ITO vs. Gope M. Rochlani (ITAT Mumbai)
Expl 5 to s. 271(1)(c): Undisclosed income offered in belated return filed u/s 139(4) eligible for immunity from penalty
Pursuant to a search and seizure action u/s 132 on 16.10.2008, the assessee offered undisclosed income of Rs. 1.25 crore to tax in the statement recorded u/s 132(4) for AY 2008-09. The due date for filing of the return of income u/s 139(1) for AY 2008-09 was 30.09.2009. The assessee filed the return of income on 31.10. 2009. The return was accordingly filed u/s 139(4) and not u/s 139(1). The AO held that as the return had been filed late, it was beyond the "due date" specified in clause (b) of Explanation 5A to s. 271(1)(c) and so penalty had to be levied under Explanation 5A to s. 271(1)(c). The CIT(A) reversed the AO. On appeal by the department to the Tribunal HELD dismissing the appeal:
Explanation 5A to s. 271(1)(c) provides that if during the course of search, the assessee is found to be the owner of any asset or income which has not been shown in the return of income which has been furnished before the date of search and the "due date" for filing the return of income has expired, the assessee is deemed to have concealed the particulars of his income or furnish inaccurate particulars of income and liable for penalty u/s 271(1)(c). In other words, if the income is offered in the return is filed by the "due date", no penalty can be imposed. The question is whether the "due date" in Explanation 5A encompasses a belated return filed u/s 139(4). The "due date" can be very well inferred as due date of filing of return of income u/s 139(4) because wherever the legislature has provided the consequences of filing of the return of income u/s 139(4), then the same has also been specifically provided. E.g., s. 139(3) which denies the benefit of carry forward of losses u/s 72 to 74A if the return of income is not filed within the time limit provided u/s 139(1). In absence of such a restriction, the limitation of time of "due date" cannot be strictly reckoned with s. 139(1). Even a belated return filed u/s 139(4) will be entitled to the benefit of immunity from penalty (Rajesh Kumar Jalan 286 ITR 276 (Gau) & Jagriti Aggarwal 339 ITR 610 (P&H) & Jagtar Singh Chawla (decisions in the context of s. 54) followed)
Cenvat Credit cannot be denied on mere non payment by the supplier -SC
The respondent-company availed deemed MODVAT credit of Rs.77,546/- during the quarter of March, 2000 on the strength of invoices issued by M/s. Sawan Mal Shibhu Mal Steel Re-Rolling Mills, Mandi Govindgarh. During MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered bythe invoices. The Competent Authority was of the view that appropriate duty of excise had not been paid by the manufacturer of inputs under the invoices on the strength of which the respondent took the benefit of deemed MODVAT credit and it was obligatory on the part of the respondent to take all reasonable steps to ensure that the appropriate duty of excise had been paid on the inputs used in the manufacture of their final product as required under Rule 57A(6) of the Central Excise Rules, 1944 (for short "the Rules") read with notification No. 58/97-CE(NT) dated 30.8.1997 and the aforesaid opinion of the Competent Authority persuaded him to issue a show-cause notice on 19.1.2001 proposing recovery of deemed MODVAT credit of Rs.77,546/- and imposition of penalty. The adjudicating authority, after receipt of the reply to the show-cause notice, by order dated 22.3.2002, disallowed the deemed MODVAT benefit earlier availed and ordered for recovery of the said sum along with interest, and, further imposed penalty of Rs.40,000/-.
In the case at hand, there is no dispute that a declaration was given by the manufacturer of the inputs indicating that the excise duty had been paid on the said inputs under the Act. It is also not in dispute that the said inputs were directly received from the manufacturer but not purchased from the market. There is no cavil over the fact that the manufacturer of the inputs had declared theinvoice price of the inputs correctly in the documents. It is perceivable from the factual matrix that the only allegation is that at the time of MODVAT verification it was found that the supplier of the inputs had not discharged full duty liable for the period covered under the invoices. This lapse of the seller is different and not a condition or rather a pre-condition postulated in the notification.
Mr. Prasad, learned counsel for the revenue has vehemently urged that it was requisite and, in a way imperative, on the part of the assessee to verify from the concerned authority of the department whether the excise duty had actually been paid or not. The aforesaid submission leaves us unimpressed. As we notice Rule 57A (6) requires the manufacturer of final products to take reasonable care that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid. The notification has been issued in exercise of the power under the said Rule. The notification clearly states to which of those inputs it shall apply and to which of the inputs it shall not apply and what is the duty of the manufacturer of final inputs. Thus, when there is a prescribed procedure and that has been duly followed by the manufacturer of final products, we do not perceive any justifiable reason to hold that the assessee-appellant had not taken reasonable care as prescribed in the notification. Due care and caution was taken by the respondent. It is not stated what further care and caution could have been taken. The proviso postulates and requires "reasonable care" and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPELLATE JURISDICTION
Commissioner of Central Excise, Jalandhar
Vs.
M/s. Kay Kay Industries
[Civil Appeal No. 7031 of 2009]
[Civil Appeal No. 7032 of 2009]
[Civil Appeal No. 7034 of 2009]
[Civil Appeal No. 7392 of 2010]
[Civil Appeal No. 7393 of 2010]
[Civil Appeal No. 7148 of 2013 arising out of S.L.P. (C) No. 26499 of 2008]
J U D G M E N T
Dipak Misra, J.
Leave granted in Special Leave Petition (C) No. 26499 of 2008.
2. The controversy that emerges for consideration in this batch of appeals, being consubstantial, was heard together and is disposed of by a common judgment. For the sake of convenience the facts from Civil Appeal No. 7031 of 2009 are set out herein.
3. The respondent-company availed deemed MODVAT credit of Rs.77,546/- during the quarter of March, 2000 on the strength of invoices issued by M/s. Sawan Mal Shibhu Mal Steel Re-Rolling Mills, Mandi Govindgarh. During MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered by the invoices. The Competent Authority was of the view that appropriate duty of excise had not been paid by the manufacturer of inputs under the invoices on the strength of which the respondent took the benefit of deemed MODVAT credit and it was obligatory on the part of the respondent to take all reasonable steps to ensure that the appropriate duty of excise had been paid on the inputs used in the manufacture of their final product as required under Rule 57A(6) of the Central Excise Rules, 1944 (for short "the Rules") read withnotification No. 58/97-CE(NT) dated 30.8.1997 and the aforesaid opinion of the Competent Authority persuaded him to issue a show-cause notice on 19.1.2001 proposing recovery of deemed MODVAT credit of Rs.77,546/- and imposition of penalty. The adjudicating authority, after receipt of the reply to the show-cause notice, by order dated 22.3.2002, disallowed the deemed MODVAT benefit earlier availed and ordered for recovery of the said sum along with interest, and, further imposed penalty of Rs.40,000/-.
4. Being aggrieved by the aforesaid order the respondent preferred an appeal before the Commissioner (Appeals), Central Excise, Jalandhar, who ruled that the credit of deemed duty paid by the manufacturer under Section 3A of the Central Excise Act, 1944, (for brevity "the Act") was available subject to the condition that the inputs were received directly from the factory of manufacturer under cover of an invoice declaring therein that the appropriate duty of excise had been paid on such inputs under the provisions of the Act. The appellate authority referred to the provisions of sub-rule (6) of Rule 57A and notification No. 58/97-CE(NT) dated 1.9.1997 and opined that the manufacturer of the inputs had not discharged the appropriate duty liability against the goods cleared vide the invoices and the respondent had not furnished the requisite documentary evidence which could controvert the said allegation made against the manufacturer of inputs. The appellate authority observed that unless and until payment ofappropriate duty had been made, the assessee could not have availed the benefit. Expressing such an opinion, it concurred with the view taken by the adjudicating authority. However, it reduced the penalty from Rs.40,000/- to Rs.20,000/-.
5. The unsuccess in appeal compelled the respondent to prefer Appeal No. E/1474/04-SM before the Customs, Excise and Service Tax Appellate Tribunal (for short "the tribunal") and the tribunal placing reliance on the decision in Vikas Pipes v. CCE1 came to hold that the declaration given by the appellant therein satisfied the conditions enumerated in the notification for claiming the deemed MODVAT credit and, accordingly, quashed the orders passed by the adjudicating authority and that of the appellate authority.
6.Questioning the justifiability of the aforesaid order, Revenue preferred Civil Appeal No. 65 of 2006 before the High Court. The High Court reproduced the proposed substantial question of law which reads as follows: -
"Whether the manufacturer of final products is entitled to deemed credit, under Notification 58/97-CE dated 30.8.97 when the manufacturer-supplier of inputs has not paid Central Excise Duty and given a wrong certificate on the body of invoices about duty dischargement under Rule 96ZP of Central Excise Rules, 1944?"
7.While dealing with the aforesaid substantial question of law, the High Court referred to its earlier decision in Vikas Pipes (supra) and distinguished the decision in Collector of Central Excise, Vadodara v. Dhiren Chemical Industries2 and ultimately concurring with the view expressed by the tribunal dismissed the appeal. Hence, the present appeal by the Revenue.
8.Assailing the legal substantiality of the impugned judgment it is urged by Mr. Arjit Prasad, learned counsel for the appellant that the tribunal as well as the High Court has fallen into error in their interpretation of Rule 57A(6) of the Rules and the notification which imposes conditions, for as per the conditions enumerated in the notification it is obligatory on the part of the manufacturer of the final products to satisfy the adjudicating authority that appropriate duty of excise had been paid. The learned counsel would submit that the "appropriate duty" has been squarely dealt with by the Constitution Bench in the case of Dhiren Chemical Industries (supra) but the High Court has failed to appreciate the ratio laid down therein and distinguished the same in an extremely cryptic manner which makes the verdict sensitively susceptible.
9. Resisting the aforesaid submissions, Mr. Ajay Aggarwal, learned counsel for the respondent, has contended that the tribunal and the High Court have appositely relied upon the decision in Vikas Pipes (supra) and correctly opined that the respondent had satisfied the conditions enshrined in the notification and, therefore, there was no warrant to proceed for recovery of the benefit availed of by the final manufacturer. The learned counsel would submit that the "appropriate duty", as interpreted by this Court in Dhiren Chemical Industries (supra), supports the case of the respondent and the conditions prescribed in the notification having been satisfied, the adjudicating authority as well as the first appellate authority has erred in holding that there was a failure on the part of the respondent to satisfy the conditions.
10. To appreciate the rival submissions raised at the Bar and the bold assertion by Mr. Prasad, learned counsel for the Revenue, that it was the duty of the assessee-respondent, the manufacturer of the final products, to see that the manufacturer of the inputs had actually paid the appropriate duty on the inputs on the bedrock of law laid down by the Constitution Bench in Dhiren Chemical Industries (supra), it is necessary to understand how and under what circumstances the controversy travelled to the Constitution Bench. Be it noted, the Constitution Bench was required to resolve the conflict between the two pronouncements, namely, Collector of Central Excise, Patnav. Usha Martin Industries3 and Motiram Tolaram and another v. Union of India and another4.
11. In Usha Martin Industries (supra) the Court was interpreting the exemption notification dated 30.11.1963 as amended on 7.4.1981 and the question before the three learned Judges was whether the benefit of excise duty exemption (granted by the Central Government as per certain notifications) could be claimed in respect of commodities made out of raw material on which no excise duty was payable. The Central Government had exempted iron or steel products falling under a particular category made from certain materials or combination thereof. One of them was fresh unused rerollable scrap on which the appropriate amount of duty of excise had already been paid. The Bench adverted to various aspects and, eventually, came to hold that the duty could legitimately be claimed by the assessee in respect of those goods referred to in the notification under consideration the raw material of which were not exigible to any excise duty at all.
12. In Motiram Tolaram (supra), another three-Judge Bench was dealing with notification No. 185 of 1983. It was a notification pertaining to exemption of alcohol falling under item 15-A of the First Schedule to the Central Excises and Salt Act, 1944 and manufactured from vinyl acetate monomer, from so much of the duty of excise leviable thereon under the said Act at the rate specified in the First Schedule, as in excess of the amount calculated at the rate of 10% ad valorem. The proviso to the notification stipulated that such polyvinyl alcohol was required to be manufactured from vinyl acetate monomer on which the appropriate amount of duty of excise under Section 3 of the Central Excises and Salt Act or the additional duty under Section 3 of the Customs Tariff Act, 1975, as the case may be, had been paid. A contention was raised before the Court that in India there was only one manufacturer of polyvinyl alcohol and the commodity in question could be produced only from vinyl acetate monomer and the Indian manufacturer was, in fact, paying duty at the rate of 10% ad velorem and that was the only duty which could be charged from the appellants therein. It was urged before the Court that the appellants were manufacturing that item in India from vinyle acetate monomer on which appropriate duty of excise had been paid and, therefore, the concessional duty should be charged from them. The learned Judges referred to the language employed in the exemption notification and opined that onus was on the assessee to prove and show that the conditions, as imposed in the exemption notification, had been satisfied. In that context the Bench proceeded to state that the condition for getting the benefit of the lower rate of duty is that on the raw material used appropriate amount of duty has been paid. If perchance or for any reason, the manufacturer of polyvinyl alcohol in India is unable to prove or show that the same has been manufactured from vinyl acetate monomer on which appropriate amount of duty of excise has been paid, then the said manufacturer would not be entitled to get the benefit of the said notification.
13. Thereafter, the Court referred to Section 3 of the Customs Tariff Act, 1975 and observed that one has to assume that the importer of polyvinyl alcohol had actually manufactured the same in India. One can further assume, possibly without any difficulty, that the said polyvinyl alcohol has been manufactured from vinyl acetate monomer, but it is not possible to assume or presume or imagine that the raw material used is the one on which appropriate amount of duty of excise has been paid in India and hence, the condition which is contained in the said notification has to be fulfilled in order to get the benefit of the notification.
14. The Court further stressing on the purpose of the notification expressed thus: -
"11. It appears to us that Excise Notification No. 185 of 1983 was deliberately worded in such a way that the importer of polyvinyl alcohol, who may not be able to prove that on the raw material appropriate duty in India has been paid, will not be able to get the benefit of the concessional rate of duty. It has to be borne in mind that the normal duty which is payable on polyvinyl alcohol is 40%. That is the rate of excise duty which would be payable by an Indian manufacturer of polyvinyl alcohol who is unable to show that he has complied with the condition contained in the proviso, namely, use in the manufacture of vinyl acetate monomer on which appropriate amount of duty has been paid. Similarly an importer of polyvinyl alcohol would be required to pay under Section 3 duty at the rate of 40% because on the polyvinyl alcohol imported duty under Section 3 of the Central Excises and Salt Act or additional duty under Section 3 of the Customs Tariff Act has not been paid on the vinyl acetate monomer used in the manufacture of polyvinyl alcohol. If it was possible to have shown that duty-paid vinyl acetate monomer had been used in the manufacture of imported polyvinyl alcohol, then the benefit of Excise Notification No. 185 of 1983 would have been available."
15. Eventually, the Court ruled that appropriate duty means the duty payable under the Central Excise and Salt Act or under the Customs Tariff Act and the condition had not been satisfied in the said case.
16. As a conflict was perceived in the aforesaid two judgments, it was referred to the Constitution Bench in Dhiren Chemical Industries (supra). The Constitution Bench adverted to the law laid down in Usha Margin Industries and Motiram Tolaram (supra) and, eventually, opined thus: -
"6. In the case of Motiram Tolaram reliance was placed upon the case of Usha Martin to contend that the appropriate duty being nil, because the raw material was not manufactured in India, it must be taken that appropriate duty had been paid and the appellants would be entitled to the benefit of the exemption notification in question, which used the said phrase. The Court was unable to agree. It said that the raw material being an item which was manufactured in India, a rate of excise duty was leviable thereon. On the raw material which had been imported, the appropriate amount of duty had not been paid. It was only if this payment had been made that the exemption notification would be applicable.
7. In our view, the correct interpretation of the said phrase has not been placed in the judgment in the case of Usha Martin. The stress on the word "appropriate" has been mislaid. All that the word "appropriate" in the context means is the correct or the specified rate of excise duty.
8. An exemption notification that uses the said phrase applies to goods which have been made from duty-paid material. In the said phrase, due emphasis must be given to the words "has already been paid". For the purposes of getting the benefit of the exemption under the notification, the goods must be made from raw material on which excise duty has, as a matter of fact, been paid, and has been paid at the "appropriate" or correct rate. Unless the manufacturer has paid the correct amount of excise duty, he is not entitled to the benefit of the exemption notification."
17. At this juncture, we are obliged to state that the factual and legal matrix in the case at hand is quite different. The decision proceeded on the language of the notifications. Moreover, we are not dealing with a notification for exemption. The controversy pertains to the interpretation of the notification No. 58/97-CE dated 30.8.1997 which has been issued in exercise of powers conferred by sub-rule (6) of Rule 57A of the Rules dealing with availing of MODVAT credit under certain circumstances subject to satisfaction of certain conditions precedent.
18. Before we advert to the notification it is necessary to refer to Rule 57A(1) and (6). The relevant part of Rule 57A(1) reads as follows: -
"57A: Applicability. – (1) The provisions of this section shall apply to such finished excisable goods (hereinafter referred to as the 'final products') as the Central Government may, by notification in the Official Gazette, specify in this behalf, for the purpose of allowing credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of 1975), as may be specified in the said notification (hereinafter referred to as the 'specified duty') paid on the goods used in or in relation to the manufacture of the said final products whether directly or indirectly and whether contained in the final product or not (hereinafter referred to as the 'inputs') and for utilizing the credit so allowed towards payment of duty of excise leviable on the final products, whether under the Act or under any other Act, as may be specified in the said notification, subject to the provisions of this section and the conditions and restrictions that may be specified in the notification:
(i) Provided that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted."
19. Sub-rule (6) of Rule 57A in exercise of which the notification has been issued is as follows: -
"(6) Notwithstanding anything contained in sub-rule (1), the Central Government may, by notification in the Official Gazette, declare the inputs on which the duty of excise paid under section 3A of the Central Excise Act, 1944 (1 of 1944), shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification, and allow the credit of such duty in respect of the said inputs at such rates or such amount and subject to such conditions as may be specified in the said notification:
Provided that the manufacturer shall take all reasonable steps to ensure that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid under section 3A of the Central Excise Act, 1944 (1 of 1944)."
[Emphasis supplied]
20. On a careful reading of Rule 57A(1), it is clear as crystal that a manufacturer of final products can avail the credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975, as may be specified by the notification in the Official Gazette subject to provisions of the Section and the conditions and restrictions that may be specified in the notification. The proviso further stipulates that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted. Thus, the conditions and restrictions have been left to be prescribed by way of notification in respect of certain classes of goods.
21. Sub-rule (6) of Rule 57A commences with a non-obstente clause and it empowers the Central Government to issue notification declaring the inputs on which the duty of excise paid under Section 3A of the Act to be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification and allow the credit of such duty in respect of the said inputs at such rates or such amount and such conditions as may be specified in the notification. It is pertinent to state here that the proviso to the said Rule stipulates that the manufacturer shall take all reasonable steps to ensure that the inputs acquired by him are goods on which the appropriate duty of excise, as indicated in the documents accompanying the goods, has been paid. Thus, what is expected of an assessee is to take reasonable steps that appropriate duty, as indicated in the documents, has been paid.
22. At this juncture, it is relevant to refer to the notification issued under sub-rule (6) of Rule 57A on 30.8.1997. In the said notification iron and steel have been mentioned as goods notified for the purposes of credit of duty under MODVAT. The relevant clauses of the notification for the present purpose are clauses 2, 4 and 5 and, hence, they are reproduced below: -
"2. The Central Government further declares that the duty of excise under the Central Excise Act, 1944 (1 of 1944) (hereinafter referred to as said Act), shall be deemed to have been paid (hereinafter referred to as deemed duty), on the inputs declared herein and the same shall be equivalent to the amount calculated at the rate of twelve per cent of the price, as declared by the manufacturer, in the invoice accompanying the said inputs (hereinafter referred to as invoice price), and credit of the deemed duty so determined shall be allowed to the manufacturer of the final products.
xxx xxx xxx xxx
4. The provisions of this notification shall apply to only those inputs which have been received directly by the manufacturer of the final products from the factory of the manufacturer of the said inputs under the cover of an invoice declaring that the appropriate duty of excise has been paid on such inputs under the provisions of section 3A of the said Act.
5. The provisions of this notification shall not apply to inputs where the manufacturer of the said inputs has not declared the invoice price of the said inputs correctly in the documents issued at the time of their clearance from his factory."
[Emphasis supplied]
23. We have referred to the aforesaid notification in extenso as the controversy really rests on the understanding of the language employed in the notification. Clause (2) spells about the concept of deemed payment of duty on the inputs and further prescribes that it shall be equivalent to the amount calculated at the rate of twelve per cent of the price, as declared by the manufacturer, in the invoice accompanying the said inputs. Clause (3) deals with a different fact situation and, hence, it need not be dwelled upon. Clauses (4) and (5) are really relevant for the present purpose. On a plain reading of the said clauses it is clear to us that there are two mandates to avail the benefit of the said notification. One part is couched in the affirmative language and the other part is in the negative. As per the first part it is obligatory on the part of the assessee to produce the invoice declaring that the appropriate duty of excise has been paid on such inputs under the provision of section 3-A of the Act The second command, couched in the negative, is that the provisions of the said notification shall not apply to inputs where the manufacturer of the said inputs has not declared the invoice price of the said inputs correctly in the documents at the time of their clearance from his factory.
24. In the case at hand, there is no dispute that a declaration was given by the manufacturer of the inputs indicating that the excise duty had been paid on the said inputs under the Act. It is also not in dispute that the said inputs were directly received from the manufacturer but not purchased from the market. There is no cavil over the fact that the manufacturer of the inputs had declared the invoice price of the inputs correctly in the documents. It is perceivable from the factual matrix that the only allegation is that at the time of MODVAT verification it was found that the supplier of the inputs had not discharged full duty liable for the period covered under the invoices. This lapse of the seller is different and not a condition or rather a pre-condition postulated in the notification.
25. Mr. Prasad, learned counsel for the revenue has vehemently urged that it was requisite and, in a way imperative, on the part of the assessee to verify from the concerned authority of the department whether the excise duty had actually been paid or not. The aforesaid submission leaves us unimpressed. As we notice Rule 57A (6) requires the manufacturer of final products to take reasonable care that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid. The notification has been issued in exercise of the power under the said Rule. The notification clearly states to which of those inputs it shall apply and to which of the inputs it shall not apply and what is the duty of the manufacturer of final inputs. Thus, when there is a prescribed procedure and that has been duly followed by the manufacturer of final products, we do not perceive any justifiable reason to hold that the assessee-appellant had not taken reasonable care as prescribed in the notification. Due care and caution was taken by the respondent. It is not stated what further care and caution could have been taken. The proviso postulates and requires "reasonable care" and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification.
26. Consequently, we concur with the view expressed by the High Court and accordingly the appeals, being devoid of merit, stand dismissed without any order as to costs.
Today the FAQ on signing of Audit Report has been released by the
Ethical Standard Board of the ICAI. It clarifies that any partner can
sign on behalf of other partners in any manner/ratio. The relevant
mail reads as under :
Dear Colleagues,
Greetings of the day. As you all are kindly aware that Chapter VI of
the Council General Guidelines, 2008, deals with Tax Audit Assignments
under Section 44AB of the Income Tax Act, 1961. Off late we have
received a number of queries from members regarding the maximum number
of tax audit assignments which a chartered accountant in practice may
undertake. In this regard, the Ethical Standards Board of the
Institute has issued a clarification in the form of an FAQ which is
reproduced below for your kind information:
FAQ ON TAX AUDIT ASSIGNMENTS
Question: If there are 10 partners in a firm of Chartered
Accountants, then how many tax audits reports can each partner sign in
a financial year?
Answer: As per Chapter VI of Council General Guidelines, 2008
(Tax Audit Assignments under Section 44AB of the Income Tax Act,
1961), a member of the Institute in practice shall not accept, in a
financial year, more than the specified number of tax audit
assignments as prescribed under Section 44AB of the Income Tax Act,
1961. The specified number of tax audit assignments under Section 44AB
of the Income Tax Act, 1961 is 45.
It is further provided in Chapter VI of Council General Guidelines,
2008 that in case of firm of Chartered Accountants in practice,
specified number of tax audit assignments means 45 tax audit
assignments per partner of the firm, in a financial year.
Therefore, if there are 10 partners in a firm of Chartered Accountants
in practice, then all the partners of the firm can collectively sign
450 tax audit reports. This maximum limit of 450 tax audit assignments
may be distributed between the partners in any manner whatsoever. For
instance, 1 partner can individually sign 450 tax audit reports in
case remaining 9 partners are not signing any tax audit report.
It is needless to say that the tax audit assignment should be in
accordance with the Standard on Quality Control (SQC) 1: Quality
Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services
Engagements.
IT: Claim made in return filed within due date is sufficient for exercising option of higher rate of depreciation at 80 per cent on windmills, as required under second proviso of rule 5(1A)
■■■
[2013] 36 taxmann.com 295 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
Assistant Commissioner of Income-tax
v.
Rajave Textiles (P.) Ltd.*
DR. O.K. NARAYANAN, VICE-PRESIDENT
AND S.S. GODARA, JUDICIAL MEMBER
AND S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NO. 1771 (MDS.) OF 2012
[ASSESSMENT YEAR 2004-05]
[ASSESSMENT YEAR 2004-05]
FEBRUARY 12, 2013
Section 32 of the Income-tax Act, 1961, read with rule 5 of the Income-tax Rules, 1962 - Depreciation - Allowance/rate of [Higher rate] - Assessment year 2004-05 - Assessing Officer disallowed higher rate of depreciation on windmills installed by assessee - Commissioner (Appeals) held that assessee was entitled to depreciation on windmills at 80 per cent on ground that claim made in return filed within due date was sufficient for exercising option of higher depreciation, as required under second proviso of rule 5(1A) - Whether, therefore, in view of judgment in case of K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai), higher rate of depreciation was allowable to assessee on windmills - Held, yes [Para 10] [In favour of assessee]
FACTS
| ■ | The assessee company, engaged in business of manufacturing cotton yarn and power generation through windmill for captive consumption, filed its return wherein it claimed depreciation at 80 per cent on windmills. | |
| ■ | The Assessing Officer disallowed depreciation on ground that excess depreciation had been claimed. | |
| ■ | On appeal, the Commissioner (Appeals), relying on decision in case of K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai), held that higher rate of depreciation was allowable as claim made in return, filed within due date, was sufficient for exercising option of claiming higher depreciation. | |
| ■ | On revenue's appeal: |
HELD
| ■ | The precise issue which arises for consideration is as to whether the windmill installed by the assessee is eligible for depreciation at 80 per cent or not. Admittedly, in the case of K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai), the co-ordinate Bench decided the issue in favour of the assessee. On this, the argument of the revenue is that the said order had not been accepted and an appeal had been preferred before the High Court. This, does not form a valid ground so as to take a different view and that too without any distinguishing features pointed out by the revenue. Therefore, the Commissioner (Appeals) rightly accepted the claim made by the assessee qua depreciation at 80 per cent pertaining to the windmills in question. [Para 10] | |
| ■ | The order of the Commissioner (Appeals) under challenge is upheld and the revenue's appeal is dismissed. [Para 11] |
CASE REVIEW
K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai) (Para 10) followed.
CASES REFERRED TO
Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) (para 4) and K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai) (para 5).
Guru Bashyam for the Appellant. N. Vijayakumar for the Respondent.
ORDER
S.S. Godara, Judicial Member - This Revenue's appeal is directed against the order of the Commissioner of Income-tax (Appeals)-I, Coimbatore, dated July 5, 2012 in I.T.A. No. 136/11-12 for the assessment year 2004-05 in proceedings under section 143(3) read with section 147 of the Income-tax Act, 1961 (in short the "Act").
2. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing of cotton yarn and power generation through renewal energy device, i.e., windmill used for captive power consumption.
3. On October 30, 2004, the assessee had filed its "return" declaring income of Rs. 22,58,390 under normal computation and Rs. 67,270 under section 115JB of the Act. Thereafter, the Assessing Officer completed regular assessment on November 22, 2006 under section 143(3) of the Act assessing the total income of the assessee as Rs. 23,81,400.
4. Thereafter, the Assessing Officer issued reopening of notice to the assessee dated March 7, 2011 for the reason that in its depreciation schedule, it had claimed depreciation at 80 per cent. (40 per cent for half-year) on windmills purchased at Rs. 1,31,84,766. Per the Assessing Officer, the same amounted to excess depreciation claimed. Further, in the opinion of the Assessing Officer, the expenditure incurred by the assessee to raise the authorised capital, if any, debited to the profit and loss account was also not allowable in view of the case law of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC).
5. In response to the aforesaid notice, the assessee put in appearance and defended its claim of depreciation qua the windmills in question. However, the Assessing Officer was not convinced. Therefore, in the reassessment finalised on November 29, 2011, he disallowed the excess depreciation pertaining to windmills of Rs. 47,66,948 and also disallowed filing fees paid by the assessee to the Registrar of Companies of Rs. 50,500.
6. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) challenging disallowance qua depreciation of the windmills in question. We notice that in the order under challenge, the Commissioner of Income-tax (Appeals) has relied on the case law of K.K.S.K. Leather Processors (P.) Ltd. v. ITO [2010] 126 ITD 215 (Chennai) and held that the assessee is eligible for depreciation on windmills at 80 per cent.
7. Therefore, the Revenue is in appeal.
8. Reiterating the grounds raised, the Departmental representative would contend that the Commissioner of Income-tax (Appeals) has wrongly held that the assessee is entitled for depreciation regarding windmills at 80 per cent on the analogy that the claim made in the "return" of income filed within the due date of filing is sufficient for exercising the option as required under the second proviso of rule 5(1A) of the Income-tax Rules. Accordingly, he prays for acceptance of the appeal.
9. Per contra, the assessee strongly supports the order of the Commissioner of Income-tax (Appeals) and prays for rejection of the appeal.
10. We have heard both parties at length and also perused the findings of the Assessing Officer, the Commissioner of Income-tax (Appeals) as well as case law referred to by the Commissioner of Income-tax (Appeals). The precise issue which arises for our consideration is as to whether the windmill installed by the assessee is eligible for depreciation at 80 per cent. or not. Admittedly, in the case law of K.K.S.K. Leather Processors (P.) Ltd. (supra) the abovesaid co-ordinate Bench above said has decided the issue in favour of the assessee. On this, the argument of the Revenue is that the said order has not been accepted and it has preferred a tax case appeal before the hon'ble jurisdictional High Court. This, in our opinion, does not form a valid ground so as to take a different view and that too without any distinguishing features pointed out by the Revenue. Therefore, we hold that the Commissioner of Income-tax (Appeals) has rightly accepted the claim made by the assessee qua depreciation at 80 per cent pertaining to the windmills in question.
11. As a sequel to our above discussions, the order of the Commissioner of Income-tax (Appeals) under challenge is upheld and the Revenue's appeal is dismissed.
P. SEN2013-TIOL-666-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Tax Appeal No.1407 of 2011
COMMISSIONER OF INCOME TAX-I
Vs
ARVIND MILLS LTD
V M Sahai and N V Anjaria, JJ
Dated: July 5, 2012
Appellant Rep by: Mrs Mauna M Bhatt
Respondent Rep by: None
Respondent Rep by: None
Income Tax - Section 80HHC - Whether the Tribunal is justified in confirming the order of the CIT(A) which allowed the assessee a genuine claim for deduction u/s 80HHC(1B) which was claimed by the assessee by addressing a letter after the AO had already passed the assessment order.
The assessee claimed deduction u/s 80HHC(1B). The benefit was claimed by the assessee by addressing a letter after the AO had already passed the assessment order. The AO was of the opinion that the claim of the assessee could not be considered as there was no provision under the Income Tax Act to make any amendment in the return of income, unless a revised return was filed by the assessee even as he held that the claim of the assessee was genuine. The CIT(A) allowed the appeal in light of the Apex Court judgment rendered in Ajanta Pharma Ltd..The Tribunal dismissed the Revenue Appeal.
Having heard the parties, the Tribunal held that,
++ when the claim of the assessee was genuine and acceptable on merits, the Appellate Commissioner acted within its powers and rightly allowed the same. That was confirmed by the Tribunal. The impugned order of the Tribunal warrants no interference.
The assessee claimed deduction u/s 80HHC(1B). The benefit was claimed by the assessee by addressing a letter after the AO had already passed the assessment order. The AO was of the opinion that the claim of the assessee could not be considered as there was no provision under the Income Tax Act to make any amendment in the return of income, unless a revised return was filed by the assessee even as he held that the claim of the assessee was genuine. The CIT(A) allowed the appeal in light of the Apex Court judgment rendered in Ajanta Pharma Ltd..The Tribunal dismissed the Revenue Appeal.
Having heard the parties, the Tribunal held that,
++ when the claim of the assessee was genuine and acceptable on merits, the Appellate Commissioner acted within its powers and rightly allowed the same. That was confirmed by the Tribunal. The impugned order of the Tribunal warrants no interference.
Revenue's appeal allowed
JUDGEMENT
Per: N V Anjaria:
In this Tax Appeal by the Revenue, which is directed against order dated 30.06.2011 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench `D' in Income Tax Appeal No.472 of 2011, following question is raised by the appellant proposing it to be a substantial question of law:-
"Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to recomputed the book profit u/s.115JB by reducing eligible profit u/s. 80HHC instead of deductible profit?"
2. We have heard learned advocate Mrs. Mauna Bhatt for the Revenue.
3. The issue is in a narrow compass and relates to the deduction claimed by the assessee under Section 80HHC(1B) of the Income Tax Act, 1961. The benefit was claimed by the respondent by addressing a letter dated 23.05.2005 after the Assessing Officer had already passed the assessment order. It was submitted by the assessee in the letter that in the assessment order entire export profit was required to be reduced from the book profit and the deduction could not have been restricted to the extent of 30% as provided in sub-section (1B) of section 80HHC of the Act. The Assessing Officer was of the opinion that the claim of the assessee could not be considered as there was no provision under the Income Tax Act to make any amendment in the return of income, unless a revised return was filed by the assessee even as he held that the claim of the assessee was genuine. In not entertaining the claim of the assessee the Assessing Officer relied on the decision of the Apex Court in Goetze (India) Ltd. v. CIT (284 ITR 323) = (2006-TIOL-198-SC-IT).
3.1. The aggrieved assessee carried the matter in appeal before the CIT(A), who allowed the appeal directing the Assessing Officer to recompute the book profit in light of the Apex Court judgement rendered in Ajanta Pharma Ltd. [327 ITR 305 (SC)] = (2010-TIOL-68-SC-IT).
3.2. The Department filed appeal before the Income Tax Appellate Tribunal, which came to be dismissed as per the impugned order. While dismissing the appeal of the Revenue, the Tribunal inter alia observed as under:
"A.O. Himself has stated in the assessment order that although the claim of the assessee is genuine but the same is not entertained because of the judgment of Hon'ble Apex Court rendered in the case of Goetze (supra). Hence there is no dispute that the claim of the assessee is genuine and is in accordance with the judgment of Hon'ble Apex Court rendered in the case of Ajanta Pharma Ltd."
4. As the facts on record show that the Assessing Officer himself had found the claim of the assessee to be genuine. He did not grant relief on the basis that the claim could have been considered only on filing of a revised return. The Appellate Commissioner on the basis of the Supreme Court decision in Ajanta (supra) allowed the claim which was admittedly a genuine one and the Tribunal ultimately upheld the same.
5. As such in Goetze (supra) the Supreme Court while dismissing the appeal clarified that its decision was restricted to the power of Assessing Officer to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the powers of the assessing authority under section 254 of the Act.
6. When the claim of the assessee was genuine and acceptable on merits, the Appellate Commissioner acted within its powers and rightly allowed the same. That was confirmed by the Tribunal. In that view, the impugned order of the Tribunal warrant no interference. No substantial question of law arises for consideration.
7. Accordingly, the appeal is dismissed.
2013-TIOL-667-HC-ALL-IT
IN THE HIGH COURT OF ALLAHABAD
AT LUCKNOW
Income Tax Appeal No.59 of 2006
Assessment Year: 1997-98
Assessment Year: 1997-98
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
SHRI SUBRATA ROY, LUCKNOW
Appellant Rep by: Shri D D Chopra
Respondent Rep by: None
Respondent Rep by: None
Income Tax Appeal No.57 of 2006
Assessment Year - 1995-96
Assessment Year - 1995-96
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
SHRI SUBRATA ROY, LUCKNOW
Appellant Rep by: Shri D D Chopra
Respondent Rep by: None
Respondent Rep by: None
Income Tax Appeal No.58 of 2006
Assessment Year - 1996-97
Assessment Year - 1996-97
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
SHRI SUBRATA ROY, LUCKNOW
Appellant Rep by: Shri D D Chopra
Respondent Rep by: None
Respondent Rep by: None
Income Tax Appeal No.60 of 2006
Assessment Year - 1998-99
Assessment Year - 1998-99
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
SHRI SUBRATA ROY, LUCKNOW
Appellant Rep by: Shri D D Chopra
Respondent Rep by: Wasquddin Ahmad
Respondent Rep by: Wasquddin Ahmad
Income Tax Appeal No.61 of 2006
Assessment Year - 1996-97
Assessment Year - 1996-97
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
O P SRIVASTAVA, LUCKNOW
Appellant Rep by: Shri D D Chopra
Respondent Rep by: Wasquddin Ahmad
Respondent Rep by: Wasquddin Ahmad
Income Tax Appeal No.62 of 2006
Assessment Year - 1997-98
Assessment Year - 1997-98
COMMISSIONER OF INCOME TAX (CENTRAL), KANPUR
Vs
O P SRIVASTAVA, LUCKNOW
Rajiv Sharma and Satish Chandra, JJ
Dated: August 27, 2013
Appellant Rep by: Shri D D Chopra
Respondent Rep by: Wasquddin Ahmad
Respondent Rep by: Wasquddin Ahmad
Income tax – Sections 2(22)(e), 17(2), 57(iii) – Whether AO has rightly disallowed interest expenditure on loan observing that by making investment of borrowed interest bearing funds for non productive purpose, assessee diverted his income and adopted a colourable device to reduce tax liability – Whether the rent-free accommodation provided to the assessee is perquisite even though the assessee was doing official work from there – Whether when the company in question is a company in which assessee has been controlling its affairs and possessing a block of majority shares, loan given to assessee or the partnership firm in which assessee is having controlling interest, is to be treated as deemed dividend.
A) Assessee claimed interest expenditure on loan for purchase of shares under the head income from other sources. AO noticed that assessee obtained loan from 'SIMBCL', and the loan amount was invested in purchase of shares of closely held companies of 'S' Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability and made disallowance. CIT (A) as well as ITAT deleted the disallowance.
Revenue contended that ITAT wrongly confirmed deletion merely relying on the judgement of Apex Court in the case Rajinder Pd. Moodi where it was observed that interest on borrowed capital has to be allowed u/s 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources without appreciating that the purpose of making or earning income from the said investments in shares was grossly lacking. In the case of assessee, there was no possibility of any income coming to the assessee. Both the appellate authorities failed to appreciate that transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning.
Assessee contended that the whole approach of the AO was incorrect as the AO had accepted that the loans taken by the assessee were invested and purchased in the share. Entire observations were based only on surmises and conjectures. Assessee took the loan from SIMBCL and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.
B) Assessee was partner in firm and director in various group companies. From one company he was getting salary income. AO observed that assessee was enjoying perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc and added the value of said perquisite. CIT (A) considered partly amount as perquisite. ITAT allowed the appeal of the assessee and deleted the addition made by AO and confirmed by CIT (A).
A) Assessee claimed interest expenditure on loan for purchase of shares under the head income from other sources. AO noticed that assessee obtained loan from 'SIMBCL', and the loan amount was invested in purchase of shares of closely held companies of 'S' Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability and made disallowance. CIT (A) as well as ITAT deleted the disallowance.
Revenue contended that ITAT wrongly confirmed deletion merely relying on the judgement of Apex Court in the case Rajinder Pd. Moodi where it was observed that interest on borrowed capital has to be allowed u/s 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources without appreciating that the purpose of making or earning income from the said investments in shares was grossly lacking. In the case of assessee, there was no possibility of any income coming to the assessee. Both the appellate authorities failed to appreciate that transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning.
Assessee contended that the whole approach of the AO was incorrect as the AO had accepted that the loans taken by the assessee were invested and purchased in the share. Entire observations were based only on surmises and conjectures. Assessee took the loan from SIMBCL and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.
B) Assessee was partner in firm and director in various group companies. From one company he was getting salary income. AO observed that assessee was enjoying perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc and added the value of said perquisite. CIT (A) considered partly amount as perquisite. ITAT allowed the appeal of the assessee and deleted the addition made by AO and confirmed by CIT (A).
Assessee contended that official work was being carried out from the premises owned by the firm. Addition pertaining to the furniture was made without any evidence on record. Regarding the salary to the servants, all the servants were engaged for the purpose of keeping of the property pertaining to the firm, which was used for official purposes. On similar grounds, the perquisite value on account of car, telephones, electricity, etc., were challenged.
C) AO made addition u/s 2(22)(e) of the Act observing that SISICOL is a company in which the public are not substantially interested and it was a private limited company. Assessee was a beneficial owner of shares of SISICOL and also partner of 62% shares in the profits of Sahara India i.e. holding substantial interest in the firm. SISICOL, having accumulated profit, offered loan to assessee through his current account and SISICOL also offered to Sahara India by not receiving the amount from Sahara India when the same had been collected for SISICOL. Sahara India had also shown the loan / advance from SISICOL on its liability side affirming the action of retaining deposit collected by Sahara India. Since, all the conditions of section 2(22)(e) were fulfilled, addition was made. If corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL.
Assessee contended that AO failed to appreciate the relationship between which was acting as an agent and the principals i.e. the Companies. Amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. Thus, Section 2(22)(e) was not applicable.
After hearing both the parties, the High Court held that,
A) ++ the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning. There was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. Fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director and was aware about the financial health of all the companies of the group. The interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest. In fact, it was colourable devices for tax evasion to avoid tax liability;
B) ++ the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer. In the instant case, as per the Inspector Report, AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. Carrying of official work from the residence and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. As per section 28(iv), the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm and is not exempted under the provisions of Section 17(2). The perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. The value of perquisite taken by the AO is correct and the same is taxable;
C) ++ as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. Therefore, it cannot be said that there was no payment to the company to the firm. The Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. The word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability. If the conditions of section 2(22)(e) are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend. No circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. It is a case of deemed income as the assessee is a shareholder in all the companies. Hence order of AO is confirmed.
C) AO made addition u/s 2(22)(e) of the Act observing that SISICOL is a company in which the public are not substantially interested and it was a private limited company. Assessee was a beneficial owner of shares of SISICOL and also partner of 62% shares in the profits of Sahara India i.e. holding substantial interest in the firm. SISICOL, having accumulated profit, offered loan to assessee through his current account and SISICOL also offered to Sahara India by not receiving the amount from Sahara India when the same had been collected for SISICOL. Sahara India had also shown the loan / advance from SISICOL on its liability side affirming the action of retaining deposit collected by Sahara India. Since, all the conditions of section 2(22)(e) were fulfilled, addition was made. If corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL.
Assessee contended that AO failed to appreciate the relationship between which was acting as an agent and the principals i.e. the Companies. Amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. Thus, Section 2(22)(e) was not applicable.
After hearing both the parties, the High Court held that,
A) ++ the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning. There was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. Fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director and was aware about the financial health of all the companies of the group. The interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest. In fact, it was colourable devices for tax evasion to avoid tax liability;
B) ++ the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer. In the instant case, as per the Inspector Report, AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. Carrying of official work from the residence and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. As per section 28(iv), the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm and is not exempted under the provisions of Section 17(2). The perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. The value of perquisite taken by the AO is correct and the same is taxable;
C) ++ as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. Therefore, it cannot be said that there was no payment to the company to the firm. The Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. The word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability. If the conditions of section 2(22)(e) are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend. No circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. It is a case of deemed income as the assessee is a shareholder in all the companies. Hence order of AO is confirmed.
Revenue's appeal allowed
JUDGEMENT
All the appeals have been filed by the Department under Section 260A of the Income-Tax Act, 1961 against the judgments and orders dated 12.07.2005 and 13.07.2005, passed by the Income Tax Appellate Tribunal, Lucknow. The details of the Income Tax Appeals are as under:-
Appeal No. | Assessment Year | Judgment & Order dated |
ITA No. 160/Luc/2000 & CO No. 34/Luc/2005 & ITA No. 201/Luc/2002 | 1997-98 | 12/07/05 |
ITA No. 564/Alld/2000 & CO No. 08/Luc/2004 | 1995-96 | 12/07/05 |
ITA No. 100/Luc/2000 & CO No. 102/Luc/2004 | 1996-97 | 12/07/05 |
ITA No. 161/Luc/2000 & CO No. 35/Luc/2005 & ITA No. 202/Luc/2002 | 1998-99 | 12/07/05 |
ITA No.733/Alld/2000 | 1996-97 | 13/07/05 |
ITA No. 419/Luc/2000 & CO No. 49/Luc/2005 | 1997-98 | 13/07/05 |
On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal Nos.59, 57 and 58 of 2006, on the following substantial questions of law:-
"1. Whether the Hon'ble ITAT has erred in law and on facts in deleting the addition of Rs.36,57,27,195/- made on account of disallowance of interest accrued on money borrowed from M/s. Sahara India Mutual Benefit Co. Ltd., a company of Sahara Group which was invested by the respondent in purchase of shares of different companies of the same group without any intention of earning any income from such investments.2. Whether the Hon'ble ITAT has erred in law and on facts in deleting the aforesaid addition, ignoring the fact that the dominant purpose for which investment was made by the respondent in the share capital of the companies of the Sahara Group was not to earn any income and as such the expenditure incurred in this behalf by way of interest on borrowings fell outside the purview of Section 57(iii) of the Income Tax Act, 1961.3. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent as he was provided with rent free accommodation, domestic servants, telephone, car with driver, free electricity, water, gas & reimbursement of club expenses from the various companies and firms in which he as a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.).4. Whether the Hon'ble ITAT has erred in law and on facts in holding that there was no outgo of funds from M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) to the firm M/s Sahara India and therefore the provisions of Section 2(22)(e) of the Act were not attracted, without appreciating that the transactions between M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) and M/s Sahara India (Firm) were not at arm's length and the amount retained by the firm out of deposits collected which in fact belonged to the company was in the nature of loan/advance given by the company to the firm within the meaning of provisions of Section 2(22)(e) of the Act."
On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No.60 of 2006, on the following substantial questions of law:-
"1. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent as he was provided with rent free accommodation, domestic servants, telephone, car with driver, free electricity, water, gas & reimbursement of club expenses from the various companies and firms in which he as a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.).2. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition made by the Assessing Officer on account of clubbing of income of the spouse of the respondent from the firm in which the respondent had a substantial interest, without appreciating that the spouse of the respondent did not possess any technical or professional qualification as envisaged in Section 64(1)(ii) of the Act and, therefore, the income of the spouse from the said firm was rightly clubbed in the hands of the respondent by the Assessing Officer.3. Whether the Hon'ble ITAT has erred in law and on facts in holding that there was no outgo of funds from M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) to the firm M/s Sahara India and therefore the provisions of Section 2(22)(e) of the Act were not attracted, without appreciating that the transactions between M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) and M/ s Sahara India (Firm) were not at arm's length and the amount retained by the firm out of deposits collected which in fact belonged to the company was in the nature of loan/advance given by the company to the firm within the meaning of provisions of Section 2(22)(e) of the Act.4. Whether the Hon'ble ITAT has erred in law and on facts in holding that the provisions of Section 2(22)(e) of the Act were not attracted in this case without appreciating that this was a fit case where the veil of corporate identity had to be lifted for the purpose of understanding the real nature of the transactions and to show that the apparent was not real.
On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No.61 of 2006 on the following substantial question of law:-
"Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in deleting the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent, as he was provided with rent free accommodation, domestic servants, telephone, car with driver, furniture & fixtures, free electricity, etc. from the various companies and firms in which he was a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.)"
On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No. 62 of 2006 on the following substantial question of law:-
"Whether the Hon'ble ITAT has erred in law and on facts in deleting the addition of Rs.3,92,86,647/- made on account of disallowance of interest on loan taken from a company of Sahara Group which was invested by the respondent in the share capital of the companies of the same group without any intention of earning any income from such investments."(Emphasis added)
The facts and circumstances in all the appeals are identical, except the dates and amounts etc. However, the figures and dates have been taken from the leading ITA No. 59 of 2006 to adjudicate present appeals.
I. DISALLOWANCE OF INTEREST:
Brief facts of the above-mentioned appeal are that the assessee is a partner of M/s. Sahara India (Firm); and Director in various companies of M/s. Sahara Group. For the assessment year 1997-98, the assessee has filed loss return for Rs.36,48,09,550/-. While completing regular assessment, the Assessing Officer disallowed the interest of Rs.36,57,27,195/- claimed by the assessee as interest paid on loan for purchase of shares under the head "income from other sources". The Assessing Officer noticed that the assessee had obtained loan from M/s. Sahara India Mutual Benefit Co. Ltd., and the loan amount was invested in purchase of shares of closely held companies of Sahara Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. Further, the assessee was having a substantial interest in the companies of Sahara Group. So, the AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability. So, he has disallowed the claim made by the Assessee pertaining to the interest and made the addition in each case, which was deleted by the first appellate authority as well as the Tribunal. Not being satisfied, the Department is before this Court.
With this backdrop, Sri D.D. Chopra, learned counsel for the Department, at the strength of written submission, has justified the order passed by the AO. He submits that the Tribunal has wrongly confirmed the deletion of the said addition merely relying on the judgment and order of the Hon'ble Apex Court in the case of Rajinder Pd. Moodi, 115 ITR 519, where it was observed that interest on borrowed capital has to be allowed under Section 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources. The facts of the aforesaid decision of the Hon'ble Apex Court are clearly distinguishable from the facts of the present cases. The Hon'ble Apex Court in the aforesaid case has emphasized on the language of Section 57(iii) and in particular, on the words "expended wholly and exclusively for the purpose of making or earning such income". The facts of these cases clearly show that, the purpose of making or earning income from the said investments in shares was grossly lacking. The Hon'ble Madras High Court in the case of CIT vs. Sujani Textile (P) Ltd., 151 ITR 653 has also taken the view that for the assessee to take the benefit of allowability of interest under Section 57(iii), there must be possibility of income coming from the investment though factually no such income need to have arisen in the year in question. In the present cases, there was no possibility of any income coming to the assessee and, therefore, relying on the ratio of the aforesaid decision of the Hon'ble Madras High Court, the claim of interest is not allowable under Section 57(iii) of the I.T. Act, 1961.
To support his submission, learned counsel also relied on the ratio laid down in the following cases :-
(i) CIT vs. Amritben R. Shah, 238 ITR 777 (Bom);(ii) Smt. Virmati Ram Krishna vs. CIT, (1981) 131 ITR 695 (Guj).(iii) CIT vs. Malyalam Plantations Ltd., (1964) 53 ITR 140 (SC);(iv) CIT vs. Birla Cotton Spinning & Weaving Mills Ltd., (1971) 82 ITR 165 (SC).
Learned counsel further submits that the impugned order as well as the order of the learned CIT(A) suffer from material illegality in so far as the learned Tribunal and the learned CIT(A) have failed to appreciate that the aforesaid transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning. In coming to the said judgment, learned Tribunal has also failed to appreciate the applicability of the binding principles of tax law as enshrined by the Hon'ble Apex Court in M/s. McDowell & Co. vs. CIT [154 ITR 148 (SC)] = (2002-TIOL-40-SC-CT). In the said judgment, the Hon'ble Apex Court has reiterated the principle that a taxing authority is not only entitled but bound to determine the true legal relation resulting from a transaction. It was also held that if the parties have chosen to employ concealing devices, it is open to the taxing authorities to unravel the device and determine the true character of the relationship.
Therefore, the Assessing Officer has rightly concluded from the undisputed material available on record that the assessee only acted as a conduit in the transfer of funds from one company of the group to the other concerns of the same group and that there was no dominant intention of earning any income from the said transactions, the real purpose being to avoid the incidence of tax. However, in spite of all evidence on record, the CIT(A) and the learned Tribunal have failed to appreciate that the assessee had resorted to mechanisms of tax avoidance which was evident by lifting the corporate veil behind which such transactions were being given effect.
Lastly, he made a request that the addition made by the AO may kindly be restored by keeping in mind the ratio laid down in the case of McDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC) = (2002-TIOL-40-SC-CT), where it was observed that it is the duty of the Court to expose avoidance device adopted by the assessee.
On the other hand, Sri Wasqudeen Ahmad, learned counsel for the assessee has justified the impugned order passed by the Tribunal. He submits that the whole approach of the AO is incorrect as the AO has accepted that the loans taken by the assessee were invested and purchased in the share. The entire observations of the AO are based only on surmises and conjectures and hypothesis and on the basis of the imaginary and illusionary, which cannot be found as basis for rejecting the assessee's claim for payment of interest. The case of the assessee is fully covered by the judgment of the Hon'ble Apex Court in the Moody's case (supra). He mentioned on 02.01.2000, an advertisement was published in the "Times of India, by Sahara India Parivar, in which, it was stated that all the Directors have taken an oath neither they nor their family members can ever share the profit or assets of the company. But the assessment will have to be completed as per the provisions contained in the Income-tax Act and not on the basis of any statement or advertisement published here and there.
Learned counsel further submits that the assessee took the loan from M/s. Sahara India Mutual Benefits Co. Ltd. (SIMBCL) and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.
It may be noticed that the companies giving outstanding performance go out of the market and the companies performing not so well tends to start showing better results. Lastly, he submits that in view of the judgment of the Hon'ble Apex Court in the case of Moody (supra), the interest in shares has to be allowed on the borrowed funds. So, he made a request that the appeals may kindly be dismissed.
We have heard both the parties at length and gone through the material available on record.
From the record, it appears that the assessee is a partner in the firm, known as M/s. Sahara India (Firm), where he is holding 62% shares and remaining shares are lying with other partners including Smt. Swapna Roy, the wife of the assessee. Thus, for all the purposes, the firm has become propriety concerned. This firm has collected the money from the public, on behalf of various companies of Sahara Groups. For this purpose, the expenditure about 4.5% was charged by the firm. In addition, the firm has retained the money for a longer period without transmitted to the concerned companies. The firm has also borrowed the funds on interest from SIMBCL; a company of the group. The assessee has invested this amount in a few companies of Sahara Groups, which were suffering heavy losses.
In another words, the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning.
In the instant case, the assessee has invested the amount in the companies, which were already suffering heavy losses. So, there was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in M/s. Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group.
In these circumstances, the AO has rightly observed that during the assessment year under consideration, the firm M/s. Sahara India had received money in the form of loan/advance from public and SIMBCL; SIFCOL; and Sahara India Housing Corporation Ltd. (SIHCL) and had retained it for a considerable period, before investing in loss making companies of the group, as submitted by the learned counsel for the Department.
Needless to mention that Section 57(iii) provides that any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable as deduction.
Further, Section 36(i)(iii) provides that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession is deductable.
In the peculiar facts and circumstances of the case, it appears that the interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest.
Further, it may be mentioned that the provisions of Section 14A was inserted in the Income-tax Act vide Finance Act, 2001 with retrospective effect from 01.04.1962 with a view to provide specific provision in the Act for disallowance of an expenditure (which includes interest) incurred in relation to income, which does not the part of the total income under the Act.
However, the provisions of sub-sections (2) & (3) of Section 14A were inserted in the Income-tax Act vide Finance Act, 2006 w.e.f. 01.04.2007 (wrongly mentioned as Clause 1 & 2 in the Income Tax Act published by the Taxman). It was provided vide sub-sections (2) that the expenditure disallowable shall be determined in accordance with such method, as may be prescribed. Pursuant to above provision made in the Act, Rule 8D of the Income Tax Rules was notified by the Government on 25.03.2008, as per the ratio laid down by the High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT; [2010] ITR (328) 81 (Bom) = (2010-TIOL-564-HC-MUM-IT); and High Court of Delhi in the case of Maxopp Investment Ltd. vs. CIT; [2012] ITR (347) 272 (Del) = (2011-TIOL-753-HC-DEL-IT).
The admitted position is that upto the assessment year 2007-08, the disallowance has to be made only on the basis of sub-section (1) of Section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred.
In the instant case, the assessee has shown no income from the company, where interest bearing borrowed funds were invested. Thus, the transactions were not exclusively and wholly for the purpose of business. In fact, it was colourable devices for tax evasion. In fact, it is an attempt of the assessee to divest the funds to avoid tax liability. In the case ofMcDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC) = (2002-TIOL-40-SC-CT), the Hon'ble Apex Court observed that it is the duty of the Court to expose of colourable device by uplifting the corporate veil.
In view of above and by considering the totality of the facts and circumstances, we set aside the impugned order passed by the appellate authorities and restored the orders passed by the AO pertaining to the disallowance of the interest on borrowed funds in the relevant appeals.
II. PERQUISITE VALUE:
Further, the assessee has claimed perquisite. But the AO has disallowed the same and made an addition of perquisite value of various items. However, the same was restricted by the first appellate authority and the Tribunal has deleted the same.
Learned counsel for the Department submits that the assessee is a partner in M/s. Sahara India (Firm); and Director in various other Group Companies. One of the Company is M/s. Sahara India Financial Corporation Ltd., from where the assessee was receiving salary income. During the course of assessment proceedings, the AO observed that the assessee was enjoying the perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc. As per AO, the value comes to Rs.10,33,835/-. So, the AO added the value of the said perquisite as an income of the assessee.
But the same was restricted by the CIT(A), who has confirmed the following additions :-
| (a) | Furniture & Fixtures | Rs.25,000/- |
| (b) | Salary of Servants etc. | Rs.57,600/- |
| (c) | Chauffeur driven car | Rs.36,000/- |
| (d) | Telephone expenses | Rs.72,000/- |
| (e) | Water charges | Rs.1,880/- |
| (f) | Electricity Expenses | Rs.60,000/- |
Learned counsel for the Department submits that the Tribunal has deleted the addition without any discussion and just by following its earlier order in the case of one J.B. Roy. So, he made a request to restore the order of the AO.
On the other hand, learned counsel for the assessee submits that working out of the valuation of the aforesaid perquisites, the AO has relied upon the statement on both of the assessee recorded on 27.01.1997, in which the replies were given according to the situation prevailing on the date of the statement and cannot be applied for the assessment order under consideration. So, the inference drawn are factually correct and the payment is unwarranted.
Learned counsel further submits that official work was being carried out from the premises owned by the firm. He further submits that the addition pertaining to the furniture was made without any evidence on record. Regarding the salary to the servants, it was submitted that all the servants were engaged for the purpose of keeping of the property pertaining to the firm, which was used for official purposes. On similar grounds, the perquisite value on account of car, telephones, electricity, etc., were challenged.
On specific inquiry made by the Bench, learned counsel admits that the property was inspected by the Inspector, who reported that the residence of the assessee was a composite property in which apparently there was no office. The report was confronted with the assessee on 10.03.1999.
Regarding the foreign travel, it is stated that the journey was performed by the assessee. This addition was restored by the CIT(A) to the file of the AO, vide order dated 05.05.2000. None of the party is able to tell the present status of this addition. However, we are of the view that the valuation of the perquisite is taxable.
After hearing both the parties and on perusal of record, it appears that the assessee is a partner in M/s. Sahara India (Firm) and a Director in various group companies. The assessee was also receiving the salary income from M/s. Sahara India Financial Corporation Ltd. The assessee was enjoying the facilities of the free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc. For the assessment year 1997-98, the AO took the value of perquisite and made an addition of Rs.10,33,835/-, but the CIT(A) has restricted the same on estimate basis, as per details given in the order.
Needless to mention that Section 17(2) of the Income-tax Act, provides that :-
"Section 17(2) "perquisite" includes-(i) the value of rent-free accommodation provided to the assessee by his employer;(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;x x x x x x x x xExplanation 3.-For the purposes of this sub-clause, "salary" includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be, but does not include the following, namely:-(a) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;(b) employer's contribution to the provident fund account of the employee;x x x x x x x x x(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases-(a) by a company to an employee who is a director thereof;(b) by a company to an employee being a person who has a substantial interest in the company;(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income 82[under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds [fifty] thousand rupees:][***][Explanation.-For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause;]x x x x x x x x x
It may be mentioned that the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer.
In the instant case, as per the Inspector Report, the AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. The assessee's report was confronted on 10.03.1999 with the assessee.
Needless to mention that carrying of official work from the residence; and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. Section 28(iv) is independent section, whereby such indirect benefits were taxed. So, the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm, the same is not exempted under the provisions of Section 17(2) of the Act.
In the light of above discussion, it appears that perquisite is a part of salary and taxable. So, the perquisite will have to come under the clutches of the Income-tax. Being the salaried person, the assessee is entitled for the standard deduction on the salary. The remaining perquisite is taxable.
For the purpose of the valuation of the perquisite, Section 295(2)(c) of the Act provides that CBDT may make rules for the determination of the value of any perquisite chargeable to tax under this Act in such manner and on such basis as appears to the Board to be proper and reasonable. As per the CBDT Circular No. 219 dated 15th March, 1971, the perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. Hence, the perquisite are subject to tax as mentioned in the Section.
It may also be mentioned that Section 28(iv) of the Act provides that "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" is chargeable to tax.
In the instant case, the assessee has raised objection before the AO as well as CIT(A) regarding the perquisite value which were rightly dealt. When it is so, then we are of the view that the value of perquisite taken by the AO is correct and the same is taxable. Hence, we set aside the impugned orders passed by the appellate authorities and restore the orders passed by the AO pertaining perquisite value in the relevant appeals.
III. DEEMED DIVIDEND:
The AO also made the addition pertaining to the deemed dividend under Section 2(22)(e) as the assessee was the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares of M/s. Sahara India Financial Corporation Ltd. (SIFCOL); M/s. Sahara India Airlines Ltd.; M/s. Sahara India International Corporation Ltd.; as also a partner holding substantial interest in M/s. Sahara India (Firm). The assessee was having 62% share as partner in M/s. Sahara India (Firm) and remaining major share was holding by other partners including his wife. After discussing the issue at length, the AO made the addition on account of deemed dividend under Section 2(22)(e) of the Act, which was deleted by the first appellate authority as well as by the Tribunal. Being aggrieved, the Department has filed the present appeals.
Learned counsel for the Department submits that the assessee is the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares in varous companies of the group.
Learned counsel for the Department read out Section 2(22) (e) of the Act. On reproduction, it reads as under:-
"Section 2(22)-dividend includes-(a) * * *(b) * * *(c) * * *(d) * * *(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
After reading Section 2(22)(e) of the Act, learned counsel submits that in the present appeals, all the three conditions mentioned below are present i.e. -
(a) The company should be one in which the public are not substantially interested within the meaning of Section 2(18) of the Act;(b) The shareholder should be a person who has substantial interest in the company in accordance with Section 2(22)(e) i.e. the shareholder should own a minimum beneficial interest of at least 20% of the equity capital. Besides, payment by such company to any concern in which the shareholder is a member or a partner having substantial interest is also covered under Section 2(22)(e); and(c) The company should possess accumulated profits.
A deeming fiction is created that a dividend has been distributed by the company to its shareholder in the form of a loan. In the present case -
(a) SISICOL is a company in which the public are not substantially interested and it was a private limited company;(b) The respondent Subrata Roy was a beneficial owner of shares of SISICOL, holding 14,36,702/- shares out of total shares of 15,48,500;(c) The respondent was a partner of 62% shares in the profits of M/s. Sahara India i.e. he is holding substantial interest in the firm;(d) SISICO had an accumulated profit of Rs.16,98,12,423/- as on 31.03.1995;(e) SISICOL had offered a loan of Rs.1,06,800/- to the respondent through his current account with M/s. Sahara India during the year;(f) SISICOL had also offered Rs.21,70,79,103/- to M/s. Sahara India indirectly, by the action of the latter not to transfer the said sum of moneys with SISICOL when the same had already been collected from the depositors for investment;(g) The firm M/s. Sahara India has shown the loan/advances from SISICOL on its liability side, thereby affirming that the action of retaining the deposit collected has created a loan transaction between SISICOL and M/s. Sahara India.
Therefore, since all conditions mentioned in Section 2(22) (e) are present in the case, so, the Assessing Officer rightly made an addition of deemed dividend of Rs.15,13,93,117/- to the income of the respondent.
It is also a submission of the learned counsel for the Department that the firm and the company SISICOL are nothing but one man show. In fact, if corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL. Assessee allowed huge interest bearing sums of money of SISICOl to remain with the firm and never charged any interest thereon. Lastly, he made a request to restore the order passed by the AO.
On the other hand, learned counsel for the assessee submits that the whole approach of the AO is incorrect. The observations and the inferences drawn by the Assessing Officer are ill-founded and against the facts and circumstances. The Assessing Officer has lost sight of relationship between the firm which was acting as an agent and the principals i.e. the Companies. The AO failed to appreciate that the amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. So, Section 2(22)(e) of the Act is not applicable in the instant case.
It is also a submission of the learned counsel that if the firm and company of the assessee is only one man show and everything belongs to the assessee, then there is no question of giving any loan by somebody to anybody because the total amount belongs to the assessee himself. So, the observations of the AO is misconceived. All the entities under different status were assessed, so the submission of the learned counsel for the Department that they are nothing but only one man show, is absolutely incorrect, uncalled for and against the facts and circumstances of the case. Lastly, he submits that the companies have not given any loan to the assessee or to the firm, there is no question of making any addition in the hands of the assessee.
After hearing both the parties and on perusal of the record, it appears that as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. It was collected by the branches of the firm to its command office, Lucknow but the assessee deliberately retained or allowed to be retained the funds in the firm. Therefore, it cannot be said that there was no payment to the company to the firm. The firm was supposed to send the money to the company promptly. Moreover, the Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. When the liability amount is shown in the balance-sheet as a liability then it is nothing except a loan.
It may be mentioned that, the word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. It is a sum of money or portion of divisible thing to be distributed according to a fixed scheme being what the shareholder earns as return on his investment; it is his share of corporate earnings credited to his account. The characteristic feature of 'dividend' is that it is declared and paid wholly from the net profits or undivided earnings leaving intact the shareholder's fractional interest represented by his holding in the capital stock. A 'dividend' is not capital but the produce of capital. Subject to well recognised limitations, 'dividend' is a word of general and indefinite meaning without any narrow, technical or rigid significance. As explained above, the term 'dividend' is applied to a distributive sum, share or percentage arising from some joint venture as profits of a corporation. In the second sense, it is proportionate amount paid on liquidation of a company. In this context, 'dividend' is referred to as corporate profits set apart for rateable division amongst the shareholders being surplus assets obtained in excess of capital.
As stated earlier, M/s. Sahara India (Firm) has collected the deposits from the public on behalf of the various companies. The money was retained by the firm, which was supposed to be transmitted to the concerning companies after deducting the services charges. But the firm has retained the amount for a longer period. The assessee is a shareholder in all the companies. The amount collected was the fresh deposit (loan) and the same was not old loan.
The AO has observed that the retained amounts by M/s. Sahara India on behalf of SIFCOL were to the tune of Rs.9,28,320,075/- and on behalf of M/s. Sahara India Airlines Ltd., a sum of Rs.55,46,77,466/-; and Rs.92,679,162/- from M/s. Sahara India International Corporation Ltd. The AO treated the said amounts as a loans as the said amount was not transmitted to the concerned company and was shown in the books of account under the head of liability. So, in each case, it is a loan. Further, the AO observed that Sahara India Housing Ltd. had also given a loan of Rs.750,00,000/- to Sahara India Ltd., in which the assessee, Sri Subrata Roy is a substantial shareholder. The AO has come to the conclusion that the amount of loans to M/s. Sahara India (Firm) was treated deemed dividend earned and brought to the clutches of tax under Section 2(22)(e) of the Act.
It may be mentioned that Hon'ble Apex Court in the case of CIT vs. Alga Sundaram Chettiar, [2001] 252 ITR 893, 894, observed that the term "payment" must not be given a literal interpretation but it must be seen whether a jural relationship of debtor and creditor was created between the parties and it was not necessary that payment should have been made in cash or in specie to the assessee. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability.
Needless to mention that as per provision of sub section (e) of Section 2(22) of the Act, by way of loan to a share-holder amounts to dividend. For a dividend to arise under this subclause, the following conditions should be fulfilled:
(i) the company must be a company shares of which are closely held.(ii) money (not money's worth) should be paid by the company.(iii) the money must form a part of the assets of the company.(iv) it may be paid either by way of advance or loan or it may be "any payment".(v) (a) the payee must be a shareholder of the company having substantial interest in the company, or(b) the payee must be a person who is acting on behalf of or for the individual benefit of such shareholder.
The expression "person who has a substantial interest in the company" is defined in section 2(32) as meaning "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power."
If these conditions are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits.
Further, from the Assessment Year 1988-89 (onwards) the provisions of Section 2(22)(e) have undergone modification by the Finance Act, 1987. Accordingly, it also includes advances or loans made to any concern in which such shareholder is a member or partner and in which he has a substantial interest. In the latter case, the advance or loan will logically have to be treated as dividend in the hands of the shareholder concerned and not the concern because the scope of the sub-clause is only to rope in benefits given by a closely-held company to certain shareholders, directly or indirectly. This construction, however, will create difficulties in a case where more than one shareholder has a substantial interest in the concern. It would, therefore, be more logical to tax the concern which enjoys benefit from the advance or loan though it has directly nothing to do with the closely-held company. It is also conceivable that payments made to a concern in which the shareholder has no interest or even less than substantial interest if they can be shown to have been made on behalf of or for the individual benefit of such shareholder so as to attract the second part of the sub-clause.
This sub-clause of Section 2(22)(e) treats loans granted by 'closely-held' company to any of its shareholders in the same manner as it treats dividends distributed by it to them. The justification is plain. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend.
In the case of CIT vs. Alagusundaram Chettiar (L) (1977) 109 ITR 508 (Mad), it was observed that the provisions of this clause are attracted to any payment by a company, of any sum (whether as representing a part of the assets of the company or otherwise) by way of (1) advance; or (2) loan; (3) any payment on behalf of any shareholder; or (4) any payment for the individual benefit of any shareholder. The first two cases deal with a payment to the shareholder directly. The last two cases contemplate payment by a company not to the shareholder but to a third party on behalf of or for the individual benefit of the shareholder.
On the date the loan is advanced, the recipient should be a shareholder. If it is not so established, the provisions of section 2(22)(e) will not apply as observed in the case of CIT vs. Mittal (HK) (1996) 219 ITR 420 (All).
Thus, any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of the section. It would seem that deposits made by a closely-held company would also be covered by the expressions advance or loan.
Advances given by a company to its shareholders should be treated as payment out of accumulated profits of the company, whether capitalised or not, and must be treated as dividend and would go to reduce the tax liability, whenever such tax liability is required to be determined as observed in the case of CIT vs. Narasimhan (G) (1999) 236 ITR 327 (SC).
Advance given to the managing director, who had also substantial interest in the company for meeting cost for construction of building to be taken on lease by the company and the advance is to be adjusted with the lease rent, will be treated as deemed dividend for the purpose of section 2(22)(b) as observed in the case of CIT vs. Abubucker (PK) (2003) 259 ITR 507 (Mad).
Even if the loan is not granted directly to a shareholder who has a substantial interest as aforesaid, if a payment be made to a third person on behalf of or for the individual benefit of such a shareholder, the amount granted as loan would be treated as dividend as observed in the case of Ravindra D Amin vs. CIT (1994) 208 ITR 815 (Guj). In another case as observed in the case of CIT vs. Alagusundaram Chettiar (L) (1977) 109 ITR 508 (Mad), a company advanced moneys out of accumulated profits to a low-paid employee and it was found that he was, in turn, advancing huge sums by way of advances to the Managing Director of the company. It was held that the Managing Director was assessable under this sub-clause. Advances received by an assessee from a company in which he has no substantial interest but the company advances the sums out of sums borrowed by it on the very same date from another company in which the assessee has substantial interest can be said to be payments by the latter for the benefit of the assessee and so taxable under the sub-clause. But if there is no such correlation and the company that advances the loan does so out of mixed funds, the sub-clause will not be applicable as observed in the case of Nandlal Kanoria vs. CIT (1980) 122 ITR 405 (Cal.) = (2003-TIOL-339-HC-KOL-IT). The mischief of this sub-clause, which does not contain the words 'directly or indirectly', cannot be extended to cover a case where it cannot be established that the amounts were in fact received by the taxpayer from the company by way of loan or advance.
In the instant case, no circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. For this reason alone, we agree that it is a case of deemed income as the assessee is a shareholder in all the companies. Hence, we restore the orders of the AO in this regard by setting aside appellate orders.
IV. CLUBBING OF INCOME:
Lastly, he made a request that the order passed by the Tribunal may kindly be set aside.
It may be mentioned that Section 64(1)(ii) of the Act provides as under :
"Section 64(1)(ii)-to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest:[Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience;]"
During the course of assessment, the Assessing Officer has concluded that Smt. Swapna Roy, the spouse of the assessee, was drawing a net income of Rs.6,22,230/-. The AO has clubbed the income of Smt. Swapna Roy, the wife of the assessee, with the income of the assessee. Thus, the income of the husband wife were clubbed together. But the appellate authorities have treated both the assessees separately.
After hearing both the parties, it appears that Smt. Swapna Roy is a post-graduate and is also a Director in many companies. She has expertise in business matter also. She is a separate assessee since long, so, her income cannot be clubbed. Hence, we find no merit in the grounds taken by the Department. The order passed by the Tribunal is hereby upheld.
The answer to the substantial questions of law are in favour of the department and against the assessee.
In view of above, the appeals filed by the department are allowed (partly), as stated above
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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