IT : Where assessee had just undertaken development and sale of plots and no construction activity was undertaken during relevant year, deduction under section 80-IB was not allowable
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[2013] 37 taxmann.com 152 (Indore - Trib.)
IN THE ITAT INDORE BENCH
Navratan Techbuild (P.) Ltd.
v.
Assistant Commissioner of Income-tax, 1(2), Indore*
JOGINDER SINGH, JUDICIAL MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER
IT APPEAL NO. 547 ( INDORE) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 30, 2013
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [Housing Project] - Assessment year 2008-09 - Whether, deduction under section 80-IB(10) is specifically provided in respect of profit earned from development and construction of housing projects on or after 1-10-1998 - Held, yes - Whether, therefore, since construction and development of housing projects is sine qua non for claim of deduction under section 80-IB(10), deduction was not available to assessee company as it had just undertaken development of plots and their sales, and no construction activity was undertaken in respect of residential units proposed on such plots during relevant assessment year - Held, yes [Para 10] [In favour of revenue]
CASES REFERRED TO
Lavkik Developers v. Dy. CIT [2007] 11 SOT 728 (Mum.) (para 9), ITO v. Vishnu Developers [IT Appeal No. 2999 (Hyd.) 2008, dated 31-1-2011], Dy. CIT v. Bombay Real Estate Development Co. (P.) Ltd. [IT Appeal No. 6504 (Mum.) of 2008] (para 9), Sree Vatsa Real Estate (P.) Ltd. v. ITO [2012] 49 SOT 55 (URO)/16 taxmann.com 254 (Chennai) (para 9), CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) (para 9),Federation of A.P. Chambers of Commerce & Inds. v. State of A.P. [2001] 247 ITR 36/115 Taxman 143 (SC) (para 9), Sir Padampat Singhania v. Dy. CWT [2002] 81 ITD 89 (Luck.) (para 9), CIT v. South Aircot Distt. Co-op Marketing Society Ltd. [1989] 176 ITR 117/43 Taxman 328 (SC) (para 9), CIT v. J.H. Gotla [1985] 156 ITR 323/23 Taxman 14J (SC) (para 9), B.M. Parmar v. CIT [1999] 235 ITR 679/102 Taxman 552 (Punj. & Har.) (para 9), CIT v. Strawboard Mfg. Co. Ltd. [1989] 177 ITR 431/44 Taxman 189 (SC) (para 9), CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC) (para 9), Baja Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 9), Gem Granited v. CIT [2004] 271 ITR 312/141 Taxman 528 (SC) (para 9) and CIT v. Madho Pd. Jatia [1976] 105 ITR 179 (SC) (para 9).
Ashwani Kumar and Ms. Anupam Goyal for the Appellant. Smt. Mridula Bajpai for the Respondent.
ORDER
R.C. Sharma, Accountant Member - This is an appeal filed by the assessee against the order passed by the CIT(A) dated 1st August, 2012, for the assessment year 2008-09 in the matter of order passed u/s 143(3) of the Income-tax Act, 1961.
2. The only grievance of assessee relates to disallowance of claim of deduction of Rs. 13,37,31,420/- u/s 80IB(10) of the Income-tax Act, 1961.
3. Rival contentions have been heard and records perused. The facts of the case are that the assessee is a Private Limited Company engaged in the business of real estate development. It had filed its return declaring nil income after claiming deduction of Rs. 13,37,31,420/- u/s 80IB(10). The Assessing Officer noted that the assessee had shown its income from the township project 'Omaxe City' situated at village Mayakhedi Indore and undertaken in the joint ventureship with co-developers Shraddha Buildcon Pvt. Ltd. and Omaxe Construction Limited. During the year under consideration, the assessee had shown his share of profit from the sale of developed plots only and had claimed deduction u/s 80IB(10) thereon. The claim was rejected by the Assessing Officer on the ground that deduction was available in respect of housing projects on fulfilment of various criterion (including the maximum built up area of each unit) as provided in the said Section ; and that construction of residential units were essential. The Assessing Officer was of the firm view that the exemption u/s 80IB(10) was not available if the project was limited to development and selling of plots only without construction of residential units thereon.
4. In an appeal filed before the CIT(A), the CIT(A) considered the submission made by the assessee in the context of judicial pronouncements cited before him and concluded as under :—
| '(i) | During the assessment year 2008-09, to which this appeal relates to, assessee had claimed deduction u/s 80IB(10) on sale of developed plots only. The quantum of deduction is Rs. 13,37,31,4520/- .. refer Table A | |
| (ii) | The claim of deduction on sale of developed plots have been made in assessment years 2010-11 & 2011-12 (Rs. 1,18,48,538/- and Rs. 5,30,704/-respectively). However, in those years deduction on sale of residential units [floors G+2] were also made. The quantum of deduction thereon have been, however, comparatively low [Rs. 25,50,850/- & Rs. 2,85,233/-] - ref Table - A. | |
| (iii) | No deduction has been claimed on sale of Villas. This was for the reasons that built up area of each unit of such Villas exceeded 1500 sq.ft. - Ref Table A & D | |
| (iv) | The total units of floors [G +2] were 48. The built up area of each flat was 1315.5 sq. ft. (i.e. less than 1500 sq. ft.). These G + 2 floors/flats were constructed on the plot of size 288 sq.mt. Thus the total area of land on which these 48 units were constructed works out to 4608 sq.m. [i.e. 2388 x 48/3]. This works out to 1.15 acres [i.e. slightly more than 1 acre] - - ref Table C. | |
| (v) | 'Villas' were of two types. - one constructed on the plot size of 108 sq.mt. and other on the plot size of 135 sq.m. The built of area was 1828 sq.ft. & 1757 sq.ft. respectively. In all 143 units [107 + 36] were constructed. The total land area used for construction of these "Villas" works out to 16416 sq.m. This accounts for apprx. 4.1 acres - ref table D. | |
| (vi) | Apart from 16 plots [of size 288 sq.m] on which G+2 floors were constructed and 143 plots [of two sizes - 108 sq.m. & 135 sq.m.] on which Villas were constructed, the remaining ones [in all 645 plots of varying plot sizes ranging from 72 sq.m. to 700 sq.m.] were sold as such without construction of any ranging from 72 sq.m. to 700 sq.m.] were sold as such without construction of any residential units thereon. The total land area in respect of such developed plots works out to 1,50,089 sq.m. This accounts for 37.52 Acres.. - ref Table B. | |
| 4.3 Thus, it is observed that the assessee at the most could have claimed deduction in respect of construction of G + 2 floors on stand alone basis, as the total land area for that exceeded 1 acre [minimum required] and the built up area of each flat was less than 1500 sq. ft. provided other conditions satisfy. The claim thereon would relate to assessment years 2010-11 & 2011-12 and need to be looked into in those years. The assessee has not claimed any deduction on the sale of "Villas" as the built up area of each of those units exceeded 1500 sq.ft. There is no dispute in that account. The rest of the claim, which is the major claim' relates to the sale of plots. In my considered view the deduction u/s 80IB(10) is available for housing projects. The construction of residential Units is must. This is an incentive provision and has been brought with a view to solve the housing problems for the people [middle & lower income group]. It is for this reason that a condition on maximum built-up area has been provided. If the project is limited to the development of plots and the developed plots are sold as such without construction of any residential unit thereon, then the deduction u/s 80IB(10) is not at all available. There is no other opinion on the issue. There is no case law [decided by High Court or Supreme Court] so far for allowing the deduction on sale of plots [ of course after due process of development work]. The claim made by the assessee in respect of sale of plot is not in accordance with the provision of Income-tax Act, 1961, and deserves to be rejected on merit. | ||
| 4.4 During the appeal proceedings, the assessee furnished detailed submissions which finds place in para 3 of this order. I have carefully gone through it and considered the same in the context of facts as mentioned in the aforesaid paras and the viewpoint taken by the Assessing Officer. I find that the argument put forth by the assessee, through such detailed submissions and reliance on the case laws thereon is totally misplaced. The various conditions provided in Section 80IB(10) relates to the housing projects wherein residential units having built up area below the prescribed limit (1000 sq.ft. for Delhi or Mumbai and 1500 sq. ft. for others) are constructed. Such housing projects could include shops and other commercial establishment but the built up area for that should not exceed 5 % of aggregate built up area of the housing project or 2000 sq. ft. whichever is less. This requirement had been modified to 3 % or 5000 sq.ft. whichever is higher w.e.f. 01-04-2010. While deciding the case, the Assessing Officer has examined the applicability of various conditions and given his views thereon. In the context of condition related to shops and commercial establishment, the Assessing Officer had observed that proposed built-up commercial area was 5.33 acres which is almost 9.71 % of the total area and as such the condition (given in Section 180IB(10)(d) also was not satisfied. In my view, there has been no need to examine the other conditions once the facts that the claim made by the assessee was on the sale of developed plots and not on residential units has come to the surface. In that case the primary condition itself was not satisfied and therefore there was no question for allowing deduction u/s 80IB(10) irrespective of whether other conditions were satisfied or not. Nevertheless on this issue, the assessee has further submitted that a large part of the commercial area had been ousted from the collaboration agreement dated 05-05-2006 by way of an amendment on 07-07-2011. Copy of "Amendment to Collaboration Agreement" has also been filed. A request was also made for admission of certain documents such as copy of amendment to agreement dated 07-07-2011, copy of registered sale deeds in the name of Shraddha Buildcon Pvt. Ltd. and Shanti Creations in respect of commercial area, copy of contract awarded by Omaxe Buildwell Pvt. Ltd. for construction of commercial area and copy of completion certificate of G+2 units and EWS units alongwith copy of completion certificate of the development works of the project as an additional evidence u/r 46A. It was submitted that these documents could not be produced before the Assessing Officer since they are of later date. The application of the assessee was forwarded to the Assessing Officer for his comments. The Assessing Officer objected to the admission of additional evidence. After having considered the facts and the issue involved, I do admit these documents as additional evidence. However, these additional evidences do not help the case of the assessee in view of the basic fact that the project undertaken by the assessee has not been a "housing project". It has been noted that the Directorate of Town and Country Planning had accorded the approval for development of "residential colony". By that itself, it cannot be conferred the status of carrying out a "housing project". In the case of residential colony, the activities could be limited to the development of plots and the construction of the residential units thereon could be done by the purchaser of plots also. In that case, the deduction u/s 80IB(10) is not allowable. Only in those residential colonies, where the houses are also built by the developer, the provision of Section 80IB(10) is applicable. In that case, the project would in fact be called "housing project". In the present case, the major part of the land of the project has been sold as developed plot only, the construction of residential units are limited to a very small part and thereto the built up area of "villas" exceeded the prescribed limit of 1500 sq.ft. Though not very relevant for arriving at decision, but nevertheless noted that the built up areas of residential units as "villas" exceeded the prescribed limit of 1500 sq.ft. even when the same were constructed on a relatively smaller sizes of plots i.e. 72, 108, 135, 144, 170, 200 , 288, 322, 344, 25, 365, 396 and 700 sq.mts. (refer table B in para 4.2). Thus, how it can be ensured that the built up area of the residential units, which could be constructed by the purchaser of such plots, would not exceed the maximum limit of 1500 sq.ft. Further, the assessee's plea that there is no mention of minimum built up area of the residential units in the said Section 80IB(10) for claiming the deduction is also misplaced as the provision has never been intended for giving incentives merely for developing plots. Thus, as already observed by me in the aforesaid paras, the assessee's claim of deduction at the most could be considered in respect of the construction of residential units in the form of G+2 floors that too on stand alone basis provided that other conditions get satisfied. For the year under consideration, nevertheless the issue is limited to the deduction u/s 80IB(10) in respect of sale of developed plots only, which is not at all allowable. In that view of the matter, the disallowance made by the Assessing Officer (Rs. 13,37,31,420/-) is confirmed. | ||
| 5. While deciding the issue, it is noted that the joint venture partners, namely, Shraddha Buildcon Pvt. Ltd. and Omaxe Limited had also received their share of profit on sale of the "developed plots". The share of profits between the assessee and the said joint venture partners had been 25 %, 25% and 50 % in respect of plot segment. It is quite likely that they would have also claimed deduction thereon u/s 80IB(10). The Assessing Officer is therefore directed to ascertain from the concerned Assessing Officers having jurisdiction over those companies as to whether the similar claim had already been disallowed in those cases. If not then those Assessing Officers should be advised to take remedial action for withdrawing the claim of their deduction. A copy of this appellate order should also be sent to those Assessing Officers to enable them to take a considered view.' |
5. Against this order of CIT(A), the assessee is in further appeal before us. Shri Ashwini Kumar, C. A. and Mrs. Anupam Goel, C.A. appeared on behalf of assessee and contended that the assessee undertook the development and construction of the housing project in collaboration with M/s. Omaxe Limited (Omaxe) and M/s. Shradha Buildcon Private Limited (SBPL). The broad terms of the collaboration were defined videagreement dated 5th May, 2006. The housing project was on an area of 36.074 hectares i.e. 89.14 acres. First approval for carrying out the housing project at an area of 36.074 hectares was obtained by the assessee on 27-5-2006. The eligible housing project consisted of development of housing sites as well as development and construction of residential units. The consolidated approval also consisted of an area of 8.292 acres. The consolidated approval also consisted of an area of 8.292 acres demarcated for commercial use. It was transferred to M/s. Omaxe Buildwell Private Limited on 31-3-2009 for development and construction and did not form part of the eligible housing project. The eligible housing project consisted of the residential area only consisting of housing sties and constructed residential units having a built up area of less than 1500 sq.ft. The assessee was following percentage of completion method for recognizing the revenue. During the year under consideration, the Revenue was recognized on sale of housing sites only and accordingly deduction u/s 80IB(10) amounting to Rs. 13,31,37,420/- was claimed on the same.
6. The ld. Authorized Representative further contended that the Assessing Officer was not justified in holding that the assessee was not a developer within the meaning of Section 80IB(10). Our attention was invited to SVPL, wherein the assessee has been referred to as "Owner" and Omaxe" has been referred as Developer" in collaboration". Our attention was also invited to the clause in MOU, which mentions that the assessee is a developer of the project. Specific reference was drawn to clause in page No. 3 of the agreement, which states that developer has approached to the assessee to collaborate for the development of the complex. The assessee has contributed land as part of cost of project and the developer has attributed the expenses to be incurred on construction/marketing etc. as part of the cost. As per ld. Authorized Representative, the assessee was not getting fixed compensation/minimum guarantee for its land. In fact, the assessee was sharing the risk as well as the profits as per the agreement, according to which the assessee was to enjoy the profit or suffer loss in case project is not sold or sold at a low price. Our attention was also invited by the ld. Authorized Representative to the various permission/sanctions obtained from the concerned Government Authorities for development of the land. The ld. Authorized Representative further contended that the assessee has developed the land and also infrastructure necessarily required for housing project for which assessee was eligible for deduction u/s 80IB(10).
7. On the other hand, the ld. Senior DR invited our attention to various findings recorded by the Assessing Officer and CIT(A) to the effect that the assessee has not undertaken development of residential house so as to enable the assessee benefit of Section 80IB(10). Further reliance was placed on the orders of the lower authorities.
8. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee has got approval for development of housing project. However, during the year under consideration, the assessee has just undertaken development of plots and their sales, no construction activity was undertaken in respect of residential units proposed on such plots. Deduction u/s 80IB(10) specifically provides for deduction in respect of profit earned on development and construction of housing projects on or after 1st day of October, 1998. Sub-Section (10) reads as under :—
"(10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, 2008, by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project if, —
| (a) | such undertaking has commenced or commences development of construction of the housing project on or after the 1st day of October, 1998 and completes such construction, — |
| (i) | in a case where a housing project has been approved by the local authority before the 1st day of April, 2004, on or before the 31st day of March, 2008. | |
| (ii) | in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority. |
| Explanation :— For the purposes of this clause:— |
| (i) | in a case where the approval in respect of the housing project is obtained more than once such housing project shall be deemed to have been approved on the dale on which the building plan of such housing project is first approved by the local authority: | |
| (ii) | the date of completion of construction of the housing project shall be taken to be the date on which the completion certificate in respect of such housing project is issued by the local authority: | |
| (b) | the project is on the size of a plot of land which has a minimum area of one acre: | |
| Provided that nothing contained in clause (a) or clause (b) shall apply to a housing project carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law for the time being in force and such scheme is notified by the Board in this behalf: | ||
| (c) | the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometers from the municipal limits of these cities and one thousand and five hundreds square feet at any other place and | |
| (d) | the built-up area of tire shops and other commercial establishments included in the housing project does not exceed five per cent of the aggregate built-up area of the housing project or two thousand square feet, whichever is less." |
9. It is crystal clear from the plain reading of sub-Section (1) of Section 80IB that deduction is subject to condition of undertaking, development and building of housing project. Thus, the construction and development of housing projects is sine qua non for claim of deduction u/s 80IB(10) subject to fulfilment of other conditions. In the instant case, it is not in dispute that the assessee has just developed the plots and sold them. No construction activity was undertaken during the year. Thus, the assessee is not eligible for claim of deduction in respect of profit earned on sale of developed plot insofar as there was no profit on sale of residential units. The ld. Authorized Representative has relied on the observations made in the following decisions :-
| 1. | Laukik Developers v. Dy. CIT [2007] 11 SOT 728 (Mum.) | |
| 2. | ITO v. Vishnu Developers [I.T.A. No. 2999/Hyd/08, dated 31-1-2011] | |
| 3. | Dy. CIT v. Bombay Real Estate Development Co. (P.) Ltd. [I.T.A. No. 6504/Mum/08 (I.T.A.T. - Mum) | |
| 4. | Sreevatsa Real Estate (P.) Ltd. v. ITO [2011] 49 SOT 55 (URO)/16 taxmann.com 254 (Chennai) | |
| 5. | CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) | |
| 6. | Federation of A.P. Chambers of Commerce & Inds. v. State of A.P. [2001] 247 ITR 36/115 Taxman 143 ( SC). | |
| 7. | Sir Padampat Singhania v. Dy. CWT [2002] 81 ITD 89 (Luck.) | |
| 8. | CIT v. South Aircot Distt. Co-op. Marketing Society Ltd. [1989] 176 ITR 117/43 Taxman 328 (SC). | |
| 9. | CIT v. J.H. Gotla [1985] l56 ITR 323/23 Taxman 14J (SC) | |
| 10. | B.M. Parmar v. CIT [1999] 235 ITR 679/102 Taxman 552 (Punj. & Har.) | |
| 11. | CIT v. Strawboard Mfg. Co. Ltd. [1989] 177 ITR 431/44 Taxman 189 (SC). | |
| 12. | CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC) | |
| 13. | Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC). | |
| 14. | Gem Granites v. CIT [2004] 271 ITR 322/141 Taxman 528 (SC) | |
| 15. | CIT v. Madho Pd. Jatia [1976] 105 ITR 179 (SC) |
10. We have carefully gone through these judgments and no where found that deduction was allowed without construction of residential units. Accordingly, the case laws relied upon by the ld. Authorized Representative were distinguishable on facts and will not help the assessee for getting deduction u/s 80IB(10) without undertaking construction of residential units. Since the assessee has sold plots and did not undertake construction of residential units, the condition prescribed in clause (c) of Section 80IB(10) was not satisfied. Clause (a) of sub-section (10) of Section 80IB make the assessee eligible for claim of deduction only after obtaining completion certificate of the project as a whole within the specified period. Once the construction of residential units itself in the housing project has not been undertaken, there does not arise any reason to issue completion certificate by the competent authority, who has approved the project. Contention of the ld. Authorized Representative to the effect that development of land and infrastructure as undertaken by the assessee was in furtherance of object of development of housing project, whatever activity has been undertaken by the assessee, out of which the assessee has derived profit should be eligible for claim of deduction u/s 80IB(10), has no substance insofar as mere development of infrastructure and development of land does not amount to construction of residential units, which is a sine qua non for claim of deduction u/s 80IB(10) of the Income-tax Act, 1961.
11. In the result, the appeal of the assessee is dismissed.
IT: Where Tribunal found working of valuation of work-in-progress was not accurate, but determined unaccounted expenditure merely on estimated basis without assigning any reason, same could not sustain
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[2013] 37 taxmann.com 197 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax -II
v.
Surat Beverages Ltd.*
M.R. SHAH AND MS. SONIA GOKANI, JJ.
TAX APPEAL NOS. 291 & 669 OF 2013†
JULY 22, 2013
Section 69C, read with section 254, of the Income-tax Act, 1961 - Unexplained expenditure [Estimation of] - Assessment year 2006-07 - Tribunal noted that assessee had not produced actual and accurate working for valuation of work-in-progress; that to justify its valuation at market rate, assessee had not produced any valuation report; and, further that Commissioner (Appeals) had sustained addition of Rs. 61.44 lakhs on estimation basis - Tribunal, without assigning any reason, estimated addition at Rs. 30 lakhs - Whether since Tribunal's order was a non-speaking and non-reasoned order, absolutely on estimation basis, same could not be sustained - Held, yes [Para 5] [Matter remanded]
FACTS
| ■ | The assessee submitted return of income of Rs. 2,30,600. | |
| ■ | The Assessing Officer passed an order of assessment making addition of Rs. 1.23 crore in respect of unaccounted expenditure under section 69C. | |
| ■ | On appeal, the Commissioner (Appeals) modified addition to Rs. 61 lakh and confirmed order in respect of speculative loss. | |
| ■ | On cross appeal, the Tribunal sustained addition of Rs. 30 lakh on an estimate basis. | |
| ■ | On cross appeals : |
HELD
| ■ | The Tribunal passed impugned order observing as follows: |
| (i) | The assessee had not produced the actual and accurate working for the valuation of work in progress before the Revenue or before the Tribunal. | |
| (ii) | Further, to justify the assessee's claim that it has valued the work in progress on the basis of market value; the assessee has not submitted any valuation report. | |
| (iii) | Looking at the complexity of the issue, the Commissioner (Appeals) had sustained addition of Rs. 61,44,189 on an estimate basis. On an overall examination of the facts, an addition of Rs. 30,00,000 was required to be sustained to meet the end of justice. |
| ■ | It appears that as such no reasons have been assigned by the Tribunal at all while dismissing the appeal preferred by the revenue and partly allowing the appeal preferred by the assessee and sustaining addition of Rs. 30 lakh except observing that 'On an overall examination of the facts, we are of the considered view that an addition of Rs. 30 lakh requires to be sustained to meet the end of justice'. Thus, as such the impugned judgment and order passed by the Tribunal is absolutely a non-reasoned and non-speaking order. [Para 4.1] | |
| ■ | The Tribunal while deciding the appeals, is required to pass the order judiciously and it should reflect that the Tribunal has applied the mind on a particular issue. The Tribunal is a judicial authority and it should exercise the powers under section 254 and as per sub-section (4) of section 254 save as provided in section 256 or section 260A, orders passed by the Appellate Tribunal on appeal shall be final. Therefore, a great care should be taken by the Tribunal while exercising the powers under section 254 and while deciding the appeals in exercise of powers under section 254. It is true that sub-section (1) of section 254 provides that the appellate tribunal may pass such orders as it thinks fit, but that does not mean that the tribunal is not required to assign any reasons and/or the Tribunal is not required to pass a speaking order. | |
| ■ | Considering the requirement of passing a reasoned and speaking order, considering the facts of the case on hand and the impugned common judgment and order passed by the Tribunal, the impugned judgment and order cannot be sustained. No reasons at all have been assigned by the Tribunal while dismissing the appeal preferred by the Revenue and partly allowing the appeal preferred by the assessee and sustaining the addition of Rs. 30 lakh. The impugned order passed by the Tribunal is absolutely on estimate basis without assigning any reasons and as such no reasons have been assigned at all while dismissing the appeal preferred by the Revenue. | |
| ■ | As stated hereinabove both, the Revenue as well as the assessee are aggrieved by the impugned judgment and order and a common grievance is made that the impugned order passed by the Tribunal is a non-speaking and non-reasoned order and it is prayed to remand the matter to the Tribunal for its fresh decision. [Para 5] | |
| ■ | In view of the above and for the reasons stated above, both these appeals succeed. Consequently, the aforesaid two appeals are ordered to be restored to file of the Tribunal for its fresh decision. |
CASE REVIEW
Notified Area Committee v. Addl. Director, Consolidation [2002] 10 SCC 87 (para 5) followed.
CASES REFERRED TO
Ravi Yashwant Bhoir v. District Collector, Raigad [2012] 4 SCC 407 (para 5), Board of Trustees of Mastyrs Memorial Trust v. Union of India [2012] 10 SCC 734 (para 5), Real Estate Agencies v. State of Goa [2012] 12 SCC 170 (para 5) and Notified Area Committee v. Addl. Director, Consolidation [2012] 10 SCC 87 (para 5).
Manav A. Mehta for the Appellant. Tej Shah for the Respondent.
JUDGMENT
M.R. Shah, J. - As both these tax appeals are against the same judgment and order passed by the Income Tax Appellate Tribunal (hereinafter referred to as "ITAT") and as such they are cross appeals, they are disposed of by this common judgment and order.
1.1 Tax Appeal No.291/2013 has been preferred by the Revenue challenging the impugned judgment and order dated 05.10.2012 passed by the learned ITAT in Appeal being ITA No.1189 and 1934/Ahd/2010 by which the learned ITAT has partly allowed the said appeal preferred by the assessee and has dismissed the appeal of the Revenue.
1.2 Tax Appeal No.669/2013 has been preferred by the assessee challenging the aforesaid judgment and order passed by the learned ITAT insofar as partly allowing the appeal only and not allowing the appeal preferred by it in toto.
2. Facts leading to the present appeals in nut-shell are as under:
That the assessee is engaged in the business of manufacturing and packaging drinking water, pet performs, per bottles, moulds and mould spares. That the assessee submitted the return of income for the assessment year 2006-07 declaring total income of Rs. 2,30,600/-. That later on the case was taken up for scrutiny assessment. That the Assessing Officer passed the order of assessment by making addition of Rs. 1,22,88,377/- as unaccounted expenditure under section 69C of the Income Tax Act, 1961 (hereinafter referred to as "Act"). The AO also treated the said share trading loss of Rs. 9,91,673/- as speculative loss under section 73 of the Act.
Feeling aggrieved and dissatisfied with the order of assessment passed by the AO, the assessee preferred appeal before the CIT(A) and by order dated 10.02.2010, the CIT(A) partly allowed the said appeal and modified the order passed by the AO with respect to addition of Rs. 1,22,88,377/- and sustained the addition to the extent of Rs. 61,44,189/- and the balance amount came to be deleted. That the CIT(A) confirmed the order passed by the AO with respect to treating share trading loss of Rs. 9,91,673/- as speculative loss under section 73 of the Act as during the course of the hearing, the assessee did not press the said ground of appeal.
Feeling aggrieved and dissatisfied with the order passed by the CIT(A) dated 10.02.2010, both, the assessee as well as the Revenue preferred appeals before the ITAT being Appeal Nos.1189 and 1934/Ahd/2010. It appears that the Revenue preferred appeal before the ITAT against the order passed by the CIT(A) in sustaining the addition to the extent of Rs. 61,44,189 only and deleting the balance amount and the assessee preferred appeal against sustaining the addition to the extent of Rs. 61,44,189/-. That by impugned common judgment and order the Tribunal has partly allowed the appeal of the assessee sustaining addition of Rs.30 lakh on an estimate basis in place of the addition of Rs. 61,44,189/- sustained by the CIT(A) and consequently dismissed the appeal of the revenue.
Feeling aggrieved and dissatisfied with the impugned common judgment and order both the revenue as well as the assessee have preferred the present appeals.
3. A common grievance made by the learned counsel appearing for the Revenue and even the learned counsel appearing for the assessee is that the impugned common judgment and order passed by the learned ITAT is a non-reasoned and non-speaking order. It is submitted by the learned counsel appearing for the revenue as well as assessee that as such no reasons have been assigned by the ITAT in modifying the order passed by the CIT(A) and while sustaining the addition of Rs.30 lakh. It is submitted that as such while passing the impugned judgment and order the ITAT has not assigned any reasons whatsoever. It is submitted that being a quasi-juridical / judicial authority, the ITAT was supposed to assign at least some reasons either in support of addition of Rs.30 lakh or not confirming either the order of the AO or the order passed by the CIT(A). Under the circumstances, it is requested to quash and set aside the impugned common judgment and order and remand the matter to the Appellate Tribunal to consider the aforesaid appeals afresh and to pass speaking and reasoned order.
4. Heard learned counsel appearing on behalf of both the appellants at length and considered the impugned common judgment and order passed by the learned ITAT.
4.1 At the outset it is required to be noted that the AO, while passing the order of assessment, made addition of Rs. 1,22,88,377/- as unaccounted expenditure under section 69C of the Act, which came to be reduced by the CIT(A) to the extent of Rs. 61,44,189/-. In further appeal, the learned Appellate Tribunal has reduced the addition/sustained the addition of Rs.30 lakh. While sustaining the addition of Rs. 30 lakh - partly allowing the appeal preferred by the assessee and dismissing the appeal preferred by the Revenue, from the impugned judgment and order, it appears that the learned ITAT has passed the impugned judgment and order by observing in para 8 as under:
"8. We have heard the rival submissions and carefully perused the material on record. Even though, the learned AR has reasoned out in various ways, he has not produced the actual and accurate working for the valuation of work in progress before the Revenue or before us. Further, to justify the assessee's claim that it has valued the work in progress on the basis of market value; the assessee has not submitted any valuation report. Therefore, the decision of the case; Sanjeev Woolen Mills v. CIT, 279 ITR 434 relied upon by the learned AR is not applicable to its facts of the case. Looking at the complexity of the issue, the learned CIT(A) had sustained addition of Rs. 61,44,189/- on an estimate basis. On an overall examination of the facts, we are of the considered view that an addition of Rs. 30,00,000/- requires to be sustained to meet the end of justice.
Accordingly, we sustain an addition of Rs. 30,00,000/- on an estimate basis. Since, we have further reduced the addition confirmed by the learned CIT(A), we hereby dismiss the appeal of the revenue."
Thus, from the aforesaid it appears that as such no reasons have been assigned at all while dismissing the appeal preferred by the revenue and partly allowing the appeal preferred by the assessee and sustaining addition of Rs.30 lakh except observing that "On an overall examination of the facts, we are of the considered view that an addition of Rs. 30,00,000/- requires to be sustained to meet the end of justice". Thus, as such the impugned judgment and order passed by the learned ITAT is absolutely a non-reasoned and non-speaking order.
5. While taking up tax appeals, we have come across similar non-speaking and non-reasoned orders passed by the ITAT and passing the order on estimate basis by deleting and/or making addition by observing that "to meet with the ends of justice". It cannot be disputed that ITAT, while deciding the appeals, is required to pass the order judiciously and it should reflect that the Tribunal has applied the mind on a particular issue. ITAT is a judicial authority and it should exercise the powers under section 254 of the Act and as per sub-section (4) of section 254 save as provided in section 256 or section 260A, orders passed by the appellate tribunal on appeal shall be final. Therefore, a great care should be taken by the ITAT while exercising the powers under section 254 of the Act and while deciding the appeals in exercise of powers under section 254 of the Act. It is true that sub-section (1) of section 254 provides that the appellate tribunal may pass such orders as it thinks fit, but that does not mean that the tribunal is not required to assign any reasons and/or the Tribunal is not required to pass a speaking order. In the case ofRavi Yashwant Bhoir v. District Collector, Raigad [2012] 4 SCC 407, the Hon'ble Supreme Court had an occasion to consider the rationale behind the requirement of recording reasons in order. In the said decision, it is observed and held by the Hon'ble Supreme Court that requirement of recording reasons is one of the principles of natural justice. It is further observed and held by the Hon'ble Supreme Court that right to reasons is an indispensable part of sound judicial system. In the said decision the Hon'ble Supreme Court in paras 44 and 46 has observed as under:
"44. This Court while deciding the issue in Sant Lal Gupta and Ors. v. Modern Co-operative Group Housing Society Ltd., placing reliance on its various earlier judgments held as under: (SCC pp.345-46, para 27)
"27 It is a settled legal proposition that not only administrative but also judicial orders must be supported by reasons recorded in it. Thus, while deciding an issue, the court is bound to give reasons for its conclusion. It is the duty and obligation on the part of the Court to record reasons while disposing of the case. The hallmark of order and exercise of judicial power by a judicial forum is for the forum to disclose its reasons by itself and giving of reasons has always been insisted upon as one of the fundamentals of sound administration of the justice delivery system, to make it known that there had been proper and due application of mind to the issue before the court and also as an essential requisite of the principles of natural justice.
'3... The giving of reasons for a decision is an essential attribute of judicial and judicious disposal of a matter before courts, and which is the only indication to know about the manner and quality of exercise undertaken, as also the fact that the court concerned had really applied its mind.'
The reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, the order becomes lifeless. Reasons substitute subjectivity with objectivity. The absence of reasons renders an order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. Recording of reasons is the principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected."
46. The emphasis on recording reason is that if the decision reveals the inscrutable face of the sphinx', it can be its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind of the authority before the court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made. In other words, a speaking out, the inscrutable face of the sphinx is ordinarily incongruous with a judicial or quasi-judicial performance.'
In the case of Board of Trustees of Board of Trustees of Mastyrs Memorial Trust v. Union of India [2012] 10 SCC 734, in para 22, the Hon'ble Supreme Court has held as under:
'22. Brevity in judgment writing has not lost its virtue. All long judgments or orders are not great nor are brief orders always bad. What is required of any judicial decision is due application of mind, clarity of reasoning and focused consideration. A slipshod consideration or cryptic order or decision without due reflection on the issues raised in a matter may render such decision unsustainable. Hasty adjudication must be avoided. Each and every matter that comes to the court must be examined with the seriousness it deserves.'
In the case of Real Estate Agencies v. State of Goa [2012] 12 SCC 170 while emphasizing the necessity of giving reasons by the Courts/Tribunals/Judiciary, it is held that, manner of reaching a decision and reasons for reaching such decisions are sacrosanct to judicial process.
While emphasizing the need to pass a reasoned order, the Hon'ble Supreme Court in the case of Notified Area Committee v. Addl. Director, Consolidation [2012] 10 SCC 87, has held as under:
"The reasons are the flesh and blood of Judicial adjudication and such reasons must be shown in the orders which are liable to be challenged in the Superior Court".
Considering the aforesaid law laid down by the Hon'ble Supreme Court and the requirement of passing a reasoned and speaking order, considering the facts of the case on hand and the impugned common judgment and order passed by the ITAT, the impugned judgment and order cannot be sustained. No reasons at all have been assigned by the learned Tribunal while dismissing the appeal preferred by the Revenue and partly allowing the appeal preferred by the assessee and sustaining the addition of Rs. 30 lakh. The impugned order passed by the learned Tribunal is absolutely on estimate basis without assigning any reasons and as such no reasons have been assigned at all while dismissing the appeal preferred by the Revenue.
As stated hereinabove both, the Revenue as well as the assessee are aggrieved by the impugned judgment and order and a common grievance is made that the impugned order passed by the learned ITAT is a non-speaking and non-reasoned order and it is prayed to remand the matter to the ITAT for its fresh decision.
6. In view of the above and for the reasons stated above, both these appeals succeed. Impugned common judgment and order dated 05.10.2012 passed by the learned ITAT in Appeal being ITA Nos.1189 and 1934/Ahd/2010 is hereby quashed and set aside and the matters are remanded to the learned ITAT to decide the aforesaid two appeals afresh in accordance with law and on merits and to pass a reasoned and speaking order. Consequently, the aforesaid two appeals are ordered to be restored to file of learned ITAT for its fresh decision and for passing a reasoned and speaking order considering the aforesaid decisions of the Hon'ble Supreme Court and this Court. Both these Appeals are Allowed accordingly to the aforesaid extent. However, it is made clear that this Court has not expressed anything on merits in favour of either parties.
SB†Arising out of IT Appeal Nos. 1189 and 1934/Ahd./2010, dated 5-10-2012.
No Recovery proceedings if applied for payment of defaulted Service Tax under VCES, 2013
The Service Tax Voluntary Compliance Encouragement Scheme, 2013 ("VCES, 2013" or "the Scheme") is not able to get success on many accounts and prospective applicants are scared to opt for VCES as the declarants are being targeted by the Preventive Wing of the Department. It is very important that the department should extend helping hands to the defaulters to pay the service tax, not paid in the past and help the Scheme to flourish in collecting a reasonable sum of money as desired by the Hon'ble Finance Minister while launching the VCES, 2013.
Before the Scheme gets flourish, litigation has started and one of the important related judgement of the Hon'ble Allahabad High Court in the case of Anand Caterers (Petitioner) Vs. Union of India and 3 Others (Respondent) AIT-2013-162-HC, is summarized for your easy digests on following issue:
Issue:
Whether Recovery can be made if Assessee has already applied for payment of defaultedService tax amount under VCES, 2013?
Facts & Background:
The writ petition is filed against the summoning order dated 31.5.2013 issued by the Superintendent (AE), Central Excise and Service Tax, Noida and Notice dated 7.6.2013 issued by the Deputy Commissioner (AE) Central Excise and Service Tax, Noida and the proceedings under Section 87 of the Finance Act, 1994 ("the Finance Act") by way of issuing garnishee order.{Relevant Portion of Section 87 is reproduced here in below}
Section 87: Recovery of any amount due to Central Government.
"Where any amount payable by a person to the credit of the Central Government under any of the provisions of this Chapter or of the rules made there under is not paid, the Central Excise Officer shall proceed to recover the amount by one or more of the modes mentioned below:—
(a) ………………………………;
(b) (i) the Central Excise Officer may, by notice in writing, require any other person from whom money is due or may become due to such person, or who holds or may subsequently hold money for or on account of such person, to pay to the credit of the Central Government either forthwith upon the money becoming due or being held or at or within the time specified in the notice, not being before the money becomes due or is held, so much of the money as is sufficient to pay the amount due from such person or the whole of the money when it is equal to or less than that amount;……………………………"
The order dated 7th June, 2013 passed under the said Section required the petitioner to deposit an amount of Rs.60 lacs (Rupees Sixty Lacs) as service tax along with interest in respect of the taxable services provided. The notice has been addressed to the bankers of the petitioner to release the funds held by them on behalf of the petitioner.
The petitioner acknowledged that he is liable to pay service tax and is registered with the service tax authorities. On 31.5.2013 a search was conducted on its business premise in which it was detected that the petitioner is required to pay Rs.60 lacs as service dues. He has challenged the garnishee order on the ground that he has filed an application on 20th June, 2013 under Section 106 (VCES, 2013), which is operative for the period from 1st October, 2007 to 31st December, 2012 and covers all the liability, outstanding as on 1st March, 2013.
Since the petitioner has submitted an application under VCES, 2013 vide which it can deposit 50% of the admitted tax due by 31st December, 2013 and the remaining amount by 30th June, 2014, the garnishee order has been illegally and arbitrarily issued without deciding the application.
Held:
The Hon'ble Allahabad High Court has held that when the liability of service tax is admitted andapplication has been made under the VCES scheme on 20th June, 2013, then no recoveryproceedings could be taken until the application is disposed of and which, under Section 107 permits the defaulter to deposit tax in two instalments i.e. to pay 50% by 31st December, 2013 and remaining 50% by 30th June, 2014.
Further, the petitioner has demonstrated that he fulfils the eligibility conditions of VCES, 2013 and that unless the application is considered and decided, no proceedings under Section 87 may be allowed to continue. The object of the Service Tax VCES, 2013 may be defeated, if the recovery is allowed to proceed.
Sir,
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Kapil Diwan & Company![]()
Chartered Accountants
G-15, IInd Floor,
Ganpati Towers,
Lawrence Road,
Amritsar, Punjab
9417323269
G-15, IInd Floor,
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Supreme Court Larger Bench upholds Raheja Development
TIOL-DDT 2199
27.09.2013
Friday
TIOL-DDT 2199 27.09.2013
Friday
AFTER all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works - Supreme Court
IN a landmark judgement in Raheja Development Corporation Vs. State of Karnataka reported in 2005-TIOL-77-SC-CT, the Supreme Court had held that the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale.
In the Raheja case, Raheja after entering into development agreement with the landowners the residential apartments were constructed on obtaining plan approvals. Before construction of residential apartments, agreements were entered into with prospective buyers. The agreements provide for giving undivided land share, construction of residential apartment, provision for car parking in the ground floor etc,.
The Court held this to be a works contract liable to pay tax under the Karnataka Act.
In Larsen & Toubro Limited & Anr Vs State of Karnataka & Anr - 2008-TIOL-186-SC-CT, Supreme Court doubted the correctness of the judgement of the Court in Raheja Development Corporation and felt the decision needs re-consideration by a larger Bench.
The Larger Bench gave its decision yesterday in a marathon judgement running into 85 pages, approving Raheja and holding that it lays down the correct legal position.
The Larger Bench summarised the legal position, as:
(i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form.(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.(iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term "works contract" in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract".(iv) Building contracts are species of the works contract.(v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.(vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract.(ix) The expression "tax on the sale or purchase of goods" in Entry 54 in List 11 of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of 'sale' defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act.(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List 11 is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.
We bring you this judgement today. Please see Breaking News
Though this is a case relating to Sales Tax/VAT/Turnover Tax/WCT, it had its ripples in Service Tax.
In early 2006, the then DG, Service Tax tried to make the Raheja judgement applicable to Service Tax and since then, this has been haunting Service Tax and to this day disputes are continuing unabated. Please see DDT 309-23 02 2006
Company's MD Sentenced 3 months rigorous imprisonment for TDS default
Managing Director of M/S Kitty Steels Ltd., Hyderabad Sentenced for 3 Months along with the Fine of Rs. 5000/- Each for the Two Offences Committed under Section 276B and 276C of the Income Tax Act.
The Court of the Special Judge, Economic offences, Nampally, Hyderabad has sentenced the Managing Director of M/s Kitty Steels Ltd., Hyderabad to rigorous imprisonment for 3 months along with the fine of Rs. 5000/- each for the two offences committed under section 276B and 276C of the Income Tax Act. The assessee company had deducted tax at source from the salaries,dividends and payments made to the contractors, but had not deposited the tax so deducted to the credit of the Central Government within the prescribed time. The assessee company had also failed to issue the requisite certificates of TDS u/s 203 of the Income Tax Act. The Hon'ble Court, after hearing both sides and perusing the documents came to the conclusion that the assessee had willfully attempted to evade the payment of tax and had committed offences punishable u/s 276B and 276C(2) of the Act.
Customs
Conversion of Free Shipping Bill into DEEC Bills - amendment can be permitted on basis of documentary evidence available at time of clearance - Conversion not allowed: CESTAT
THE appellant made a request for conversion of free shipping bills into DEEC Bills in view of the fact that they had imported components duty free for using in their manufacture of export goods and while filing ARE-2/shipping bills, they had failed to mention these facts in the relevant documents. The request has been rejected by the Commissioner and so the appellant is before the Tribunal.
Income Tax
Whether when assessee transfers its running business and obtains Right of First Refusal to start new business, compensation received from purchaser for breach of such a right is in nature of capital receipt - YES: ITAT
THE Parle Group of companies were engaged in the business of manufacturing, bottling and distribution of soft drinks and beverages under several popular brands viz., Thumbs Up, Limca, Gold Spot, Maaza, Citra, etc., and other popular brands. The Parle Group of companies entered into a "master agreement" with The Coca Cola Co. of U.S.A. ("TCCC") on September 1993, for transfer of intellectual property rights in the nature of trade marks, knowhow, franchisee rights, etc., in respect of various brands of beverages / soft drinks owned by Parle Group.
The issue before the Bench is - Whether when the assessee transfers its running business and obtains Right of First Refusal to start a new business, compensation received from the purchaser for breach of such a right is in the nature of capital receipt. YES is the Tribunal's answer.
Service Tax
CENVAT - Whether credit is available on Inputs and Capital goods used for Constructing of Mall by contractor which Mall, shops therein, are rented out by appellant and appellant paying service tax under category of "Renting of Immovable Property" - Pre-deposit ordered of 35% of the Credit involved: CESTAT by Majority
THE appellants are owners of shopping malls which consist of various shops. As the said shops are being given on rent by them, they are registered with the Service Tax department as a service provider falling under the category of "renting of immovable property services", along with 'maintenance and repair services' and 'sale of space or time for advertisement services'.
The dispute in the present appeals relates to the CENVAT credit availed by the appellants and utilised for providing output services of 'renting of immovable property services'.
ST : A recipient of clearing and forwarding services was made liable to file return by section 71A and section 73 was amended by Finance (No. 2) Act, 2004 to enable demand of service tax from persons falling under section 71A; therefore, such persons could not be asked to pay service tax prior to such amendment w.e.f. 10-9-2004 and show-cause notice issued prior to that date was invalid
■■■
[2013] 37 taxmann.com 148 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner, Customs & Central Excise
v.
Hindalco Industries Ltd.*
SUNIL AMBWANI AND SURYA PRAKASH KESARWANI, JJ.
CENTRAL EXCISE APPEAL DEFECTIVE NO. 13 OF 2013
JULY 23, 2013
Section 65(25), read with section 73, of the Finance Act, 1994 - Clearing and Forwarding Agent's Services - Period from 16-7-1997 to 31-8-1999 - Assessee received clearing and forwarding agent's services and did not pay service tax under reverse charge and did not file return - Section 68 was amended and section 71A was inserted by Finance Act, 2003 to revalidate collection of service tax from recipients of clearing and forwarding agent's services - Section 73 was also amended retrospectively on same lines vide Finance (No. 2) Act, 2004 - Department had issued notices under section 73 in 2002 demanding service tax for said period but no notices were issued in 2004 after amendment by Finance (No. 2) Act, 2004 - Assessee contended that demand was invalid - HELD : Before retrospective amendment in 2004, Section 73 took in only case of assessees, who were liable to file return under section 70 - Since assessee was liable to file return only under section 71A, which was introduced in Finance Bill, 2003 and class of persons, who came under section 71A, was not brought under the net of section 73 until amendment by Finance (No. 2) Act, 2004, a show cause notice invoking section 73 in year 2002 was not maintainable - In this case, assessee was not required to file return nor any show-cause notice or demand was issued or was outstanding when amendment in Act came into force, assessee could not be asked to pay service tax by invoking section 73 [Paras 7 to 11] [In favour of assessee]
CASE REVIEW
L.H. Sugar Factories Ltd. v. CCE [2007] 8 STT 295 (New Delhi - Cestat) (para 10) ; CCE v. L.H. Sugar Factories Ltd. [2005] 2 STT 282 (SC) (paras 10 and 11) ; Precot Mills Ltd. v. Union of India [2012] 34 STT 162/17 taxmann.com 52 (Ker.) (para 10) ; CCE&C v. Eimco Elecon Ltd. [Tax Appeal No. 1365 of 2009, dated 1-7-2010] (para 10) and CCE v. Hiren Aluminum Ltd. [Tax Appeal No. 2459 of 2009, dated 17-9-2010] (para 10). CCE v. Gujarat Carbon & Industries Ltd. [2008] 16 STT 108 (SC) (paras 11 & 13) relied on.
CASES REFERRED TO
L.H. Sugar Factories Ltd. v. CCE [2007] 8 STT 295 (New Delhi - Cestat) (para 10), CCE v. L.H. Sugar Factories Ltd. [2005] 2 STT 282 (SC)(para 10), Precat Mills Ltd. v. Union of India [2012] 34 STT 162/17 taxmann.com 52 (Ker.) (para 10), CCE&C v. Emico Elecon Ltd. [Tax Appeal No. 1365 of 2009, dated 1-7-2010] (para 10), CCE v. Hirem Aluminium Ltd. [Tax Appeal No. 2459 of 2009, dated 17-9-2010] (para 10) and CCE v. Gujarat Carbon & Industries Ltd. [2008] 16 STT 108 (SC) (para 11).
Ramesh Chandra Shukla for the Appellant. Nishant Misra for the Respondent.
ORDER
1. This Central Excise Appeal under Section 35-G of Central Excise Act, 1944 is reported to be delayed by 19 days. Notices were issued on the delay condonation application. Shri Nishant Misra and Shri Aditya Bhattacharya have put appearance on behalf of the respondent. They do not propose to file counter affidavit to the delay condonation application.
2. We find that the delay of 19 days has been sufficiently explained. The delay is accordingly condoned. The appeal will be given regular number .
3. We have heard Shri R.C. Shukla, learned counsel appearing for the department. Shri Nishant Misra and Shri Aditya Bhattacharya appear for the respondent.
4. The Central Excise Department has preferred the appeal on the following substantial question of law:—
"(i) Whether non-addition of Section 71-A in the Finance Act, 1994 and also in its non insertion in erstwhile Section 73 of the Finance Act, 1994 invalidates the substantial liability of service tax based on the show-cause notice dated 11-10-2002 issued for realization in respect of clearing & forwarding agent services during 16-7-1997 to 31-8-1999 when the legislative intention was for realization of service tax and show-cause notice although not revised but adjudicated after amendment of the provisions of the erstwhile Section 73"
5. The Customs Excise & Service Tax Appellate Tribunal found that the matter relates to service tax demanded from Hindalco for the services of clearing and forwarding agents received by Hindalco under provisions of Rule 2 (1) (d) (xii) of the Service Tax Rules. The show-cause notice was issued on 11-10-2002. The Commissioner confirmed the service tax along with interest and imposed penalty under Section 76 of Finance Act equal to Rs. 200/- per day from the date of default to date of payment, penalty under Sections 77 and Section 75-A.
6. M/s Hindalco Industries Ltd. filed an appeal challenging the tax, interest and penalties. The revenue also filed an appeal on the ground that the penalty imposed under Section 76 should have been at the rate of 2% of the tax for every month instead of Rs. 200/- per day imposed by the adjudicating officer.
7. The Tribunal found that the show-cause notice in this case was issued after the retrospective amendment made by the Finance Act, 2000, but before the amendment made by Finance Act, 2003 and 2004. The retrospective amendment by Finance Act, 2000 has raised a question as to whether the amendment was good enough to issue demands under Section 73 of Finance Act, 1994 on persons, who had not paid tax during the said period as per Rule 2 (1) (d). The dispute relating to the period when the transport service recipients were not required to file any return under section 70 nor they were required to disclose any information because they were not assessees within the meaning of the word under Sections 70 and 71.
8. Section 73 of the Finance Act as it stood prior to its amendment on 10-9-2004 provided as follows:-
"73. Value of Taxable Services Escaping Assessment.- If —
| (a) | the Assistant Commissioner of Central Excise or, as the case may be, the Deputy Commissioner of Central Excise has reason to believe that by reason of omission or failure on the part of the assessee, to make a return under section 70 for any prescribed period or to disclose wholly or truly all material facts required for verification of the assessment under Section 71, the value of taxable service has escaped assessment or has been under-assessed or any sum has erroneously been refunded, or; | |
| (b) | notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise has, in consequence of information in his possession, reason to believe that the value of any taxable service assessable in any prescribed period has escaped assessment or has been under assessed, or any sum has erroneously been refunded, |
he may, in cases falling under clause (a), at any time within five years, and in cases falling under clause (b), at any time within six months from the date for filing the return, serve on the assessee a notice and proceed to assess or reassess the value of taxable service.
Explanation : Where the services for the notice is stayed by an order of a Court, the period of such stay shall be excluded in computing aforesaid period of five years or six months, as the case may be."
9. The Finance Act 1994 was amended again by Finance Act, 2003 to insert a clause 71A retrospectively from 16-7-1997 and ending with 16-10-1998 as follows:—
"71A. Filing of return by certain customers. — Notwithstanding anything contained in the provisions of sections 69 and 70, the provisions thereof shall not apply to a person referred to in the proviso to sub-section (1) of section 68 for the filing of return in respect of service tax for the respective period and service specified therein and such person shall furnish return to the Central Excise Officer within six months from the day on which the Finance Bill, 2003 receives the assent of the President in the prescribed manner on the basis of the self assessment of the service tax and the provisions of section 71 shall apply accordingly."
10. The Tribunal was of the opinion supported by the decisions of Delhi High Court in L.H. Sugar Factories Ltd v. CCE [2007] 8 STT 295 (New Delhi- cestat) which was affirmed by the Apex Court in CCE v. L.H. sugar Factories Ltd. [2005] 2 STT 282 in favour of the service recipients. It further relied upon judgments of High Courts in Precot Mills Ltd. v. Union of India [2012] 34 STT 162/17 taxman.com 52 (Ker);CCE&C v. Eimco Elecon Ltd. [Tax Appeal No. 1365 of 2009, dated 1-7-2010] and CCE v. Hiren Aluminim Ltd. [Tax Appeal No. 2459 of 2009, dated 17-9-2010] that the demand issued in the year 2002 for the period from 16-11-1997 to 6-2-1998 under Section 73 of the Finance Act was not sustainable.
11. Shri Nishant Misra has relied on the opinion of Apex Court in CCE v. Gujarat Carbon & Industries Ltd. [2008] 16 STT 108 in which it was held relying upon L.H. Sugar Factories Ltd. (supra) that the amended Section 73 takes in only the case of assessees, who are liable to file return under Section 70. The liability to file return is cast on the appellants only under Section 71A, which was introduced in the Finance Bill, 2003. The class of persons, who come under Section 71A is not brought under the net of Section 73 and thus a show-cause notice invoking Section 73 is not maintainable. In L.H. Sugar Factories Ltd. (supra) the conclusions drawn by the Tribunal were upheld. In the said case the Tribunal had held:-
"The above would show that even the amended Section 73 takes in only the case of assessees who are liable to file return under Section 70. Admittedly, the liability to file return is cast on the appellants only under Section 71A. The class of persons who come under Section 71A is not brought under the net of Section 73. The above being the position show-cause notices issued to the appellants invoking section 73 are not maintainable."
12. In the present case it is not denied that the respondent was not required to file the return nor any show-cause notice or demand was issued or was outstanding when the amendment in the Act came into force.
13. In view of the above discussion and the judgment of the Apex Court we do not find any error in the judgment of the Tribunal. The question on the facts and circumstances of the case decided against the revenue and in favour of the assessee.
14. The Central Excise Appeal is dismissed.
IT : Refund arising on account of self assessment tax is eligible for interest
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[2013] 37 taxmann.com 157 (Rajasthan)
HIGH COURT OF RAJASTHAN
Commissioner of Income-tax, Jaipur -II
v.
Mangalam Arts*
ARUN MISHRA, CJ.
AND NARENDRA KUMAR JAIN-I, J.
AND NARENDRA KUMAR JAIN-I, J.
D.B. IT APPEAL NO. 260 OF 2011
AUGUST 6, 2012
Section 244A, read with section 140A, of the Income-tax Act, 1961 - Refunds - Interest on [Self assessment tax] - Assessment year 2006-07 - Whether where assessee paid self assessment tax under section 140A, it is eligible to get interest under section 244A on refund arising on account of such payment - Held, yes [Para 1] [In favour of assessee]
R.B. Mathur for the Appellant. Atul Saxena for the Respondent.
JUDGMENT
1. It is submitted by counsel appeariong on behalf of both the parties that similar issue has already been decided by this Court against the Revenue in D.B. Income Tax Appeal No. 264/2011 vide judgment dated 08.05.2012. Following order was passed:
'The question which arises for consideration is about the payment of allowability of interest u/s.244A(1)(b) on excess payment u/s.140A(3) of the Income Tax Act. The I.T.A.T. has discussed the matter thus:
"4. We Have heard the rival contentions and perused the facts of the case. We concur with the views of the Ld. CIT(A) that Hon'ble Karnataka High Court in the case of CIT v. NGEF Ltd., 244 ITR 665 has held that tax paid by way of self assessment u/s 140A got adjusted against the assessed tax and thus partook the character of tax paid in pursuance of assessment order and Tribunal order and was justified in directing the AO to allow interest u/s 244(1A) of the Act after considering self assessment tax paid by the assessee. Hon'ble Kamataka High Court has relied upon Hon'ble Supreme Court judgment in the case of Modi Ind. Ltd. v. CIT 216 ITR 759. Similar view has been taken by Hon'ble Madras High Court in the case of CIT v. Cholamandalam Inv. & Finance Co. Ltd.294 ITR 438 in which it was held that refund arising on account of payment of self tax assessment is eligible for interest purpose since the Govt. was liable to pay interest to the excess amount refunded to the assessee. Hon'ble Madras High Court has relied upon the Hon'ble Supreme Court judgment in the case of Sandvik Asia Ltd. v. CIT 280 ITR 643. Similar view has also been taken by Hon'ble Delhi High Court in the case of CIT v. Jyotsna Holding Pvt. Ltd., 284 ITR 121 in which they have held that interest on refund arising due to excess amount paid on self assessment tax is liable for interest and they have also relied upon Hon'ble Supreme Court judgment in the case of Modi Ind. Ltd. v. CIT, supra. Considering aforesaid direct judgments which are based upon Hon'ble Supreme Court judgment and considering clear position of Sec 244A(1)(b) of the Act, the assessee is eligible to get interest on self assessment tax payment also. Therefore, in such circumstances and facts of the case, we find no infirmity in the order of the ld. CIT(A) who has rightly allowed the claim of the assessee. Thus the solitary ground of the Revenue is dismissed."
The decision of the Tribunal is based on the various decisions including the decision of the Apex Court in the case of Sandvik Asia Ltd. v.CIT 280 ITR 643 and, other decision in the case of Modi Ind Ltd. v. CIT 216 ITR 759. The decisions of the High Courts of Madras, Karnataka and Delhi have also been relied upon.
We do not find any ground to take a different view of the matter.
Consequently, the appeal, being bereft of merit, is hereby dismissed.'
2. This appeal, being similar, also stands dismissed in terms of aforesaid order. I.A. No. 17646/2012 is disposed of.
IT : Where assessee advanced a sum for purchase of machineries and further he himself rescinded said contracts, loss incurred due to forfeiture of advances by suppliers was on capital account
IT : Advances which were paid to employees who had left their services were deductible as business loss
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[2013] 37 taxmann.com 163 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'I'
Integrated Technology Solutions (P.) Ltd.
v.
Income-tax Officer, 6(1)(3), Mumbai*
B. R. MITTAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL NO. 3695 (MUM.) OF 2011
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
JUNE 28, 2013
I. Section 28(i) of the Income-tax Act, 1961 - Business loss/Deduction - Allowable as [Forfeiture of advances] - Assessment year 2006-07 - Assessee advanced certain sum against contracts for purchase of some machineries - However, it rescinded said contracts - Consequently, advances were forfeited by suppliers and assessee incurred loss - It claimed deduction treating said loss to be business loss which was denied holding said loss is on capital field - Whether since loss suffered by assessee was due to its decision rescinding contracts for purchase of capital asset and, consequently by allowing amounts paid to be forfeited, it was reducing loss on capital account - Whether loss was a capital loss - Held, yes [Para 4.4] [In favour of revenue]
II. Section 28(i) of the Income-tax Act, 1961 - Business loss/deduction - Allowable as [Irrecoverable advances] - Assessment year 2006-07 - Whether where assessee claimed deduction on account of advances paid to employees who had left their services and produced requisite details, same was deductible as business loss - Held, yes [Para 4.7] [In favour of assessee]
FACTS
| ■ | The assessee advanced a certain sum for purchase of some machineries. It took a business decision and rescinded contracts for purchase of said machineries. Consequently, suppliers forfeited said advances. The assessee wrote-off said irrecoverable advances in its books and claimed deduction as business loss. | |
| ■ | The Assessing Authority observed that said loss was purely capital in nature. | |
| ■ | The Commissioner (Appeals) partly allowed assessee's claim. | |
| ■ | On second appeal: |
HELD
| ■ | Losses are in the capital field and, therefore, not deductible in computing the business income either under section 36(1)(vii) or section 37(1) or even with reference to section 28. [Para 4.3] | |
| ■ | The loss suffered by the assessee is, in fact, not on account of factors extraneous to it, but due to its, rescinding the relevant contract/s for purchase of capital asset for which the impugned advances had been given. Further, the assessee by foregoing its right to purchase the same by not paying the balance amount due, i.e., which it was required to pay (in respect of purchase of terminals), or by not taking the delivery of the machinery supplied, i.e., OMR, as the case may be, and consequently, allowing the amounts paid to be forfeited, is only reducing its loss - of course on capital account, i.e., by not acquiring the assets which it deems or considers no longer useful or profitable for its business by incurring additional (capital) expenditure, eschewing further investment. The decision is a business decision, taken in its interest. That would not, however, convert the character of the loss sustained on capital account to one on revenue account. The capital expenditure, it may be appreciated, is incurred as much for business as is the revenue expenditure. However, it is only the latter which is deductible in computing the business income, while specific allowances, as under sections 32,35,35D, etc. are provided for under the Act in respect of the former. In the instant case, the transaction not fructifying has led to a loss of capital. | |
| ■ | Even if, for the sake of argument, the assessee's plea of the same as being a business loss is considered as valid, the next question that would arise is the year of the allowability, as loss under section 28 could be allowed only in the year it is sustained, and not in the year in which the assessee chooses to recognize the same in its books of account by writing it off. As such, even if held as allowable per se, the matter would require a further finding of fact as to the year of suffering the loss. As apparent, the advances have been paid, as well as the assessee's decision/s for not observing the terms of the relevant contract/s (due to the changed circumstances perhaps), forfeiting the balance amount which stands written off, taken place in the earlier years. The warehousing period, as per the notice under section 72(1) of the Customs Act, stands expired on 15-10-2003, so that the Bond Department of the Customs issued notice for the levy of rent and interest, besides duty; the said notices being dated 30-11-2004 and 14-1-2005. The forgoing, however, is stated only by way of an alternate argument, without prejudice to view of the loss suffered being only in the capital field, and which though would stand modified in the light of the same, so that the said loss cannot be said to have arisen in the relevant year in view of the relevant decisions having been taken by the assessee in an earlier year. [Para 4.5] | |
| ■ | In the result, the assessee's appeal is partly allowed. |
CASE REVIEW
CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC); Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J&K); Gulf Oil Corpn. Ltd. v. Asstt. CIT[2012] 24 taxmann.com 325/53 SOT 305 (Hyd); CIT v. Gujarat Mineral Development Corpn. Ltd. [2009] 314 ITR 322 (Guj.); Pik Pen (P.) Ltd. v. ITO (IT Appeal No. 6847/(Mum) of 2008) and Dy. CIT v. Edelweiss Capital Ltd. (IT Appeal No. 3971/(Mum)/of 2009); and CIT v.Triveni Engg. & Industries Ltd. [2012] 343 ITR 245/[2010] 8 taxmann.com 135 (Delhi) (para 4.6) distinguished.
Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927/98 Taxman 303 (SC) and CIT v. Khimline Pumps Ltd. [2002] 258 ITR 459/125 Taxman 104 (Bom.) (para 4.4) followed.
CASES REFERRED TO
CIT v. S.R. Subramanya Pillai [1950] 18 ITR 85 (Mad.) (para 4.2), Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927/98 Taxman 303 (SC)(para 4.3), Hasimara Industries Ltd. v. CIT [1998] 231 ITR 842/98 Taxman 352 (SC) (para 4.3), CIT v. Hindustan Times Ltd. [1998] 231 ITR 741/98 Taxman 349 (SC) (para 4.4), CIT v. Khimline Pumps Ltd. [2002] 258 ITR 459/125 Taxman 104 (Bom.) (para 4.4), CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC) (para 4.6), Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J&K) (para 4.6), Gulf Oil Corpn. Ltd. v.Asstt. CIT [2012] 24 taxmann.com 325/53 SOT 305 (Hyd.) (para 4.6), CIT v. Gujarat Mineral Development Corpn. Ltd. [2009] 314 ITR 322 (Guj.) (para 4.6), CIT v. Arjani Kumar Co. Ltd. [2003] 259 ITR 114/[2002] 124 Taxman 429 (Raj.) (para 4.6), Pik Pen (P.) Ltd. v. ITO [IT Appeal No. 6847 (Mum.) of 2008 (para 4.6), Dy. CIT v. Edelweiss Capital Ltd. [IT Appeal No. 3971 (Mum.) of 2009 and CIT v. Triveni Engg. & Industries Ltd. [2012] 343 ITR 245/[2010] 8 taxmann.com 135 (Delhi) (para 4.6).
Haresh G. Buch and Harsh Kapadia for the Appellant. Amit Kamat for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-14, Mumbai ('CIT(A)' for short) dated 14.01.2011, partly allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 24.12.2008.
2. The principal issue arising in the instant appeal concerns the validity in law of the assessee's claim for loss sustained on the write off of non-recoverable advances made for the purchase of machinery (at Rs.32.60 lacs) and that incurred due to the non-acceptance by it of the delivery of the machinery imported for its business (at Rs.57.50 lacs), claimed per its return of income for the current year.
3. The facts, in-so-far as are relevant, are that the assessee is a company engaged in the business of a sub-distributor to the sole selling agent (Best & Co.) for online lottery run by the State of Nagaland. Besides, it also provides professional services to various companies by way of consultancy and data processing. An advance of Rs.56.68 lacs was given to one M/s. CMC Ltd. for the purchase of 288 terminals during the financial year (f.y.) 2003-04, of which 128 terminals were supplied in the following month (October, 2003), adjusting the advance proportionately. As the assessee-company was since no longer interested in buying the balance terminals, the outstanding advance of Rs.32.60 lacs was forfeited by the supplier, M/s. CMC Ltd., which stands written off by the assessee in its books for the current year. The company had likewise placed an order for Rs.57,50,106/-, paying the entire cost in advance, for purchase of one Optical Mark Reader (OMR) from M/s. Chatsworth Data Corporation, USA. However, as the assessee did not require OMRs any more, the delivery of the same was not accepted; with, rather, the company requiring the custom authorities, in whose custody the same was lying, to auction the same and pay the proceeds in excess of the custom duty levied (Rs.20.25 lacs), if any, thereto. It is also claimed, and which is only understandable, that the company could not find any buyers so as to take the delivery of the machinery and dispose it off in the domestic market. These sums, as well as the custom duty as demanded by the custom authorities, debited to the account 'capital work-in-progress', were written off during the relevant year in accounts as irrecoverable, so that the same represented a loss (PB pg. 60).
4. We have heard the parties, and perused the material on record, including the case law cited by the parties.
4.1 Our first observation in the matter is that the primary facts are on record and undisputed.
4.2 We may proceed by first delineating the respective cases of both the parties. As regards the assessee's case, it claims the said loss as on account of bad debts u/s. 36(1)(vii); the same having been written off in its accounts for the current year. Alternatively, the assessee claims the said losses by way of business loss; the same being incidental to its trade. Reliance is placed on a host of case law in the matter. The Revenue's case, on the other hand, is that the question of the claim being exigible to deduction u/s. 36(1)(viii) does not arise, as the same is neither a debt going bad on revenue account nor is the condition of section 36(2)(i), i.e., that the same (debt) should have been taken into account in computing the income for any year, to which the deduction u/s.36(1)(vii) is subject, satisfied. Qua the claim of it being a trade or business loss, the same is purely capital in nature. Reliance is placed on the decision in the case of Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514 (SC) and CIT v.S.R. Subramanya Pillai [1950] 18 ITR 85 (Mad.), to the effect that only losses arising or springing directly from the carrying on of the trade or business and incidental thereto are deductible, while those not arising out of the operations of the trade or business are really losses of capital.
4.3 During the course of the hearing, after hearing the parties, it was observed by the Bench that it finds it difficult to accept as to how the impugned losses are not on capital account. That is, in the capital field and, therefore, not deductible in computing the business income either u/s. 36(1)(vii) or section 37(1) or even with reference to section 28. Reference was made to the decision in the case of Hasimara Industries Ltd. v.CIT [1998] 230 ITR 927/98 Taxman 303 (SC), whereat, again, the claim of loss of deposit as a business loss u/s.28 of the Act was pressed. In the facts of that case, the assessee had deposited Rs.20 lacs with the licensor company for the purpose of securing a license under which the assessee had acquired to work the licensor's cotton mills. The deposit, it was held, was made, clearly, for acquisition of a profit-making asset, to carry on the business in cotton. The loss of such deposit, on it remaining unpaid, following the liquidation of the licensor company, was suffered on capital account and not on revenue account, so as to be treated as a business loss. Even as the ld. AR sought to distinguish the said case law, upon being confronted with the said decision - of course on the basis of facts, which would be specific and unique to the fact situation of each case, in our clear view, the same is squarely applicable in its ratio, even as observed during hearing. Rather, first principles admit of no difference, so that the said decision was put forth only to impress the unequivocal and the settled position of law in the matter, i.e., as an example of the application of those principles by the hon'ble apex court. In the case of Hasimara Industries Ltd v. CIT [1998] 231 ITR 842/98 Taxman 352, again, the loss qua irrecoverable advance to the lessor, on account of the latter's incapacity to repay, was held as a capital loss; the same having been made by the assessee-leasee to modernize the cotton mill under a leave and license agreement, obtaining operating rights in its respect with an intention to enter the cotton manufacturing business.
4.4 In the instant case, the loss suffered by the assessee is, in fact, not on account of factors extraneous to it, as in the two cases of Hasimara Industries Ltd. (supra), but due to its' rescinding the relevant contract/s for purchase of capital assets for which the impugned advances had been given. Further, as we see it, the assessee by foregoing its right to purchase the same by not paying the balance amount due, i.e., which it was required to pay (in respect of purchase of terminals), or by not taking the delivery of the machinery supplied, i.e., OMR, as the case may be, and consequently, allowing the amounts paid to be forfeited, is only reducing its loss - of course on capital account, i.e., by not acquiring the assets which it deems or considers no longer useful or profitable for its business by incurring additional (capital) expenditure, eschewing further investment. The decision is a business decision, taken in its interest. That would not, however, convert the character of the loss sustained on capital account to one on revenue account. The capital expenditure, it may be appreciated, is incurred as much for business as is the revenue expenditure. However, it is only the latter which is deductible in computing the business income, while specific allowances, as u/ss.32, 35, 35D, etc. are provided for under the Act in respect of the former. In the instant case, the transaction not fructifying has led to a loss of capital, so that the Revenue's stand is in agreement with the settled position of the law, which we have sought to emphasize with reference to the two decisions by the apex court, also enumerating their facts. In the case of CIT v. Hindustan Times Ltd. [1998] 231 ITR 741/98 Taxman 349, the dispute was not of depreciation on the new building constructed by the assessee on the lease-hold land, but on the additional charges paid by it to the lessor for it's commercial user. The said amount was held as forming part of the cost of new building, i.e., as on capital account. It is pertinent to note that the fact that the same did not constitute revenue expenditure was an admitted position between the parties, so that the only issue was the validity of the claim of depreciation qua the additional charges paid to the lessor for the commercial use of the building. That lease premium is a capital expenditure is also well settled, and for which we may refer to the decision in the case of CIT v. Khimline Pumps Ltd. [2002] 258 ITR 459/125 Taxman 104 (Bom).
4.5 Continuing further, there is another aspect to the matter. Even if, for the sake of argument, the assessee's plea of the same as being a business loss is considered as valid, the next question that would arise is the year of the allowability, as loss u/s.28 could be allowed only in the year it is sustained, and not in the year in which the assessee chooses to recognize the same in its books of accounts by writing it off. As such, even if held as allowable per se, the matter would require a further finding of fact as to the year of suffering the loss. As apparent, the advances have been paid, as well as the assessee's decision/s for not observing the terms of the relevant contract/s (due to the changed circumstances perhaps), forfeiting the balance amount which stands written off, taken place in the earlier years. The warehousing period, as per the notice u/s.72(1) of the Customs Act (which appears at PB pgs.1 & 2), stands expired on 15.10.2003, so that the Bond Department of the Customs issued notice for the levy of rent and interest, besides duty; the said notices being dated 30.11.2004 and 14.01.2005. The foregoing, however, is stated only by way of an alternate argument, without prejudice to our clear view of the loss suffered being only in the capital field, and which though would stand modified in the light of the same, so that the said loss cannot be said to have arisen in the relevant year in view of the relevant decisions having been taken by the assessee in an earlier year.
4.6 We may next take up the decisions relied upon by the assessee, all of which have, as afore-stated, been perused by us. The decisions in the case of CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC) and Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J&K) are clearly distinguishable as the advances in those cases are on trade account. Similarly, in the case of Gulf Oil Corpn. Ltd. v. Asstt. CIT [2012] 24 taxmann.com 325/53 SOT 305 (Hyd.), the advance, which stands claimed, was found on facts to be for protecting the assessee's business. It is well settled that any expenditure incurred in maintaining or protecting the existing capital structure or assets is on revenue account, so that the same was rightly allowed as a business loss u/s.28(1) r.w.s. 36(1)(vii). The decision in the case of CIT v. Gujarat Mineral Development Corpn. Ltd. [2009] 314 ITR 322 (Guj), again, cannot be relied upon as the Revenue's appeal in that case stood denied admission by the hon'ble court in view of the same not raising any substantial question of law. The solitary decision in favour of the assessee, i.e., CIT v. Anjani Kumar Co. Ltd. [2003] 259 ITR 114/[2002] 124 Taxman 429 (Raj), again, cannot be considered as a binding precedent, being, as would be apparent from the perusal of the said judgment, without reference to and de hors the judicial precedents in the form of the binding decisions by the apex court, to three of which reference has been made by us in the preceding paragraphs of this order (refer paras 4.3 & 4.4), besides to two others by the Revenue (refer para 4.2 supra). The decisions by the tribunal in the case of Pik Pen (P.) Ltd. v. ITO (in ITA No.6847/Mum/2008) and Dy. CIT v. Edelweiss Capital Ltd. (in ITA No.3971/Mum/2009) stand rendered following the decision in the case of Anjani Kumar Co. Ltd. (supra), which we have found as being contrary and inconsistent to the binding decisions by the hon'ble apex court. The said reliance would thus be of little moment. The decision in the case of CIT v. Triveni Engg. & Industries Ltd. [2012] 343 ITR 245/[2010] 8 taxmann.com 135 (Delhi) is in respect of advance to employees, which is on a different footing altogether, so that the said advances would stand to qualify as on trade account, even as also clarified per decisions as in the case of Mysore Sugar Co. Ltd. and Chenab Forest Co. (supra).
4.7 Finally, the assessee's ground before us is for an amount of Rs.92,12,968/-, while the two sums referred to add up to Rs.90,10,106/-, leaving a balance of Rs.2,02,862/-. Even though no arguments in its respect were advanced before us, we find the assessee to have furnished the details in respect thereof (vide its letter dated 08.12.2008/copy on record at PB pg.61), and which, as it appears, are in respect of prepaid expenses, as by way of advances paid to the employees, who had subsequently left their employment with the assessee. No findings in the matter have been issued by the authorities below. We have already indicated that the same to be on a different footing altogether, so that subject to the necessary verification as to the nature of the advance as well as the year in which the said loss stands incurred by the Assessing Officer (AO), we hold the same as deductible as business loss u/s.28(i) of the Act. Though it is the satisfaction of the assessing authority that is paramount, as the nature of the material signifying the period of incurring the loss would depend on the facts and circumstances of each case, the AO shall adopt a holistic approach in the matter. We decide accordingly.
5. In the result, the assessee's appeal is partly allowed for statistical purposes.
IT: No reassessment to be made merely on ground of audit objection
IT: Where issue as to whether income accrued on sale of prepaid coupon of mobile phones in current year or in future, was already considered during assessment, reopening of assessment would be unjustified
IT: Where issue as to whether royalty paid to Wireless Planning Commission of Government of India is revenue or capital in nature, was already considered during assessment, reopening on this ground would be unjustified
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[2013] 37 taxmann.com 158 (Gujarat)
HIGH COURT OF GUJARAT
Vodafone West Ltd.
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 16455 OF 2012
MARCH 11, 2013
I. Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [Audit objection] - Assessment year 2007-08 - Whether reassessment proceeding cannot be initiated merely on basis of audit objection, where Assessing Officer has no subjective satisfaction - Held, yes [Para 11] [In favour of assessee]
II. Section 28(i), read with section 148, of the Income-tax Act, 1961 - Business income - Year in which chargeable [Reassessment] - Assessment year 2007-08 - Assessee-cellular service provider sold prepaid coupons and in balance sheet showed sale amount as current liability being 'Advance income (Prepaid)' on ground that income would accrue in future at time of actual use made of network of assessee by customers - According to revenue it was outright purchase and not advance to be appropriated in future - Whether since such issue was threadbare examined by Assessing Officer at time of assessment, it cannot be said that assessee failed to disclose fully and truly all material facts and, thus, reopening was unjustified - Held, yes [Para 12.2] [In favour of assessee]
III. Section 35ABB, read with section 148, of the Income-tax Act, 1961 - Telecommunication Licence, fees for [Reassessment] - Assessment year 2007-08 - It was stand of assessee that royalty paid to Wireless Planning Commission of Government of India was not paid for obtaining license and this being revenue expenditure and not capital expenditure for obtaining license, was not amortizable under section 35ABB - Whether since Assessing Officer, had already raised said issue of amortization of royalty paid to Wireless Planning Commissioner of Government of India while framing assessment under section 143(3), reopening of same issue was unjustified - Held, yes [Para 12.3] [In favour of assessee]
FACTS-I
| ■ | The assessee raised objection pleading that reopening was merely on basis of audit objection but such audit objection did not provide information leading to formation of belief by the Assessing Officer that the income assessable to tax has escaped assessment. |
HELD-I
| ■ | It is apparent that not only the Assessing Officer had no reason to believe that the income had escaped assessment, but also, he was on the contrary, of the opinion that there was inconsistent stand adopted by the audit, as for the assessment year 2008-09, the audit party had accepted the say of the Assessing Officer that the income had not escaped the tax. Yet identical grounds were raised for the assessment year 2007-08 and Assessing Officer chose to go ahead with reopening proceedings only at the instance of audit party objection despite his unwillingness. [Para 10] | |
| ■ | Section 147 permits initiation of reassessment proceedings only when the Assessing Officer has a reason to believe that income has escaped the assessment. Whenever the audit party raises objections, it may provide information; however, eventually it is the Assessing Officer who should be satisfied himself and form a belief of his own that taxable income escaped the assessment. He cannot abdicate his decision making power by choosing to solely rely on the audit objection or follow such direction without his subjective satisfaction. In the instant case, therefore, the petitioner has succeeded on this ground alone and notice of reopening does need to be quashed. [Para 11] |
CASES REFERRED TO
Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 4), CIT v. Lucas T.V.S. Ltd. [2001] 249 ITR 306/117 Taxman 366 (SC) (para 6.1), Agricultural Produce Market Committee v. ITO [2011] 15 taxmann.com 170/[2012] 204 Taxman 22 (Guj.) (para 6.3), Adani Exports v.Dy. CIT [1999] 240 ITR 224 (Guj.) (para 6.3), Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Appeal No. 15566 of 2011, dated 14-12-2011] (para 6.4), Jagat Jayantilal Parikh v. Dy. CIT [2013] 215 Taxman 444/32 taxmann.com 161 (Guj.) (para 6.5) and CIT v. Kelvinator India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 13).
B.S. Soparkar and Saurabh Soparkar for the Petitioner. Ms. Paurami B Sheth for the Respondent.
JUDGMENT
Ms. Sonia Gokani, J. - Challenge is made in this petition preferred under Article 226 of the Constitution of India to the notice of reopening issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), seeking to reopen the assessment of the petitioner for the Assessment Year 2007-2008.
2. Brief facts necessary for appreciating the issue involved in this petition are as under:
2.1 Petitioner herein is a limited company which filed its return of income for the assessment year under question on 30.10.2007, declaring its total income as Nil. On scrutiny, the assessment had been framed by the respondent under Section 143(3) of the Act on 29.12.2009.
2.2 It is also averred in the petition that the reopening is proposed on two grounds 1) Income reflected as on "Advance Income (Prepaid)" was in fact for the outright purchase of "Recharge" by Prepaid Connection Customers and the same was not an advance to be appropriated against the future use of services and 2) Non-amortization of royalty paid to the Wireless Planning Commission of Government of India by treating the same as capital expenditure. Instead, entire expenditure charged to P&L Account was allowed as deduction resulting into under assessment of income.
2.3 It is the say of the petitioner that, on issuance of notice under Section 148 of the Act dated 07.03.2012 for reopening the assessment of the Assessment Year 2007-2008, the assessment is sought to be reopened on the very grounds which were already earlier scrutinized by the Assessing Officer as specific queries were raised under Section 142(1) of the Act alongwith detailed questionnaires & therefore, this notice is nothing but a change of opinion.
2.4 On petitioner's request, reasons recorded for such reopening of assessment vide communication dated 02.05.2012 have been provided which are as follows:
"1. Section 145 of the I.T. Act, 1961 provide that the income chargeable under the head "Profit and gains of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Assessee was a cellular service provider in the state of Gujarat. It followed mercantile system of accounting. Schedule 10: Current Liabilities of the Balance Sheet reflected an amount of Rs. 103,82,20,000/- with narration "Advance Income (Prepaid)". The business of providing cellular service caters to mainly two category of customer i.e. Post paid customers and prepaid customers. Post paid customers were billed periodically. In Schedule 19: Significant Accounting Polices, it was disclosed that, where, as per billing plan, customers were billed in subsequent period, income was offered on accrual basis. However, as far as Prepaid Service was concerned customer in this category were required to pay for the service in advance by purchase of "Recharges". The advance so paid was non-refundable even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using assessee's service, the unutilized balance was not refundable. Thus, the amount paid for prepaid service was for outright purchase of "Recharge" and not an advance to be appropriated against future use of the service. The customer derives the absolute right to utilize the service. Thus, the income from "Prepaid Service" crystallizes as soon as customers make payment. The right to received the income vests with the assessee as soon as the "Recharges" are purchased by customers. The H'ble S.C. held in CIT v. Ashokbhai Chimanbhai (56 ITR 42) that income accrues when assessee acquire right to receive it. Since assessee employed mercantile system of accounting, income accrues with receipt and it cannot be considered as advance income. Accordingly, the amount of Rs. 1038220000/- treated by it as "Advance Income (Prepaid)" was liable to IT, in current A.Y. 2007-08 itself. Under assessment of income of Rs. 103,8220000/-involves I.T. Tax effect of Rs.4647.88 lakhs.
2. Section 35ABB of the Income Tax Act, 1961 provides for amortization of license fee paid to operate telecommunication services.
The assessee company was engaged in the business of providing mobile telecom services in the state of Gujarat.
In para 7 of the Assessment order the Assessing Officer disallowed the claim for deduction of Rs.98,29,17,915/- which was charged to the Profit & Loss account but considered the same for amortization by invoking the provisions of Section 35ABB. Accordingly one-eleventh of Rs.982917915/-/- was allowed as deduction.
It was seen from Annexure 7 of assessee's submission dated April 15, 2009 under the heading "Break up of Access & regulatory Charges " that the assessee had charged Rs. 583898027 to the Profit & Loss account, being royalty paid to Wireless Planing Commission of Govt. of India. This expenditure, as stated by the assessee, was in the nature of fee paid to Wireless Planning Commission as percentage of Revenue.
It was further seen from Annexure 6 of assessee's submission dated November 11, 2009 (i.e. copy of agreement between telecom operators and Department of Telecommunication- para 19.3 Radio spectrum Charges) that "in addition to license fee payable to the DOT, the cellular licensees pay spectrum charges on revenue share basis of 2% of Adjusted Cost Revenue (AGR) towards WPC charges covering royalty payment for the use of cellular spectrum and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination wing (WPC). Any additional band width, if allotted subject to availability and justification shall attract additional License fee as revenue share.
It was observed that although the license fee paid to the Department of telecommunication was disallowed and amortized and accordingly the deduction was limited to one-eleventh of the total expenditure, the royalty charges (which includes license fee also) paid to WPC was not considered for amortization. Instead, the entire expenditure of Rs. 583898027/- as charged to the Profit & Loss account was allowed as deduction.
This resulted in under assessment of income of Rs. 530816388/- with impact on revenue to the extent of Rs. 23,76,34,818/-.
In view of the above I have reasons to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act."
2.5 Objections were raised against such notice of reopening which includes the ground that only on objection raised by the audit department, such exercise is undertaken and Assessing Officer disposed of such objections vide order dated 16.11.20125 in toto and therefore, the present petition.
2.6 Affidavit-in-reply, on due service of notice, has been filed by the respondent, inter-alia, contending that challenge to the notice under Section 148 of the Act must not fail in as much as reopening is sought beyond a period of four years when the Assessing Officer had reason to believe that income has escaped the assessment as the petitioner did not disclose fully and truly the material necessary for assessment. It is further contended in the said affidavit that it was not sufficient on the part of the assessee to produce the evidences, it ought to have brought to the notice of the Assessing Officer uncovering embedded material. It is the say of the respondents that rejection of the objections raised by the petitioner was after proper verification and justification and reassessment proceedings are not initiated on the basis of change of opinion.
3. Affidavit-in-rejoinder on behalf of the petitioner has also been filed contending therein that there is no failure on the part of the petitioner in disclosing all material facts fully and truly. According to the petitioner, the reassessment proceedings are only on account of change of opinion based on audit objection and therefore, completely without jurisdiction. It is further the say of the petitioner that the assessee is not required to assist the Assessing Officer in drawing legal inferences from the factual details. The Assessing Officer ought to have reasonably drawn the conclusion on the basis of facts presented before him.
4. Learned Senior counsel Mr. Saurabh Soparkar, appearing with learned counsel Mr. Bandish Soparkar for the petitioner-company, has urged that it is a well settled law that if the Assessing Officer has not acted independently nor had a reason to believe that any income had escaped assessment and instead, had acted on the basis of the audit objection exclusively, such notice for reopening cannot be allowed to be proceeded with. He further urged that the grounds on which notice under Section 148 of the Act has been issued, were scrutinized by the Assessing Officer on petitioner having furnished the materials and after scrutinizing assessment under Section 143(3) of the Act and therefore also, this is nothing but a change of opinion on the part of the Assessing Officer. He relied on the decision of the Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) and urged that the assessee is under no obligation to assist the Assessing Officer in drawing legal inferences. Cumulatively, it was argued that this is nothing but a change of the opinion on the part of the Assessing Officer.
5. Learned counsel Ms. Paurami Sheth for the revenue-department has urged this Court that this is not a mere change of opinion and reopening is valid as income has escaped the assessment on account of the act of the petitioner assessee who failed to disclose fully and truly the material facts. By a detailed discussion while rejecting objections to such reopening, when the revenue has denied to entertain objections raised in this petition, this petition requires no entertainment.
6. Upon thus hearing both the sides, before adverting to the facts of the instant case, law on the subject requires some discussion at this stage.
6.1 In case of CIT v. Lucas T.V.S. Ltd. [2001] 249 ITR 306/117 Taxman 366 (SC) notice of reopening was quashed in absence of any independent material except the information from the audit party.
6.2 The Division Bench of this Court in case of Agricultural Produce Market Committee v. ITO [2011] 15 taxmann.com 170/[2012] 204 Taxman 22 (Guj.), quashed the notice for reopening when the only basis for such notice was audit objection.
6.3 In case of Adani Exports v. Dy. CIT [1999] 240 ITR 224 (Guj.), the Assessing Officer did not hold the belief that income had escaped the assessment. His recording in a office note that he had reason to believe was found to be a mere pretension to give validity to the exercise of powers under Section 147 of the Act. It was only on the basis of audit objections that the information was passed on to him that the income has escaped the assessment. This Court, on the basis of the decision of the Supreme Court, held that the audit objection may serve as information on the basis of which, Income-tax Officer can act, however, ultimately his action must depend directly and solely on forming of his own belief that the income has escaped the assessment.
6.4 This Court m case of Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Appeal No. 15566 of 2011, dated 14-12-2011], also reiterated this principle by holding thus:
"Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the AO, she held correspondence with the assessee. Taking into account the assessee's explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board's circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decisions of the Apex Court in the case of P.V.S. Beedies Pvt. Ltd. (supra) and Indian & Eastern Newspaper Society (supra), if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening assessment. However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the Audit Party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year."
6.5 Also in case of Jagat Jayantilal Parikh v. Dy. CIT [2013] 215 Taxman 444/32 taxmann.com 161 (Guj.), this Court, following the decision of the Cadila Healthcare Ltd. (supra), held notice of reopening invalid, where independent application of mind of the Assessing Officer was found lacking in issuing notice of reopening. It was held as under:
"6. As is more than apparent, assessment was completed on scrutiny. In post assessment period, audit party raised the objection and Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.
7. In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained."
7. Therefore, the moot question requiring consideration is as to whether the issuance of impugned notice is based on objection raised by audit party or it simply provided information leading to formation of belief by the Assessing Officer that the income assessable to tax has escaped the assessment on petitioner not having disclosed fully and truly all material facts.
8. To verify this vital aspect, the original file was called for from the department & it can be noted pertinently that the revenue had raised audit objections in respect of both the grounds proposed to be reopened. The gist of audit objections is reproduced hereinafter for better grasping of the issue:
'1. Section 145 of the I.T. Act, 1961 provide that the income chargeable under the head "Profit and gains of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Assessee was a cellular service provider in the state of Gujarat. It followed mercantile system of accounting. Schedule 10: Current Liabilities of the Balance Sheet reflected an amount of Rs. 103,82,20,000/- with narration" Advance Income (Prepaid)". The business of providing cellular service caters to mainly two category of customer i.e. Post paid customers and prepaid customers. Post paid customers were billed periodically. In Schedule 19: Significant Accounting Polices, it was disclosed that, where, as per billing plan, customers were billed in subsequent period, income was offered on accrual basis. However, as far as Prepaid Service was concerned customer in this category were required to pay for the service in advance by purchase of "Recharges". The advance so paid was non-refundable even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using assessee's service, the unutilized balance was not refundable. Thus, the amount paid for prepaid service was for outright purchase of "Recharge" and not an advance to be appropriated against future use of the service. The customer derives the absolute right to utilize the service. Thus, the income from "Prepaid Service" crystallizes as soon as customers make payment. The right to received the income vests with the assessee as soon as the "Recharges" are purchased by customers. The H'ble S.C. held in CIT v. Ashokbhai Chimanbhai (56 ITR 42) that income accrues when assessee acquire right to receive it. Since assessee employed mercantile system of accounting, income accrues with receipt and it cannot be considered as advance income. Accordingly, the amount of Rs. 1038220000/- treated by it as "Advance Income (Prepaid)" was liable to IT, in current A.Y. 2007-08 itself. Under assessment of income of Rs. 103,8220000/-involves IT. Tax effect of Rs. 4647.88 lakhs.
2. Section 35ABB of the Income Tax Act, 1961 provides for amortization of license fee paid to operate telecommunication services.
The assessee company was engaged in the business of providing mobile telecom services in the state of Gujarat.
In para 7 of the Assessment order the Assessing Officer disallowed the claim for deduction of Rs. 98,29,17,915/- which was charged to the Profit & Loss account but considered the same for amortization by invoking the provisions of Section 35ABB. Accordingly one-eleventh of Rs. 982917915/- was allowed as deduction.
It was seen from Annexure 7 of assessee's submission dated April 15, 2009 under the heading "Break up of Access & regulatory Charges " that the assessee had charged Rs.583898027 to the Profit & Loss account, being royalty paid to Wireless Planning Commission of Govt. of India. This expenditure, as stated by the assessee, was in the nature of fee paid to Wireless Planning Commission as percentage of Revenue.
It was further seen from Annexure 6 of assessee's submission dated November 11, 2009 (i.e. copy of agreement between telecom operators and Department of Telecommunication- para 19.3 Radio spectrum Charges) that "in addition to license fee payable to the DOT, the cellular licensees pay spectrum charges on revenue share basis of 2% of Adjusted Cost Revenue (AGR) towards WPC charges covering royalty payment for the use of cellular spectrum and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination wing (WPC). Any additional band width, if allotted subject to availability and justification shall attract additional License fee as revenue share.
It was observed that although the license fee paid to the Department of telecommunication was disallowed and amortized and accordingly the deduction was limited to one-eleventh of the total expenditure, the royalty charges (which includes license fee also) paid to WPC was not considered for amortization. Instead, the entire expenditure of Rs.583898027/- as charged to the Profit & Loss account was allowed as deduction.
This resulted in under assessment of income of Rs. 530816388/- with impact on revenue to the extent of Rs. 23,76,34,818/-.
In view of the above I have reasons to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act.'
9. It can be further noted that Asstt. Commissioner of Income-tax, Circle-8, while addressing a letter to the Commissioner of Income-tax, Ahmedabad-4, dated 27.07.2011, noted that the assessment for the Assessment Year 2006-2007 in case of the assessee was completed where a request was also made for necessary direction from the office of CIT-IV as for Assessment Year 2006-2007. Similar objections were raised and they were dealt with on such guidance. On the issue of amortization of license fees paid to operate telecommunication services, it is contended that identical objections when raised, the audit had accepted the department's stand and on the very same ground, "inconsistent and whimsical stand" is taken by audit for Assessment Year 2007-2008 for which, verification needs to be sought from the audit. It is further contended that though objections were not acceptable, in view of Board's instruction no.9/2006, however, the remedial actions were needed to be undertaken.
10. It is, thus, apparent that not only the Assessing Officer had no reason to believe that the income had escaped assessment, he was on the contrary of the opinion that there was inconsistent stand adopted by the audit, as for the Assessment Year 2008-2009, it had accepted the say of the Assessing Officer that the income had not escaped the tax & yet identical grounds were raised for the Assessment Year 2007-2008 & Assessing Officer chose to go ahead with reopening proceedings only at the instance of audit party objection despite his unwillingness.
11. We need to note at this stage that Section 147 of the Act permits initiation of reassessment proceedings only when the Assessing Officer has a reason to believe that income has escaped the assessment. Whenever the audit party raises objections, it may provide information, however, eventually it is the Assessing Officer who should be satisfied himself & form a belief of his own that taxable income escaped the assessment. He cannot abdicate his decision making power by choosing to solely rely on the audit objection or follow such direction without his subjective satisfaction. In the instant case, therefore, the petitioner has succeeded on this ground alone and notice of reopening does need to be quashed.
12. At this stage, we must hold that both these grounds raised by the respondent in the impugned notice have been duly scrutinized & we are backed by the record placed before us.
12.1 The amount paid for prepaid service was contended to be the outright purchase of "Recharge" by Prepaid Connection Customers and not an advance to be appropriated against the future use of services. The petitioner followed mercantile system of accounting and yet recognized the revenue only when the services were rendered to the prepaid customers.
12.2 It was the stand of the petitioner that as long as no services were rendered by the assessee to the customers, income cannot be recognized by the assessee. It is only at the time of actual use made of the network of the assessee by the customers that he would be required to render the services. Such issue was threadbare examined by the Assessing Officer and therefore also, it cannot be said that the assessee failed to disclose fully and truly all material facts.
12.3 As far as the second question was concerned, Section 35ABB provides for amortization of license fees paid for operating telecommunication services. Petitioner's claim for the Assessment Year 2008-2009 was disallowed to the extent of Rs. 98,29,17,915/- charged to P & L account but one eleventh (1/11 th) of which was allowed as deduction for considering the same for amortization. It is the stand of the petitioner that the royalty paid to the Wireless Planning Commission of Government of India is not paid for obtaining the license & this being revenue expenditure & not capital expenditure for obtaining license, is not amortizable under Section 35ABB. The respondent-Assessing Officer thus, already had raised the said issue of amortization of royalty paid to the Wireless Planning Commission of Government of India while framing the assessment under Section 143(3) of the Act.
13. Heavy reliance is placed on the decision in case of CIT v. Kelvinator India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) by the petitioner to insist that the Assessing Officer has no right to reopen on changing his mind. Not only there is absence of element of non-disclosure of relevant materials fully and truly necessary for assessment, but, both the grounds appear to have been, on scrutiny, finalized.
14. In view of above discussion, the impugned notice of reopening dated 07.03.2012 fails with all consequential reliefs. Other grounds on merit, therefore, deserve no further elaboration.
Resultantly, petition stands disposed of in the above terms.
SB*In favour of assessee.
IT: Interest relating to pre-construction period of house property is not part of cost of acquisition but allowable under section 24(b)
IT : Assessee living with his wife in house occupied by her and paying rent to her through bank transfers would be entitled to exemption under section 10(13A)
■■■
[2013] 37 taxmann.com 186 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'C'
Bajrang Prasad Ramdharani
v.
Assistant Commissioner of Income-tax, Circle -14, Ahmedabad*
A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
IT APPEAL NO. 715 (AHD.) OF 2013
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
JULY 12, 2013
I. Section 55, read with section 24, of the Income-tax Act, 1961 - Capital gains - Cost of acquisition [Interest on pre-construction period] - Assessment year 2009-10 - Whether interest of pre-construction period of house property cannot form part of cost of acquisition for computing gain on sale of that property but would be allowable as deduction under section 24(b) - Held, yes [para 5][In favour of assessee]
II. Section 10(13A) of the Income-tax Act, 1961 - House rent allowance [Conditions precedent] - Assessment year 2009-10 - Assessee's claim for exemption under section 10(13A) was disallowed on ground that rent was paid by assessee as tenant to his wife who was landlord and both were living together - Whether since house was owned by wife of assessee and assessee had paid rent to her through bank transfer entry, assessee had fulfilled twin requirements of section 10(13), i.e., occupation of house and payment of rent and, thus, would be entitled to exemption under section 10(13A) - Held, yes [Para 7][In favour of assessee]
FACTS-II
| ■ | Assessing Officer disallowed the assessee's claim for exemption under section 10(13) on the ground that assessee and his wife were living together and claim of payment of rent to assessee's wife was just to avoid payment of taxes and to reduce the tax liability. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the disallowance. | |
| ■ | On second appeal: |
HELD-II
| ■ | The Assessing Officer and the Commissioner (Appeals) have disallowed the claim of the assessee on ground that assessee and his wife are living together but not on the ground that in return of income a house owned by him is declared as self-occupied. However, in the remand report, the Assessing Officer has commented that it is not ascertainable whether the assessee stayed with his wife at her house or at his own house which he claimed self-occupied and claimed the relief under section 24. [Para 7] | |
| ■ | From the reading of the section 10(13A), it is clear that the requirement of the section is that any allowance (by whatever name called) is granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed. However, the exemption is not available in case the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. Admittedly, the Assessing Officer has given a finding of fact that the assessee and his wife are living together as a family. Therefore, it can be inferred that the house owned by wife of the assessee is occupied by the assessee also. In remand report it has been submitted that the assessee has submitted the rent receipt(s) and stated that the payments have duly been paid through bank transfer entry. A verification of the said entry shows the transfer on the given dates. Therefore, the assessee has fulfilled twin requirements of the provision, i.e., occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled to exemption under section 10(13A). [Para 7.1] |
CASES REFERRED TO
CIT v. K. Raja Gopala Rao [2001] 252 ITR 459/[2002] 125 Taxman 148 (Mad.) (para 4) and CIT v. Sri Hariram Hotels (P.) Ltd. [2010] 325 ITR 136/188 Taxman 170 (Kar.) (para 4).
Ms. Nikita Brahmbhatt for the Appellant. D.K. Singh for the Respondent.
ORDER
Kul Bharat, Judicial Member - This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-XXI-Ahmedabad ('CIT(A)' for short) dated 27.12.2012 for Assessment Year 2009-10.
2. Facts in brief are that the case of assessee was picked up for scrutiny assessment and the assessment was framed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The Assessing Officer (AO) has made various additions on account of short-term capital gain, disallowance of interest claimed u/s.24, disallowance of exemption u/s.10(13A) and addition u/s.68 of the Act. The assessee feeling aggrieved by this order, filed an appeal before the ld.CIT(A) who after considering the submissions of the assessee, partly allowed the appeal.
3. While allowing the appeal, ld.CIT(A) confirmed the addition of Rs.42,371/- in respect of the disallowance of interest and the disallowance u/s.10(13A) of Rs.1,11,168/-. Against these two confirmation of additions, the assessee is further in appeal before this Tribunal.
4. The first ground relates to the disallowance of Rs.42,371/- being disallowance of interest while computing the capital gain from sale of house-property. The Ld. counsel for the assessee submitted that the ld. CIT(A) erred in confirming the addition. Ld. counsel for the assessee submitted that admittedly this amount pertained to previous year and the interest being related to the pre-construction period on borrowed capital. She submitted that the interest on borrowed capital of pre-construction period is allowable u/s.24(b) of the Act. She further submitted that since the property was sold, therefore this pre-construction interest period should form part of the cost of acquisition of property. She submitted that alternatively this interest amount is allowable u/s.24(b) of the Act. In support of her contention about pre-construction period, interest ought to have been allowed as a cost of acquisition of property and relied on the decision of Hon'ble High Court of Madras rendered in the case of CIT v. K. Raja Gopala Rao [2001] 252 ITR 459/[2002] 125 Taxman 148 and also the decision of Hon'ble High Court of Karnataka rendered in the case of CIT v. Sri Hariram Hotels (P.) Ltd. [2010] 325 ITR 136/188 Taxman 170.
4.1 On the contrary, ld. Sr. DR supported the orders of the authorities below and submitted that this amount cannot form part of the cost of acquisition as the assessee himself has claimed it as an interest of pre-construction period.
5. We have heard the rival submissions, perused the material available on record and the judgements relied upon by the Ld. counsel for the assessee. We find that the AO disallowed this claim of the assessee without assigning any reason and the ld. CIT(A) has simply confirmed the amount without assigning reason as to how this amount is not admissible. The contention of the counsel is that the assessee has paid interest on borrowed capital for construction of house to City Bank of Rs. 52,964/-which was related to pre-construction period. The assessee has claimed this interest as part of cost of construction and accordingly claimed in the return of income. It is further submitted that the interest expense related to pre-construction period either can be added to cost of construction or can be claimed 1/5th every year. The assessee has claimed the interest as part of cost of construction and assessee could avail the deduction only once and, therefore, the unabsorbed interest of Rs.42,371/- shall become part of the cost of the property. It is also submitted that this cost towards unabsorbed interest should be considered as cost of acquisition of property and allowed to be deducted at the time of sale of the property. Alternatively, it is submitted by the Ld.counsel for the assessee that even if adverse view is taken deduction u/s.24 of the Act is allowable. So far the contention of the assessee is concerned that this amount is required to be treated as cost of acquisition of granting deduction qua the interest on borrowed capital related to pre-construction period is allowable u/s.24(b) of the Act. However, this claim of the assessee would be allowable u/s.24(b) of the Act, therefore, in our considered opinion, the assessee is entitled for deduction u/s.24(b) of the Act. The AO is directed accordingly and the addition is hereby deleted. This ground of appeal is allowed.
6. Now coming to the second ground which relates to the disallowance of exemption u/s.10(13A) of the Act of Rs.1,11,168/- for house rent allowance. Ld.counsel for the assessee submitted that the assessee claimed deduction u/s.10(13A) of the Act amounting to Rs.1,11,168/- in respect of house rent allowance and the authorities below grossly erred in not allowing the exemption. She further submitted that a bare reading of the provision would make it ample clear that the assessee is entitled for exemption u/s.10(13A) of the Act. She submitted that in support of the expenditure of house rent, requisite details and evidences were filed before the ld. CIT(A) who had called for a remand report from the AO. She submitted that the reasoning given by the AO and the ld.CIT(A) are different in disallowing the exemption.
6.1 On the contrary, Sr.DR for the Revenue supported the orders of the authorities below. Sr.DR pointed out that the AO in the remand report has submitted that the assessee has claimed the house owned by him as self-occupied and therefore, the authorities below were justified in disallowing the claim of the assessee.
7. We have heard the rival submissions, perused the material available on record and the orders of the authorities below. We find that the AO disallowed the claim of the assessee on the ground that the assessee has not given details of payment and evidences and also on the basis that the assessee and his wife are living together, hence the claim of payment of rent is just to avoid payment of taxes and to reduce the tax liability. Ld.CIT(A) confirmed the addition on the ground that the rent is paid by the assessee as a tenant to his wife who is a landlord and he found that the landlord and tenant are living together in the same house-property and the very fact that the landlord and tenant are staying together which indicates that the whole arrangement is of the nature of colourable device as pointed out by the AO. He observed that since it is evidently a colourable device, even though the amount purportedly paid as a rent will not qualify for exemption u/s.10(13A). The AO and CIT(A) have disallowed the claim of the assessee on the ground that assessee and his wife are living together but not on the ground that in return of income a house owned by him is declared as a self-occupied, however, we find a mention in the remand report (annexed at page-61), where the AO has commented that it is not ascertainable whether the assessee stayed with his wife's house or at his own house which he claimed self occupied and claimed the relief u/s.24 of the Act. Under these circumstances, we have to only examine whether the assessee is entitled for exemption u/s.10(13A) or not. For the sake of clarity, section 10(13A) is reproduced hereinbelow:-
"(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
| (a) | the residential accommodation occupied by the assessee is owned by him; or | |
| (b) | the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him;" |
7.1 From the reading of the above section, it is clear that the requirement of the section is that any allowance (by whatever name called) granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed. However, the exemption is not available in case the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. Admittedly, the AO has given a finding of fact that the assessee and his wife are living together as a family. Therefore, it can be inferred that the house owned by wife of the assessee is occupied by the assessee also and in remand report it has been submitted that the assessee has submitted the rent receipt(s) of Rs.15,000/- dated 3.7.2008 and Rs.1,65,000/- dated 31.3.2009 and stated that the payments have duly been paid through bank transfer entry. A verification of the said entry shows the transfer on the given dates but the receipts date and amount of Rs.1,65,000/- not reflecting as transfer. Therefore, in our considered opinion, the assessee has fulfilled twin requirements of the provision, i.e. occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled for exemption u/s.10(13A) of the Act. Since we have observed that the ld.CIT(A)'s chose not to make enhancement and disallow the relief u/s.24 of the Act, therefore we cannot comment upon this aspect of the matter. In this view of the matter, we delete the addition and direct the AO to allow exemption u/s.10(13A) of the Act to the assessee. This ground is also allowed as indicated above.
8. In the result, appeal of the assessee is allowed.
VERSHA IT : Profit derived from one industrial undertaking should be adjusted against loss suffered in another undertaking
■■■
[2013] 37 taxmann.com 217 (Gujarat)
HIGH COURT OF GUJARAT
Sintex Industries Ltd.
v.
Assistant Commissioner of Income-tax (OSD)*
M.R. SHAH AND MS. SONIA GOKANI, JJ.
TAX CASE NOS. 261 & 375 OF 2012†
JULY 2, 2013
Section 80-IA, read with section 80-IB, of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings [Computation of deduction] - Whether deduction under Chapter VI-A would be available only if computation of gross total income as per provisions of Act after setting off carried forward loss and unabsorbed depreciation of earlier years is not 'nil - Held, yes - Assessee-company was engaged in business of manufacturing of thermoplastic mouldings, prefab structures, etc., and blended and common fabrics and yarns - It had two units, named Baddi unit and Daman unit and one Captive Power Plant (CPP) - Assessee claimed deduction under section 80-IA on account of income derived from CPP and deduction under section 80-IB on account of Baddi unit - However, it had incurred loss in its Daman unit - Assessing Officer held that deduction under section 80-IA in case of CPP and deduction under section 80-IB for Baddi unit were to be allowed only after allocation of loss of Daman Unit on proportionate basis in ratio of sales of units - Whether no error or illegality had been committed by Assessing Officer in reducing eligible profits under section 80-IA of CPP and under section 80-IB of Baddi unit by adjusting loss of Daman unit - Held, yes [Para 8.1] [In favour of revenue]
FACTS
| ■ | The assessee-company was engaged in the business of manufacturing of thermoplastic mouldings, prefab structures, etc., in its plastic division and manufacturing of blended and common fabrics and yarns in its textile division. It had two units, one located at Baddi and another at Daman and one Captive Power Plant (CPP). | |
| ■ | The assessee claimed deduction under section 80-IA on account of income derived from CPP and deduction under section 80-IB on account of Buddi Unit. However, it had incurred loss in its Daman unit. | |
| ■ | The Assessing Officer held that considering the provisions of section 80-IB(13), read with section 80-IA(5), deduction under section 80-IA in the case of CPP and deduction under section 80-IB for Baddi unit were to be allowed only after allocation of loss of Daman Unit on proportionate basis in the ratio of sales of units. | |
| ■ | Commissioner (Appeals) allowed assessee's claim but partly by not allowing deduction under section 80-IB. | |
| ■ | The Tribunal had directed the Assessing Officer to reduce eligible profits under section 80-IA of CPP and section 80IB of Baddi unit by losses of Daman unit. | |
| ■ | On further appeal: |
HELD
| ■ | The Supreme Court in Synco Industries Ltd. v. Assessing Officer (Income-tax) [2008] 299 ITR 444/168 Taxman 224 held that deduction under Chapter VI-A would be available only if the computation of the gross total income as per the provisions after setting off carried forward loss and unabsorbed depreciation of earlier years is not 'nil'. [Para 8] | |
| ■ | Further, the Court held that while considering the gross total income, deduction under Chapter VI-A is contemplated only after total income is computed after setting off of the unabsorbed depreciation as per section 72 and therefore, section 72 has to be applied before total income of the assessee is determined i.e. before deduction under Chapter VI-A are allowed. In the aforesaid decision, the Supreme Court has specifically held that the contention that under section 80-I(6) profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. [Para 8.1] | |
| ■ | Considering the aforesaid decision of the Supreme Court, no error and/or illegality had been committed by Tribunal in reducing eligible profits under section 80-IA of CPP unit and under section 80-IB of Baddi unit by adjusting loss of Daman unit. [Para 8.1] |
CASE REVIEW
Synco Industries Ltd. v. Assessing Officer (Income-tax) [2008] 299 ITR 444/168 Taxman 224 (SC) (para 8.1) followed.
CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262 (SC) (para 8.2); Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC) (para 8.3); CIT v. Bharat Heavy Electricals Ltd. [2013] 352 ITR 88/[2012] 210 Taxman 155/26 taxmann.com 252 (Delhi)(para 8.5) and CIT v. Modi Xerox Ltd. [2012] 344 ITR 411/[2013] 33 taxmann.com 637 (All.) (para 8.4) distinguished.
CASES REFERRED TO
Synco Industries Ltd. v. Assessing Officer (Income-Tax) [2008] 299 ITR 444/168 Taxman 224 (SC) (para 5), CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262 (SC) (para 5.1), CIT v. Modi Xerox Ltd. [2012] 344 ITR 411/[2013] 33 taxmann.com 637 (All.) (para 5.2), Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC) (para 5.3), CIT v. Bharat Heavy Electricals Ltd. [2013] 352 ITR 88/[2012] 210 Taxman 155/26 taxmann.com 252 (Delhi) (para 5.4), Synco Industries Ltd. v. Assessing Officer [2002] 254 ITR 608/[2001] 119 Taxman 503 (Bom.) (para 6.1) and CIT v. Madras Motors (P.) Ltd. [1984] 150 ITR 150/19 Taxman 67 (Mad.) (para 8.1).
Manish J. Shah for the Appellant. Ms. Paurami B. Sheth for the Respondent.
JUDGMENT
1. As common question of facts and law arise, both these appeals are disposed of by this common judgement and order.
2. Both these Tax Appeals have been preferred by the common assessee - Sintex Industries Limited challenging the impugned order passed by the learned Income Tax Appellate Tribunal (C), Ahmedabad (hereinafter referred to as "the Tribunal") dtd. 25/11/2011 passed in ITA Nos.4091/2008 and 213/2009, by which the tribunal has allowed the appeal preferred by the department and reduced the eligible profits under section 80IA of CPP unit and section 80IB of Income Tax Act with respect to Baddi unit.
3. Facts leading to the present appeals in nut-shell are as under :
3.1 That in both these appeals, the dispute is with respect to the Assessment Year 2006-07. That the assessee filed Return of income for the Assessment Year 2006-07 declaring total income of Rs.43,16,14,095/- on 21/6/2006. The assessee also filed audited final accountants; Directors Report; computation of Income; tax audited report in Form No.3 CD and in Form No.10 CCB. It appears that the case was selected for scrutiny by issuing notice under section 143(2) dtd. 18/9/2007. A detailed questionnaire along with the statutory notice under section 142(1) was issued on 18/10/2007. In response to the same, the representative of the assessee attended from time to time and furnished details called for, which were placed on record. It appears that the assessee Company is a Public Limited Company engaged in the business of manufacturing of thermoplastic mouldings, prefab structures etc. in its plastic division and manufacturing of blended and common fabrics and yarns in its textile division. That approximately 73% of the major business was undertaken in its plastic division under which the assessee Company was manufacturing its various products under the brand name of Sintex. That the assessee Company had two units, one located at Baddi in Himachal Pradesh and another at Daman (U.T.). That during the year the assessee Company claimed deduction under section 80IB of the income derived from the aforesaid two industrial undertakings. In addition to the same, the assessee also claimed deduction under section 80IA of the Income Tax Act (hereinafter referred to as "the Act") on independent captive power plants (CPPs) which were entitled on its main manufacturing site located at kalol. That as per its return of income for the A.Y. 2006-2007 the assessee Company claimed deduction under section 80IA of the Act amounting to Rs. 17,93,81,731/-, on account of the income derived from CPP unit. That the assessee Company also claimed a deduction amounting to Rs. 8,63,51,359/-. Out of the aforesaid deduction, Rs.3,33,091/- was claimed on account of Daman unit at 30% of eligible profit of Rs. 11,10,302/- and Rs.8,60,80,268 @ 100% eligible profit of Rs.8,60,18,268/- on account of Baddi unit. That the Assessing Officer while passing order of assessment disallowed Rs.3,33,091/- under section 80IB for Daman Unit; disallowed Rs.6,90,34,962/- under section 80IB for Baddi Unit; Rs.48,28,944/- under section 80IA for CPP unit and Rs.9,72,326/- under section 40A of the Act, by holding that deduction under section 80IB is to be allowed after adjusting loss worked out in other unit or in other words, deduction under section 80IA for CPP unit and deduction under section 80IB for Baddi unit, are to be allowed only after allocation of loss of Daman Unit of Rs.1,97,47,000/- on proportionate basis in the ratio of sales various units. The Assessing Officer also held that setting off of the loss has been upheld by the CITA in earlier assessment years.
3.2 Being aggrieved by and dissatisfied with the order of assessment passed by the Assessing Officer, the assessee preferred appeal before the Commissioner (Appeals) and by order dtd. 3/10/2008, the Commissioner (Appeals) held against the assessee with respect to deduction under section 80IB of the Act. However, partly allowed the appeal.
3.3 Being aggrieved by the order passed by the Commissioner (Appeals), both, the assessee as well as the Department preferred appeals before the ITAT and by the impugned judgement and order, the tribunal has dismissed the appeal preferred by the assessee and has upheld the direction under section 80IA and 80IB of the Act and considering the loss of Daman Unit allocated to the remaining 2 units i.e. Baddi Unit and CPP unit, the tribunal has allowed the appeal preferred by the Department and has dismissed the Cross Objection of the assessee.
3.4 Being aggrieved by and dissatisfied with the impugned judgement and order passed by the ITAT, the assessee has preferred both these appeals with the following substantial question of law :
"Whether the tribunal was right in law in reducing the eligible profits under section 80IA of CPP unit and section 80IB of Baddi Unit by losses of Daman unit?"
4. Considering the above, the short question which is posed for consideration of this Court is, whether the loss from the Baddi unit is required to be adjusted before determining the gross total income of the assessee? Whether the tribunal erred in upholding the adjustment of loss from eligible unit against the profit of another eligible unit while computing deduction under section 80IA and 80IB of the Income Tax Act?
5. Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has vehemently submitted that as such the decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. v. Assessing Officer (Income-Tax) [2008] 299 ITR 444/168 Taxman 224, as such cannot be said to be against the assessee. It is submitted that even in the said decision it is observed by the Hon'ble Supreme Court that under section 80I(6) for the purpose of calculating deduction, losses sustained in one unit cannot be taken into account, because sub-section (6) contemplates that only profits shall be taken into account as if it was the only source of income.
5.1 Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has vehemently submitted that as such the question in the present appeals is squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262 . It is submitted that in the aforesaid decision it is specifically observed and held by the Hon'ble Supreme Court that while computing profits for the purpose of deduction under section 80E of the Income Tax Act, losses incurred by the assessee in a priority nature could not be set off against the profits of the manufacture in another priority and the assessee would be entitled to a deduction @ 8% (in that case) on the entire profits of the automobiles parts industries included in the total income without deducting their losses in the Alloy Steel Manufacture. It is submitted that in the case before the Hon'ble Supreme Court the assessee had 2 units, both priority industries and in one unit the assessee was manufacturing Alloy Steels and in another priority industries the assessee was manufacturing automobile ancillaries and the High Court affirmed the view of the appellate tribunal holding that in computing profits for the purpose of deduction under section 80E of the Income Tax Act, losses incurred in the manufacture of Alloy Steels should not be set off against the profit of manufacture of automobile ancillaries. It is submitted that in the aforesaid decision it is specifically observed by the Hon'ble Supreme Court that in the application of section 80E, profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.
5.2 Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has also relied upon the decision of the Allahabad High Court in the case of CIT v. Modi Xerox Ltd. [2012] 344 ITR 411/[2013] 33 taxmann.com 637 in which the Allahabad High Court had an occasion to consider both these decisions of the Hon'ble Supreme Court, in the case of Canara Workshops (P.) Ltd. (supra) and Synco Industries Ltd. (supra).
5.3 Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has further relied upon the decision of the Hon'ble Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349.
5.4 Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has also relied upon the decision of the Delhi High Court in the case ofCIT v. Bharat Heavy Electricals Ltd. [2013] 352 ITR 88/[2012] 210 Taxman 155/26 taxmann.com 252, by submitting that the Delhi High Court considering the decision of the Hon'ble Supreme Court in the case of Canara Workshops (P.) Ltd. (supra) has held that for the purpose of special deduction under section 80HHB, losses in one unit is not to be set off against the profit in another unit.
5.5 Mr. J.P. Shah, learned counsel appearing on behalf of the assessee has further submitted that even in the case of Synco Industries Ltd. (supra) the Hon'ble Supreme Court has specifically observed in para 13 that while computing the quantum of deduction under section 80-I(6), the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. According to him, it is also further observed by the Hon'ble Supreme Court in the said decision that "It is true that under section 80-I(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into accounts because sub-section (6) contemplates that only the profits shall be taken into account as if it was the only source of income." it appears that in the case before the Hon'ble Supreme Court as it was found that even after adjusting the loss from all divisions before determining the gross total income, gross total income was nil. The assessee was not entitled to claim deduction under Chapter VI-A which includes section 80I also. Mr. Shah, learned counsel appearing on behalf of the assessee has submitted that while calculating the gross total income and deduction, there can be there eventualities. It is submitted that there may be "nil" gross total income or there may be "loss" while considering the gross total income or there can be "profit". It is submitted that in the case of first two eventualities, there will not be any difference. However, if there is any profit, in that case, while considering the gross total income, loss of one unit is required to be adjusted first. Under the circumstances, it is submitted that despite the decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra), considering the decision ofCanara Workshops (P.) Ltd. (supra) present appeals deserve to be allowed .
6. Both these appeals are opposed by Ms. Paurami Sheth, learned counsel appearing on behalf of the Department. It is vehemently submitted that as such the controversy raised in the present appeals is squarely covered by the decision of the Hon'ble Supreme Court in the case ofSynco Industries Ltd. (supra). It is submitted that after considering various decisions of the other High Courts and considering the provisions and deductions under section 80IA and 80IB of the Act, it is specifically held by the Hon'ble Supreme Court that loss from one unit / division is required to be adjusted before determining the gross total income. Therefore, as such no error and/or illegality has been committed by the learned tribunal so also the Commissioner as well as the Assessing Officer.
6.1 Now, so far as the reliance placed upon the decisions of the Hon'ble Supreme Court in the case of Canara Workshops (P.) Ltd. (supra), in the case of Bharat Heavy Electricals Ltd. (supra) and in the case of Liberty India (supra) and decision of the Allahabad High Court in the case of Modi Xerox Ltd. (supra), are concerned, it is submitted by Ms. Paurami Sheth, learned counsel appearing on behalf of the Department that none of the aforesaid decisions would be applicable to the facts of the present case. It is submitted that in the aforesaid cases the controversy was with respect to granting special deductions which was available to a particular unit of the assessee and therefore, it was held that considering the loss of another unit special deduction in the form of incentive etc. to particular unit cannot be denied. It is submitted that as such the Bombay High Court in the case of Synco Industries Ltd. (formerly known as Synco Textiles (P.) Ltd. v. Assessing Officer [2002] 254 ITR 608/[2001] 119 Taxman 503 (Bom.) against which SLP was preferred before the Hon'ble Supreme Court in the decision of Synco Industries Ltd. (supra) had considered the decision of the Hon'ble Supreme Court in the case of Canara Workshops (P.) Ltd. (supra) and it was held that the decision of Canara Workshops (P.) Ltd. (supra) would not be applicable. It is submitted that the decision of the Bombay High Court has been subsequently confirmed by the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra).
Ms. Paurami Sheth, learned counsel appearing on behalf of the Department has further submitted that similar issue in earlier Assessment Years 2003-04, 2004-05 and 2005-06 was decided against the assessee which was not further challenged by the assessee.
7. Now, so far as not challenging the decision of the CIT(A) with respect to earlier assessment years is concerned, it is submitted by Mr.Shah, learned counsel appearing on behalf of the assessee that looking to the smallness of the amount involved, the assessee did not thought it fit to challenge the adverse decision before the higher forum.
8. Heard the learned counsel appearing on behalf of the respective parties at length. Short question which is posed for consideration of this Court is "Whether the tribunal was right in law in reducing the eligible profits under section 80IA of CPP unit and section 80IB of Baddi Unit by losses of Daman unit?"
8.1 It appears that while submitting the return of the Assessment Year 2006-07, the assessee claimed deduction under section 80IA of the Act amounting to Rs.17,93,82,731/-on account of income derived from CPP unit. The assessee also claimed deduction under section 80IB of the Act amounting to Rs.8,63,51,359/- and out of the said deduction, Rs.3,33,091/-was on account of the Daman Unit @ 30% of the eligible profits of Rs.11,10,302/- and Rs.8,60,80,268/- on account of Baddi unit. It was found that the Company had incurred loss of Rs.1,97,47,000/- so far as Daman unit is concerned and therefore, considering the provisions of section 80IB(13) read with section 80IA(5), deduction of the assessee Company for Daman unit was further reduced to Rs.1,97,47,000/-. The Assessing Office also held that as per the provisions of section 80AB of the Income Tax Act, deduction under section 80IB is to be allowed after adjusting loss worked out in other units or in other words deduction under section 80IA in the case of CPP unit and deduction under section 80IB for Baddi unit are to be allowed only after allocation of loss of Daman Unit of Rs.1,97,47,000/- on proportionate basis in the ratio of sales of units.
As such the question raised in the present appeals is squarely covered by the decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra). In the said decision, the Hon'ble Supreme Court also noted the decisions of various High Courts taking view that deduction under Chapter VI-A of the Act would be available only if the computation of the gross total income as per the provisions of the Act are setting off carried forward loss and unabsorbed depreciation of earlier years is not "nil". In the said decision the Hon'ble Supreme Court also considered the decision of the Madras High Court in the case of CIT v. Madras Motors (P.) Ltd. [1984] 150 ITR 150/19 Taxman 67 (Mad.), taking view that while considering the gross total income, deduction under Chapter VI-A is contemplated only after total income is computed after setting off of the unabsorbed depreciation as per section 72 is evident and therefore, section 72 has to be applied before total income of the assessee is determined i.e. before deduction under Chapter VI-A are allowed. In the aforesaid decision, the Hon'ble Supreme Court has specifically held that the contention that under section 80I(6) profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Mr. Shah, learned counsel appearing on behalf of the assessee has relied upon the observations made by the Hon'ble Supreme Court in the said decision that "It is true that under section 80-I(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into accounts because sub-section (6) contemplates that only the profits shall be taken into account as if it was the only source of income." However, the said decision and the observations are required to be considered as a whole. After observing the above, it is further observed by the Hon'ble Supreme Court that "However, sections 80A(2) and 80B(5) are declaratory in nature. They apply to all sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and, therefore, the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. As observed earlier, section 80I(6) deals with only computation of deduction, whereas section 80I(1) deals with treatment to be given to such deductions in order to arrive at the total income of the assessee and therefore, while interpreting section 80I(1) which also refers to gross total income, one has to read the expression "gross total income" as defined in section 80B(5)." After observing so, the Hon'ble Supreme Court confirmed the view expressed by the High Court holding that loss from the Oil division was required to be adjusted before determining the gross total income and as the gross total income was nil, the assessee was not entitled to claim deduction under Chapter VI-A which includes section 80I also. The proposition of law which is laid down by the Hon'ble Supreme Court in the said decision is in the last but one paragraph which reads as under :
'The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is "nil" the assessee would not be entitled to deductions under Chapter VI-A of the Act.'
Considering the aforesaid decision of the Hon'ble Supreme Court, as such no error and/or illegality has been committed by the tribunal in reducing eligible profits under section 80IA of CPP unit and under section 80IB of Baddi unit by adjusting loss of Daman unit.
8.2 Now, so far as the reliance placed upon the decision of the Hon'ble Supreme Court in the case of Canara Workshops (P.) Ltd. (supra) is concerned, on considering the controversy in the aforesaid decision and the facts in the said case, we are of the opinion that the said decision would not apply to the present case. In the case before the Hon'ble Supreme Court, the assessee was a Public Limited Company engaged in the business of manufacture of automobile spares. During the assessment year 1965 it commenced another activity, viz. manufacture of Alloy steels. Both the activities falled within Fifth Schedule of the Act. The assessee sustained loss in the manufacture of alloy steels whereas profits were earned from the business of automobile spares. The assessee claimed relief under section 80E as it than stood. The Assessing Officer declined to grant relief on the ground that the assessee has ignored loss incurred in Alloy Steel Industry. He held that the assessee would be entitled to deduction under section 80E on the profits from the manufacture of automobile spares only after setting off loss in Alloy Steel. He accordingly granted a limited relief to the assessee under section 80E. Ultimately, the matter reached the Hon'ble Supreme Court and the Hon'ble Supreme Court held that the legislature under section 80E, it clearly stipulated that while computing deduction, following conditions were required to be satisfied viz., that it must be a Company to which section 80E applied; that total income as computed in accordance with law, should include profits and accounts attributable to the business or the industries mentioned in section 80E without taking into account provisions of section 80E and lastly from the profit and accounts attributable to such business, deduction has to be allowed of an amount equal to 8% of the profits and effect must be given to that deduction without computing total income of the Company. The Hon'ble Supreme Court has further held that the object of Section 80E was properly served only by confining the application of the provisions of that section to the profits and gains of a "single industry". In the present case, under section 80I(6), profit of Baddi unit are required to be treated as if that was the only source of income. That the losses from the Daman unit are required to be ignored. Therefore, while calculating quantum of deduction, profit of the Baddi unit alone are required to be taken. To that there is no difficulty. However, after calculating the deduction on the basis that the profits from the Baddi unit was the only source of income, one has to give effect to the computed deduction in order to arrive at the total income of the Company and while giving effect, one has to consider the provisions of section 80IA and 80IB of the Act. In other words, while considering the gross total income of the assessee, deduction under section 80IA and 80IB of the Act are required to be allowed after adjusting loss out in other units. Under the circumstances and as stated above, the decision of the Hon'ble Supreme Court in the case of Canara Workshops (P.) Ltd. (supra) shall not be applicable to the facts of the case and the controversy in question.
8.3 Now, so far as the reliance placed upon the decision of the Hon'ble Supreme Court in the case of Liberty India (supra) is concerned, on facts, the said decision shall not be applicable. In the case before the Hon'ble Supreme Court, the dispute was with respect to special deduction claimed with respect to a particular unit and one unit was found to be eligible for claiming such special deduction. Thus, on facts, the said decision shall not be applicable to the facts of the present case.
8.4 Now, so far as the reliance placed upon the decision of the Allahabad High Court in the case of Modi Xerox Ltd. (No.2) (supra) is concerned, considering the facts and the special deduction claimed under section 80HH and 80I, the said deduction also would not be of any assistance to the appellant.
8.5 Similarly, on facts, the decision in the case of the Delhi High Court in the case of Bharat Heavy Electricals Ltd. (supra), also shall not be of any assistance to the appellant. It is also required to be noted that before the Delhi High Court, decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra) was not brought to the notice of the Delhi High Court and therefore, the Delhi High Court had no occasion to deal with and/or consider the decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra).
8.6 It is also required to be noted that in the case of the very assessee, the very issue arose in the Assessment Years, 2003-04, 2004-05 and 2005-06 wherein the issue was decided against the assessee, however, the same was not challenged further. It is the case on behalf of the assessee that as the amount involved was small, the assessee thought it fit not to challenge the same before higher forum. Be that it may, the fact remains that in the earlier years while considering deduction under sections 80IA and 80IB, loss in another unit was first given set off and only thereafter deduction under section 80IA and 80IB of the Act was given.
8.7 In view of the above and for the reasons stated above, we are of the opinion that the tribunal was right in law in reducing eligible profits under section 80IA of the CPP unit and under section 80IB of the Baddi unit by losses of Daman unit.
9. In view of the above and for the reasons stated above, both the appeals fail and they deserve to be dismissed and are accordingly dismissed, however, in the facts and circumstances of the case, there shall be no order as to costs.
POOJAAFTER YOU HAD SUBMITTED DETAILS TO CPC WITH LEGAL HEIR CERTIFICATES ETC. , CPC WILL APPROVE IT AND WILL ALSO UPDATE THE PROFILE BY INSERTING PAN NO OF LEGAL HEIR IN THE PROFILE OF DECEASED.
ABOVE CAN BE VIEWED AS FOLLOWS:
STEP 1 : LOG IN THE EFILLING PORTAL WITH DETAILS OF DECEASED
STEP 2: GO TO PROFILE SETTING
STEP 3: GO TO VIEW MY PROFILE & CHECK WHETHER PAN NO OF DECEASED IN THERE
STEP 4: IF PAN NO OF LEGAL HEIR IS SHOWING , THAN UPLOAD RETURN
CA NITESH MORE
query:I uploading a tax audit report of a proprietorship business,the proprietor of which is dead and his legal heir is registered with income tax and necessary approval have been taken by submitting the death certificate etc..But when I am trying to approve the tax audit form of through the DSC of legal heir,the message is displaying that the PAN registered at the e-filing portal and the DSC is not matching.What to do.How to approve the form
CPC HAS NOT UPDATED THE PAN IN UR PROFILE OF THE LEGAL HEIR
CHECK
VIEW MY PROFILEPAN DETAILS
IF CPC APPROVE D UR REQUESTS THAN PAN OF LEGA HEIR WILL APPEAR
CPC FAQ IS AS FOLLOWS FOR LEGAL HEIR
Legal Heir
Problem Description :What all document do I need to attach as a ZIP file during registering myself
as Legal Heir?
Corrective Action:You need to scan the following documents and ZIP them in a file:
Copy of the Death Certificate of the deceased person,
Copy of the PAN card of deceased person,
Self attested copy of PAN card of the Legal Heir.
Self attested copy of Legal Heir Certificate
Problem Description :What is the address where I need to send the documents?
Corrective Action:You need to send the documents on the below address by Ordinary or Speed post
ONLY.
Income Tax Department
e-Filing Administrator
Centralized Processing Centre,
Post Bag No. 12,
Electronic City Post Office,
Bangalore - 560100
Problem Description :I received an e-mail from Income Tax Department stating that my request for
Legal Heir has been accepted and I am assigned as the Legal Heir for the deceased. Can I e-File for
the deceased person now?
Corrective Action:Yes.
Problem Description :I am assigned as the Legal Heir for the deceased person. How can I e-File for
the deceased person?
Corrective Action:LOGIN using your own User ID, Password and Date of Birth. Once logged in, GO
TO 'e-File' --> 'Upload Return'. Select the PAN from the drop-down option as the deceased's PAN. Fill
the remaining details on the page and upload XML. Sign using DSC if available and applicable.
Problem Description :I am trying to upload Income Tax Return for a deceased but I am getting an
error message saying "PAN mentioned on Personal/ Verification section is invalid". What should I do?
Corrective Action:Please ensure that the PAN entered in the Verification section of the Income Tax
Return is your (Legal heir) PAN and not of the deceased person. Also, if the Income Tax Return is
being digitally signed, the PAN encrypted in the DSC must match with the PAN mentioned in the
verification section.
Problem Description :Whose Digital Signature Certificate (DSC) can I use to e-File the deceased's
Income Tax Return?
Corrective Action:You need to use your own valid Digital Signature Certifcate (DSC) which is
registered with e-Filing.
Kindly email your query,news,information,opinion etc to moreassociate@gmail.com.
Warm Regards,
CA Nitesh More
9883157484
Follow on face book: CA Nitesh More
DISCLAIMER - The opinion(s) expressed by member(s) are of their own, and/OR information provided by member(s), the users need to verify it from their own sources. No responsibility of any sort taken by me or any member(s) or the moderator for any opinion expressed or the information posted on this group.
CA Nitesh More
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Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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