax (Appeals).

8. During the pendency of this appeal, the Central Board of Direct Taxes vide their order dated 02.07.2004 approved the assessee - Trust for the purpose of Section 10(23C)(vi) of the Act for assessment years 1999-2000 to 2001-2002. A copy of the order of the Board was placed before the Appellate Authority. He noticed that the Assessing Officer has not brought anything adverse to his notice regarding the fulfilment of the conditions as laid down in the order of exemption. Therefore, he proceeded to hold that the Assessee-Academy qualifies for exemption under Section 10(23C)(vi) of the Act. Insofar as the payment of advance of Rs. 37 crores to Sri. P. Dayananda Pai, for the purchase of immovable property as an investment under Section 11(5) of the Act is concerned, he was of the view that the amount of Rs.37 crores has actually remained as an advance only during the year under consideration, as the same could not be utilized and invested for purchase of the land for the purposes of the Academy. Therefore, he recorded a finding that he is in complete agreement with the Assessing Officer that the Assessee's claim in the above matter cannot be accepted as there has been a clear infringement of the provisions contained under Section 11(5) of the Act. In view of the notification issued by the Board under Section 10(23C)(vi) of the Act and the fulfilment of the conditions laid down therein, the entire income of the assessee was held to qualify for exemption under the said provision. Accordingly, the appeal was partly allowed. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal.

9. The Tribunal after narrating the aforesaid facts was of the view that since the Board has already approved the Institution under Section 10(23C)(vi) of the Act, its income is exempted under the Section since only the prescribed authority has the power to withdraw approval in case there is violation of the condition provided by them. It is not necessary for the Tribunal to record a finding that there has been violation of the conditions while giving approval. Therefore, on merits, the Tribunal refrained from, giving any finding regarding infringement of Section 11(5) of the Act as such jurisdiction is with the Board. Therefore, it also held that the Assessee is entitled to the exemption and not liable to pay tax.

Section 10(23C)(vi) of the Act reads as under:

"10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

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(23C) any income received by any person on behalf of-

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**

(vi)

any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or"

10. In computing the total income of a previous year of any person any income falling under Section 10(23C)(vi) shall not be included. Before the assessee could claim the benefit of the said provision, the assessee should obtain an approval by the prescribed authority. In the instant case, the approval has been accorded by the prescribed authority which reads as under:

"ORDER

In exercise of powers conferred by the sub-clause (vi) of clause (23C) of Section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby approves "Manipal Academy of Higher Education, Manipal" for assessment year 1999-2000 to 2001-2002 for the purpose of the said sub-clause subject to the following conditions namely:-

(i)		the assessee will apply its income, or accumulate for application, wholly and exclusively to the objects for which it is established;
(ii)		the assessee will not invest or deposit its fund (other than voluntary contributions received and maintained in the form of jewellery, furniture etc.) for any period during the previous years relevant to the assessment years mentioned above other wise than in any one or more of the forms or modes specified in sub-section (5) of Section 11;
(iii)		this order will not apply in relation to any Income being profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of account are maintained in respect of such business;
(iv)		the assessee will regularly file its return of Income before the Income-tax authority in accordance with the provisions of the Income-tax Act, 1961;
(v)		that in the event of dissolution, its surplus and the assets will be given to a charitable organisation with similar objectives."

As is clear from the said order, it is not an unconditional approval. It is subject to the conditions mentioned therein. The proviso to the said provision makes it clear that after obtaining the approval from the prescribed authority, if the assessee has not applied its income in accordance with the provisions contained in the third proviso then, the approval granted to such assessee is liable to be rescinded. However, before the prescribed authority rescinds such an approval, the assessee is entitled to a reasonable opportunity of showing cause against the proposed acts. The third proviso reads as under:

"Provided also that the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via)-

(a)		applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and
(b)		does not invest or deposit its funds, other than-

(i)		any assets held by the fund, trust or institution or any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of the fund, trust or institution or any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1973;
(ia)		any asset, being equity shares of a public company, held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998;
(ii)		any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the fund, trust or institution or any university or other educational institution or any hospital or other medical institution before the 1st day of March, 1983;
(iii)		any accretion to the shares, forming part of the corpus mentioned in sub-clause (i) and sub-clause (ia), by way of bonus shares allotted to the fund, trust or institution or any university or other educational institution or any hospital or other medical institution;
(iv)		voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of Section 11."

The third proviso makes it very clear that if the assessee does not invest or deposit its funds, other than in the manner set out therein for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-Section (5) of Section 11, then the assessee is not entitled to the benefit of the said exemption. Section 11(5) of the Act reads as under:

"11(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :-

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**

**

(x) investment in immovable property.

Explanation.—"Immovable property" does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;"

11. A reading of the aforesaid provisions makes it very clear that if an assessee invests its funds in immovable property as aforesaid and satisfies one of the requirements of law, then he is entitled to the exemption as per the notification issued. Whether the assessee has complied with the conditions stipulated in the exemption order, before it could claim exemption is a matter, which has to be investigated by the Assessing Authority. It is only on the Assessee satisfying the conditions stipulated in the exemption order, it would be entitled to exemption. In the event there is a violation of the terms and conditions of the exemption order, the Assessing Authority would be justified in not extending the benefit of exemption but at the same time the Assessing Authority cannot ignore the order of exemption. Therefore, on enquiry if he is satisfied that the assessee is not entitled to exemption as he has violated the terms and conditions of exemption order, he has to bring the said fact to the notice of the prescribed authority. Thereafter, the prescribed authority is under an obligation to issue a show cause notice to the assessee to show-cause, why the order of exemption should not be rescinded. After hearing the assessee, if the prescribed authority decides to rescind the exemption granted, they are at liberty to pass such an order and a copy of the said order is to be communicated both to the assessee as well as the Assessing Authority. It is on receipt of such an order rescinding the exemption order, the Assessing Authority could proceed to assess the assessee and raise a demand for payment of tax. This is the procedure prescribed under the scheme of the Act. Therefore, merely because there is an exemption order, the assessee is not entitled to exemption unless he satisfies the conditions subject to which the said exemption is granted. The question whether such conditions are fulfilled or not is a matter to be investigated by the Assessing Authority.

12. In the instant case, on the day the assessment order was passed, this order of exemption was not there. Therefore, the Assessing Authority did not have the opportunity to bring the violations as recorded by them under Section 11(5) of the Act. On that day, the Assessing Authority was justified in proceeding with the assessment. However, during the pendency of the appeal, the order of exemption was passed. The jurisdiction of the First Appellate Authority being continuation of the jurisdiction of the Assessing Authority, though the First Appellate Authority concurred with the finding recorded by the Assessing Authority with the continuation of jurisdiction under Section 11(5) of the Act, it committed a serious error in extending the benefit of exemption on the ground that it has not yet been rescinded. The First Appellate Authority had a duty to bring the said fact to the notice of the Prescribed Authority and await decision of the prescribed authority before passing an order on appeal. That was not done. On the contrary, ignoring the said violation, without waiting for the prescribed authority to look into the matter, it granted the exemption. In appeal, the Tribunal could have gone into the correctness of the finding recorded by both the authorities under Section 11(5) of the Act, but the Tribunal was of the view that it has no jurisdiction to go into the same. The reason given is, as long as the order of exemption stands and not rescinded, the assessee is entitled to the said benefit. This approach is also erroneous. An assessee is entitled to exemption subject to the conditions stipulated in the said order. When two fact finding authorities recorded a categorical finding that there is violation of Section 11 (5) of the Act, the Tribunal committed a serious error by ignoring the same holding that the assessee is entitled to the benefit. If the Tribunal was not inclined to go into the merits of the case, the proper course would have been to set-aside the order of the authorities, remit the matter back to the Assessing Authority to take note of the exemption and then to see whether the violation of Section 11(5) of the Act is recorded by it earlier, still holds good and then pass appropriate orders in the light of the aforesaid provisions of law. Therefore, the approach of the Tribunal cannot be countenanced and sustained. Therefore, the appropriate course would be to set-aside the order passed by all the authorities, remit the matter back to the Assessing Authority.

13. The Assessing Authority shall on the facts available as on today shall go into the question whether the assessee has violated the terms and conditions subject to which, exemption was granted. If it records a finding that there is violation of Section 11(5) of the Act,. then it shall bring the said violation to the notice of the prescribed authority. On such violations being brought to the notice of the prescribed authority, the prescribed authority shall issue a show cause notice to the assessee to show cause why the order of exemption should not be rescinded and after hearing him, to pass orders on merits and in accordance with law. If the prescribed authority decides to rescind the order of exemption granted earlier, it shall do so and shall send a copy of the same to the Assessing Authority as well as to the assessee. On receipt of such order, the Assessing Authority shall proceed to frame the assessment order and proceed in accordance with law. That would meet the ends of justice. Hence, we pass the following order:

(a)		Appeal is allowed.
(b)		The substantial question of law is answered in favour of the Revenue and against the assessee.
(c)		The entire matter is remitted to the Assessing authority to pass appropriate orders in accordance with law keeping in mind the observations made in the order supra.

Parties to bear their own costs.

POOJA

 [2013] 36 taxmann.com 85  (Article)

Seized Cash - Like a monkey on assessee's back

DR. RAJ K. AGARWAL CA

DR. RAKESH GUPTA Ex-Member, ITAT

Introduction

1. Finance Act, 2013 has inserted Explanation 2 to section 132B which reads as under:-

"For the removal of doubts, it is thereby declared that the 'existing liability' does not include advance tax payable in accordance with the provision of Part C of Chapter XVII".

Section 132B of the Income-tax Act prescribes the provisions regarding the application of seized assets, including cash seized during the course of income-tax search conducted under section 132 or requisitioned under section 132A of the Act. It prescribes, inter alia, that the seized assets/cash can be utilized for the purpose of recovery and adjustment of the amount of any existing tax liability and the amount of the liability determined on completion of the assessment in pursuance of search under section 153A.

Earlier to the insertion under reference, there used to be a controversy as to whether 'existing tax liability' would include the advance tax payable by the assessee relating to the year of search? In several judicial decisions rendered by the Courts, it was held that cash seized could be adjusted towards the advance tax payable by the assessee on request to this effect to be made by the assessee. In such cases, it was further held that interest under sections 234B and 234C had not been charged from the assessee from the date, such request for adjustment of the seized cash towards advance tax liability was made by the assessee. Reference may be made to the cases of CIT v. Arun Kapoor [2012] 20 taxmann.com 431 (Punj. & Har.), Vishwanath Khanna v. Union of India [2012] 20 taxmann.com 828 (Delhi) and CITv. K. K. Marketing [2005] 278 ITR 596 (Delhi).

It seems that the Finance Act, 2013 has inserted the above referred to Explanation 2 to section 132B, to nullify the effect of the above judicial decisions consistently rendered by various benches of the Tribunal & the different High Courts.

The impact of the above amendment as inserted by the said Explanation 2 shall, however, be quite harsh on the assessees who have been searched under section 132 of the Act or in respect of whom requisition has been made under section 132A.

The above Explanation shall have the effect that the seized cash cannot be claimed as payment of advance tax by the searched person in the return of income to be filed under section 153A/139. He shall be required to pay tax separately towards the tax liability relating to the undisclosed income declared during the course of search.

After the insertion of the above Explanation, even in a case, say when cash of Rs. 10 crores is found and seized during the course of search which is declared by assessee as his undisclosed income during the statement recorded under section 132(4), the searched person shall be required to pay tax separately on the above amount of undisclosed income of Rs.10 crores to be declared in his return of income. The cash seized during search shall not be permitted to be adjusted towards tax liability relating to such undisclosed income declared during the course of search. It would imply that cash seized shall remain as an additional security with the income-tax department to be adjusted against any other tax demand which may be created on completion of assessments of search cases.

The Explanation 2 to section 132B is quite harsh

2. The above provision is quite harsh in nature. It will discourage the searched person from making declaration of the undisclosed income during the course of search. On the one side there remains a lot of persuasion/pressure from the search team for making declaration of the undisclosed income during the course of search as has been practically observed, whereas on the other side insertion of such an Explanationwould discourage the searched person from making a declaration of the undisclosed income which may ultimately prove the search not to be so productive to the income-tax department and may further increase the litigation.

In case the assessee makes declaration of the undisclosed income during the course of search and the unaccounted assets including cash are seized by the search team, a practical problem would arise as to wherefrom the assessee may bring further funds to pay the tax liability relating to such undisclosed income?

In the case of Asstt. CIT v. Raghu Nandan Lal [2002] 82 ITD 436 (Chd.), bench of Hon'ble Tribunal has held that the seizure of asset is certainly a recovery from the assessee. There is no basic difference between "payment" or "recovery" through seizure and other modes of recovery provided in the statute.

From the standpoint of the income-tax department, there may be justification for all this inasmuch as the assets in kind seized during the course of search are not applied and adjusted towards the advance tax liability. Amount of cash seized is also of the same character and, therefore, cash should also not be permitted to be adjusted towards advance tax.

Income-tax return to be treated as Defective Return under section 139(9) for non-payment of tax

3. The Finance Act, 2013 has simultaneously made amendment to sub-section (9) of section 139 by way of insertion of clause (aa) providing that Income-tax Return filed by the assessee shall be regarded as defective in case the tax together with interest, if any, payable in accordance with the provision of section 140A, has not been paid on or before the date of furnishing of the return. Further, section 139(9) provides in case of defective return that if the defect is not cured within the time-limit allowed by the Assessing Officer, the return shall be treated as invalid return and provisions of this Act shall apply as if the assessee has failed to furnish the return.

It would now imply in view of the insertion of the Explanation 2 to section 132B that in case assessee files his return of income after search under section 153A/139 and claims adjustment of cash seized as advance tax paid and adjusts the cash seized towards his tax liability and does not pay the tax separately, it shall be treated as if no return has been filed by the assessee for the particular assessment year and he will have to face all the consequences for non-filing of return of income as prescribed under the Income-tax Act.

Enhanced penalty under section 271AAB

4. In the case of income-tax search under section 132 initiated on or after 1st July, 2012, assessee would be covered by the penalty provision relating to Specified Previous Year as contained under section 271AAB. This section provides, inter alia, that in case of declaration of the undisclosed income by the searched person during statement recorded under section 132(4) and further fulfilling other conditions as prescribed therein, penalty at the rate of 10 per cent of the undisclosed income is leviable. This concessional rate of penalty is applicable only when assessee pays the tax in respect of the undisclosed income and furnishes the return of income declaring such undisclosed income therein, on or before due date of filing of return of income under section 139/153A.

In case assessee does not pay the tax due in respect of the undisclosed income before the due date of filing of return of income, he may be liable to pay penalty at the rate of 30 per cent to 90 per cent of the undisclosed income.

It would now imply in view of the Explanation 2 to section 132B that in case assessee files his return of income claiming adjustment of the cash seized towards the advance tax liability, penalty under section 271AAB, even in a case when the declaration of undisclosed income is made during the course of search and other conditions mentioned as prescribed therein having been complied with, may be imposed at the rate of 30 per cent to 90 per cent of the undisclosed income.

Whether applicability of Explanation 2 is prospective or retrospective?

5. Explanation 2 as inserted by the Finance Act, 2013 has been made applicable with effect from 1-6-2013. The said Explanation has been inserted in the form of a clarification stating that for the removal of doubts, it is hereby declared that the 'existing liability' does not include advance tax payable. It may imply that the said Explanation is clarificatory in nature and shall be applicable as if it was there right from the date when section 132B was brought on the statute.

Such an interpretation will create further complications for the assessees in whose cases income-tax search was held in the past and cash seized was claimed in the return of income as advance tax paid. In such cases, assessees may be liable to be penalized under section 271AAA or 271AAB or other provisions of the Act in much harsher manner, as explained in earlier part of this article. In our opinion, there is a need to bring clarification stating that the above Explanation shall be applicable prospectively, i.e., in respect of searches conducted on or after 1-6-2013.

Whether "existing liability" would include self assessment tax?

6. Explanation 2 to section 132B states that the existing liability does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII. A question may arise as to whether self assessment tax payable can be distinguished from the advance tax payable and whether the above Explanation shall be applicable for self assessment tax also, meaning thereby as to whether existing liability under section 132B may include self assessment tax payable by the assessee at the time of filing of return of income or not?

Under the Income-tax Act, 1961, provisions regarding payment of self assessment tax are contained in Chapter XIV under section 140A, whileas the provisions regarding payment of advance tax are contained in Part C of Chapter XVII under section 207 to section 219. The requirement of payment of advance tax before the end of the relevant Financial Year is on estimated income relating to that F.Y. while as self assessment tax is paid after the end of the F.Y. at the time of filing of return of income for that F.Y. on the basis of actual tax liability determined by the assessee relating to the income earned during the previous year. Thus, the nature of self assessment tax and advance tax is different and the said Explanation 2 has specifically referred to and covered only advance tax payable. Therefore, it can be argued that self assessment tax is of distinct nature and cannot be brought within the ambit of the said Explanation 2 to section 132B.

In case the above argument is accepted and the Courts read down the interpretation of Explanation 2 in the above manner, particularly keeping in view the harshness of the provision as discussed earlier, the searched person can still get the benefit of adjustment of cash seized to be adjusted as self assessment tax paid at the time of filing of the return of income. In such a situation, the assessee shall be adversely affected only regarding extra burden of interest, since credit of self assessment tax can be taken not from the date of cash seized but can be taken at the time of filing of the return of income.

On the other hand an argument from the side of Revenue may be advanced that advance tax payable and self assessment tax payable are of the similar nature which are determined by the assessee himself and cannot be covered within the meaning of existing liability under section 132B. Existing liability envisaged under section 132B is the liability outstanding which was earlier determined by the tax authorities by passing any order under the Income-tax Act or other allied Acts. When the Legislature has excluded advance tax payable from the scope of existing liability, self assessment tax payable can also not be part of existing liability.

Conclusion

7. The above discussion shows that the new provision would create fresh line of litigation. Until suitable clarification is made in this regard, the assessee would remain in dilemma as to whether cash seized should even be adjusted as tax paid at the time of filing of return.

A provision such as Explanation 2 to section 132B under the Income-tax Act providing that cash seized during search representing the undisclosed income of the assessee cannot be treated as advance tax paid by the assessee, may stand to the test of constitutional validity, but having regard to harsh nature and consequences flowing therefrom, the High Courts may read down the above provision so as to mitigate the impact of such a harsh provision.

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IT: Where hearing was adjourned to await order of Special Bench of ITAT on same issue, it could not be held that assessee had sought adjournment by pointing out such fact, and thus flouted stay order

IT: Tribunal has power to order refund of amounts collected by revenue in violation of stay order

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[2013] 36 taxmann.com 46 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'I'

Motorola Solutions India (P.) Ltd.

v.

Deputy Commissioner of Income-tax, Circle-2*

S.V. MEHROTRA, ACCOUNTANT MEMBER 
AND SMT. DIVA SINGH, JUDICIAL MEMBER

INTERIM ORDER IN IT APPEAL NO. 5797 (DELHI) OF 2012
[ASSESSMENT YEAR 2008-09]

APRIL  10, 2013 

Section 220, read with sections 221 and 254, of the Income-tax Act, 1961 - Collection and recovery of tax - When tax payable and when assessee deemed in default [Stay of demand] - Assessment year 2008-09 - Demand raised against assessee was stayed on condition that assessee would not seek adjournment - Whether, where Division Bench of ITAT adjourned hearing to await order of Special Bench of ITAT on same specific issue, which fact was pointed out by assessee, it could not be held that assessee had sought adjournment and thus flouted stay order - Held, yes - Whether, on the contrary, revenue had flouted said stay order, though on bona fide belief, by issuing notices under sections 220 and 221 for recovery of tax - Held, yes - Whether, therefore, Tribunal had power to order refund of amounts collected by revenue in violation of stay order - Held, yes [Para 15] [In favour of assessee]

FACTS

 

■		In present case, the Tribunal had passed a stay order in respect of demand raised on assessee on condition that assessee should deposit Rs. 2.50 crores and furnish a bank guarantee. Also, the assessee could not seek any adjournment. If the assessee did not comply with the conditions, the stay would be cancelled and entire outstanding demand would be recoverable.
■		During the hearing, the assessee pointed out that the same issue was subject matter of consideration by the special bench and the different benches of the Tribunal were awaiting the order of the special bench. Therefore, the division bench adjourned the hearing. The Assessing Officer held that the assessee had flouted the stay order by seeking adjournment, and he, therefore, recovered the outstanding demand by issuing notices under section 221(1) and 226(3).
■		On assessee's appeal:

HELD

 

Whether stay order had been flouted by assessee

■		It is not disputed that the conditions in regard to the deposit of Rs. 2.50 crores and furnishing of bank guarantee were fully complied with by the assessee. [Para 11.1]
■		The record shows that on 16-1-2013, the appeal was adjourned. The adjournment was made in conformity with judicial discipline and judicial propriety, wherein the issues in the appeal could not be decided as the order of the special bench on the same issue, namely AMP (Advertising, Marketing and Promotion) expenses was awaited as special bench (larger bench consisting of 3 members) was constituted specifically for the said purpose and order was awaited. [Para 11.2]
■		It is a matter of record that the factum of the issue being a subject matter of consideration by the special bench was pointed out on behalf of the assessee. However, mere mention of the fact cannot be said to be an act of seeking adjournment as the said fact in all fairness could have been pointed out by either side. The advocates representing the respective sides before the Court/Tribunal are expected to 'act as officers of the Court'. As such they are duty bound to assist the Court in the discharge of its duties and obligations. In fact, if none of the sides had pointed out to the bench, the division bench on its own motion, on a bare perusal of the grounds raised before the Bench, would have had no alternative but to itself suo motu adjourn the appeal, as judicial propriety, judicial decorum and judicial discipline mandates that when the bench is having knowledge of the fact that the specific issue is not being proceeded with by different benches of the ITAT and they are awaiting the order of the special bench constituted of three Members, it is appropriate for the division bench to await the order. As such this could not have been considered that adjournment was sought by the assessee. [Para 11.3]
■		Accordingly, since no adjournment was sought by the assessee, the order of the ITAT passed in the stay petition has not been flouted by the assessee. [Para 11.4]

Whether action of revenue was bona fide

■		The stay order passed by the Tribunal was flouted by the department. [Para 12.1]
■		On examination and considering the arguments advanced, it is held that the action was bona fide as the Field Officers acted on a bona fidebelief that they were required to do so. The field Officers were able to show that efforts were made on their part through some inspector to obtain information in regard to the adjournment on 16-1-2013. However, whether any order was passed thereon could not be ascertained and confusion occurred on a non-understanding of the relevance of certain wordings. Had the propriety of division bench awaiting the special bench on the very same issue been given due care and consideration, the situation may not have occurred. Having thus observed, it is held that the action of the departmental officers was bona fide. [Para 12.2]

Whether Tribunal has power to direct refund

■		On a consideration of a catena of orders of the Tribunal and judgments rendered by the Apex Court and various High Courts, it is found that the Tribunal has the power to direct refund. [Para 13.1]
■		The power of the Tribunal is of widest amplitude in dealing with the appeals before it and that it has the power of doing all such acts or employing such means as are essentially necessary to its execution. Ordinarily, when the demands gets collected, the Tribunal does not interfere. Unfortunately in the facts of the present case, the action of the Assessing Officer to effect recoveries was clearly misplaced and apparently on a misunderstanding of the actual position in regard to the functioning of the ITAT, namely that judicial propriety required the division bench to await the order of a larger bench on the very same issue. Considering section 254, it is seen that under sub-section (1) of the same, the Tribunal is empowered after hearing the parties to pass such orders 'thereon' as it thinks fit. 'Thereon' refers to subject-matter of appeal pending before the Tribunal and has been expanded to include passing any orders in rendering justice 'thereon'. [Para 13.2]
■		Thus, on a consideration of the sections 254, 255 and 131, it is held that the Tribunal has the power to pass such appropriate orders in the facts and circumstances of each case to maintain judicial balance between the parties. As such, section 254 would include the power to grant stay which is incidental and ancillary and while exercising the powers to grant stay, the Tribunal would be having all the powers to grant stay in the nature of prohibitory, mandatory or directory to order for refund of the amount recovered by the revenue in appropriate cases where such directions are warranted. [Para 13.3]

Conclusion

■		Since the bank guarantee furnished by the assessee was in the possession of the department, the interest of the revenue is secured. [Para 14]
■		Accordingly, the petition of the assessee is allowed. The revenue is directed to refund the amounts collected in violation of the stay order. [Para 15]

CASES REFERRED TO

 

ITO v. M.K. Mohd. Kunhi [1969] 71 ITR 815 (SC)(para 1), CIT v. Bansi Dhar & Sons [1986] 157 ITR 665/24 Taxman 11 (para 13.2),Mahindra and Mahindra Ltd. v. Union of India [1992] 59 ELT 505 (para 13.2) and Susanta Kumar Nayak v. UOI [1990] 185 ITR 627 (Cal.)(para 16).

C.S. Aggarwal, Himanshu Shekhar Sinha, Rajiv Anand, Sujit Parakha, Vipin Sharma and Santdas Wadhwani for the Appellant. Peeyush Jain for the Respondent.

ORDER

 

Diva Singh, Judicial Member - This application has been moved by the assessee in ITA No.-5797/Del/2013 in peculiar circumstances invoking the provisions of section 151 CPC in terms of judgment of Supreme Court in ITO v. M.K. Mohd. Kunhi [1969] 71 ITR 815 at 819, praying for a refund of the amount recovered by the revenue in alleged violation of a Stay order dated 13-12-2012 passed by this Tribunal in Stay Petition No.273/Del/2012 in the said Appeal. While avoiding the danger of over elaboration at the expense of clarity, in contrast to the opposite extreme of paucity and ambiguity of information on why and under what circumstances this application has been moved, it would be true and fair that the essential facts are first set out in a form it can be properly and readily appreciated.

2. In the case of the assessee, order was passed in the stay petition No- 273/Del/2012 in ITA No.-5797/Del/2013 which was disposed in the following manner :-

"4. In consideration of the application of the assessee in the light of rival submissions and material on record, we grant of stay recovery, subject to condition that assessee shall deposit Rs.2.50 crores on or before 21-12-2012 and shall furnish bank guarantee in the amount involved for which MAP application has been filed, on or before 31-12-2012, for a period of 180 days or disposal of the appeal/MAP application, whichever is earlier. However, assessee shall not seek any adjournment and get finalized the appeal fixed for hearing on 13-01-2013 or any subsequent date. In case assessee seeks adjournment or commit default in making payment or furnish bank guarantee within the stipulated time, the accommodation herein granted shall stand automatically cancelled and entire outstanding demand would be recoverable as per law."

3. Consequent thereto, the appeal of the assessee came up for hearing on 16-01-2013 (in the order passed in the stay petition the date noted is 13-01-2013). On the said date, the record shows that the appeal was adjourned by the Co- ordinate Bench with the following noting :-

"Ld. Counsel for the assessee contends that the appeal involved AMP issue on which the Special Bench order in the case of the LG Electronics is awaited. Adjourned to 16-4-2013".

3.1 However on the receipt of notices u/s 221(1) dated 22-03-2013 to the assessee and notice u/s 226(3) received by the assessee's bank, the assessee approached the Tribunal seeking an order barring the department from collection of amounts stayed by the Tribunal. On the said request the following administrative order was passed by the Senior Member:

"Put up before "I" Bench for 14-4-2013

S/d

U.B.S. Bedi

28/03/2013"

3.2 As a result of this, the Stay petition No-273/Del/2012 came to be listed for hearing on 01-04-2013. Since it was considered appropriate to have an effective response of the department , the hearing was adjourned to 02-04-2013.

3.3 On the said date on noting that the cause list showed that what was listed was an already disposed Stay petition No-273/Del/2012 it was indicated that it is non-maintainable, Ld. AR was put to notice of the said fact and heard on the aspect. However on considering the orders and judgments relied on behalf of the assessee, an opinion was formed that they are operating in different facts as therein the appeal was pending and listed for hearing which was not the position before the Division Bench on 02-04-2013. In support of the view formed we may mention that Jurisdiction is not acquired either by the consent of the parties or on a mistake or error on the part of the Court or Tribunal who proceeds to hear because and if it was wanting ab-initio, no amount of hearings will confer jurisdiction thereafter.

3.4 Since the department on the said dated was represented by CIT(Adm.), Faridabad, Smt. Neena Kumar; Sh. Sampoorna Anand, Joint CIT; Smt. Shashi Kajle, Dy. CIT, Circle-II, Gurgaon, the concerned officers were heard. The sum total of their submissions were that the action was taken on a strong bona fide belief that the amounts were recoverable as the order in the stay petition in clear terms mandated that in the event the assessee seeks adjournment , the stay will be automatically cancelled and the efforts of the department showed that on 16-01-2013 adjournment was "prompted by" the assessee.

3.5 Time was given to the parties on the said to arrive at a mutually acceptable solution since bona fide belief was pleaded by the Revenue. However it did not yield any result. The petition 273/Del/2013 was declared non-maintainable.

3.6 In the above-mentioned background the appeal which was listed for hearing on 16-04-2013 came to be listed for hearing before the Bench on 08-04-2013 as the assessee moved a petition dated 02-04-2013 before the Hon'ble Vice President, ITAT, Delhi Benches requesting for pre-ponement of the appeal so that the assessee may be able to address the petition for refund of the outstanding demand collected in violation of the stay order.

3.6.1 The Hon'ble Vice President, Delhi Benches passes the following administrative order:-

"Hearing of appeal is preponed to 08-04-2013. This letter of 'a' would also be placed before the Bench on 08-04-2013."

Sd/

(G.D. Agarwal)

03-04-2013

4. Accordingly the appeal stood preponed and duly listed in the cause list of 08-04-2013.

5. Ld. AR reiterated the position qua the collection of outstanding demand in violation of the order of the Tribunal wherein for no fault on the part of the assessee, it was put at a disadvantage despite having an order of stay in its favour as the amounts stood withdrawn on 28-03-2003 and 30-03-2013. It was his submission that the interest of the revenue was well protected as the assessee in compliance of the direction of the Tribunal given in the stay order had furnished bank guarantee amounting to Rs.208 crore odd. which was in the possession of the department.

6. Before we proceed to discuss the merits of the petition wherein petition dated 28-03-2013 was declared non-maintainability as the jurisdiction of the Tribunal had been invoked wrongly by way of filing stay petition No. 273/Del/2012 which already stood "killed" on the records of the ITAT. We propose to briefly refer to some arguments advanced by the parties concerned which though not relevant arguments for deciding the issue need a mention. The need and necessity to mention the same arises on account of the fact that both the sides had made anguished pleas in support of their respective stands which as observed though judicially do not have any relevance in the present proceedings however the anguish behind the ground realities expressed by the parties moves us to make a reference to them.

7. Whereas the Ld. CIT(Admn.) Smt. Neena Kumar in support of the action taken submitted that the action has been taken by the Revenue Officers in "a bona fide belief" to "watch out for the interests of the Revenue" as such there can be no occasion to even consider that there was any element of a personal interest, as such, it was urged there can be no mala fide in the action taken; it was also her vehement plea that the monies have been collected for the country and it was also urged that apart from that the plight of the concerned officer may be given due consideration when the order of the Tribunal passed in the stay petition categorically mentioned that on mere seeking of an adjournment by the assessee, the stay granted would be automatically cancelled; and the event occurred; in the circumstances the concerned officers would have had no defence from the audit objections etc. which would have been raised and comments from the CAG etc. on the functioning of the said officers wherein loss has been caused to the Government on account of non-action on the part of the Field Officers.

7.1 These laudable arguments and pleas seeking to perhaps ignite the spirit of patriotism we humbly observe cannot be taken judicial notice for deciding the issue in the present proceedings.

7.2 Similarly, the arguments and pleas that an officer exercising its powers is presumed to have always acted in a bona fide manner is a presumption available to the officers in the discharge of their official duties however this is a rebuttable presumption which an officer in facts and circumstances if so warranted can be asked to explain.

7.3 However what has left a heavy impact on our judicial minds is the prevalent ground reality wherein it seems to appear that the officers are working under extremely trying circumstances and pressures where the decisive factor for decision making may not necessarily only be the facts and circumstances of the case vis-à-vis the position of law but the apprehensions and fears of being found to be derelict in the discharge of their duties where comments, observations, criticisms and may be strictures from the CAG/Audit would have a seriously damaging effect on their carriers. These are grave concerns and even though not relevant consideration for deciding the issue but move our conscience to request the Competent Authority in the CBDT to make endeavours and create if so found necessary an atmosphere of faith, trust and confidence in the officers through which the aims and objects of the Income-tax Act are achieved. It may not be out of place to make a mention that the Government policies are sought to be implemented through the vast arena of provisions of the Income-tax Act to give a fillip/boost to the economy as such in our humble opinion, it is imperative to ensure that the morale of the officers who perform the statutory functions undue the Income-tax Act perform them fearless and confidently. The creation of a conducive atmosphere can not be over-emphasized.

8. On behalf of the assessee the Ld. AR Sh. C.S. Aggarrwal, Sr. Adv. also apart from arguing for a refund of the outstanding demand collected by the department despite the operation of the stay order in its favour had also advanced various submissions which also were not relevant for deciding the allowability of assessee's claim however in our humble opinion they may merit a reference.

8.1 The Ld. AR made an impassioned plea that the officers should not act in such manner where despite knowing that the Stay order was in existence in assessee's favour for reasons best known to themselves chose not to act immediately after 16-01-2013 i.e the day on which the appeal was adjourned or immediately thereafter and instead "suddenly woke-up" after a few months "close to the end of the financial year" during the holiday week of "Holi" and "Good Friday" putting the assessee to a disadvantage for no fault of it to such an extent that the opportunity to seek legal remedy was also compromised.

8.2 It was his vehement argument that if the officers act in complete disregard of orders of higher forums then faith in the fair functioning of the officers would be eroded and all the efforts of the Government to attract FDI and invite businesses would be negated as the business climate of the country would be considered not conducive to business and the "businesses" would flee the country.

9. As observed the concerns through grave have no relevance to deciding the issue as the limited prayer in writing is refund of the dues collected in violation of the stay order. However mention of the same is made as in our opinion it may call for some contemplation on the administrative side of the department.

10. Addressing the issue before us in the present proceedings, we propose to consider them in the following manner:-

"(a)		Has the stay order of the Tribunal been flouted by the assessee;
(b)		Has the stay order of the Tribunal been flouted by the department;
(c)		if the answer to b) is yes then is the action of the department bona fide or mala fide on facts;
(d)		if the answer to b) is yes then does the Tribunal have the power to direct a refund;
(e)		in case the answer to d) is yes, then what are the safeguards which can be ensured to protect the interests of the Revenue."

11. Addressing the issues posed in a) we have taken into consideration the order of the Tribunal dated 13-12-2012. On a perusal of the same, it is seen that in the light of the rival submissions and material on record, the Co-ordinate Bench granted stay of recovery subject to the conditions (i) that the assessee shall deposit Rs.2.50 crores; and ii) shall furnish bank guarantee of the amount involved for which MAP application had been filed. Both the conditions were to be fulfilled on or before 31-12-2012. Apart from the said conditions, it is seen that the assessee was further saddled with the condition that it shall not seek any adjournment and get the appeal finalized fixed for hearing on 13-01-2013 (as noted by the Co-ordinate Bench which on facts it is seen was infact listed for hearing on 16-01-2013) or any subsequent date. On the above terms and conditions stay was granted for a period of 180 days or disposal of the appeal/MAP application whichever was earlier. The assessee it is seen was put to the rigorous of automatic cancellation of the accommodation granted by the Bench in the eventuality the assessee either seeks an adjournment or commits a default in making the payment or on non-furnishing of the bank guarantee covering the amounts involved in MAP proceedings within the stipulated time.

11.1 It is not disputed that the conditions in regard to the deposit of Rs.2.50 crores and furnishing of bank guarantee were fully complied with by the assessee.

11.2 The record shows that on 16-01-2013 the appeal was adjourned. The adjournment was made in conformity with judicial discipline and judicial propriety wherein the issues in the appeal could not be decided as the order of the Special Bench on the same issued namely AMP (Advertising Marketing Promotion) expenses was awaited as Special Bench (larger Bench consisting of 3 Members) was constituted specifically for the said purpose and order was awaited.

11.3 It is a matter of record that the factum of the issue being a subject matter of consideration by the Special Bench was pointed out on behalf of the assessee. However, mere mention of the fact cannot be said to be an act of seeking adjournment as the said fact in all fairness could have been pointed by either side. The Advocates/CIT DR representing the respective sides before the Court/Tribunal are expected to "act as officers of the Court" and they do so. As such they are duty bound to assist the Court in the discharge of its duties and obligations. Infact if none of the sides had pointed out to the Bench, the Division Bench on its own motion on a bare perusal of the grounds raised namely Ground Nos. 4 to 4.9 before the Bench would have had no alternative but to itself suo motto adjourn the appeal as judicial propriety, judicial decorum and judicial discipline mandates that when the Bench is having knowledge of the fact that the specific issue is not being proceeded with by different Benches of the ITAT and are awaiting the order of the Special Bench constituted of three Members, it is appropriate for the Division Bench to await the order. As such this could not have been considered that adjournment was sought by the assessee.

11.4 Accordingly we hold that since no adjournment was sought by the assessee, the order dated 13-12-2012 of the ITAT passed in the stay petition has not been flouted by the assessee.

12. Coming to the next question which we have posed to ourselves in b) and c) namely to consider whether the stay order was flouted by the department and if yes, was the action bona fide or mala fide on facts.

12.1 Giving our due consideration to the arguments advanced on behalf of the assessee as well as by the CIT DR, we are of the view that the stay order passed by the Tribunal was flouted by the Department.

12.2 Having come to the said conclusion on examination and considering the arguments advanced we are of the view that the action was bona-fide. We have come to the said conclusion after considering the submissions advanced by the Field Officers which were reiterated by the Ld. CIT DR that the officers have acted on a bona fide belief that they were required to do so. The Field Officers have been able to show that efforts were made on their part through some Inspector to obtain information in regard to the adjournment on 16-01-2013. Letter it was shown was addressed to the Registry by the Joint CIT, Gurgaon seeking the requisite information; whether any order was passed thereon could not be ascertained however hand-written noting of the exact wording of the order-sheet dated 16-01-2013 was shown from the file by the AO who was unable to say whether it was formally or informally obtained. We have also seen that the confusion has occurred on a non-understanding of the relevance of the wordings that "the appeal involves AMP issue on which the Special Bench order in the case of the L.G. Electronics" and more attention was given to the wording "Ld. Counsel for the assessee contends". Had the propriety of Division Bench awaiting the Special Bench on the very same issue had been given due care and consideration we are confident the situation may not have occurred. Having thus observed we hold that the action of the departmental officers was bona fide.

13. Considering the next question which arises for our consideration namely if the assessee to (b) is yes then does the Tribunal have the powers to direct a refund.

13.1 On a consideration of a catena of orders of the Tribunal and judgments rendered by the Apex Court and various High Courts, we find that the Tribunal has the power to direct refund.

13.2 For the said purpose, we may refer to CIT v. Bansi Dhar & Sons [1986] 157 ITR 665/24 Taxman 11 wherein the Hon'ble Apex Court has held that the power of the Tribunal is of widest amplitude in dealing with the appeals before it and that it has the power of doing all such acts or employing such means as are essentially necessary to its execution. Ordinarily when the demands gets collected, the Tribunal does not interfere. Unfortunately in the facts of the present case, we regret to note that the action of the AO to effect recoveries was clearly misplaced and apparently on a misunderstanding of the actual position in regard to the functioning of the ITAT namely that judicial propriety required the Division Bench to await the order of a larger Bench on the very same issue. Considering Section 254 of the Income-tax Act, it is seen that under sub-section (1) of the same, the Tribunal is empowered after hearing the parties to pass such orders "thereon" as it thinks fit. "Thereon" refers to subject matter of appeal pending before the Tribunal and has been expanded to include pass any orders in rendering justice "thereon". It has been variously addressed by the Courts and Tribunals that the Tribunal has the power to remedy any wrong committed in proceedings before it. We may refer to the celebrated judgment of the Apex Court in the case of M.K. Mohammed Kunhi (supra) which has held that section 254 of the Income-tax Act, 1961 confers on the Appellate Tribunal powers of the widest amplitude in dealing with appeals before it which thus grants by implication the power of granting stay of recovery of the disputed tax. At the relevant point of time the power to grant stay was not available to the Tribunal on the Statute. The position being different now however the power to grant stay of recovery of the disputed demand can be exercised only when an appeal is filed by the assessee against the decision of the First Appellate Authority. Coming to the powers to direct a refund, reference may be made to the judgement of the Mumbai High Court in Mahindra and Mahindra Ltd. v. Union of India [1992] 59 ELT 505 wherein the customs authority had recovered the disputed demand by encashment of bank guarantee during the pendency of the stay application and before the expiry of the statutory period of three months for filing the appeal. Their Lordships held that the customs authority was not justified to recover the disputed demand by encashment of the bank guarantee during the pendency of the stay application and before the expiry of the statutory period for filing the appeal. In the circumstances, the department was directed to pay back the entire amount recovered by encashing the bank guarantee.

13.3 Thus, on a consideration of the Sections 254 & 255 of the Income-tax Act, and Section 131 of the Act, we are of the considered view that the Tribunal has the power to pass such appropriate orders in the facts and circumstances of each case to maintain judicial balance between the parties. As such Section 254 of the Act would include the power to grant stay which is incidental and ancillary and while exercising the powers to grant stay, the Tribunal would be having all the powers to grant stay in the nature of prohibitory, mandatory or directory to order for refund of the amount recovered by the revenue in appropriate cases where such directions are warranted.

13.4 Section 151 of Code of Civil Procedure reads as under :-

"Nothing contained in this code shall be deemed to limit or otherwise affect the inherent power of the court to make such orders as may be deemed necessary for the ends of justice or to prevent abuse of process of court."

13.5 It may not be out of place to quote from M.K Mohd. Kunhi's case (supra) (cited supra) :-

"it is firmly established rule that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective."

In view of the above facts and circumstances and position of law, we are of the view that the Tribunal u/s 151 CPC can pass orders which includes all types of orders which ought to be passed according to peculiar facts and circumstances in appropriate cases to do justice between the parties.

13.6 We may also refer again to the judgment rendered in M.K. Md. Kunhi (supra) wherein their Lordships quote from Domat's Civil Law as under :

"It is the duty of the judges to apply the laws, not only to what appears to be regulated by their express dispositions, but to all the cases where a just application of them may be made and which appears to be comprehended either within the consequences that may be gathered from it."

13.7 Similarly Maxwell on Interpretation quoted by their Lordships may also be referred to "where an Act confers a jurisdiction, it impliedly also grants the power of doing all such acts or employing such means, as are essentially necessary to its execution"

13.8 Accordingly, on a consideration of facts circumstances and position of law we are of the view that "ex debito justitiae" mandates that we set right the wrong done. We refer to another well recognized legal principle namely doctrine of legitimate expectation which operates in assessee's favour, as having fulfilled and duly complied with the directions contained in the stay order the legitimate expectation of the person is that he/it shall not be subjected to any act detrimental to it during the existence of stay and it is this expectation which has not been fulfilled in the present facts of the case. Justice demands that the wrong be set right.

14. Coming to the last question which we have posed to ourselves namely is the interest of the Revenue protected? We have been informed on behalf of the assessee that the bank guarantee furnished by the assessee amounting to Rs.208 crore odd is in the possession of the department as such the interest of the Revenue is secured. This fact has not been disputed by the department.

15. Accordingly for the detailed reasons given hereinabove the petition of the assessee is allowed. The Revenue is directed to refund the amounts collected in violation of the stay order dated 13-12-2012 on or before 18-04-2013. During the dictation given in the open Court on 08-04-2013 in the presence of the parties the date announced for compliance was 15-04-2013, however due to infrastructural/technical problems, the dictation could not be transcribed as such on 09-04-2013 the parties were informed in the open Court that the date for compliance would be on or before 18-04-2013.

16. Before parting we may refer to Susanta Kumar Nayak v. UOI [1990] 185 ITR 627 (Cal.) for making a mention of the legal position qua the interim orders of Courts/ Tribunals namely every Bench hearing a matter on the facts and circumstances of each case should have the right to grant interim orders on such terms as it considers fit and proper and if it had granted the interim order at one stage, it should have the right to vary or alter such interim orders if so warranted on facts on law.

--

2011-TIOL-165-ITAT-DEL

(Also see analysis of the Order)

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'F' DELHI

Case Tracker

PINE PACKAGING PVT LTD Vs CIT (HIGH COURT)

ITA No.4084 (Del) of 2010
Assessment Year: 2007-2008

M/s PINE PACKAGING PVT LTD
B–6, 25/1, SAFDARJUNG ENCLAVE
NEW DELHI
PAN NO:AAACP1832G

Vs

INCOME TAX OFFICER
WARD-14(2), NEW DELHI

R P Tolani, JM and K D Ranjan, AM

Dated: January 14, 2011

Appellants Rep by: Shri Pradeep Dinodia, F C A & Shri R K Kapoor, CA
Respondent Rep by: Shri H K Lal, Sr. DR

Income Tax - Sections 80IB, 80IC - Whether reimbursement of expenses paid to a captive unit as idle period charges can be treated as receipt from industrial undertaking for the purpose of Sec 80IB benefits.

Assessee had entered into an agreement with M/s Hindustan Liver Limited (HLL) for manufacturing some products on behalf of HLL. As per this agreement the HLL agreed to pay certain sum for the idle period during which no order would be placed by it. Assessee termed this amount as standing charges and claimed deduction under section 80-IB. AO denied the claim drawing analogy from the decision of Apex Court in the case of Liberty (2009-TIOL-100-SC-IT). CIT(A) affirmed the order of the AO. Before Tribunal, the AR of the assessee argued that standing charges were directly proportional to selling price and production and hence available for deduction of section 80-IB.

After hearing the parties the ITAT held that,

++ the contention of the assessee is that standing charges received are in the nature of first degree income and, therefore, in view of decision of Supreme Court in the case of Liberty India the assessee is eligible for deduction under section 80-IC of the Act. There is no dispute that the assessee is eligible for deduction under section 80-IC. The only dispute is whether the standing charges have been derived from any business referred to in sub section (2) of section 80-IC;

++ in the case of assessee, the standing charges have been received as idle charges including return on capital. They represent the reimbursement of certain expenses which cannot be treated as derived from the manufacturing of or production of a article or thing. Therefore, the standing charges which are received by the assessee for compensation on account of idle charges cannot be treated as income derived from industrial undertaking from manufacture or production of a article or thing on simple reason that they are reimbursement of expenses, which the assessee has to incur being a captive unit of HLL and could not manufacture the products for others.

Assessee's appeal dismissed.

ORDER

Per: K D Ranjan:

This appeal by the assessee for assessment year 2007-08 arises out of order of the ld. CIT (Appeals)-XVII, New Delhi.

2. The grounds of appeal raised by the assessee, read as under :-

" 1. That the ld. CIT (Appeals) has grossly erred in law and on facts and in the circumstances of the appellant case in confirming the addition of Rs.1,05,09,877/- on account of claim under section 80-IC of the Income-tax Act made by the appellant;

2. That the ld. CIT (Appeals) has grossly erred in misunderstanding and wrongly applying the provisions of law for the purposes of section 80-IC of the Income-tax Act made by the appellant;

3. That the ld. CIT (Appeals) ought to have appreciated that the maximum amount of disallowance of claim under section 80-IC could not exceed the amount of claim made by the appellant under that section amounting to Rs.10,79,096/-;

4. That the confirmation of the order of the assessing officer by the CIT (Appeals) in disallowing a sum of Rs.1,05,09,877/- as against the actual claim of Rs.10,79,096/- is based on misapplication of mind by the CIT (Appeals) and grossly wrong in law and on facts;

5. That the CIT (Appeals) ought to have held that the sum of Rs.1,05,09,877/- has been derived from the business of manufacturing activities and therefore was eligible for computing the claim under section 80-IC of the Income-tax Act;

6. That the reliance by the CIT (Appeals) on the decision of the Hon'ble Supreme Court in the case of Liberty India Ltd. Vs. CIT is erroneous and in fact, the decision of the Supreme Court should have been interpreted in favour of the assessee;

7. That the ld. CIT (Appeals) has grossly erred in upholding the charging of interest under section 234-B of the Income-tax Act. "

3. The first issue for consideration relates to confirming the addition of Rs.1,05,09,877/- on account of claim under section 80-IC of the I. T. Act, 1961. The facts of the case stated in brief are that the assessee during the relevant previous year was engaged in the business of manufacturing plastic bottles, caps and closures for Hindustan Liver Ltd. [HLL] from its factory situated at Plot No. 6, Sector 1-A, IIE Ranipur, Haridwar. During the year under consideration made the assessee sales of Rs.9,81,75,513/- and earned misc. income of Rs.1,78,461/- and net profit was shown at Rs.86,95,402/-, which was adjusted against brought forward un-absorbed depreciation of Rs.45,26,020/- and balance amount was claimed as deduction under section 80- IC of the Act. The total receipts of Rs.9,81,75,513/- includes misc. income of Rs.1,05,09,877/- on account of standing charges paid by HLL. The AO required the assessee to explain as to why deduction under section 80-IC of the Act should be allowed on this misc. income of Rs.1,05,09,877/-. It was explained by the assessee that M/s. Hindustan Liver Ltd., Mumbai, [HLL] entered into agreement with the assessee on 23rd June, 2004 for setting up a manufacturing unit at Haridwar to undertake the manufacture / processing and packaging and sale of plastic bottles, caps and enclosures etc. to HLL as per the specifications prescribed by the company. M/s. Pine Packaging Pvt. Ltd. pursuant to agreement with HLL set up a manufacturing unit at Haridwar. As per agreement the assessee was to manufacture the products on the normatic fixed level fixed by HLL and in the eventuality of downward change of volume and production levels based on HLL the assessee was to be compensated for idle time and conversion cost, which remained un-covered. Considering the business model, HLL agreed to pay in such eventuality standing charges equal to salaries and wages, depreciation, interest on term loan, 50 per cent of return of equity, fixed portion of repairs and maintenance, insurance, rent, if any. In case of over-production from normatic production the charges payable would be revised down-ward. During the year under consideration the assessee received Rs.1,05,09,877/- on account of standing charges on which deduction under section 80-IC of the Act has been claimed.

4. As regards eligibility of deduction under section 80-IC it was submitted by the assessee that the standing charges are mechanism of balancing the production cost in relation to normatic production agreed by HLL. Since the standing charges were payable only when sale decreased from normatic level and selling prices reduced when sale increased than the normatic production. Therefore, the standing charges are paid under a mechanism to increase and decrease the selling price to cover the fixed expenses. Hence, the nature of standing charges could be said as part of selling price of the product manufactured to cover the fixed cost incurred by the company while there was drop in normatic production volume. It was also submitted that standing charges were in the nature of reimbursement of fixed cost of production in relation to unit which could not be recovered due to drop in production volume from stipulated normatic level and therefore, the amount received on this account amounts to reduction of expenses and instead of showing in the income side, it could have been credited to respective expenses account, but on the basis of accounting principle and practice it has been shown on the income side in the profit and loss account. Therefore, the assessee was entitled to deduction under section 80-IC of the Act. The AO was, however, of the opinion that standing charges were not on account of sale, but were on account of compensation for less than minimum guarantee of buying goods from eligible undertaking. Therefore, the profit belonged to category of ancillary profits which could not be treated as sale consideration. The AO relied on the decision of Hon'ble Supreme Court in the case of Liberty India - (2009-TIOL-100-SC-IT) = 317 ITR 218 (SC) for the proposition that the profit derived from undertaking would mean the profit of first degree as against the profits attributable to industrial undertaking. Accordingly, the assessee was not entitled for deduction under section 80-IC of the Act.

5. On appeal it was submitted that the assessee was entitled for deduction under section 80IC of the Act. The assessee company was engaged in no other activity then running the production facilities at Haridwar, the profits from which were eligible under section 80-IC. The whole of the income received by the assessee was wholly and exclusively derived from manufacturing operations set up at Haridwar. It was submitted that even if the AO treats the receipts by the assessee company of Rs.1,05,09,877/- as not eligible for deduction under section 80-IC, at the best he could disallow the deduction at Rs.10,79,096/- which was claimed by the assessee in the return of income. The AO has mistakenly added the whole amount of standing charges to the taxable income without realizing that the same has been included in the gross total income of Rs.86,95,402/-. Therefore, it amounted to double taxation of Rs.94,30,731/-. The ld. CIT (Appeals) after considering the various decisions cited by the assessee held that the assessee was not entitled for deduction under section 80-IC on the ground that standing charges received by the assessee were not derived from the first degree income, which is directly derived from manufacturing. While confirming the order, he held as under :-

" 4. I have carefully considered the submission made by the appellant and perused the assessment order passed by the AO. It is seen that the receipt of standing charges received by the appellant from Hindustan Lever Limited is on account of compensation for less than minimum guarantee of buying of goods from the eligible undertaking. The profits belong to the category of ancillary profit of such undertaking. The standing charges cannot be treated as sale consideration and are treated as separate items of income and are accounted for accordingly in the Profit and Loss account. Therefore, the profit belongs to the category of ancillary profit and not a direct profit from the manufacturing which is envisaged under section 80-IC. In the case under consideration it is an admitted fact that the appellant was receiving standing charges from Hindustan Lever Ltd. which are in the nature of compensation for "idle time" and "conversion cost". Thus, the payment received on account of standing charges by no stretch of imagination can be said to be derived from manufacturing. The AO has given cogent reason for making the disallowance. The Hon'ble Apex court in the case of Liberty India Vs. CIT (supra) has held that in order to be eligible for deduction under section 80-IA / 80-IB, there has to be first degree income which is directly derived from the manufacturing. The ITAT Jodhpur Bench in the case of Income Tax Officer Vs. VJ Home (P) Ltd. (supra) has held that any incentive cannot be treated as having been derived from eligible undertaking. The decision in the case of CIT Vs. Arvind Construstion Ltd. and CIT Vs. Sportking India Ltd. (supra) cited by the ld. AR are not applicable to the facts of the appellant's case as they were decided on altogether different facts. In view of the facts of the case and legal position on the issue, I hold that the AO was fully justified in disallowing the claim of the appellant under section 80-IC of the Act. Therefore, I confirm the addition made by the AO. These grounds of appeals are rejected. "

6. Before us, the ld. AR of the assessee submitted that the standing charges received at Rs.1,05,09,877/- were in respect of compensation on account of idle time of the machinery. The selling price of the product manufactured by the assessee is determined in terms of cost model. It was also submitted that the assessee is a captive unit of HLL. Therefore, whenever the machinery was not used for the manufacturing purposes, HLL had agreed to reimburse the salary and wage, interest on term loan, 50 per cent return on equity, fixed portion of repairs and maintenance, insurance, rent in the form of standing charges. The money was received by the assessee from its customer, as per the agreement already signed at the time of commencement of production and, therefore, the payments received are wholly and exclusively related to the actual production of the assessee, which is based on orders received from the customers. Therefore, whatever standing charges have been received are wholly and exclusively derived from the manufacturing operations and are fully eligible for deduction under section 80-IC of the Act. He submitted that standing charges are in the nature of first degree income accruing to the assessee from the buyers based on price fixation of products manufactured and sold by the assessee and is nothing, but compensation of expenses which are incurred for running the production facility. Therefore, it has been pleaded that the assessee was entitled for deduction under section 80-IC. On the other hand, the ld. Sr. DR submitted that standing charges are not in the nature of first degree income, but are in the nature of ancillary profits and, therefore, deduction under section 80-IC is not allowable.

7. We have heard both the parties and gone through the material available on record. Under section 80-IC where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub section (2) the assessee will be eligible for deduction from such profits and gains to the extent specified in sub section (3) of section 80-IC of the Act. The contention of the assessee is that standing charges received are in the nature of first degree income and, therefore, in view of decision of Hon'ble Supreme Court in the case of Liberty India (supra) the assessee is eligible for deduction under section 80-IC of the Act. There is no dispute that the assessee is eligible for deduction under section 80-IC. The only dispute is whether the standing charges have been derived from any business referred to in sub section (2) of section 80-IC. Sub section (2) applies to any undertaking or enterprise, which has begun to manufacture or produce any article or thing, not being any article or thing specified in Thirteenth Schedule or which manufactures or produces any article or thing, not being any article or thing specified in the said Schedule and undertakes substantial expansion during the period specified in sub-clauses (i), (ii) and (iii) of clause (a) of sub section (2) of section 80-IC of the Act. Clause (b) of sub section (2) applies to industrial undertaking or enterprise, which has begun or begins to manufacture or produce any article or thing specified in Fourteenth Schedule or commences any operation specified in Fourteenth Schedule and undertake substantial expansion during the period which has been specified in subclause (i), (ii) and (iii) of clause (b) of section 80-IC(2) of the Act. On plain reading of sub section (2) it is clear that deduction under section 80-IC will be available in respect of any profits and gains derived from manufacture or production of article or thing, which is eligible for deduction under section 80-IC of the Act. Therefore, the income should be derived from industrial undertaking from manufacturing or production activities. In the case of assessee, the standing charges have been received as idle charges including return on capital. They represent the reimbursement of certain expenses which cannot be treated as derived from the manufacturing of or production of a article or thing. Therefore, the standing charges which are received by the assessee for compensation on account of idle charges cannot be treated as income derived from industrial undertaking from manufacture or production of a article or thing on simple reason that they are reimbursement of expenses, which the assessee has to incur being a captive unit of HLL and could not manufacture the products for others. The standing charges are received because of lower product demands from HLL though the same have been paid under the agreement to compensate the assessee in such eventualities. Thus the standing charges cannot be treated as derived from manufacturing activities since it has no nexus between the goods manufactured or produced with the profits derived. The standing charges at the best can be treated as attributable to industrial undertaking.

8. Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. Vs. CIT - (2003-TIOL-51-SC-IT) =262 ITR 278 (SC) has held that the words "derived" in section 80-HH of Income Tax Act must be understood as something which has a direct and immediate nexus with the assessee's industrial undertaking. Although electricity may be required for the purpose of industrial undertaking, the deposit required for its supply is a step removed from the business of industrial undertaking. It was held by the Hon'ble court that the interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profit or gains derived by undertaking for the purpose of special deduction under section 80-HH of the Act.

9. In the case of Liberty India Vs. CIT (supra) Hon'ble Supreme Court held that section 80- IB provides for allowing of deduction in respect of profits and gains derived from eligible business. The connotation of words "derived from" is narrower as compared to that of words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree.

10. Applying the ratio of decisions of Hon'ble Supreme Court referred to above to present case we find that the standing charges received by the assessee are reimbursement of expenses incurred by the assessee during idle period and, therefore, it cannot be said to have been derived from manufacture of an article or a thing of eligible business carried on by the industrial undertaking. The standing charges are in the nature of ancillary profits, which at the best can be treated as attributable to the business of industrial undertaking. Respectfully following the precedents, it is held that standing charges will not be eligible for deduction under section 80-IC of the Act. Accordingly, we do not find any infirmity in the order passed by the ld. CIT (A) confirming the disallowance.

11. In the result, the appeal filed by the assessee is dismissed.

(Order pronounced in the open court today on 14.1.2011.)

2013-TIOL-91-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' AHMEDABAD

Sl. No(s).	ITA No(s)	Assessment Year(s)	Appeal(s) by
			Appellant (s)	Respondent(s)
1	1828/Ahd/2010	2001-02	SUGAM CONSTRUCTION PVT LTD 4th FLOOR, ARUN COMPLEX ASHRAM ROAD AHMEDABAD-380014 PAN NO:AACCS6759H	INCOME TAX OFFICER WARD-8(2) AHMEDABAD/ ACIT (OSD) CIRCLE-8
2	787/Ahd/2010	2001-02	Revenue	Assessee
3	402/Ahd/2012	2005-06	Assessee	Revenue
4	602/Ahd/2012	2005-06	Revenue	Assessee
5	1864/Ahd/2010	2006-07	Assessee	Revenue
6	1788/Ahd/2010	2006-07	Revenue	Assessee
7	403/Ahd/2012	2007-08	Assessee	Revenue
8	404/Ahd/2012	2008-09	Assessee	Revenue

Mukul Kr Shrawat, JM and Anil Chaturvedi, AM

Dated: December 21, 2012

Appellant Rep by: Shri Dhiren Shah, CA
Respondent Rep by: Shri D P Gupta, CIT-DR

Income Tax - Sections 40(a)(ia), 41(1), 68, 80IA, 148, Rule 46A - Unexplained Cash Credit - Depreciation - Deduction 80IA - Whether the credits, claimed as expenses by assessee were in nature of unexplained cash credit u/s 68 or bogus liability u/s 41- Whether the CIT(A) had breached the Rule 46A of the Act by admitting fresh evidence - Whether the money paid in advance for out of court settlement is taxable - Whether the company can claim depreciation where the car was owned in the name of directors.

E) ++ ….order of ITAT Ahmedabad in the case of ITO vs. Electro Ferro Alloys Ltd. 13 ITR 594(Trib.)[Ahd] has been cited, wherein the Tribunal has decided the issue in assessee's favour. Likewise, the Gujarat High Court in the case of CIT vs. Aravali Finlease Ltd. [2012]341 ITR 282 (Guj.) was held that although the vehicle was registered in the names of the Directors but it was asset of the assessee, hence Tribunal was right in allowing the depreciation on the said vehicle.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

Allowability of ESOP expenditure

 

CA Nitul Mehta

What is an ESOP?

In today's world employers have become increasingly motivated to make the employees a part of their wealth creation process.  A scheme of Employee Stock Option ('ESOP') is one such process where employers reward employees by making them partners/ rightful owners in wealth which they have build together by issuing shares in the entity at a discounted price which otherwise is available at higher price in the market due to various reasons such as market expecting to reap the reserves sitting in the books of accounts, goodwill generated by the Company in the market, expected discounted cash flow forecasts of the Company etc .

ESOP is a plan wherein an option is provided by the employer to employee to opt for issue of shares in the company at the end of vesting period on satisfying specific conditions set in by employer at an agreed pre-determined discounted price against a commitment from the employee of provision of uninterrupted services to the company.

The major benefits out of such ESOP scheme are (i) Employers do not have immediate payout obligation while they continue to lure the employees and receive their uninterrupted services. (ii) Employees feel a sense of ownership and their efforts can directly be remunerated in an employee oriented industry (iii) Employees may get a sense of getting retained with the company for atleast a near future time period (iv) Employees get a very good opportunity to become partners in wealth creation in a twofold manner wherein on one side they are issued shares at a discounted price when compared to market price or sometimes even at free of cost and on the other side they become eligible for all the future shareholder payouts whether be it dividends or buyback/ redemption of capital.

Accounting treatment of ESOP:

As per the Guidance Note issued by Institute of Chartered Accounts of India ('ICAI') and SEBI the main objective to issue an ESOP share or say sweat equity share is to remunerate the employee for, his past services, for making available intellectual property rights to the employer.

 However, due to the issue of ESOP the rights of the existing shareholders get diluted and therefore there is a need to compensate such dilution by creating an artificial reserve. The only resource available with any company is the corporate profits. Hence the ICAI and SEBI have suggests to create such reserve from the current profits earned by the company. The methodology to be adopted as suggested by ICAI and SEBI to compute the quantum of reserve is the difference between market value as computed under SEBI rules on the date of grant and the price at which the shares are issued to the employees in order to compensate the payout obligation which might arise on ESOP shares either at buyback or at liquidation.

Jargons of an ESOP plan:

An employer who wishes to issue ESOP proposes a plan to the employees on a certain date i.e. grant date with certain conditions attached to it which inter-alia includes a minimum period of employment with the company i.e. vesting period. There is a certain time period within which the employee after the ESOP getting vest gets an opportunity to exercise the option i.e. Exercise period. The value at which the shares are issued to employees is technically called exercise price. Some companies also keep a lock in period for the exercised ESOP within which an employee cannot sell those shares in the market.

Legal Issues in claiming Tax Deduction ('TD')

There is no specific section under which ESOP expenditure is allowable under the Income Tax Act 1961 ('Act'). The only provision where a company can claim the expenditure is section 37 of the Act. Hence, it is pertinent to test the conditions mentioned in section 37 in order to conclude whether the expenditure is allowable?

Section 37 of the Act allows an assessee to claim expenditure if it fulfills the following conditions:

• It should be an expenditure,
• It should not be dealt in section 30 to 36,
• It should not be a capital expenditure, and
• It should be incurred or laid out wholly and exclusively for the purpose of business.

Now let us analyse all the above tests in detail:

As discussed above, the expense which is debited to profit and loss account ('P&L') is the difference between the market value of share as computed under the guidelines of SEBI and the value at which the share are issued to employees.

The revenue has always contested to disallow the ESOP expenditure debited to P&L account based on the following arguments;

• The company is choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. Hence there is no expenditure that the company is incurring or laying out.

• The issue of shares is also not crystallized till the date on which the employee exercises the option and hence any expenditure debited during the vesting period remains contingent in nature.

• The ESOP expense even if treated as expenditure is a capital expenditure since securities premium being a capital item.

The views of various judicial courts on the above issue differ widely. Whereas the Delhi ITAT in the case of ACIT Vs Ranbaxy Laboratories ITA No 2613 & 3871 has held that the ESOP expense debited to P&L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/ lesser securities premium. The alternative argument that this ITAT has supported is since the receipt of securities premium is not chargeable to tax being a capital receipt any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure.

The Delhi ITAT in the case of Ranbaxy (Supra) has relied on the following court rulings which have held that shares issued against assets/ Technical know-how contributed by shareholders cannot be claimed as revenue expenditure:

• Eimco K.C.P Ltd Vs CIT 159 CTR 137 (Supreme Court)
• CIT Vs Reinz Talbros Pvt Ltd 252 ITR 637 (Delhi HC).

Further , there are different views within the Supreme Court rulings as to what constitutes an expenditure since there are rulings on one side of Indian Mollasses Co Pvt Ltd Vs CIT 37 ITR 66, CIT Vs Nainital Bank Ltd  62 ITR 638 which denotes expenditure in the normal course as 'spending', 'paying out or away' of money. However, there are other rulings of Supreme Court in the case of Madras Industrial Investment Corp Ltd 225 ITR 802 (SC) where it has held that  'expenditure is not confined to what is paid out but also includes any liability which has accrued or incurred which might have to be paid in future'.

The above views of Delhi ITAT in the case of Ranbaxy (supra) were also upheld subsequently by the following judicial courts:

• Hyderabad ITAT in the case of Medha Servo Drivers Limited ITA No 1114/Hyd/2008.
• Mumbai Tribunal in the cases of:
  • DCIT Vs Blow Plast Limited ITA No 512/Mum/2009.
  • Mahindra & Mahindra Vs DCIT ITA No 8597/Mum/2010.
  • M/s VIP Industries Vs DCIT ITA No 7242/Mum/2008.

However, there were following judicial courts which did not buy the above line of argument and ruled that since the SEBI has promulgated such debit to P&L and since the ESOP are issued with an expectation to receive uninterrupted services from employees and further this expenditure is treated as part of remuneration by employer and employee, this expenditure should be allowed as deduction U/s 37 of the Act:

• CIT Vs M/s PVP Ventures Limited TC (A) No 1023 of 2005 (Madras HC).
• S.S.I Ltd Vs DCIT 85 TTJ 1049 (Chandigarh ITAT)
• ACIT Vs Spray Engineering Devices Limited ITA No 701 of 2009 (Chandigarh ITAT).

Though there is a High court judgement available on this issue, the ruling of PVP Ventures (supra) is not a speaking order and does not justify the conclusion it has given in the favour of PVP Ventures. Hence, this led to a confused state of environment with regard to claim of ESOP expenditure under the Act.

It is under this circumstances that a special bench was constituted by Bangalore ITAT ('SB') in the case of M/s Biacon Ltd Vs DCIT ITA No 368/369/370/371/1206/Bang/2010 which was then intervened by M/s Advinus Therapeatics Limited, M/s Bharti Airtel Limited, M/s NDTV media Ltd, and M/s New Delhi Television Limited.

It is also important to note that Biacon Ltd had apart from the above arguments taken by various assessees in the above rulings had taken an additional argument that when there is nothing in the taxing statue regarding a claim then the guidance should be taken from the accountancy principles. This claim was also supported by two Apex Court ruling:

• Challapalli Sugars Limited Vs CIT 98 ITR 167.
• CIT Vs Industrial Development Corporation 225 ITR 703.

However, the revenue authorities contested the supremacy of accounting principles by citing the following rulings of Apex court:

• Tuticorin Alkali Chemicals & Fertilizers Ltd Vs CIT 227 ITR 172 (SC).
• Godhra Electricity Co Ltd Vs CIT 225 ITR 746 (SC).

The SB has divided the question of allowability of ESOP expenditure into three parts:

• Whether deduction of any such discount is allowable?
• If yes, then when and how much?
• Subsequent adjustments to the discount if any?

The SB has given a detailed reasoned judgement on all the above questions. The first argument of the revenue that since the receipt of share premium is considered as capital item, any short receipt of such securities premium should also be considered as capital outflow was overruled by relying on the recent amendment to section 56 of the Act wherein monies received over and above the face value and in excess of fair market value of the shares during its issue is considered as income for the purpose of the Act, thereby negating the comparison of receipt of share premium and lower recovery of share premium. The SB also has by this argument overruled the plea of Revenue authorities that accounting principles which treat share premium as a capital receipt are not supreme when it comes to taxing statue.

Further, on the question whether an ESOP layout can be considered as an expenditure the SB has in order to substantiate and correct the interpretation of the ruling given by Apex court, relied by the revenue authorities, in the case of Indian Molasses (Supra) in which an expenditure is defined as something that is 'paid out or away' has taken a recourse and reliance on section 43(2) relevant for section 37 which reads the word 'paid' used by the Apex court as:

"Actually paid or incurred according to the method accounting upon the basis of which profits and gains are computed"

 Further the SB has also put additional reliance on section 2(h) of Expenditure Act 1957 (since no definition of expenditure is given under the Act) which describes expenditure as:

 "Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee"

Hence, the SB has from the above definitions has made clear that the word paid includes incurred by an assessee, though no actual payout or layout has occurred and in turn the word expenditure includes not only any sum paid but also any sum incurred, which is the present case since though no cash outflow is expected from an ESOP arrangement the company has incurred/committed an obligation to issue shares at discount which according to the SB is nothing but incurring expenditure.

Further, to support the above argument it has also relied on the ruling of Apex Court in the case of CIT Vs Woodward Governor India (P) Ltd 312 ITR 254 (SC) by citing that:

"it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P) Limited [(2009) 312 ITR 254 (SC)] has gone to the extent of covering "loss" in certain 17 circumstances within the purview of "expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They held that "the word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession". In sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation, has also been used. For example depreciation and allowances are dealt with in section 32; therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term `expenditure' in certain circumstances can also encompass `loss' even though no amount is actually paid out"

Further, there is an alternative argument that one can make in the above context, though not taken in the above ruling, that debiting the ESOP expense leads to creation of artificial reserve which goes and sits in the reserves in the balance sheet, be it either securities premium account or any specific reserve created for ESOP. Hence at the time of liquidation or buyback there is a liability to payout the shareholders from not only the amounts lying in share capital account and general free reserves but also from the above mentioned reserves. Hence, these amounts which are debited to P&L, which are located in reserves during buyback/ liquidation, are ultimately liable to be paid to shareholders which also means that company has not only incurred the ESOP expense but also is be liable to pay such amounts to employees who have become shareholders during the process of ESOP plans or has to be paid to persons who have become shareholders by buying those ESOP shares from employees.

Further, it is pertinent to note that the company has not received any money against the portion of reserves created for ESOP which it will pay during the process of buyback/ liquidation. Instead the company has received services from employees, the payment for which in the form of payouts during the buyback/ liquidation is going to the employees AKA shareholders.

Further, the SB has also upheld the arguments ruled by S.S.I Ltd (Supra) and Spray Engineering (Supra) that the main objective of issuing ESOP is not to raise the share capital but to expect an uninterrupted service from the employee which will be used in revenue generation and hence it cannot be equated with issue of share capital against acquisition of asset so as to fall into the brackets of capital items.

The SB has also pondered on the issue of whether the ESOP expenditure is of contingent in nature. The major reasons of revenue authorities treating such expense as contingent in nature was because In the case of ESOP the question whether share will be ultimately issued is not clear since it contains restrictions and various other eligibility criteria on employees in order to make them eligible for ESOP, the clouds on which get clear only on exercise of ESOP options by employees.

However, the SB has ruled that since the companies follow mercantile system of accounting in which any income or expense is booked in the books based on the accrual concept.  Accordingly in the present context once the employer has committed the issue of shares at the end of the vesting period, the expenditure no longer remains contingent and the company has to issue shares at the vesting period. However, the SB has also ruled that based on the actual number of options exercised at the end of the vesting period the company needs to make a downward adjustment to the discount on ESOP which are lapsed and such discount should be offered it to tax.

To add strength to the above argument the SB has taken recourse to the following two Apex Court rulings wherein it is held that a liability definitely incurred by an assessee is deductable notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent one:

• Bharat Earth Movers Vs. CIT [(2000) 245 ITR 428 (SC)]
• Rotork Controls India (P) Vs CIT [(2009) 314 ITR 62 (SC)]

The SB has also invited attention to erstwhile Fringe Benefit rules wherein the same ESOP cost was treated as expenditure liable for Fringe Benefit Tax ('FBT'). The SB has also ruled that once the legislature has treated the very same ESOP as expenditure while taxing it under FBT, it is not open on the part of legislature to argue that the ESOP layout is not expenditure now once the FBT legislature is written off. This has on the one hand negated the argument upheld by Ranbaxy (supra) and on the other has once again reiterated the supremacy of taxing statue over the accounting principles.

Further, adding to the concept of accrual system of accounting, it has gone ahead and said that the companies are eligible to claim the ESOP expenditure during the vesting period depending upon the conditions prescribed under that ESOP plan.

The next question that the SB has put suo-motto is as to what happens when there is a difference between market price of shares as on the date of grant of the option and the price of the share as on the date of exercise of options?

The SB has further taken the argument of Tuticorin Alkali (Supra) and Godhra Electricity (Supra) and ruled that accountancy principles cannot govern the amount of income that should be offered to tax in cases where no specific provisions are available. Since the employees become the legal owners/rightful owners of the shares only on the date on which they exercise the option the SB has ruled that the discount on ESOP must be computed based on the market price of the share as on the date of exercise of options. Alternatively it can be said that the actual expense/ loss born by the company in an ESOP arrangement is the difference between the market price of the shares as on the date of exercise of options and value that is received from the employees against such ESOP.

The difference if any arising from the quantum of discount computed based on the market value of shares as on the date of grant should be appropriately adjusted to taxable income in the year of excursive and should be offered to tax/ claimed as expenditure. In this manner though the SB has allowed the ESOP deduction throughout the vesting period, it has called for a revision of computation of discount on ESOP as on the date of exercise and adjust it appropriately while computing tax liability.

Conclusion

Though the judgement of SB seems to clear the clouds on the variety of decisions given by various tribunals and a decision given by Madras High Court on PVP Ventures (Supra) the dust is not yet settled because the case of Ranbaxy (Supra) is pending before the Hon'ble Delhi High Court and one can expect that this dispute may travel through the corridors of Supreme Court.

Madras HC explains principles when repairs is current and when non current

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The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives.  The ratio deductible from the decisions referred to above are:

(i)            To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs". The basic test is to find out whether expenditure is incurred to "preserve and maintain" an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(ii)           Under Section 31(i), the deduction admissible is only for current repairs.  Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such  expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of "current repairs" [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(iii)          A new asset or new/different advantage cannot amount to `current repairs'. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(iv)         Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc.  Replacement cannot be a current repair, for, "replacement" and "current repair" do not go hand in hand .  If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd.  Thus, replacement expenditure cannot be said to be `current repairs' vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(v)          Expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business.  – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited);

(vi)         Expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited).

(vii) Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. – [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

HIGH COURT OF JUDICATURE AT MADRAS

Dated : 24.07.2013

Tax Case (Appeal) Nos.140 to 143 of 2013

489 to 491 of 2012 and 319 of 2013

and connected MPs

Tax Case (Appeal).No.140/2013:-

M/s.Super Spinning Mills Ltd.

-vs-

The Assistant Commissioner of Income-tax

Coram

The Honourable Mrs.Justice CHITRA VENKATARAMAN

The Honourable Ms.Justice K.B.K.VASUKI

Prayer in Tax Case (Appeal).No.140/2013:- Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal,  Chennai 'C' Bench dated 07th February 2013 in ITA.No.04/Mds/2013 for the assessment year 2005-06.

COMMON JUDGMENT

(The Judgment of the Court was made by CHITRA VENKATARAMAN, J.)

                The assessee is one and the same in all the present Tax Case (Appeals).  The assessee raised the following common substantial question of law seeking admission of the present Tax Case Appeals:

                " Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in law, in disallowing the claim of expenditure on replacement of machinery as revenue expenditure ?"

After issuing notice to the respondent in the Tax Case (Appeals), we decided to take the Tax Cases for final hearing.

                2. It is seen from the documents placed before this Court that in respect of the assessment year 1994-95, the Revenue preferred an appeal before this Court in T.C(A).No.1074 of 2010, wherein, the same issue was raised, which reads as follows:-

                "1. Whether the replacement of machinery parts will amount to revenue expenditure or not ?

                2. Whether brining into existence of a new asset or obtaining a new advantage would amount to revenue expenditure or not ?"

                3. Under order dated 10.01.2011, this Court remanded the matter back to the Commissioner of Income Tax (Appeals) to reconsider the issue as to whether the replacement of machinery parts brings into existence a new asset or a new advantage, so as to hold the expenditure as revenue or not by following the decision of this Court in Tax Case (Appeal) No.261 of 2010 dated 22.06.2010, wherein, this Court followed the decision in T.C.Nos.1290 and 1291 of 2009 and 1216 to 1221 of 2009 and the decision of the Apex Court in S.L.P.Nos.413 and 414 of 2009 and Civil Appeal No.7297 of 2009.  Thus, a reading of the order of this Court shows that based on the decisions on similar issues rendered by the Apex Court and that of this Court, this Court remanded the matters therein back to the Commissioner of Income Tax (Appeals) for fresh investigation of the facts and thus the Revenue's case in TC(A).No.1074 of 2010 was also remitted back to the Commissioner of Income Tax (Appeals).  Thereupon, the Commissioner of Income Tax (Appeals) passed the order dismissing the appeal, holding that the assessee had not submitted the efficiency of the machinery replaced nor had given details about the new machinery.  The aggrieved assessee preferred appeals before the Tribunal, which dismissed the appeals.

                4. The assessment years under consideration are 2003-04 and 2005-06 to 2008-09.  Before going into the questions raised, few facts need to be seen.  The assessee herein is engaged in the business of manufacture and trading in cotton yarn and allied products. In the course of the previous year relevant to the respective assessment years, the assessee incurred expenditure in respect of replacement of certain textile machinery.  The machinery which had gone for replacement are different in respect of each of the assessment years involved in the respective Tax Cases.  For the purpose of considering the question raised, for the reasons given below, it is not necessary for us to go into the details of the machinery replaced.  It is suffice to say that the assessee claimed expenditure therein as revenue expenditure/ current repairs.  However, the Assessing Officer held that the replacement could not be considered to be current repairs.

                5. It is a matter of record that the question as to whether such replacement could be current repairs/capital in nature came up for consideration in series of decisions before this Court, which, however, went on appeal before the Apex Court.  The question as to the nature of the claim on expenditure incurred on the replacement of machinery, came up for consideration before this Court in the decision reported in  [2005] 275 ITR 403 (CIT Vs. Janakiram Mills Ltd.).  There the assessee claimed the expenditure on the replacement on ring frames as current repair, while the Revenue treated it as a capital expenditure.  On appeal, the Commissioner of Income Tax (Appeals) held the expenditure as revenue expenditure, that replacement of ring frames constituted an integral part of the production system in a textile machinery.   The view of the Commissioner of Income Tax (Appeals) was affirmed by the Tribunal.  On appeal, in the decision cited above, this Court held that the expenditure was deductible under Section 31(i) of the Income Tax Act. On appeal against the judgment of this Court, the Supreme Court considered the question in the decisions reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited) and (2007) 294 ITR 328 (SC)  (CIT Vs. Ramaraju Surgical Cotton Mills) as to (a) Whether the expenditure incurred on modernisation and replacement came with the constitution of the words "current repairs" in Section 31(i) and (b) Whether replacement of an old machinery by a new machinery constituted an advantage of an enduring nature and hence, capital in nature.

                6. In the decision reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited), the Apex Court considered the meaning of the phrase "current repairs".  Reversing the decision of this Court, the Apex Court held that one of the basic tests to find out whether the expenditure was current repairs or not, was to see as to whether the expenditure was incurred to "preserve and maintain" an already existing asset.  The expenditure must not be one to bring a new asset into existence or to obtain new advantage; the replacement of ring frames constituted substitution of an old asset by a new asset and therefore, the expenditure incurred by the assessee did not fall within the meaning of "current repairs" under Section 31(i) of the Income Tax Act, 1961 (hereinafter called as the "Act").  The Supreme Court observed "… we may state that replacement generally may not fall under the expression "current repairs" but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression "current repairs". … old type of replacement parts were not available in the market and, therefore, the expenditure came within the expression "current repairs." …   Holding that Section 37 is a residuary Section, the Supreme Court observed: "Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. "  Thus, the Supreme Court held that even if the expenditure is revenue in nature, it may not fall within the connotation of "current repairs".  Thus, the Supreme Court reversed the decision of this Court and held that the expenditure in question was not "current repairs" and hence, could not be allowed under Section 31(i) of the Act.  The Apex Court accepted the case of the Revenue that the assessee was not entitled to deduction under Section 31(i) of the Act. It however pointed out to the decision reported in (1967) 3 SCR 957 (CIT Vs. Mahalakshmi Textile Mills Ltd.) that when old parts were not available in the market or where the old parts had worked 50 or 60 years, replacement in such cases of exception fall within the expression "current repairs".  The Apex Court, however, expressed no opinion on the applicability of Section 37(1) of the Act.  This came to be considered separately in other batch of cases reported in (2007) 294 ITR 328 (SC)  (CIT Vs. Ramaraju Surgical Cotton Mills).

                7. In the case of CIT Vs. Ramaraju Surgical Cotton Mills reported in (2007) 294 ITR 328 (SC), in the appeal taken by the Commissioner of Income-Tax, the Supreme Court considered the case where the assessee claimed the expenditure under Section 37 of the Act. The assessee contended that the expenditure incurred on replacement of assets without increase in the production capacity was revenue in nature. Pointing out that such question was not raised before the Commissioner, the Supreme Court pointed out that to decide the question as to whether the expenditure is revenue or capital, number of aspects are required to be considered therein; in the absence of any details regarding the production capacity even after replacement, the matter needed to be remitted back to the Commissioner of Income Tax (Appeals).  The Apex Court pointed out that since there was confusion regarding the applicability between the tests to be applied in respect of Section 31 of the Act and the test to be applied in the case of Section 37 of the Act, the matter deserved to be remanded back to the Commissioner of Income Tax (Appeals) to decide the matter uninfluenced by any observations made in the orders of the Court.  Thus, in the case of CIT Vs. Ramaraju Surgical Cotton Mills (SC) reported in (2007) 294 ITR 328 (SC), the Apex Court, after referring to the decision reported in (2007) 293 ITR 201(SC) in the case of CIT Vs. Saravana Spinning Mills (P) Ltd., held that Section 31 of the Act and Section 37 of the Act, operated on different spheres and the tests applicable to Section 31 of the Act could not be read into Section 37 of the Act.  Thus, the matters were restored to the files of the Assessing Officer for fresh hearing.

                8. Apart from these two decisions, there is yet another decision of the Apex Court in the case of CIT Vs. Sri Mangayarkarasi Mills P. Limited reported in 2009-TIOL-86-SC-II. There the assessee incurred expenditure on replacement of machines.  The assessee claimed the expenditure as allowable under Section 37 of the Act.  While the Assessing Officer disallowed the expenditure on the ground that each machine in a spinning mill was independent of each other and they were not integrally connected; hence, he treated the expenditure as capital in nature, the Appellate Authority allowed the appeal filed by the assessee.  On further appeal by the Revenue before the Income Tax Appellate Tribunal, it followed the decision of this Court and upheld the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal.  On further appeal before this Court, this Court agreed with the assessee and rejected the Revenue's Appeal. This Court held that the expenditure on replacement of machinery was revenue in nature. In so holding, it followed the decision reported in [2005] 275 ITR 403 (CIT Vs. Janakiram Mills Ltd.),  which was subsequently reversed by the Apex Court.  It further referred to the decision reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited) and pointed out: "expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. We are satisfied that the assessees' expenditure satisfies requirements (a), (c) and (d) as stated above.  … expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, in Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) it has been held by this Court that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure." The Supreme Court considered the question as to whether the expenditure amounted to revenue expenditure or current repairs.  The Supreme Court pointed out that each machine in a spinning mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill.  It can, at best, be considered part of an integrated manufacturing process employed in a textile mill.  Referring to its decision reported in  (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited), it held that the expenditure could not be treated as current repairs under Section 31(i). The expenditure incurred for reaping long-term and enduring benefits by replacing the independent machine could only be a capital expenditure. Thus, the Apex Court restored the Assessing Officer's order and held that the expenditure was capital in nature. The decision in the case of CIT Vs. Sri Mangayarkarasi Mills P. Limited reported in 2009-TIOL-86-SC-II, thus rested on the facts of its case.

                9. The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives.  The ratio deductible from the decisions referred to above are:

(i)            To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs". The basic test is to find out whether expenditure is incurred to "preserve and maintain" an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(ii)           Under Section 31(i), the deduction admissible is only for current repairs.  Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such  expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of "current repairs" [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(iii)          A new asset or new/different advantage cannot amount to `current repairs'. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(iv)         Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc.  Replacement cannot be a current repair, for, "replacement" and "current repair" do not go hand in hand .  If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd.  Thus, replacement expenditure cannot be said to be `current repairs' vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(v)          Expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business.  – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited);

(vi)         Expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited).

(vii) Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. – [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

                10. In the case of Empire Jute Co. Ltd Vs. Commissioner of Income Tax reported in (1980) 124 ITR 1 (SC), the Apex Court referred to the decision in the case of John Smith and Son Vs. Moore reported in (1921) 12 TC 266, 296 (HL) that for an expenditure to become a business expenditure, there must be an outlay of a business "in order to carry it on and to earn a profit out of this expense as an expense of carrying it on".  The Apex Court further cautioned that when considering the question on the claim of the expenditure being revenue or capital, it must be viewed in the larger context of business necessity or expediency.  The Apex Court further pointed out to the concept of an advantage of enduring benefit and further explained the question on capital or revenue expenditure in the following words:-

                " There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down.  It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test.  What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.  If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.  The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."

                11. Having thus held so, the Apex Court further pointed out that where an expenditure is incurred primarily and essentially for the purpose of business of an assessee without any addition or augmentation in the profit-making structure to the better utilisation of the assessee, the claim would be in the nature of revenue expenditure.  The Apex Court pointed out that even if the expenditure is producing a larger quantity of goods and earning more income, nevertheless, the nature of expenditure would be revenue in character.  This judgment of the Apex Court in the case of Empire Jute Co. Limited Vs. CIT reported in (1980) 124 ITR 1 (SC) has to be seen in the background of the decision of the Apex Court in the case of CIT, Madras Vs. Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR 710 (SC).

                12. The decision in the case of CIT, Madras Vs. Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR 710 (SC) is related to the assessee introducing "Casablanca conversion system" in its spinning plant.  This involves replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts, introduction of ball-bearing jockey-pulleys for converting the original band-drivers to tape- drivers and other additions and alterations in the drafting mechanism.  Confirming the judgment of this Court, the Supreme Court pointed out that with the introduction of the Casablanca conversion system, there was no installation of new machinery or plant, but it amounted, in substance, to "current repairs" to the existing machinery.

                13. The judgment of the Supreme Court in the case of CIT, Madras Vs. Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR 710 (SC) read along with the decision the Madras High Court pointed out that there was no change in the method of spinning and that the parts that were replaced, performed precisely the same function as old parts and when it was found that the original old type of replacement parts were not available in the market, necessarily the company had to replace it with the new system; in that context, the Supreme Court affirmed the judgment of this Court that it was "current repairs" to the machinery and plant.

                14. Keeping the decisions referred to above, one can detect that in considering the claim of the assessee, the decision must be guided by business prudency of the necessity or expediency which compel the assessee to carry on such repairs/replacement and if this repair  ultimately has gone in for bettering its business profits in the nature of increasing its profits, as held by the Supreme Court in the case of CIT Vs Ramaraju Surgicial Cotton Mills reported in (2007) 294 ITR 328 (SC) through increase in the production capacity, then the outlay, not being just to carry on the business to earn profit out of its existence, but to enlarge its profit-earning capacity, the expenditure may fall for consideration under the head of "capital expenditure".  But, whether the expenditure in question has no such ingredient of increasing its production capacity, expenditure would necessarily fall under the head of "revenue expenditure".

                15. With the law declared by the Apex Court in the background, when we look at the order of Commissioner of Income Tax (Appeals) as well as that of the Income Tax Appellate Tribunal, one may note herein summary of case law alone and admittedly, there is no discussion on the facts as to the impact of such expenditure on the profit-earning capacity or mechanism of the assessee.  Learned Senior counsel appearing for the assessee placed before us the expenditure incurred on the various items which had gone in for replacement and also the date of installation of such machinery and its impact on the production capacity.

                16. Even though the assessee has furnished list of items chart, the data which are available before us were not available before any of the Appellate Authorities for coming to the right conclusion herein.  Thus, with no details available as stated in the case of CIT Vs.Ramaraju Surgical Cotton Mills reported in (2007) 294 ITR 328 (SC), the decision of the Tribunal cannot be held as based on any material data necessary for considering the claim one way or the other.  Hence, the proper course herein is to set aside the order of the Income Tax Appellate Tribunal and remit the matter back to the Commissioner of Income Tax (Appeals) for de novo consideration.

                17. Keeping in view the law declared by the Apex Court in the case of CIT Vs. Ramaraju Surgical Cotton Mills' case reported in (2007) 294 ITR 328 (SC) and in the case of CIT Vs. Sri Mangayarkarasi Mills P. Limited reported in 2009-TIOL-86-SC-II, the Commissioner of Income Tax (Appeals) shall grant an opportunity to the assessee to state its case in a proper perspective and decide on the issue as to whether the expenditure, in effect, could be treated as "revenue expenditure".

                18. We direct the Commissioner of Income Tax (Appeals) to pass a detailed order on the impact of the replaced material as well as the functioning of the machinery after hearing the assessee in detail, whom, we hope, would extend all cooperation before the Commissioner of Income Tax (Appeals) and furnish the materials for arriving at a proper conclusion.

                19. The Tax Case (Appeals) stand disposed of on the above terms. No costs. Consequently, connected MP is closed.

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