Testing of Injection Moulds - Service Tax liability?

TIOL-DDT 2181
03.09.2013
Tuesday

IN a recent RAC meeting of Hyderabad Central Excise Zone, a Member asked the following question:

We are manufacturers of Injection Moulded Plastic Articles; we are loading the customers' moulds on our injection moulding machine to test the functioning of new moulds & its products for 8-12 hrs and we charge to the customers for the machine hours used for that purpose.

In this connection the following queries are raised:

i. For this mould trials on our machine, is service tax attracted?

ii. If so,under which service it can be classified?
iii. If we are liable to pay service tax, whether we can avail SSI exemption?

iv. Prior to mould trials, whether we/our customers have to file any intimation/declaration to Central Excise department regarding mould trials?

The Department replied:

Till 30.06.2012, there were more than 115 service categories which were liable to service tax. Any taxpayer to know whether his services were taxable had to refer to the definition of various services and decide whether tax is payable or not. However, w.e.f. 1st July 2012 the same has been done away with, as there are no specific taxable services there is a negative list of services on which no tax is applicable. Also there is a mega notification which provides a list of services which are specifically exempted from tax. In the present case, the services rendered are taxable. (before or after 1.7.2012 or both?)

Taxable service of aggregate value not exceeding ten lakh rupees in any financial year is exempt from the whole of the service tax liable thereon under section 66B of the said Financial Act as per Notification No.33/2012-Service Tax dated 20.06.2012.

If the customer is a manufacturer of moulds and sending the moulds without payment of duty for testing purpose, he has to intimate the jurisdictional Central Excise Officer under Rule 16C of Central Excise Rules, 2002. If the customer has purchased moulds from open market he need not file any intimation to the Central Excise Department.

Central Excise

CENVAT -A buyer can take steps which are in their control and he cannot be expected to verify records of the supplier's broker to check whether in fact supplier has paid duty on goods supplied by him or not - as long as bona fide nature of consignee transaction is not doubted, credit should not be denied - Revenue appeals rejected: CESTAT

IT is not only possible but impractical also for an assessee to further check the records maintained by the first stage dealer and to verify correctness of the same. It is sufficient if the assessee buys the goods from first stage dealer whose status he has checked and verified. There is no dispute in the present case that M/s. M K Steels was registered as a dealer with the Revenue and the invoices issued by him reflected his registration number.

Income Tax

Whether depreciation is allowable even if machinery is not put to use due to paucity of raw materials - YES: HC

THE issues before the Bench are - Whether depreciation can be claimed when business is a going concern and the machinery could not be put to use due to raw material paucity and Whether the word "used" in Section 32 should be understood in a wider sense so as to embrace passive as well as active use. And the verdict goes against the Revenue.

Service Tax

GTA Service - CENVAT Credit can be used to pay Service Tax by recipient of service: HC

THE assessee is engaged in manufacture of yarn of different kinds. The assessee holds Service Tax Registration for the Service Goods Transport Agency ("GTA"). During the period between 1.1.2005 and 30.9.2005, the assessee had paid the service tax due on the GTA service by utilizing the CENVAT Credit availed on inputs and capital goods. The adjudicating authority viewed that such adjustment of the CENVAT Credit towards the liability on Service tax was contrary to the Rule. It was held that the CENVAT Credit could be utilised only in respect of "input service" as per definition of 2(l) of CENVAT Credit Rules, 2004. Thus, utilisation of CENVAT Credit for payment of service tax due was improper and consequently show cause notice was issued, proposing to demand service tax on GTA under Section 73 of Chapter V of Finance Act, 1994 along with interest under Section 75 of the Finance Act, apart from proposing levy of penalty under Section 76 of the Act.

IT/ILT: Tax was required to be deducted at source on share of audit expenses paid to foreign parent company, as element of income was embedded in receipt of auditor

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[2013] 36 taxmann.com 377 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'G'

SPX India (P.) Ltd.

Commissioner of Income-tax (Appeals)-XII, New Delhi*

S. V. MEHROTRA, ACCOUNTANT MEMBER
AND RAJPAL YADAV, JUDICIAL MEMBER

IT APPEAL NO. 976 (DELHI) OF 2011
[ASSESSMENT YEAR 2007-08]

JULY 16, 2013

Section 195, read with section 40(a)(i) of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident [Reimbursement of audit fee to parent company] - Assessment year 2007-08 - Whether, where assessee-company paid its share of expenses for ISO audit to its foreign parent company, tax was required to be deducted at source under section 195, as element of income was embedded in receipt of auditor - Held, yes - Whether, therefore, assessee's claim that tax was not deducted under bona fide belief that it had only reimbursed expenses, was not acceptable and, amount was to be disallowed under section 40(a)(i) - Held, yes [Para 9] [In favour of revenue]

CASES REFERRED TO

Asstt. CIT v. Madicon Network (P.) Ltd. [2007] 14 SOT 204 (Delhi) (para 7), Nathpa Jhakri Joint Venture v. Asstt. CIT [2010] 37 SOT 160 (Mum.) (para 7) and Dy. CIT v. Lazard India (P.) Ltd. [2010] 41 SOT 72 (Mum.) (para 9).

Satyen Sethi and Arta Trana Panda for the Appellant. Satpal Singh for the Respondent.

ORDER

Rajpal Yadav, Judicial Member - Assessee is in appeal before us against the order of ld. CIT (A) dated 31.12.2010 passed for A.Y. 2007-08.

2. The solitary grievance of the assessee is that it has made a provision of Rs. 261540/- which is to be paid to SPX Corporation (Parent Co. in USA), towards its share of expenses for ISO audit, it failed to deduct the TDS on such payment, therefore, the AO has disallowed the claim of assessee.

3. The brief facts of the case are that assessee has filed its return of income on 30.10.2007 declaring total income of Rs. 87,43,640/- after adjusting brought forward losses of Rs. 101,19,786/-. The case of the assessee was selected for scrutiny assessment and a notice u/s 143(2) was issued and served upon the assessee. On scrutiny of the accounts it revealed to the AO that assessee has made a provision, whereby it has credited the account of parent company by a sum of Rs. 2,61,540/-. The provision was made for the purpose of carrying out environmental audit. According to the assessee, it has not deducted the TDS, because it has just reimbursed the expenses and on reimbursement of expenses TDS was not required to be deducted. The ld. AO has rejected the claim of the assessee on the ground that amount is payable to a third party for the services rendered by that party. The element of income is embedded in the alleged provision because, for carrying out the audit service, if third party would receive any amount then that amount would be taxable in India.

4. Alternatively, assessee has contended that a sum of Rs. 1,05,989/- was written back as an income being excess provision and it was offered for taxation. According to the assessee the only amount payable by it is Rs. 1,55,,551/- which at the most can be disallowed.

5. We find that qua this argument AO has just observed that contention of the assessee is not acceptable because it had made a provision of Rs. 2,61,540/-.

6. Appeal to the CIT (A) did not bring any relief to the assessee.

7. Before us ld. counsel for the assessee, on the strength of two Tribunal decisions rendered in the case of Asstt. CIT v. Madicon Network (P.) Ltd. [2007] 14 SOT 204 (Delhi) and Nathpa Jhakri Joint Venture v. Asstt. CIT [2010] 37 SOT 160 (Mum.) contended that expenses reimbursed to the parent company TDS would not be required to be deducted.

8. On the other hand ld. DR relied upon the order of ld. CIT (A).

9. We have duly considered the rival contention and gone through the case law relied upon by the assessee. In the case of Modicon Network (P.) Ltd. (supra) there was a joint venture and arrangement of incurring expenses was made. The assessee has reimbursed part of the expenses thus it was conclude by the Tribunal that reimbursement without any element of profit or income embedded therein, no deduction of TDS would require. Similarly in the case of Nathpa Jhakri Joint Venture (supra), the ITAT, Mumbai has held that if amount paid or payable to non-resident is chargeable to tax in his hand and assessee fail to deduct tax at source then said amount shall not be allowed as deduction u/s 40 (a) (i). The counsel for the assessee also drew our attention towards the order of ITAT, Mum. in the case ofDy. CIT v. Lazard India (P.) Ltd. [2010] 41 SOT 72, his submissions are that there is no mala fide in the conduct of the assessee, it has just reimbursed the expenses to the parent company. It has not made this arrangement for avoiding payment of taxes. Under a bona fide belief it has reimbursed the expenses without deducting TDS. We are of the view that section 195 put an obligation for deducting TDS while making payment to non- resident. It nowhere provides that such an obligation can be absolved by showing reasonable cause for not deducting the TDS while making payment or crediting the account. Thus the contentions of the assessee that under bona fide belief, it has reimbursed the expenses are irrelevant. The element of income is embedded in the receipt of the auditor. If the receipts are routed through the parent company that does not extinguish the element of income from the payments. Therefore assessee was bound to deduct TDS. It failed to deduct TDS, hence a disallowance is to be made u/s 40 (a) (i). As far as quantification of the amount is concern, we find that assessee has made the provision for a sum of Rs. 2,61,540/-. The excess provision has been written back and a sum of Rs. 1,05,989/- was offered for tax in the next year. Thus the exact amount paid without deducting the TDS is Rs. 1,55,551/-. The assessee has raised the plea before the AO but ld. AO has not assign any reason for not accepting this plea. If we confirmed the disallowance of the total amount then amount of Rs.1,05,989/- would suffer tax twice i.e. by way of disallowance in this year and in the next year when assessee has written back the provision. Therefore, we direct the AO to exclude this amount from the disallowance after verification that it was offered for tax in the next year.

10. The appeal of the assessee is partly allowed for statistical purposes.

2011-TIOL-387-ITAT-MUM

(Also see analysis of the case )

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCHES 'B' MUMBAI

ITA No.6504/Mum/2008 : Assessment Year: 2002-2003
ITA No.4219/Mum/2009 : Assessment Year: 2003-2004
ITA No.4728/Mum/2007 : Assessment Year: 2004-2005
ITA No.6505/Mum/2008 : Assessment Year: 2005-2006

ASSISTANT DEPUTY COMMISSIONER OF INCOME TAX
1(1), MUMBAI

BOMBAY REAL ESTATE DEVELOPMENT COMPANY PVT LTD
MUMBAI
PAN NO:AAACB2092E

R V Easwar, President and T R Sood, AM

Dated: June 03, 2011

Appellant Rep by: Mr Satbir Singh
Respondent Rep by: Mr Arvind Sonde

Income tax – Sections 40A(2), 80IB(10) – Whether when assessee enters into agreement with a builder to construct a building and also get approvals from various authorities, it is merely a case of transfer of right in the land and Sec 80IB(10) benefits cannot be allowed to the assessee - Whether no disallowance can be made u/s 40A(2) without comparing the payment made by other companies to similarly qualified and capable Managing Directors and nothing has been brought on record to show that the payment was excessive or unreasonable.

A) Assessee was engaged in the business as builder and developer – it claimed deduction u/s 80IB(10) – AO asked the assessee to justify the claim of deduction – Assessee submitted that in terms of the development agreement entered into with 'EBPL', it had undertaken the activities for development of the project, which activities entitled the assessee to claim deduction – the assessee contributed the land for development whereas EBPL undertook the construction activity as well as finance cum marketing activities and the profits from the project were to be shared between the assessee and EBPL in the ratio of 43 : 57.

AO dismissed the claim of the assessee observing that the assessee should be both a developer and a builder to be eligible for the deduction, that it was EBPL which actually developed and constructed the housing project, that the assessee merely provided the other incidental services such as obtaining FSI and all statutory permissions, putting up the pipeline up to the boundary of the project, setting up the infrastructure and complying with the conditions imposed by MMC and these activities do not amount to developing and building the housing project.

CIT (A) allowed the appeal of the assessee stating that the appellant prepared the land for building the Housing Project till the issue of commencement certificates as a developer, appellant jointly contributed the cost of the entire housing project and jointly appointed the contractors for construction of flats, the entire sale proceeds of the flats etc. were deposited in the jointly operated current account number and their respective shares were subsequently transferred to their bank accounts. Thus, the appellant was engaged to develop and build the housing project and section 80-IB(10) does not prescribe the proportion of developing and building housing project – the assessee was entitled for deduction under section 80-IB to the extent of its business income as the appellant was a developer and builder.

Revenue contended that the assessee is not a developer of housing projects and it has only provided some services to EBPL which is actually the developer and therefore the assessee is not entitled to the deduction - mere ownership of land by the assessee is not sufficient compliance with section 80- IB(10) and the assessee has to undertake further activities for development of the housing project, in which case alone he would be entitled to the deduction – it was a simple case of transfer of land by the assessee for consideration, which gives rise to capital gains and not business profits - the fact that the assessee was described as a developer or joint developer in the various agreements was not conclusive of the matter and that these agreements actually concealed the real intention of the assessee, which was only to transfer the land for a surplus - what the assessee was actually obliged to do under the various agreements was only to complete the legal formalities to put through the transfer of the land.

B) Assessee paid Rs. 4.45 crores to its Managing Director on account of salary, exgratia and medical reimbursement. AO was of the view that it was on the higher side in comparison with the payment made to the other Directors of the company. Assessee submitted the details of the payment made but did not submit any justification regarding non applicability of section 40A(2) – AO observed that in the impugned A.Y. the consideration was three times more than the preceding year and held the payment of remuneration as unreasonable and excessive. In appeal before CIT (A), assessee submitted that the MD runs the entire business and cannot be compared with the other two directors who hardly worked – further the MD is a chartered accountant from London and was earlier working for about ten years with M/s A A Ferguson & Company and the other two directors were not even graduates – moreover, the remuneration was paid only 8% of the profits and since the remuneration was linked to the profits, the same increased commensurate with the profits. CIT (A) allowed the appeal of the assessee stating that the reasonableness of the payment should be compared to the payment for similar services in the open market. AO had not compared the payment to MD with the payment made by other companies to similarly qualified and capable Managing Directors.

After hearing both the parties, the ITAT held that,

A) ++ Clause 3 states that the assessee and EBPL shall develop the said land through utilization of the FSI of approximately 20,00,000 sq. ft. by constructing building on the said land in different phases according to the revised layout and building plans. It was the duty of the assessee to ensure that the revised plans are sanctioned by the BMC including the TDR which are to be acquired by the assessee at its costs and made available for joint development in accordance with the agreement. Clause 4 states that the revised layout and the revised building plans are to be prepared by EBPL in consultation with the assessee and it is the assessee's duty to get them approved by the BMC. The condition however is that no changes shall be made by the assessee unilaterally without obtaining the prior written approval of EBPL. Clause 5 states that all the deposits and other charges for obtaining approval for the revised layout plan and the revised building plan shall be made by EBPL by account payee cheques drawn in favour of BMC and these amounts can be recovered by EBPL from the purchasers of flats, shops, etc. at the time of delivery of possession. EBPL shall also be entitled to withdraw the deposits directly from BMC. Clause 6 provides that all premiums and charges payable to BMC for obtaining additional FSI shall be borne by the assessee alone. It is however provided that initially these amounts may be paid by EBPL to the assessee but the amount is subject to recovery later from the assessee. Clause 7 states that the expenses of obtaining additional FSI in the form of compensatory TDR and the cost of acquisition of the TDR shall be borne and paid by the assessee. The other obligations of the assessee under the agreement were to obtain plinth commencement certificate from the BMC, to pay premium for obtaining FSI in respect of staircase, lift and balconies, to provide the requisite pipeline up to the boundary of the land for supply of potable water for construction purposes and drinking purposes at its own cost in time so that the construction of the buildings is not delayed or impeded, the funds required for the construction of the buildings on the said land shall be expended by EBPL alone and the assessee shall not be required to spend any amount for the same, the assessee is responsible for obtaining all statutory permissions including IOD plinth certificates and it shall at its own costs obtain all requisite permissions and orders from ULCRA authorities until the construction is complete;

++ section 80IB(10) confers deduction to an undertaking "developing and building housing projects". What is development of a housing project has not been defined in the sub-section. It cannot be postulated that the assessee, even in 1982, with a view to obtaining deduction under section 80-IB undertook certain paper transactions in order to claim deduction at a much later period on the ground that those transactions amounted to development activity preceding the construction of the housing projects. The obligations and responsibilities undertaken by the assessee, under the various agreements, show that the activities undertaken by the assessee are activities relating to development of the housing project. The assessee has been in the business of developers and builders since many years and has undertaken and completed several housing projects. Assessing Officer has not raised any objection on the ground that the assessee is not a developer. The fact that the construction activity was financed by EBPL cannot obliterate or take away all the earlier responsibilities undertaken by the assessee to legally and factually prepare the land for putting up the housing projects. The assessee which had the development rights over the land and which had undertaken the responsibility of obtaining all statutory clearances, permissions, etc. for putting up the housing project on the land, had collaborated with EBPL which had the necessary technical knowhow as well as the finance for putting up the construction;

++ the most of the crucial, preliminary and basic developmental activities necessary for the purpose of making the land ready and prepared for construction activity, both legally and factually, were undertaken and put through only by the assessee. It would be unfair to ignore or brush aside these activities by calling them not developmental activities merely because the assessee has claimed deduction in respect of the profits under section 80- IB(10);

++ right from the day one, the assessee undertook all the developmental activities only with a view to putting up housing projects on the land. The very fact that the assessee was given development rights by BJPL over the land means that the assessee intended to develop the land by removing all unauthorized persons and structures and to obtain the necessary permissions from all concerned statutory authorities so that the construction of the housing project thereon can be commenced and proceeded with without any hitch;

++ there is no escapement of tax by way of double deduction. the gross sale proceeds are to be divided between the assessee and EBPL on the basis of 43% and 57% respectively. Thus the assessee would be getting deduction under section 80-IB(10) in respect of the profits derived by it from the housing project and EBPL will be similarly claiming deduction in respect of its share of the profits. Both of them combined do not exceed 100% of the profits from the housing project. Thus there is also no double deduction;

B) ++ AO ought to had compared the payment made to MD with payments made for similar services by other companies. Comparison of the payment with the payments made to the other two Directors was not justified as the payments are depending upon the qualification, experience, etc. of each employee. AO had not brought on record anything to show that the payment was excessive or unreasonable. Hence, disallowance u/s 40A(2) was deleted.

Revenue's appeal dismissed

ORDER

Per: R V Easwar:

These are appeals filed by the revenue for the assessment years 2002-03 to 2005-06. The assessee respondent is a private limited company engaged in the business as builder and developer. These appeals arise out of assessments made on the assessee under section 143(3) of the Income Tax Act, 1961. We may first take up ITA No: 4728/Mum/2007 for disposal. It relates to the assessment year 2004-05. This is the year in which the controversy raised in the present appeals first arose and based on the decision taken by the Assessing Officer for this year; the assessments for the other three years were reopened under section 147 of the Act. Thus, in respect of the assessment year 2004-05, the appeal arises out of original assessment proceedings, whereas in respect of the other three years the appeals arise out of the reassessment orders. However, the facts in all the four years and the controversy arising out of those facts are the same and hence all the appeals were heard together and are disposed of by a single order.

2. In respect of the assessment year 2004-05, the assessee filed its return on 01.11.2004, in which it claimed deduction of Rs.22,07,52,051/- under section 80-IB(10) in respect of the profits from the project called "Evershine Project". The Assessing Officer called upon the assessee to justify the claim. The assessee submitted that in terms of the development agreement entered into on 22.12.1999 with M/s Evershine Builders Private Limited (hereinafter referred to as EBPL), it had undertaken the activities for development of the project, which activities entitled the assessee to claim deduction under section 80-IB(10) and reference was made to the important terms of the agreement. It was submitted that under the terms of the agreement, the assessee developed the property by undertaking several responsibilities and activities relating to the construction of the buildings and EBPL were associated with the project as joint developers. It was also pointed out that the assessee contributed the land for development whereas EBPL undertook the construction activity as well as finance cum marketing activities and the profits from the project were to be shared between the assessee and EBPL in the ratio of 43 : 57. It was repeated that the assessee fulfilled all the conditions of section 80-IB(10) in order to qualify for the deduction. These submissions were put forth in writing by letter dated 20.11.2006 before the Assessing Officer and the said letter has been reproduced in full in the assessment order.

3. The Assessing Officer examined the facts right from the inception when the assessee acquired the development rights over the land and after examining the terms of the agreement between the assessee and EBPL, came to the conclusion that the assessee should be both a developer and a builder to be eligible for the deduction, that it was EBPL which actually developed and constructed the housing project, that the assessee merely provided the other incidental services such as obtaining FSI and all statutory permissions, putting up the pipeline up to the boundary of the project, setting up the infrastructure and complying with the conditions imposed by MMC and these activities do not amount to developing and building the housing project. He accordingly rejected the assessee's claim for deduction under section 80-IB(10) of the Act.

4. On appeal, the assessee filed detailed written submissions, which are reproduced in paragraphs 5 and 5.1 of the impugned order of the CIT(A). The CIT(A), after examining the facts in some detail and the various agreements entered into by the assessee, accepted the submissions of the assessee and summed up his findings as below: -

"7.7. On the basis of the facts, the issue is summed up as under: -

a) The appellant prepared the land for building the Housing Project till the issue of commencement certificates dated 17.09.2001 and 01.10.2001 as a developer.

b) The appellant jointly contributed the cost of the entire housing project at Rs.46,51,16,279/- and jointly appointed the contractors for construction of flats; marketing and sale of constructed flats.

c) The entire sale proceeds of the flats etc. were deposited in the jointly operated current account number 1800102462 with Global Trust Bank Ltd. and their respective shares were subsequently transferred by the bank to separate bank accounts of the appellant and M/s Evershine Builders Pvt. Ltd. in the ratio of 43% & 57% respectively, as maintained with the same bank.

d) The above facts confirm that the appellant was engaged to develop and build the housing project and as section 80-IB(10) does not prescribe the proportion of developing and building housing project, the appellant is entitled for deduction under section 80-IB to the extent of its business income as the appellant was a developer and builder for the Poisar Housing Project at Kandivli (E). Accordingly, the grounds of appeal are allowed and the AO is directed to grant the deduction under section 80-IB to the appellant."

5. It is against the aforesaid order of the CIT(A) that the revenue has come in appeal before the Tribunal. Since the original grounds of appeal filed by the revenue were not properly framed, the following revised grounds of appeal were filed, which have been taken into consideration while disposing of the appeal: -

"1. Whether on the facts and in the circumstances of the case, the CIT(A) erred in directing the AO to allow the deduction u/s 80-IB(10) to the assessee as allowable to a developer and builder for the Poisar Housing Project at Kandivali (E).

1.1 Whether the receipts of sale proceeds of development right would amount to income eligible for deduction u/s. 80-IB.

1.2 Whether mere sale of development rights would equate to activities of developer and builder eligible for deduction u/s. 80-IB.

1.3 Whether the assessee was entitled to deduction u/s. 80-IB(10) even though the development project was started prior to 01.10.1998".

6. In respect of the assessment years 2002-03 and 2003-04, the Assessing Officer reopened the assessments to disallow the assessee's claim for deduction under section 80-IB(10) of the Act. The CIT(A), following his predecessor's order for the assessment year 2004-05, accepted the assessee's claim, against which the revenue has come in appeal. It appears that for the assessment year 2003-04 the revenue by oversight filed wrong grounds of appeal before the Tribunal, which mistake has been corrected by filing revised grounds, which are identical to the revised grounds filed in the appeal for the assessment year 2004-05. The original grounds of appeal filed by the revenue for the assessment year 2002-03, however, have been correctly framed and therefore there are no revised grounds for that year.

7. In respect of the assessment year 2005-06, the Assessing Officer, even while framing the assessment under section 143(3) of the Act pursuant to the return filed by the assessee, disallowed the deduction claimed under section 80-IB(10) for reasons which are identical with the reasons given in the assessment order for the assessment year 2004-05. The CIT(A), following his predecessor's order for the assessment year 2004-05, decided the issue in favour of the assessee. Certain other disallowances were also made by the Assessing Officer while completing the assessment, which were deleted by the CIT(A), against which also the revenue has filed grounds of appeal. Therefore, in the appeal for the assessment year 2005-06, the revenue has challenged the findings of the CIT(A) not only with regard to the claim under section 80-IB(10), but also with regard to the various other reliefs given by him. They would be dealt with at the appropriate juncture.

8. In respect of the assessee's claim under section 80-IB(10), the argument of the revenue, in tune with the reasoning of the Assessing Officer, is that the assessee is not a developer of housing projects and it has only provided some services to EBPL which is actually the developer and therefore the assessee is not entitled to the deduction. It is submitted that mere ownership of land by the assessee is not sufficient compliance with section 80- IB(10) and the assessee has to undertake further activities for development of the housing project, in which case alone he would be entitled to the deduction. It is further contended by the learned CIT DR that this is a simple case of transfer of land by the assessee for consideration, which gives rise to capital gains and not business profits and that such transfer was camouflaged in the present case and put through as a development activity so as to claim deduction under section 80-IB(10). In this connection it was submitted that the fact that the assessee was described as a developer or joint developer in the various agreements was not conclusive of the matter and that these agreements actually concealed the real intention of the assessee, which was only to transfer the land for a surplus. It was pointed out that no development work was undertaken by the assessee and that merely because the assessee was earlier considered as developer is not conclusive so far as the present transaction or present years are concerned and what the assessee was actually obliged to do under the various agreements was only to complete the legal formalities to put through the transfer of the land. It is submitted that the entire documentation, on the basis of which the claim is put forward by the assessee, was designed to avoid payment of legitimate taxes on what is essentially a land deal.

9. The learned CIT DR assailed the findings of the CIT(A) recorded in paragraph 7.7 of the impugned order on the following grounds: -

(a) None of the findings make the assessee a developer. The activities undertaken by the assessee merely amount to preservation of the land and cannot be called development activities.

(b) All the activities on which reliance was placed by the CIT(A) are only paper transactions and not activities of a developer.

(c) Assessee has only incurred the expenditure to maintain its title to the land and nothing more.

(d) The entire arrangement is a camouflaged sale of land to the buyer of the flats in the housing project and the medium adopted is the documentation to show as if the assessee is also a developer so that it can claim deduction under section 80-IB(10) of the Act.

10. In order to test the correctness of the arguments of the learned CIT DR and before we refer to the arguments of the learned counsel for the assessee, it is necessary to briefly refer to certain facts. We may first refer to the agreement dated 29.06.1982, a copy of which is at pages 330 to 357 of the paper book. This is an agreement entered into between a company by name Byramjee Jeejeebhoy Private Limited (hereinafter referred to as BJPL), referred to as "the owners" in the agreement and the assessee company which is referred to as "the developers" in the said agreement. The preamble of the agreement narrates that BJPL owned about 370 acres plus at village Poisar near Kandivli in Greater Bombay and that they had agreed to sell the said land to the developers (the assessee herein) and allow the developers to develop the lands. The consideration is fixed at Rs.1,11,00,000/-. Clause 1 of the terms and conditions of the agreement states that BJPL shall allow the assessee to develop and the assessee shall develop the land for a consideration of Rs.1,11,00,000/-. Clause 2 prescribes the mode and the instalments in which the consideration was to be paid. Clause 5 onwards refer to the obligations of the developer (the assessee herein) under the agreement. The first obligation of the assessee was to remove at its own costs and expense the unauthorized persons / structures if any upon the land. Clause 6 provides that the assessee shall develop the land subject to all prevailing laws, Acts and enactments in force. Clause 7 says that the assessee shall obtain all the necessary or required permissions, orders or No Objection Certificates in writing from the competent authority under the provisions of the Urban Land (Ceiling & Regulation) Act, 1976 [hereinafter referred to as ULCRA] from the Collector or Deputy Collector of Bombay or the Government of India or the Government of Maharashtra or any other competent authority under any of the provisions of any of the applicable laws in relation to the land at the assessee's own costs and expenses. However, BJPL, wherever required, shall join in and sign such applications. Clause 8 provided for the obligation of the assessee to remove the unauthorized structures, hutments or occupants thereof and to take such steps in that behalf at its own costs and expenses. Any permission required to do so was also to be taken by the assessee at its own expense. Clause 9 reiterated the assessee's obligation to obtain permissions under the ULCRA as also the permissions under the Maharashtra Regional Town Planning Act, 1961, at its own costs and expenses. Clause 11 provided for the obligation of the assessee to complete the transaction relating to the said land on or before 30th June 1986. Under clause 12, it was the obligation of the developers (the assessee) to bear and pay all rates and taxes (excluding personal taxes such as income tax), cess, land revenue and all other outgoings in respect of the land or any part thereof or in respect of any structure standing on the land or in respect of buildings or structures to be constructed on the land by the developer and payable to the Government or the Municipal Corporation or any other public body after the developer is put in possession of the land.

11. Clause 13 provides for certain other obligations of the assessee under the agreement. It provides for the following obligations of the assessee: -

(a) The land shall be developed by the developer at its own risk, costs and expenses and shall carry out the development work in accordance with the plans and specifications duly approved and sanctioned by the Municipal Corporation of Greater Bombay and other concerned local authorities.

(b) The assessee as developer shall comply with all the building rules and bye-laws and orders and directions that may be issued by the aforesaid bodies.

(c) The assessee shall bear all charges and expenses in relation to the construction work including the payment of salary and wages of the personnel and workmen employed in the construction work or the payment of any compensation in case of injury or death of any employee or worker.

(d) From the date on which the assessee is put in possession of the land; all rates, taxes, cess and other outgoings in respect of the land and the construction work made thereon including the fees of architects, surveyors, RCC consultants and specialists / professionals engaged in regard to the construction work shall also be the responsibility of the assessee.

(e) The assessee shall indemnify BJPL against any claims or damages made against BJPL by any person for any breach of the building byelaws and rules and regulations issued by the competent authorities. The indemnity also extends to other expenditure incurred by BJPL in relation to the construction work either as salary or wages or compensation or as payment in respect of suppliers of building materials or any other loss that may be suffered by BJPL as a result of the construction work being carried on by the assessee.

12. Clause 14 provides that the assessee shall bear all the expenses relating to the submission of the scheme or project to the Government of Maharashtra for sanction. Clause 18 states that the assessee as developer alone shall be entitled to enter into agreements for sale of flats, shops, garages, godowns, units and other premises comprised in the building to be constructed by the developer on the land on ownership basis. This obligation is further subject to the right of the BJPL under the agreement and shall also be subject to the terms and conditions and obligations on the part of the assessee. Clause 19 provides that the assessee alone shall be entitled to the rights as also be liable and responsible for the observance and performance of the terms and conditions of the agreements for sale of the flats, shops, etc. and the owners (BJPL) shall not be required to join and execute such agreements. The clause further states that the assessee agrees and undertakes that the purchasers of the flats etc. shall not be given possession until the developers had paid in full to BJPL the consideration money payable to BJPL in terms of clause 2 (i.e. the amount of Rs.1,11,00,000/-).

13. Clause 20 of the agreement provides that the assessee as developer further agrees to take a conveyance or any other documentation in respect of the land in their favour or in favour of the nominee or nominees or a co-operative society or a limited company or an association of apartment owners or any other body corporate, as the case may be, after the assessee has paid the full consideration money payable to BJPL. Clause 21 provides that the developer shall not be entitled to transfer or assign the benefit of the agreement for development to any other person without the prior written consent of BJPL. Clause 26 provided that it was the obligation of the assessee as developer to pay brokerage at the rate of 2% of the consideration money on completion of the transaction.

14. The above are in effect the obligations undertaken by the assessee under the agreement with BJPL.

15. It would appear that after the aforesaid agreement was signed between BJPL and the assessee and after the assessee had paid to BJPL the consideration of Rs.1,05,00,000/- pursuant to which BJPL had also agreed to give a power of attorney to the assessee, its directors, officers or employees or any nominee to enable the assessee to effectively develop and deal with the said property under the agreement, certain disputes arose between BJPL and another company by name Nanabhoy Jeejeebhoy Private Limited (hereinafter referred to as NJPL). These disputes were ultimately decided by the Hon'ble Bombay High Court on 21.12.1988 in Company Petition No: 868 of 1988 and in terms of the order passed by the Hon'ble High Court, the entire land of 370 acres and odd vested absolutely in NJPL. Thereafter the assessee requested NJPL to honour the earlier agreement dated 29.06.1982 and give irrevocable power of attorney in favour of the assessee for the purpose of developing the property. NJPL agreed to the request of the assessee and in order to give effect to the arrangement between the assessee and NJPL, an agreement was entered into on 28.02.1989 between NJPL and the assessee (copy is placed at pages 354 to 375 of the paper book). This is actually termed as "irrevocable general power of attorney" given by NJPL to the assessee. Under the power of attorney, the following were the obligations of the assessee: -

(1) To look after and manage the property diligently.

(2) To obtain the plans for construction of the buildings including sub-division and layout plans, submit them to the MCGM or other authorities for obtaining their approval / consent and to revise such plans if necessary and to obtain IOD, commencement, occupation and completion certificates from the MCGM.

(3) To prepare layout plan or development scheme with all details and to submit the same for approval to the concerned authorities, including internal and main roads, water mains and also to design and plan dwelling units for weaker sections of the society.

(4) To engage architects and engineers etc. for development of the property at their own expense.

(5) To complete the construction in accordance with the approved plans and to sell the units.

(6) To act and represent NJPL before the various authorities, public bodies, etc. in any inquiries and proceedings in connection with all matters relating to the development of the property.

(7) To obtain all permissions under the ULCRA for sale or assignment of the property or part thereof and to execute all applications, plans, affidavits, etc. in the name of NJPL before the State or Central authorities functioning under ULCRA.

(8) To obtain permits for cement, steel and other building materials, water supply, electricity supply, gas, telephones, drainage and sewerage etc. at the assessee's costs.

(9) If required by BSES, the assessee shall also put up a sub-station on the property for supplying electricity to the buildings to be constructed.

(10) To obtain commencement, occupation and completion certificates in respect of the building to be constructed.

There are several other clauses in the power of attorney which obliged the assessee to take various steps in connection with the development of the property and the construction to be put up thereon. They are mostly statutory obligations which are required to be undertaken by a developer in connection with development work. These are contained in clauses 21 to 30 of the power of attorney.

16. On 22.12.1999 an agreement was entered into between the assessee who is referred to therein as "the developers", EBPL who is referred to as "the joint developer" and M/s Thakur Brothers Agricultural Farm as "the confirming party". The preamble to this agreement refers to the grant of development rights on the land by BJPL to the assessee by agreement dated 29.06.1982 and the subsequent court order under which the land became vested in NJPL as well as the power of attorney given by NJPL to the assessee on 29.02.1989 enabling the assessee to fully deal with the development activity in the land. Thereafter, clause 7 of the preamble refers to the assessee having obtained sanction and approval for the development of the land from the ULCRA authorities under orders dated 28.10.1989. Clause 12 of the preamble refers to the fact that M/s Thakur Brothers Agricultural Farm, a partnership firm, which is the confirming party in the agreement, was in adverse possession of some portion of the land and also goes on to refer to a Memorandum of Understanding (MOU) dated 06.10.1986 entered into between the assessee and the said M/s Thakur Brothers Agricultural Farm (which was confirmed by BJPL) under which the assessee agreed to make available to M/s Thakur Brothers Agricultural Farm 25% of the permissible FSI in respect of the said land. Clause 13 of the preamble refers to the supplementary MOU dated 29.01.1992 under which the assessee agreed to make available to M/s Thakur Brothers Agricultural Farm 40% of the permissible FSI in respect of the land. Clause 14 of the preamble refers to the proposal of the assessee to construct several buildings on the land having an aggregate built-up area of 20,00,000 sq. ft. by utilizing not only the FSI available in respect of the land but also the FSI of other properties as may be available by way of Transfer of Development Rights (TDR). Clause 15 of the preamble refers to the fact that pursuant to the scheme of development the assessee had already obtained IOD (Intimation of Disapproval) in respect of sanctioned FSI of 2,50,000 sq. ft. Clause 16 of the preamble states that the assessee and EBPL, who is referred to as "the joint developer", proposed to develop the said land jointly and the development work shall be carried out jointly with the consent of M/s Thakur Brothers Agricultural Farm and that the said M/s Thakur Brothers Agricultural Farm have granted unconditional and irrevocable consent. Clause 18 of the preamble states that the revised layout and building plans shall be prepared by EBPL and approved by the assessee in respect of the FSI of 20,00,000 sq. ft. to be utilized in the construction of the buildings on the land. Clause 20 of the preamble refers to the declaration / confirmation of the assessee to EBPL to the effect that its title to the said land is clear, marketable and free from encumbrances and clause 21 states that the assessee has not entered into any prior commitment for grant of development rights on the land in favour of any other person. Clause 24 of the preamble states that EBPL agrees to carry out and complete the joint construction on the land phase-wise as a residential/ shopping/ commercial/ recreational complex as may be permitted by the concerned local authorities. Clause 25 refers to the assurance of EBPL that it has the requisite financial, managerial and organizational resources as well as the infrastructure to carry out the joint development of the land and marketing of the buildings to be constructed thereon. Clause 26 of the preamble says that the assessee and EBPL have agreed to develop the said land in four phases and that the assessee has permitted EBPL to enter upon the land on which phase III and phase IV-A are to be constructed. It is also stated that EBPL has been permitted by the assessee to construct buildings on this land.

17. Now we turn to the main terms of the aforesaid agreement dated 22.12.1999. Clause 3 states that the assessee and EBPL shall develop the said land through utilization of the FSI of approximately 20,00,000 sq. ft. by constructing building on the said land in different phases according to the revised layout and building plans. It was the duty of the assessee to ensure that the revised plans are sanctioned by the BMC including the TDR which are to be acquired by the assessee at its costs and made available for joint development in accordance with the agreement. Clause 4 states that the revised layout and the revised building plans are to be prepared by EBPL in consultation with the assessee and it is the assessee's duty to get them approved by the BMC. The condition however is that no changes shall be made by the assessee unilaterally without obtaining the prior written approval of EBPL. Clause 5 states that all the deposits and other charges for obtaining approval for the revised layout plan and the revised building plan shall be made by EBPL by account payee cheques drawn in favour of BMC and these amounts can be recovered by EBPL from the purchasers of flats, shops, etc. at the time of delivery of possession. EBPL shall also be entitled to withdraw the deposits directly from BMC. Clause 6 provides that all premiums and charges payable to BMC for obtaining additional FSI shall be borne by the assessee alone. It is however provided that initially these amounts may be paid by EBPL to the assessee but the amount is subject to recovery later from the assessee. Clause 7 states that the expenses of obtaining additional FSI in the form of compensatory TDR and the cost of acquisition of the TDR shall be borne and paid by the assessee. The other obligations of the assessee under the aforesaid agreement are : -

(a) To obtain plinth commencement certificate from the BMC (clause 8).

(b) To pay premium for obtaining FSI in respect of staircase, lift and balconies (clause 9).

(c) To provide the requisite pipeline up to the boundary of the land for supply of potable water for construction purposes and drinking purposes at its own cost. It is the duty of the assessee to provide the pipeline in time so that the construction of the buildings is not delayed or impeded (clause 10).

(d) The funds required for the construction of the buildings on the said land shall be expended by EBPL alone and the assessee shall not be required to spend any amount for the same. EBPL is not entitled to claim any interest on such expenses (clause 11).

(e) The assessee is responsible for obtaining all statutory permissions including IOD plinth certificates (clause 13).

(f) The assessee shall at its own costs obtain all requisite permissions and orders from ULCRA authorities until the construction is complete (clause 14).

18. Under the aforesaid agreement dated 22.12.1999 EBPL also had certain rights and obligations and these briefly are as follows:-

(a) To spend monies for the construction of all the buildings without charging any interest thereon (clause 11).

(b) In particular, EBPL shall incur expenses on construction and completion of all the buildings and also all occupation and commencement certificates, expenses on consultants' fee incidental to the construction including architects and RCC consultants' fees (clause 12).

(c) EBPL was to carry out the construction of the buildings in four phases using good building materials, fitting and fixtures and good workmanship in the matter of construction. It is to complete the construction under each phase within three years from the commencement of construction, failing which the assessee shall have the option to address a letter to EBPL to call upon it to complete the construction within six months from the date of the letter. If the construction is not completed within such extended period, EBPL's right as joint developer shall stand forfeited and the right to utilize the balance FSI shall be revoked and the assessee shall be entitled to deal with and dispose of the balance construction as it may deem fit (clause 15).

(d) EBPL is entitled to carry out the construction on its own and also to appoint selling agents in its own right for the marketing of the flats (clause 18).

(e) EBPL is entitled to sell in its own right and on its own account on ownership basis or otherwise the flats / shops / commercial units etc. constructed on the land (clause 20).

19. The other important clause in the agreement is clause 21, which states as to how the gross sale proceeds of the flats, shops, etc. shall be shared between the assessee and EBPL. According to the said clause, 43% of the gross sale proceeds shall belong to the assessee and 57% thereof shall belong to EBPL. This clause further refers to the fact that a sum of Rs.20,00,00,000/- which EBPL had earlier deposited with the assessee shall be first recovered out of the gross sale proceeds. Clause 22 defines "gross sale proceeds" to mean all proceeds of sales received from the sale of premises excluding certain deposits and other recoveries made from the purchasers of the flats. Clause 28 refers to the deposit made by EBPL to the assessee in the amount of Rs.20,00,00,000/-. It is this deposit which can be recovered by EBPL from the assessee on priority basis from the sale proceeds as per clause 21. The other clauses of this agreement are not very relevant for the purpose of the present appeals.

20. It is necessary to refer to a specimen agreement for sale of the flat (page 117 of the paper book) only for the purpose of noting that in this agreement EBPL and the assessee are referred to as "joint developers".

21. From the above facts we are to decide whether the assessee can be described as a developer and builder so as to be entitled to the deduction under section 80-IB(10) of the Act. This provision confers deduction to an undertaking "developing and building housing projects". What is development of a housing project has not been defined in the sub-section. The central argument of the learned CIT DR before us, based on the Commentary on Income Tax by A C Sampath Iyengar, 10th Edition, pages 5793, 5794 of Volume Four, is that the assessee merely transferred the land to the purchasers of the flats for consideration and this was camouflaged by reference to certain activities, which were only on paper, and which cannot amount to any development activity, and therefore the assessee ought to have declared the receipts as capital gains. Though the word "develop" appearing in the sub-section has not been defined in the Act, it should mean, in our humble opinion, the activities which a person undertakes in order to prepare the land, both factually and legally, for putting up housing projects thereon. The development activity precedes the actual construction or building activity. A clue to this position is given in clause (a) of sub-section (10) of section 80-IB, which says that the deduction will be given if the undertaking has commenced or commences development and construction of the housing project on or after a particular date and completes the construction by a particular date. This shows that the development activity precedes the actual construction activity. There is no objection on the ground that the assessee is not a builder of housing projects. The objection is that the assessee should be both a developer and a builder and the assessee in the present case has not undertaken any development activity. We have already referred to the various responsibilities undertaken by the assessee from the day on which it acquired the development rights over the land from BJPL in 1982. Section 80-IB(10) was introduced in the statute book with effect from 01.04.2000 by the Finance Act, 1999. It cannot be postulated that the assessee, even in 1982, with a view to obtaining deduction under section 80-IB undertook certain paper transactions in order to claim deduction at a much later period on the ground that those transactions amounted to development activity preceding the construction of the housing projects. Be that as it may, the obligations and responsibilities undertaken by the assessee under the various agreements, which we have referred to earlier, unmistakably show that the activities undertaken by the assessee are activities relating to development of the housing project. We are in complete agreement with the reasoning and findings of the CIT(A) in support of the conclusion that the various activities carried on by the assessee amounted to development activities within the meaning of section 80-IB(10). In addition, the assessee has been in the business of developers and builders since many years and have undertaken and completed several housing projects such as Viceroy Park, Vasundhara, etc. and hitherto the Assessing Officer has not raised any objection on the ground that the assessee is not a developer. The fact that the construction activity was financed by EBPL cannot obliterate or take away all the earlier responsibilities undertaken by the assessee to legally and factually prepare the land for putting up the housing projects. In business world it is common to find persons having different talents pooling them together. In the same way, the assessee which had the development rights over the land and which had undertaken the responsibility of obtaining all statutory clearances, permissions, etc. for putting up the housing project on the land, had collaborated with EBPL which had the necessary technical knowhow as well as the finance for putting up the construction. It should also be remembered that the assessee had also undertaken to remove all the structures and unauthorized occupants on the land. In fact M/s Thakur Brothers Agricultural Farm had admittedly been in adverse possession of the land and therefore they had to be given 40% of the FSI and this was largely due to the efforts of the assessee, as can be seen from the tripartite agreement dated 22.12.1999 to which the assessee, EBPL and M/s Thakur Brothers Agricultural Farm were parties. We have referred to the terms and conditions in this agreement in considerable detail earlier. The Memorandum of Understanding dated 06.10.1986 and 29.01.1992 under which M/s Thakur Brothers Agricultural Farm were given 25% and 40% respectively of the FSI was entered into only between the assessee and the said M/s Thakur Brothers Agricultural Farm with BJPL confirming the Memorandum of Understanding. EBPL was not a party to the MOU under which 40% FSI was given to M/s Thakur Brothers Agricultural Farm in consideration of their giving up adverse possession of the land.

22. Thus most of the crucial, preliminary and basic developmental activities necessary for the purpose of making the land ready and prepared for construction activity, both legally and factually, were undertaken and put through only by the assessee. It would be unfair to ignore or brush aside these activities by calling them not developmental activities merely because the assessee has claimed deduction in respect of the profits under section 80- IB(10). It would be particularly so because the department has consistently accepted the assessee as a developer in the other assessment years, which were reopened only because the Assessing Officer did not accept the assessee's claim for deduction in the assessment year 2004-05.

23. It is also not fair to treat the activities undertaken by the assessee as paper transactions merely to enable it to claim deduction, because many of the activities and responsibilities undertaken by the assessee were statutory in nature such as the clearance under the ULCRA, permissions, approvals and IODs from the BMC etc. These cannot be treated as paper transactions. Nor is it correct to say that whatever expenditure the assessee had incurred to legally and factually prepare the land for construction was only incurred to preserve and maintain the assessee's title to the land. Right from the day on which the assessee obtained the development rights from BJPL, which was subsequently confirmed by NJPL, the assessee undertook all the developmental activities only with a view to putting up housing projects on the land. The very fact that the assessee was given development rights by BJPL over the land means that the assessee intended to develop the land by removing all unauthorized persons and structures and to obtain the necessary permissions from all concerned statutory authorities so that the construction of the housing project thereon can be commenced and proceeded with without any hitch. All the clauses in the agreement dated 29.06.1982 between BJPL and the assessee are calibrated only towards this end. We have already referred to this agreement in some detail and at the cost of repetition we may note that clause 13 of the said agreement in particular states that the assessee shall develop the land at its entire risk as to costs and expenses and shall carry out the entire development work in accordance with the plans and specifications duly approved and sanctioned by the MCGM. The clause even referred to the fact that the assessee will bear the expenses in relation to the construction work including compensation payable for injury. Clause 20 referred to the understanding that the assessee would get the conveyance either in its own favour or in favour of its nominee or nominees or a cooperative society or any other entity in respect of the structures sold to the flat buyers. All these clauses put the matter beyond doubt and if any clarification is needed reference may be made to clause 18 of the said agreement which says that the assessee alone is entitled to enter into agreements for sale of the flats, shops, etc. on ownership basis or otherwise. The assessee is a businessman engaged in the development and construction of housing projects and it would make no sense for him to acquire development rights of such a large parcel of land (370 acres plus) if he did not have in mind the proposal to utilize the land for purposes of construction of housing projects. As events turned out the assessee could not find the necessary wherewithal for the construction and the same was supplied by EBPL along with the knowhow. The assessee therefore thought it ideal to collaborate with EBPL and put up the housing project. The assessee had all the clearances and statutory permissions ready. EBPL was prepared to finance the project. Both of them collaborated and put up the housing project.

24. There is also no escapement of tax by way of double deduction. We have already noticed that the gross sale proceeds are to be divided between the assessee and EBPL on the basis of 43% and 57% respectively. Thus the assessee would be getting deduction under section 80-IB(10) in respect of the profits derived by it from the housing project and EBPL will be similarly claiming deduction in respect of its share of the profits. Both of them combined do not exceed 100% of the profits from the housing project. Thus there is also no double deduction.

25. For the above reasons we are of the view that the CIT(A) was right in holding that the assessee was entitled to the deduction under section 80-IB(10). The appeal in ITA No: 4728/Mum/2007 for the assessment year 2004-05 is therefore dismissed.

26. We may add that Ground Nos: 1.1 and 1.2 taken by the department do not arise out of the orders of the departmental authorities. The only objection raised by the Assessing Officer was that the assessee was not a developer. The above grounds however raise the point whether the receipts on account of development rights would be eligible for deduction under section 80-IB of the Act. This objection was not raised by the Assessing Officer. Even otherwise, factually the assessee has not claimed deduction in respect of sale proceeds of development rights. The profits have been shown only from the sale of the units in the housing project. Similarly, Ground No: 1.3, which raises the point that the development of the project was started prior to 01.10.1998, does not arise from the orders of the departmental authorities because no such objection was taken by the Assessing Officer. This point was not also argued before us by the department.

27. As regards the assessment year 2003-04, the grounds are identical with those taken in the assessment year 2004-05. Our observations with regard to the revised grounds raised in this year are the same as in our decision in the appeal for the assessment year 2004-05. The appeal in ITA No: 4219/Mum/2009 is dismissed in line with our decision in the appeal for the assessment year 2004-05.

28. As regards the assessment year 2002-03, the only ground relates to the decision of the CIT(A) to allow deduction under section 80-IB(10). In line with our decisions for the assessment years 2004-05 and 2003-04, the decision of the CIT(A) is confirmed and the appeal in ITA No: 6504/Mum/2008 is dismissed.

29. We may now take up the appeal of the department for the assessment year 2005-06. The first ground is that the CIT(A) erred in allowing deduction under section 80-IB(10) of the Act. The CIT(A) has followed his predecessor's order for the assessment year 2004-05, which has been confirmed by us in the appeal filed by the department for that year. In line with our decision, we confirm the decision of the CIT(A) for this year also and dismiss the ground.

30. The second ground relates to the disallowance under section 40A(2)(b) of the Act. The assessee paid Rs.4,45,40,974/- to its Managing Director, Shri P R Mody, on account of salary, exgratia and medical reimbursement. The Assessing Officer was of the view that it was on the higher side in comparison with the payment made to the other Directors of the company. The assessee was therefore asked to justify the payment and also furnish a detailed note as to the applicability of the section. The assessee filed the details of the payments made to Shri P R Mody but did not submit any justification as to why the section cannot be applied. The Assessing Officer noticed that in the assessment year 2004-05 the total payments as Directors' remuneration was Rs.1,58,21,555/- whereas for the year under consideration it was three times more. The increase was found to be mainly due to the payment made to Shri P R Mody. The Assessing Officer then compared the income of the year with the income of the earlier year and found that even this does not justify the increase in the payment to Shri P R Mody. The other two Directors, Shri P D Colabawala and Shri K E Vaid were found to have been paid only Rs.5,73,320/- and Rs.2,60,707/- respectively, though they are also of the same capability as Shri P R Mody. The Assessing Officer for these reasons held that the payment of remuneration to Shri P R Mody was unreasonable and excessive. He restricted the payment to that of the last year, namely, Rs.1,49,68,760/- and the excess of Rs.3,01,26,247/- was disallowed under section 40A(2)(b) of the Act.

31. On appeal, it was submitted by the assessee that Shri P R Mody as Managing Director runs the entire business and cannot be compared with the other two Directors who hardly worked. Shri P R Mody is a Chartered Accountant from London and was earlier working for about ten years with M/s A A Ferguson & Company. The other two Directors were stated to be not even graduates. Shri P R Mody, it was pointed out, was paid only 8% of the profits and since the remuneration was linked to the profits, the same increased commensurate with the profits. It was accordingly submitted that it cannot be said to be unreasonable or excessive having regard to the legitimate needs of the business.

32. The CIT(A) found that there was nothing to show that the other two Directors were equally capable as Shri P R Mody. He further found that the reasonableness of the payment should be compared to the payment for similar services in the open market. The Assessing Officer has not compared the payment to Shri P R Mody with the payment made by other companies to similarly qualified and capable Managing Directors. According to the CIT(A), the Assessing Officer was not justified in comparing the payment to Shri P R Mody with the payments made to other two Directors, nor was he justified in comparing the payment with that made in the earlier year. In these circumstances he cancelled the disallowance.

33. We have considered the facts. The facts are not in dispute. As rightly pointed out by the CIT(A), Shri P R Mody is a Chartered Accountant from London and had quality experience as employee of M/s A A Ferguson & Company for ten years before joining the assessee. He is also stated to be running the entire show whereas the other two Directors are not so qualified and also did not take part in the business in the same way in which Shri P R Mody took part in the assessee's business. The CIT(A) is also right in saying that the Assessing Officer ought to have compared the payment made to Shri P R Mody with payments made for similar services by other companies. Comparison of the payment with the payments made to the other two Directors is not justified because in every organization there may be differential payments depending upon the qualification, experience, etc. of each employee. The Assessing Officer has not brought on record anything to show that the payment to Shri P R Mody is excessive or unreasonable having regard to the fair market value of the services for which the payment was made or the legitimate needs of the business or the benefit derived from the services of Shri P R Mody. The conditions of section 40A(2)(b) not having been fulfilled, the CIT(A) was right in deleting the disallowance. His decision is confirmed and the ground is dismissed.

34. The third ground relates to the addition of Rs.31,30,792/- being sundry balances written off. The Assessing Officer made the disallowance of the sundry balances written off in the Profit and Loss Account on the ground that the complete documentary evidence was not adduced by the assessee. He noted that the balances pertained to payments made to contractors which were initially not approved but were finally approved and one payment was made to a person who was declared bankrupt. He therefore disallowed the claim.

35. On appeal, the assessee submitted that the major amount of Rs.21,59,960/- was in respect of one person by name Hemendra Sheth and the other balances were below Rs.1,00,000/- each. The amounts have been paid by the assessee as advances to contractors for execution of various projects. If the work done by them and certified is less than the advances paid to them, there is an outstanding balance in their account which is to be written off as a loss. The assessee wrote off the amounts outstanding against the contractors because there was no scope of getting back the amount. In the case of Hemendra Sheth, he had become bankrupt. These facts were accepted by the CIT(A) and he therefore upheld the assessee's claim.

36. On a careful consideration of the matter we see no ground to interfere, especially when the factual findings of the CIT(A) are not disputed. The ground is accordingly dismissed.

37. The fourth ground relates to the disallowance of Rs.7,48,734/- under section 40(a)(ia) of the Act. The Assessing Officer noticed that the assessee paid professional fees of Rs.6,03,692/- and brokerage and commission of Rs.1,45,042/-, aggregating to Rs.7,48,734/- during the year, from which tax of Rs.43,801/- was deducted in the months of February and March 2005. The tax so deducted was not deposited by the assessee with the Government before the due dates. The relevant details are set out in paragraph 5 of the assessment order in the form of a chart and they are not reproduced here for the sake of brevity and also because there is no dispute about them. Since section 40(a)(ia) says that no deduction would be allowed in computing the business income if the assessee fails to deduct, or fails to deposit the tax after deduction, the tax which is deductible at source under Chapter XVII-B of the Act from interest, commission or brokerage, rent, royalty, fees for professional or technical services, the Assessing Officer, relying on the said provision, disallowed the professional fees and brokerage and commission.

38. On appeal, the assessee pointed out that the tax deducted has been deposited on 06.04.2005 and therefore there is no default which would attract the provisions of the aforementioned section. The CIT(A) accepted the contention and deleted the disallowance.

39. The revenue is in appeal. In the present case the assessee has admittedly deducted the tax at source at the time of the payment. According to section 40(a)(ia), as it stood at the relevant time, if the tax was deducted during the last month of the previous year, it should have been deposited before the due date specified in section 139(1) and any other case it should have been deposited with the Government on or before the last day of the previous year. According to the details set out in the assessment order, the tax of Rs.35,316/- was deducted from the professional fees in the month of March 2005. The due date for depositing the tax, according to Explanation 2 below section 139(1) is 31.10.2005. The tax of Rs.35,316/- was deposited on 22.06.2005, which is within the due date. Therefore, there is no justification for the disallowance of the professional fees of Rs.6,03,692/-.

40. As regards the brokerage and commission, from the details given by the Assessing Officer, it is seen that tax of Rs.2,240/- was deducted in the month of February 2005 and as per section 40(a)(ia), as it stood at the relevant time, the tax ought to have been deposited before 31.03.2005, which is the last day of the previous year. The tax was actually deposited only on 06.04.2005. Therefore, so far as the brokerage and commission payment, on which tax of Rs.2,240/- was deducted in February 2005 is concerned, the disallowance made by the Assessing Officer should be upheld. The Assessing Officer is directed to ascertain the relevant amount and disallow the same. However, with regard to the tax of Rs.6,245/- deducted in March 2005, the same has been deposited on 06.05.2005, which is within the due date as per section 139(1). Therefore, the brokerage and commission payment referable to the tax of Rs.6,245/- deducted at source cannot be disallowed. The said disallowance is held to be rightly deleted. Thus Ground No: 4 is partly allowed.

41. Ground No: 5 relates to the disallowance of car expenses. Whereas the Assessing Officer disallowed Rs.7,85,375/-, the CIT(A) restricted the same to Rs.2,00,000/-. After going through the orders of the departmental authorities, we see no reason to interfere. The ground is rejected.

42. Ground No: 6 relates to the disallowance of the delayed employees' contribution to Provident Fund. The amount disallowed is Rs.28,840/-. According to the assessment order, the due date for deposit of the amount was 15.06.2004 and it was actually paid the next day, i.e. 16.06.2004. The payment is within the grace period allowed as per the Circular issued by CPDC which is referred to in paragraph 9.1 of the order of the CIT(A). It gives a grace period of five days. The assessee has deposited the contribution within the grace period. Accordingly the decision of the CIT(A) to delete the disallowance is upheld and the ground is rejected.

43. Ground Nos: 7(a) & 7(b) relates to the disallowance under section 14A of the Act, in respect of administrative expenses attributable to the exempt income. The Assessing Officer disallowed Rs.15,26,507/- by invoking section 14A, noting that the assessee received dividend income of Rs.1,58,32,195/- which was exempt from tax. He noted that the dividend income constituted 2.49% of the income as per the Profit and Loss Account, which came to Rs.63,56,24,975/-. The total administrative expenses claimed in the Profit and Loss Account was Rs.6,13,05,507/-. The Assessing Officer disallowed 2.59% of the administrative expenses which came to Rs.15,26,507/-. On appeal, the assessee submitted that it invested surplus funds in mutual funds through Standard Chartered Bank and the entire activity of selection of the appropriate fund, paper work and redemption was undertaken by the bank and the assessee was not involved in the work at all. It was therefore contended that no specific expenses can be said to have been incurred for earning the dividend income. It was pointed out that even the dividend warrants were directly deposited in the bank by the mutual funds. The CIT(A) did not accept the broad contention that no administrative expenses were incurred by the assessee since it had appointed Standard Chartered Bank for investing in mutual funds. He however held that the calculation of the disallowance as made by the Assessing Officer was not proper. According to the CIT(A), a disallowance of 3% of the dividend income can be held to be a proper estimate of administrative expenses attributable to the earning of the dividend income. This came to Rs.4,75,965/-, which was confirmed, thereby giving relief of Rs.10,51,541/- to the assessee.

44. There is no appeal by the assessee against the disallowance sustained by the CIT(A). The contention of the revenue is that the disallowance made by the Assessing Officer should be restored. On a careful consideration of the facts, we are of the view that the disallowance sustained by the CIT(A) based on a percentage of the dividend income seems less reasonable than the method adopted by the Assessing Officer. The Assessing Officer has adopted the same percentage which the dividend income bears to the total income of the assessee as per the Profit and Loss Account. This seems to be a more reasonable approach. We accordingly reverse the decision of the CIT(A) and restore the disallowance made by the Assessing Officer.

45. Ground Nos: 8 and 9 are general and require no decision.

46. The appeal of the department for the assessment year 2005-06 in ITA No: 6505/Mum/2008 is thus partly allowed.

47. To sum up, ITA Nos: 4728/Mum/2007, 6504/Mum/2008 and 4219/Mum/2009 are dismissed and ITA No: 6505/Mum/2008 is partly allowed.

(Order pronounced in the Open Court on 3.6.2011.)

Additional Depreciation can not be denied on the ground that electricity is not an article or thing

The expression "article, thing or goods" are not defined in the Income-tax Act, 1961. Learned Commissioner while treating the electricity as not an article or thing has not made reference to any provisions of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon'ble Supreme Court given in the case of Indian Cine Agency, CST Vs. M.P. Electricity Board and State of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods. The process of its generation is also akin to manufacture or production of an article or thing. It is being generated in huge plants though scientifically one may say it is transformation of one source of energy into the other. But all these aspects have been considered in these three judgments of the Hon'ble Supreme Court wherein Hon'ble Court has explained what is manufacture or production and what is electricity. Learned DR at the time of hearing, had made reference to the order of the ITAT, Chennai and the judgment of the Hon'ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon'ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon'ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon'ble Supreme Court reads as under:

"6. Reference was made to the decisions of Apex Court rendered in the case of M.P. Electricity Board 35 STC 188 (sic). In this case it was held that electricity is goods within the meaning of section 2(3) of Central Province and Virar Sales-tax Act. This decision was rendered in the context of the language of a particular statute. As such this meaning cannot be extended to the facts of the present case".

Thus, taking into consideration all these aspects, we are of the view that admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Learned CIT(Appeals) is reversed to this extent and the disallowance is deleted.

INCOME TAX APPELLATE TRIBUNAL, DELHI

ITA No. 1438/Del/2009 – Assessment Year: 2005-06

N.T.P.C. Limited Vs. Deputy Commissioner of I.T.

Date of pronouncement : 30.04.2012

ORDER

The present appeal is directed at the instance of assessee against the order of Learned CIT(Appeals) dated 20.02.2009 passed under section 263 of the Income-tax Act, 1961 in assessment year 2005-06. The assessee has taken five grounds of appeal and ground Nos. 2, 3 and 4 have further sub-grounds of appeal. Thus, they are not strictly in consonance with Rule 8 of the ITAT Rules, they are descriptive and argumentative in nature. In brief, the grievance of assessee is that Learned CIT(Appeals) has erred in taking cognizance under sec. 263 of the Act and thereby modifying the assessment order by withdrawing the additional depreciation amounting to Rs.187,55,77,000 and directing the Assessing Officer to examine the allowance of Rs.938.80 crores on account of revision of sales afresh.

2. The brief facts of the case are that assessee has filed its return of income under sec. 139(1) of the Income-tax Act, 1961 on 24.10.2005 declaring total income of Rs.1330,17,92,000. This return was processed under sec. 143(1) of the Act on 27.2.2006 at the returned income. Subsequently, the case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued on 23.3.2006 which was duly served upon the assessee. Learned Assessing Officer had served a detailed questionnaire upon the assessee under sec. 142(1) of the Act. In response to the notices, Shri PK Gupta, DGM(Finance & taxation) attended the assessment proceedings and submitted the necessary details from time to time, as called for by the Assessing Officer. On an analysis of various issues, learned Assessing Officer has passed the assessment order under sec. 143(3) on 27.11.2006. Learned Assessing Officer has determined the taxable income of the assessee at Rs.3736,18,91,370.

3. On an analysis of the assessment record, Learned Commissioner harbored an opinion that Assessing Officer has allowed additional depreciation under sec. 32(1)(iia) of the Act amounting to Rs. 187,55,71,000 on account of additional assets at Rama Gundam and Talcher Super Power Plants, prima facie, is not admissible to the assessee. Assessing Officer has not deliberated upon on this issue and, therefore, his order is erroneous as well as prejudicial to the interest of the revenue. Learned Commissioner further observed that the assessee company had raised the total sale bills to the customers of Rs.23066.03 crores as per the earlier norms of Central Electricity Regulatory Commission (CERC), final order of CERC was not passed during the year and the same was to be passed in succeeding year. The assessee company has provisionally revised the sales downward as on 31.3.2005, it reduced the sales provisionally to Rs.22128 crores on estimate basis that too without issuing any corresponding credit note to the customers. In the opinion of the Learned CIT(Appeals), learned Assessing Officer has allowed the assessee to reduce sales by a sum of Rs.938.03 crores without examining the issue, hence his order is erroneous and prejudicial to the interest of the revenue. He issued a detailed show-cause notice under section 263 of the Income-tax Act, 1961 on 19.10.2007 inviting the explanation of the assessee as to why the assessment order be not treated as erroneous and prejudicial to the interest of the revenue. The copy of the show-cause notice is available on page 70 of Volume I of the paper book. Learned Commissioner has also extracted the notice in the impugned order and it reads under:

"2. Accordingly, a notice dated 19.10.2007 u/s. 263 as follows was issued to the assessee.

(a) "Additional Depreciation:

During the year under consideration assessee company claimed additional depreciation of Rs. 187,55,71,000 on account of addition of assets at Ramagundam and Talcher Super Power Plants u/s. 32(1)(iia) of the Income-tax Act. This was the first year in which such claim was made:

Section 32(iia) of the Income-tax Act reads as under:

In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture of production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).

From plain reading of the Section 32(iia) of the Act, it is evident that benefit is available only to those undertakings which are engaged in the business of manufacture or production of any article or thing. Other businesses are not eligible to claim the benefit. Generation of power cannot be equated with the production of article or thing. Article or thing in common parlance is known as something tangible, movable, etc.

Generation of power is giving energy as output and therefore, activity is no way similar to the production of article or thing. In case of CIT vs. N.C. Budhiraja and Co. (1993), 204 ITR 412 (S.C), it was held that the expression 'manufacture' and 'produce' are normally associated with movables-articles and goods, big and small. Therefore, in light of the position of facts and law claim of additional depreciation has been erroneously allowed and to that extent order of the A.O. is erroneous is so far as it is prejudicial to the interest of revenue.

(b) Provisional Revision of Sales

In Schedule 28 of Annual Report of the company vide para 3(a) and (b) it is mentioned:

3(a)

'The Central Electricity Regulatory Commission (CERC) has notified by regulation in March 2004, the terms and conditions for determination of tariff applicable with effect from Ist April, 2004 for a period of five years. Pending final determination of tariff for the period Ist April 2004 onwards, CERC has directed by notification that on provisional basis, the annual fixed charges as applicable on 31st March, 2004 shall be billed at target availability and variable charges based on norms of operation notified in Regulation, 2004. The amount billed for the year on this basis is Rs.230,663 Million. Since the amount billed is subject to adjustment with effect from Ist April, 2004, pending final determination of the tariff by CERC, sales amounting to Rs.221,280 million for the year have been provisionally recognized on the basis of principles enunciated by the CERC in Regulation, 2004.

3(b)

further, in case of stations for which final tariff orders have been issued by the CERC for the period up to 3 1.3.2004, sales amounting to Rs.2768 million has been accounted for during the year. In the previous year there was a reduction effected in sales to the extent of Rs.9034 million relating to earlier years".

In this matter assessee company has provisionally revised the sales downward as on 3 1.3.2005. Assessee company had raised the total sale bills of the customers of Rs.23066.3 crores as per earlier norms of CERC. Final order of CERC was not passed during the year and same was to be passed in some succeeding years. There was no occasion to reduce the sales provisionally to Rs.22 128 crores on estimated basis and that too without issuing any corresponding credit note to the customers. The determination of liability as on 31.3.2005 is contingent upon the final order by the CERC. Therefore, the reduction in sale in this manner is against the law. Moreover, assessee company is again passing a final entry on receipt of CERC order as mentioned in para 3(b) of the Schedule 28. Assessee company cannot make any provision on estimated basis when final determination is a future event. In this manner, company has wrongly reduced sale by Rs.938.3 crores. Assessing Officer has failed to examine the issue. Therefore, in light of the position of facts and law provisionally entry reducing the sale has been erroneously allowed and to that extent order of the A.O. is erroneous in so far as it is prejudicial to the interest of revenue.

You are requested to show cause as to why the order passed u/s. 143(3) be not revised on the issue of wrong allowance of additional depreciation and provisional revision of sales of energy. Your reply must reach to the office of the undersigned on or before 26.10.2007. You may attend the office of undersigned on 26.10.2007 at 11.00 a.m,"

4. Learned Commissioner after hearing the assessee and going through the record observed that assessee is engaged in the activity of generation of power. Section 32(1)(iia) of the Act provides an additional depreciation to those undertakings which are engaged in the business of manufacture or production of any article or thing. According to the Learned Commissioner, other businesses are not eligible to claim the benefit. He is of the opinion that generation of power cannot be equated with the production of article or thing because article or thing in common parlance is known as something tangible and moveable etc. Generation of power is giving energy as out put and, therefore, activity is no way similar to the production of article or thing. According to the Learned Commissioner, an article or thing is always associated with the concept of weight, mass and volume. Power or Electricity does not have any of these attributes. It has no volume, it does not occupy any space, no weight or no mass can be attributed to it. In the history of income-tax legalization, a distinction between the manufacturing undertaking and undertaking in generation of power has been maintained throughout. Learned Commissioner observed that if one looks through the various deductions/exemptions granted to the power sector in the history of income-tax legislation then he would come to know that this activity has always been treated differently from the other activities, like manufacturer production of article, construction and mining etc. Wherever a deduction has been granted for power generation undertaking separate mechanism has been provided. Referring to section 32(1)(vi) as stood prior to 01.04.1998, Learned Commissioner has observed that additional depreciation was provided by virtue of this section but categorically specifies both the businesses i.e. generation of power and manufacture of production or an article or thing. In this way, Learned Commissioner has held that additional depreciation is not admissible to the assessee. Learned Assessing Officer without conducting proper inquiry has granted the additional depreciation to the assessee. He set aside the assessment order and directed the Assessing Officer to withdraw the additional depreciation of Rs. 187,55,71,000.

5. With regard to the second issue, Learned Commissioner has observed that Central Electricity Regulatory Commission (hereinafter referred to CERC )was established under the Electricity Regulatory Commission Act, 1998. The Central Electricity Regulatory Commission is to regulate the tariff of generating companies owned or controlled by the Central Government. The assessee had raised total sales bills of Rs.23,066.30 crores to the customers as per existing norms of CERC. The final order of CERC was not passed during the year, though it was a provisional figure but the assessee has revised the sales downward to Rs.22,128 crores and did not take into account a sum of Rs.938.30 crores. Assessing Officer allowed the assessee to revise the sales downward, without conducting any inquiry about this aspect. Learned Commissioner set aside the assessment order and remitted this issue to the file of the Assessing Officer for fresh examination of this issue.

6. The learned counsel for the assessee while impugning the order of the Learned Commissioner appraised us with the meaning of expression 'manufacture' or 'production'. For buttressing his contentions, he relied upon the judgment of the Hon'ble Supreme Court in the case of CIT vs. Sesa Goa Ltd. reported in 279 ITR 331 and India Cine Agency vs. CIT reported in 308 ITR 98. He pointed out that the main controversy for adjudication before the ITAT is whether electricity is a goods and generation is a manufacture. In order to appraise us the meaning of expression 'goods and manufacture", he drew our attention towards their dictionary meaning provided in the Oxford English Dictionary and how these expressions have been construed in various authoritative pronouncements of the Hon'ble High Court as well as of Hon'ble Supreme Court. He relied upon the following decisions and placed their copies on the record:

CST Vs. Madhya Paradesh Electricity Board A 1970 S.C 732; State of A.P Vs. NTPC 127 STC 280 (S.C);

Orient Paper vs. Orissa State 42 ELT 552;

CMS (India) Operations vs. CCE 7 STR 369 (CEGAT);

NTPC-SAIL vs. CCE (unreported;

Tamilnadu Cholrates vs. JCIT 98 ITD 1 (Che);

CIT vs. Hi Tech Arai 321 ITR 477 (Mad.);

CIT vs. Texmo Precision Castings 321 ITR 481 (Mad.).

7. The learned counsel for the assessee further drew our attention towards the budget speech of the Hon'ble Finance Minister when he introduced Finance Bill No. 2 of 1980 which contemplates grant of additional depreciation. He particularly took us through paragraph No. 76 whose copy has been placed on page No. 74 of the paper book. He also took us through Circular No. 281 and pointed out that in paragraph No. 93, it has been observed that in order to stimulate investment during the new five year plan period, the Finance Act has inserted a new clause i.e. (iia) in sub¬section(1) of sec. 32 of the IT Act, which provides for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. Thus, according to the learned counsel for the assessee, the main thrust of granting additional depreciation was to stimulate the investment in certain core sectors. The learned counsel for the assessee thereafter appraised us about the scope of section 263 and when Learned Commissioner can exercise such powers. He placed reliance upon the following decisions:

" CIT vs. Gabriel 203 ITR 108 (Bom.);

Malabar Industrial Vs. CIT 243 ITR 83 (S.C); CIT vs. Honda Siel 333 ITR 547 (Del.);

CIT vs. Vikas Polymers 236 CTR 476 (Del.);

CIT vs. International Travel House 194 TM 324 (Del.); Piem Hotels vs. DCIT 128 ITD 275 (Mum.);

Revenue Principles of consistency

Radhasaomi Satsang vs.CIT 193 ITR 321 (S.C); CIT vs. Neo Poly Pack 245 ITR 492 (Del.).

8. The learned counsel for the assessee while taking us second issue raised by the Learned Commissioner in the show-cause notice submitted that assessee has disclosed all material facts fully and truly. Assessing Officer has passed an assessment order under section 143(3) of the Act. In paragraph (3a) and (3b) of Schedule 21 of the Annual Report for the financial year 2004-05, assessee has disclosed all the material facts. The Learned Commissioner while harboring a belief about the erroneousness of the assessment order which caused a prejudice to the revenue has made reference to these schedules. He pointed out that the tariff for the electricity in respect of NTPC stations was based on Government of India's Norms up to financial year 2000-01. However, after coming into operation, the Central Electricity Regulatory Commission under the Electricity Regulation Commission Act, 1998, this duty has been assigned to CERC. The CERC, by way of Regulation 2001 notified the terms and conditions of tariff determination for the period 2001 to 2004 and similarly by another regulation of 2004, it notified the terms and conditions for the period 2004-

9. First tariff order for NTPC station for the period 01 to 2004. was issued by CERC in financial year 2003-04. For the period 2004-09, it was issued in financial year 2006-07. Prior to issue of such orders, the CERC issued provisional order for the purpose of billing which is to be retrospectively adjusted when the final tariff orders are issued. Thus, the assessee raised the bill as per existing norms of CERC but the company has made a bona fide estimate of the sale being realizable as per the expected tariff notification and thus revised the sales. Assessing Officer has accepted this aspect after going through the details. The learned counsel for the assessee argued that this amount cannot be included in the total sales of the assessee because final order of CERC was not available at the end of the accounting year as the rates were provisional. For buttressing his contentions, he relied upon the following decisions:

ED Saroon Vs. CIT 26 ITR 27 (S.C);

CIT vs. Sahrda Sugar 239 ITR 393 (Bom.);

CIT vs. Walchander Industries 262 ITR 212 (Bombay)

9. Learned DR on the other hand submitted that in the show-cause notice issued by the Assessing Officer, he nowhere put a query to the assessee in respect of both these issues which indicate that Assessing Officer has not conducted any inquiry before accepting the accounting entry of the assessee as it is on these two issues. Hence, his order is erroneous which caused prejudice to the revenue. In support of his contentions, he relied upon the judgment of Hon'ble Delhi High Court in the case of CIT vs. Ashok Logani reported in 2011 Taxman.com 208. CIT vs. Nalwa Investment reported in 338 ITR 522, CIT vs. DLF Power Ltd. reported in 17 Taxman.com. 269, CIT vs. Infosys Technologies Ltd. (Karnataka High Court) 17 Taxman.com 203 and Gee Vee Enterprises vs. Addl. CIT 99 ITR 373. He pointed out that in all these decisions, Hon'ble Delhi High Court has observed that if Assessing Officer has failed to conduct proper inquiry then his order is erroneous and deserves to be set aside. Putting emphasis upon the judgment of Hon'ble Delhi High Court in the case of Ashok Logani, he pointed out that in this case, Hon'ble High Court has observed that Assessing Officer was required to go into the issue in proper perspective and could not be perfunctory in his approach. When CIT set aside an assessment order for further inquiry, the ITAT has a limited jurisdiction and it should confine its discussion focusing on the proprietary of the order of learned CIT invoking his power under sec. 263 of the Act. ITAT need not to go into the merits of the issues by itself which has neither been considered by the Assessing Officer nor by the Learned CIT in the impugned order.

10. With regard to the withdrawal of additional depreciation on merit, Learned DR submitted that the ITAT Chennai has considered this issue in the case of Tamilnadu Chlorates vs. JCIT reported in 98 ITD 1, the decisions referred by the learned counsel for the assessee have been considered by the ITAT in this order and the ITAT has held that electricity cannot be equated with any article or thing, generation of power cannot be construed as manufacture of any article or thing. Thus, Learned Commissioner has rightly withdrew the additional depreciation granted to the assessee. He further relied upon the judgement of Hon'ble Supreme Court in the case of State of Gujarat and Ors. Vs. ESSAR. Oil reported in 2012 TIOL in order to buttress that taxing statute to be construed liberally while exemption to be interpreted strictly. He also relied upon the judgment of Hon'ble Allahabad High Court in the case of CIT vs. Oriental Motor Car CO. Ltd. reported in 3 taxman 567 and the decision of Hon'ble Gujarat High Court in the case of Alambic Chemical Works vs. DCIT reported in 266 ITR 47. Learned DR also relied upon the judgement of Hon'ble Supreme Court in the case of CIT vs. N.C. Budhiraja reported in 204 ITR 412 and apprised us as to how the expression "manufacture and production" are to be construed.

11. We have duly considered the rival contentions and gone through the record carefully. On an analysis of the record, we are of the opinion that basically three issues are to be resolved by us, namely, (a) whether Learned Commissioner has rightly taken cognizance of sec. 263 of the Income-tax Act, 1961 and treated the assessment order as erroneous as well as prejudicial to the interest of the revenue; (b) whether Learned Commissioner has rightly withdrew the additional depreciation claimed and granted by the Assessing Officer; (c) whether, in case, answer to question No.1 is against the assessee, are we required to go into the merit of the issue regarding allowability of reduction in sales or not?

12. With regard to the first issue, we are of the view that learned representatives have made reference to a large number of decisions. We do not deem it necessary to recite and recapitulate all the decisions on the legal aspect as to how the order of Learned Commissioner passed under sec. 263 is to be judged. The ITAT in the case of The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO,Mumbai reported in 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 ITR 83 as well as Hon'ble Bombay High Court rendered in the case of Gabriel India Ltd. reported in 203 ITR 108, has propounded the following broader principle to judge the action of CIT taken under section 263.

" (i) The CIT must record satisfaction that the order of the A.O is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.

(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the A,O and it was only when an order is erroneous that the section will be attracted.

(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.

(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the A.O has adopted one of the courses permissible under law or where two views are possible and the A.O has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the A.O is unsustainable under law.

(vi) If while making the assessment, the A.O examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s. 263 is not permitted to substitute his estimate of income in place of the income estimated by the A.O.

(vii) The A.O exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion.

(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.

(ix) If the A.O has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the A.O allows the claim on being satisfied with the explanation of the assessee, the decision of the A.O cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard."

13. Before embarking upon an inquiry about the facts of the present case and how those facts have been considered by the learned CII, we deem it appropriate to make a reference to the observations of the Hon'ble Delhi High Court in the case of Vee Gee Enterprises reported in 99 hTR 373 wherein Hon'ble High Court has expounded the approach of the Assessing Officer required to be adopted while passing assessment order. The observations of the Hon'ble High Court read as under:-

" It is not necessary for the Commissioner to make further inquiries before canceling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statement made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."

14. In the light of above propositions, let us examine the facts of the present case. On page No. 5 of the paper book, volume-I, the assessee has placed on record copy of the questionnaire dated 29.6.2006 issued by the Assessing Officer. In this questionnaire, Assessing Officer has called for information from the assessee under sec. 142(1) on fifteen counts. With the assistance of learned representatives, we have gone through this questionnaire carefully. Perusal of this questionnaire reveals that Assessing Officer has not a single question on both the issues. Therefore, it suggests that he has not conducted any inquiry on these two issues. The contentions of the assessee is that it has disclosed all material facts fully and truly during the assessment proceedings and assessment has been framed under sec. 143(3) of the Act, therefore, it be presumed that Assessing Officer must have gone through all these details. However, Hon'ble Supreme Court in the case of Malabar Industries, Hon'ble Delhi High Court in the case of Gee Vee Enterprises as well as in the case of Ashok Logani and DLF Power Equipments, it has been held that if the Assessing Officer failed to go into the issues in proper perspective and his approach is perfentory then the order would be termed as erroneous which would ultimately caused a prejudice to the assessee on escapement of income from tax. The judgment of the Hon'ble Delhi High Court in the case of Ashok Logani as well as in the case of DLF Power are the latest decisions on this issue. Similarly, Learned DR has brought to our notice the decision of Hon'ble Delhi High Court dated 15.2.2012 in the case of CIT vs. Regency Park Property Management Service Pvt. Ltd. reported in 2012 TIOL page 75 where it has been held that if Assessing Officer had not dealt with the details and examined the issues then there was an error on the part of the Assessing Officer upon which action under sec. 263 can be justified. Thus, considering all these aspects, we are of the view that Learned Commissioner has rightly taken cognizance under sec. 263 of the Act because Assessing Officer has not conducted any inquiry on these two issues.

15. Before taking up the second issue, we deem it proper to take the third issue. The learned counsel for the assessee submitted that the company follows the policy of determination of tariff based on the norms as notified by CERC in its regulation and sales are thus provisionally accounted on a realistic base so as to avoid major impact on profit and loss account and balance sheet on the final determination of tariff by CERC. He emphasized that the bills raised by the assessee are liable to be adjusted on the basis of the rates notified y the CERC which usually take substantial time. On the strength of past experience, he pointed out that rates are being finalized after 2 to 3 years. He made reference to page No. 102 of the paper book and pointed out that Learned Commissioner has remitted this issue to the file of the Assessing Officer for fresh adjudication but he failed to point out what prejudice has been caused to the revenue by provisionally reducing the sales. Whatever, the sales bills, assessee has raised to the customers, they are not final. As and when the rates are finalized, the assessee has accordingly given effect in the accounts. Thus, there is no prejudice to the revenue and Learned Commissioner failed to establish the prejudice on the record. He further pointed out that reduction of amount by 983 crores is not a very substantial amount, it is less than 3% of the annual charges. The assessee has been consistently following this practice and in the past it was never disturbed by the revenue. Learned Commissioner failed to look into this aspect. He relied upon the decision of Hindustan Hosiery reported in 161 ITR 524. He also contended that if assessee over charges then it has to refund with interest and if it under charges then it can charge with interest. The Government has 85% stake, accounts are verified by CAG and CAG has not disapproved this accounting practice by the assessee. He also made reference to page 90 of the paper book wherein reply of the assessee was given to the Assessing Officer during the assessment proceedings and he submitted that all these aspects were brought to the notice of the Assessing Officer. On the other hand, Learned DR pointed out that in the show-cause notice issued under section 142(1), Assessing Officer has neither raised query on this issue nor any finding is discernible from the assessment order or from the Learned Commissioner's Order with regard to inclusion or exclusion of these amounts from the sales. Therefore, it is not adviseable at the end of ITAT to take up this issue and record a finding on merit.

16. On due consideration of all these facts and circumstances, we are of the view that learned Assessing Officer has not put any query to the assessee about the reduction of the sales provisionally. As far as the reference to page No.90 is concerned, the assessee has given an explanation with regard to different issues wherein it has pointed out about the provisional revision of the sales, but Assessing Officer has not called for the information on this issue nor examined it. Even if the details are available on the record, there is no application of the mind at the end of the Assessing Officer. Thus, his order is erroneous. As far as the second condition i.e. whether any prejudice has been caused to the revenue or not is concerned, we find that Learned Commissioner has recorded a finding that permitting the assessee to reduce the sales without examining the issue, whether the assessee can reduce it or not would result a loss to the revenue, prima facie, there is an escapement of income. Though Learned Commissioner has not examined the issue on merit but the discussion prima facie indicates his formation of opinion about the loss of revenue. He remitted it to the file of the Assessing Officer after satisfying himself that the record cry for an inquiry on this issue. Hon'ble Delhi High Court in the case of Ashok Logani (supra) has specifically observed in paragraph 14 of the judgment that if the matter was relegated to the Assessing Officer to conduct an inquiry then ITAT itself should not take up that inquiry in its hands and adjudicated the issue on merit and thereafter judge the order of the Learned Commissioner. In such circumstances, ITAT has a very limited scope and it should focus its discussion on the proprietary of the order of the Learned Commissioner. At the time of hearing, we have confronted the learned counsel for the assessee that if the Assessing Officer failed to conduct an inquiry then assessment order can be termed as erroneous which ultimately caused a prejudice to the revenue and deserves to be set aside, then learned counsel for the assessee submitted that if hundred items are there in computation of income and no inquiry was conducted by the Assessing Officer on certain items then can the assessment order be erroneous. In our opinion if an verification of the record, Learned Commissioner formed an opinion that an issue available in the computation of income required verification and investigation at the end of Assessing Officer before its acceptance or rejection and such inquiry was not conducted than and an error has crept in the assessment order. If such an error caused a prejudice to the revenue than assessment order on such issue could be set aside. Therefore, in view of the above discussion, we are of the view that on reduction of sales Learned CIT has rightly taken cognizance u/s. 263 and has rightly remitted this issue to the Assessing Officer for fresh adjudication.

17. The next question for our adjudication is whether Learned Commissioner has rightly withdrew the additional depreciation claimed by the assessee and granted by the Assessing Officer? As discussed earlier, the assessee has claimed additional depreciation for the first time amounting to Rs.187,55,71,000. Learned Commissioner withdrew this additional depreciation on the ground that Assessing Officer has not conducted inquiry before allowing this depreciation. On merit, Ld. Commissioner has observed that assessee is engaged in the activity of generation of power. Section 32(1)(IIa) of the Act provides additional depreciation to those undertaking which are engaged in the business of manufacture or production of any article or thing. According to the Learned Commissioner, other businesses are not eligible to claim the benefit. He observed that generation of power cannot be equated with the production of article or thing because article or thing in common parlance is known something tangible and moveable etc. Generation of power is giving energy as output and, therefore, this activity is nowhere similar to production of article or thing because an article or thing is always associated with the concept of weight, mass and volume. The power or electricity does not have any of these attributes. It has no volume and it does not occupy any space, no weight or no mass can be attributed to it. The learned counsel for the assessee in order to appraise us the meaning of expression 'manufacture and production made reference to the decision of Hon'ble Supreme Court in the case of Sesa Goa Ltd. and India Cine Agency (supra)

18. In the case of India Cine Agency, Hon'ble Supreme Court has considered the judgment rendered in the case of Sesa Goa (supra) and all other decisions on the point which contemplate the meaning of expression "manufacture" as well as "production". The relevant discussion made by the Hon'ble Court reads as under:

"2. As noted above, the core issue is whether activity undertaken was manufacture or production.

3. In Black's Law Dictionary (5th Edition), the word "manufacture' has been defined as, "the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine". Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Taxes) Coco Fibres [1992] Supp. 1 SCC 290).

4. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise v. Rajasthan State Chemical Works [1991] 4 SCC 473).

x x x x x x x x x x x

7. To put it differently, the test to determine whether a particular activity amounts to "manufacture' or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted. Etymologically the word 'manufacture' properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [1985] 3 SCC 314).

x x x x x x x x x x x

x x x x x x x x x x x

19. In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961/ Hon'ble Supreme Court has held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression "manufacture". But suffice to say that core of all the decisions of the Hon'ble Supreme Court or Hon'ble High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Hon'ble Court also explained broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process.

20. As observed earlier, Learned Commissioner withdrew the additional depreciation primarily on the ground that power/electricity generated by the assessee cannot be equated with an article or thing which is being manufactured in an industrial undertaking. The learned counsel for the assessee in order to buttress his arguments, power/electricity generated by the assessee is an article or goods, made reference to the decision of Hon'ble Supreme Court in the case of CST Vs. MP Electricity Power. In this case, the MPEST Board sold, supplied and distributed electric energy to various consumers. It also sold coal-ash, a waste product and supplied stream to Nepa Mills of Burhanpur. The sale of electricity is exempt from sales-tax. However, for the purpose of determining the gross turn over, the sale of electric energy is to be taken into account. The first question which arose before the Honble Court was;

"On the facts and circumstances of the case whether or not the Madhya Pradesh Electricity Board is a dealer with in the meaning of Section 2© of the C.P. and Bare Sales-tax Act, and section 2(d) of the Madhya Pradesh General Sales-tax Act, 1958, in respect of its activity of generation, distruption, sale and supply of electric energy?"

20.1 In order to decide whether Madhya Pradesh Electricity Board is a dealer or not, Hon'ble Court took into consideration the definition of "dealer" as given in the two acts referred in the question and observed that the definition contemplates that any person who carries on the business of buying, selling, supplying or distributing the goods as a "dealer". The expression "goods" are defined by section 2(d) of the Act, 1947 according to which all kinds of moveable properties other than actionable claim and include material articles and commodities whether or not to be used in the construction, fitting out, improvement or repair of immoveable property. According to the Hon'ble Court, the definition of expression "goods" contained in section 2(g) of the Act No. 11 of 1959 has almost similar. In the light of these definitions, Hon'ble Court has examined whether electricity can be termed as a goods. The discussion made by the Hon'ble Court in the judgment reads as under:

"The reasoning which prevailed with the High Court was that a well-defined distinction existed between the sale or purchase of "goods" and consumption or sale of electricity; otherwise there was no necessity of having Entry No.53. But under Entry 53 taxes can be levied not only on sale of electricity to derive much assistance from the aforesaid entries. What has essentially to be seen is whether electric energy is "goods" within the meaning of the relevant provisions of the two Acts. The definition in terms is very wide according to which 'goods' mean all kinds of movable property. Then, certain items are specifically excluded or included in electric energy or electricity is, not one of them. The term "moveable property" when considered with reference to "goods" as defined for the purposes of sales tax cannot be taken in a narrow sense and merely because electric energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be cease to be movable property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, would attract punishment under sec. 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered stored, possessed etc. in the same way as any other movable property. Even in Banjamin on Sale, 8th Edn., reference has been made at page 171 to Country of Durham Electricial, etc., Co. v. Inland Revenue(1) in which electric energy was assumed to be "goods". If there can be sale and purchase of electric energy like any other moveable object we see no difficulty in holding that electric energy was intended to be covered by the definition of "goods" in the two Acts. If that had not been the case there was no necessity of specifically exempting sale of electric energy from the payment of sales tax by making a provision for it in the Schedules to the two Acts. It cannot be denied that the Electricity Board carried on principally the business of selling, supplying or distributing electric energy. It would therefore clearly fall within the meaning of the expression "dealer" in the two Acts".

20.2 This question again fallen for the consideration of the Hon'ble Supreme Court in the case of State of Andhra Pradesh Vs. NTPC. The dispute in this case was that respondent NTPC had a thermal power station at Ramagundam within the State of Andhra Pradesh and sold the electricity to the Board of Karnataka, Kerala, Tamilnadu and the State of Goa in pursuance of contract of sales occasioning interstate movement of electricity. The Andhra Pradesh Government wanted to levy of duty on certain sales of electric energy. According to the understanding of Andhra Pradesh Government, section 3 of their Sales-tax Act provides that every distributor of electric energy and every producer shall subject to certain exceptions pay every month to the State Government a duty calculated at the rates specified in the table appended thereto on the units of electric energy sold or supplied to a consumer or consumed by himself for his own purpose or for the purpose of his township or colony during the preceding months. Similar steps were taken by the Madhya Pradesh Government for the plants situated in its territorial jurisdiction. The question arose whether electricity sold to other states would be amenable to duties. The Hon'ble Court in that context considered, what is an electric energy and made following observations:

"Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales-tax, Madhya Pradesh, Indore Vs. Madhya Pradesh Electricity Board, Jabalpur- 1969 (2) SCR 939 that electricity is goods. The definition of goods as given in Article 366(12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which "goods" means all kinds of moveable property. The term "moveable property" when considered with reference to "goods" as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electricity energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under sec. 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of "goods". However, A.N. Grover, J. speaking for three-Judge Bench of this Court went on to observe that electric energy "can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other moveable property". In this observation we agree with Grover, J. on all other characteristics of electric energy except that it can be 'stored' and to the extent that electric energy can be 'stored', the observation must be held to be erroneous or by oversight. The science and technology till this day have not been able to evolve any methodology by which electric energy can be preserved or stored.

Another significant characteristic of electric energy is that its generation or production coincides almost instantaneously with its consumption. To quote from Aiyar' s Law Lexicon (Second Adition, 2000)__ 'Electricity in physics is "the name given to the cause of a series of phenomena exhibited by various substances, and also to the phenomena themselves." Its true nature is not understood. Imperial Dict. (quoted in Spensley v. Lancashire Ins. Co., 54 Wis. 433, 442, 11 NW 894, where the court, quoting from the same authority, said, "We are totally ignoran of the nature of this cause whether it be a material agent or merely a property of matter. But as some hypothesis is necessary for explaining the phenomena observed, it has been assumed to be a highly subtle, imponderable fluid, identical with lightning, which pervades the pores of all bodies, and is capable of motion from one body to another.' This characteristic quality of electric energy was judicially noticed in Indian Aluminium Co. etc. etc. Vs. State of Kerala & Ors (1996) 7 SCC 637. Vide para 25 this court has noted, "Continuity of supply and consumption starts from the moment the electrical energy passes through the meters and sale simultaneously takes place as soon as meter reading is recorded. All the three steps or phases (i.e. sale, supply and consumption) take place without any hiatus. It is true that from the place of generating electricity, the electricity is supplied to the sub-station installed at the units of the consumers through electrical higher-tension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. "as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply. There is no hiatus in its operation. Simultaneously sale also takes place." These properties of electricity as goods are of immense relevance as we would state hereafter".

21. On due consideration of these two decisions, it is implicitly clear that the Hon'ble Supreme Court has explained the meaning of electricity, the Hon'ble Court has considered the definition of goods as given in Article 366(12) of the Constitution of India. It also took into consideration the sales-tax Act of the State of Andhra Pradesh as well as Madhya Pradesh and also considered the dictionary meaning. Thereafter Hon'ble Court has observed that goods means, all kind of moveable properties. The terms moveable property when considered with reference to goods as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electric energy is not a tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such properties. It is capable of abstraction, consumption and use of which if done dishonestly is punishable under sec. 39 of the Indian Electricity Act. If there can be sales and purchase of electric energy like any moveable object than there was no difficulty in holding that electric energy was intended to be covered by the definition of goods.

22. The expression "article, thing or goods" are not defined in the Income-tax Act, 1961. Learned Commissioner while treating the electricity as not an article or thing has not made reference to any provisions of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon'ble Supreme Court given in the case of Indian Cine Agency, CST Vs. M.P. Electricity Board and Sate of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods. The process of its generation is also akin to manufacture or production of an article or thing. It is being generated in huge plants though scientifically one may say it is transformation of one source of energy into the other. But all these aspects have been considered in these three judgments of the Hon'ble Supreme Court wherein Hon'ble Court has explained what is manufacture or production and what is electricity. Learned DR at the time of hearing, had made reference to the order of the ITAT, Chennai and the judgment of the Hon'ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon'ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon'ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon'ble Supreme Court reads as under:

23. Thus, taking into consideration all these aspects, we are of the view that admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Learned CIT(Appeals) is reversed to this extent and the disallowance is deleted.

24. In the result, the appeal of the assessee is partly allowed.

Decision pronounced in the open court on 30.04.2012

2013-TIOL-747-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'E' NEW DELHI

ITA Nos.4212 & 4213/DEL/2011
Assessment Year: 2004-05 & 2005-06

MGF AUTOMOBILES LTD
4/17-B, MGF HOUSE,
ASAF ALI ROAD, NEW DELHI
PAN NO:AABCM4248A

ACIT
CENT CIRCLE-7, NEW DELHI

Rajpal Yadav, JM And T S Kapoor, AM

Dated: June 28, 2013

Appellant Rep by: Shri V K Aggrawal, AR
Respondent Rep by: Shri Gunjan Prasad, CIT (DR).

Income Tax - Sections 153A & 153C - Whether any addition can be made under the new provision of assessment pertaining to search and seizure if no proceedings are pending and no incriminating material is found during search.

Assessee is in this case was searched by the revenue and thereafter the notices under section 153A was issued and served. Accordingly the assessee filed it's ROI. Thereafter assessment under section 153A read with 143(3) of the Act was framed. Assessee challenged the validity of assessment before the CIT(A) on the ground that no proceedings were pending before the AO and hence no additions could be made without the support of incriminating material- CIT(A) rejected the contention of assessee-Matter reached to the ITAT wherein the AR of the assessee reiterated the submissions made before the CIT(A).

After hearing the parties the ITAT held that,

++ in the present case it is apparent that on the date of search be on 12/09/2007, the assessments for assessment year 2004-05 & 2005-06 were already completed. There was no incriminating material found during search for these years as is apparent from arguments of Ld. AR and from records and Ld. Departmental Representative did not bring to our notice regarding any incriminating material having been found during search. Therefore following the Judicial Precedents, we are of the opinion that though assessments for the above year were bound to be reopened but additions could be made only if some incriminating document was found during search.

Assessee's appeal allowed

ORDER

Per: T S Kapoor:

These are two appeals filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-I, New Delhi both dated 18.07.2011 for the assessment years 2004-05 & 2005-06. The grounds taken by the assessee are as under:

Grounds for Assessment year: 2004-05

"1. Under the facts and circumstances of the case, the appellate order passed by the Ld. CIT (A) is illegal being against the principles of natural justice and against the provisions of IT Act, 1961especially in view of the following:-

a) That neither any valuable article or thing nor any incriminating document was found during the search and hence section 153A was not applicable.

b) That the cases laws relied upon by the appellant were not considered.
c) That he has relied upon the judgment of Hon'ble ITAT, Delhi in the case of Shivnath Rai Hrnarain (India) Ltd. Vs. DCIT, (2009) 17 ITD 74 without appreciating the fact that the same has been overruled by Hon'ble ITAT, Delhi in its later judgment in the case of Shri Anil Kumar Bhatia & Ors. Vs. ACIT, (2010) 1ITR (Trib) 484 (Del) which was brought to his notice vide appellant's letter dated 8/6/2010.

The Ld. CIT (A) has grossly erred on facts as well as in law in confirming the disallowance of set off of Rs.1,65,09,929/- on account of accumulated losses including unabsorbed depreciation of M/s Compact Motors Ltd., the amalgamating company, especially in view of the following:-

a) In ignoring the specific provisions of scheme of amalgamation which was duly approved by the jurisdictional High Court regarding accumulated losses and unabsorbed depreciation and directed to be binding on all concerned.

b) In relying on the case law which is not applicable to the appellant.
3. The Ld. CIT (A) has grossly erred on facts as well as in law in confirming the charging of interest under various sections of the IT Act, 1961.

4. The appellant craves leave to add, alter, modify and withdraw any ground of appeal before or during the appellate proceedings."
Ground For Assessment year: 2005-06
"1. Under the facts and circumstances of the case, the appellate order passed by the Ld. CIT (A) is illegal being against the principles of natural justice and against the provisions of IT Act, 1961especially in view of the following:-

a) That neither any valuable article or thing nor any incriminating document was found during the search and hence section 153A was not applicable.

b) That the cases laws relied upon by the appellant were not considered.
c) That he has relied upon the judgment of Hon'ble ITAT, Delhi in the case of Shivnath Rai Hrnarain (India) Ltd. Vs. DCIT, (2009) 17 ITD 74 without appreciating the fact that the same has been overruled by Hon'ble ITAT, Delhi in its later judgment in the case of Shri Anil Kumar Bhatia & Ors. Vs. ACIT, (2010) 1ITR (Trib) 484 (Del) which was brought to his notice vide appellant's letter dated 8/6/2010.

2. The Ld. CIT (A) has grossly erred on facts as well as in law in confirming the disallowance of set off of Rs.15,22,410/- on account of accumulated losses/ unabsorbed depreciation of M/s Compact Motors Ltd., the amalgamating company, especially in view of the following:-

a) In ignoring the specific provisions of scheme of amalgamation which was duly approved by the jurisdictional High Court regarding accumulated losses and unabsorbed depreciation and directed to be binding on all concerned.

b) In relying on the case law which is not applicable to the appellant.
3. The Ld. CIT (A) has grossly erred on facts as well as in law in confirming the charging of interest under various sections of the IT Act, 1961.

4. The appellant craves leave to add, alter, modify and withdraw any ground of appeal before or during the appellate proceedings."

2. The brief facts of the case are that search and seizure operation u/s 132 of the Income Tax Act, was carried out in the case of assessee on 12.09.2007 and, therefore, notice u/s 153 A of Income Tax Act dated 17.10.2008 was issued to the assessee requiring it to file income tax returns. The assessee filed returns of income for assessment year 2004-05 and assessment year 2005-06 declaring Nil income in respect of assessment year 2004-05 and income of Rs.50,04,700/- for assessment year 2005-06. Both the returns were same as were filed originally u/s 139 (1) of the Act, on 30.10.2004 and 27.10.2005 respectively. Notices u/s 143(2) and 142(1) along with questionnaires were issued to the assessee on 18.09.2009 requiring the assessee company to file necessary details and in response, the Ld. AR of the assessee company filed various details and attended the proceedings from time to time.

3. During the assessment proceedings, the Assessing Officer observed that assessee was dealing in the business of car dealership and service stations. He further observed that during the assessmsent year 2004-05 the assessee had entered into an amalgamation agreement with M/s Compact Motors Ltd. pursuant to the scheme of amalgamation of the erstwhile M/s Compact Motors Ltd. with the assessee company. He further observed that assessee had prepared amalgamated accounts with effect from appointed date i.e. 1st April, 2003 and all assets and liabilities of M/s Compact Motors Ltd. were incorporated in the books of assesssee at their book values. He further observed that assessee had set off an amount of Rs.1,65,09,929.93 against its business income for A. Y 2004-05 and it was mentioned that the loss belonged to M/s Compact Motors Ltd. since merged with the assessee vide order of Delhi High Court dated 27.09. 2004. In the A. Y. 2005-06, the assessee had set off the balance unadjusted carried forward loss of earlier year.

The Assessing Officer disallowed the set off of such losses by holding as under:

The allowability of the accumulated loss and unabsorbed depreciation of the amalgamating company in the hands of amalgamated company, in this case M/s MGF Automobiles Ltd. is governed by the provisions of section 72A of the Income Tax Act. The relevant extracts of provisions of section 72A of the Income Act, as applicable for A. Y. 2004-05 is reproduced below for ready reference:

72.A (1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company; or an amalgamation of a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation lands of the amalgamate company. In other words, to avail benefits u/s 72A, the condition that the company should be an "industrial undertaking" has to be fulfilled. Industrial undertaking is defined in clause (aa) of subsection 7 of section 72 A of the Income Tax Act. In case this condition is not complied with then the set off unabsorbed business loss or depreciation will not be allowed. It may be seen from the above that the assessee company is not covered in the definition of "Industrial undertaking" defiled in section 72A(7) (aa) of the Act. Therefore, the company cannot be allowed to set off of accumulated business loss or depreciation of the amalgamating company as stipulated by section 72A of the Act. Hence the entire loss of Rs.1,80,32,339/- incurred by the amalgamating company, M/s Compact Motors Ltd. shall not be set off against the business income of the amalgamated company M/s MGF Automobiles Ltd. for the A. Y.20040-05.

4.3 Further, even on merit also, the assessee has failed to retain 3/4th of the book value of assets of the amalgamating company for continuous period of five years from the date of amalgamation. In the A. Y. 2007-08, the company has sold land amounting to Rs.37,93,375/-. The above land was added to the assets of the assesssee company in the scheme of amalgamation. By the above sale the amalgamation company has violated provisions of sub-section (3) of section 72A of the Income Tax Act, 961. Therefore, otherwise also the assessee company is not allowed to set off the accumulated loss and depreciation of the amalgamating company. An amount of Rs.1,65,09,929/- being profit shown in the profit and loss account of the company is treated as the income for the year under consideration. The assessee shall not be allowed to carry forward the accumulated business loss and unabsorbed depreciation of the amalgamating company to the next assessment year."

4.4. For A. Y. 2005-06, the Assessing Officer disallowed the carried forward business loss of Rs.15,22,410/-, by holding as under:

4. In the computation of income the assessee has set off an amount of Rs.15,22,410/- as unabsorbed business loss and depreciation which could not be set off during the assessment year 2004-05. In the assessment order for the assessment year 2004-05, the assessee was not allowed to carry forward any amount as business loss to be set off in the next assessment year as the case of the assessee did not fall within the purview of section 72A of the Income Tax Act, 1961. Hence, there is no business loss left in the assessment year 2004-05 for being carried forward to the next assessment year. The set off of Rs.15,22,410/- is disallowed and added to the income of the assessee of the assessee for the assessment year under consideration.

(Addition of Rs.15,22,410/-)"

5. Aggrieved with the additions, the assessee filed appeals before CIT

(A) and submitted as under:

"That the issue of amalgamation was considered in the original assessment and the same cannot be considered again while framing the assessmen afresh u/s 153A unless some incriminating document and material is found during the search and that addition has to be made on the basis of documents found during the search."

6. The Ld. CIT (A) after going through the submissions of assessee upheld the disallowance by rejecting the contention of assessee that without incriminating material addition cannot be made and also upheld the addition on merits. The relevant extracts of Commissioner of Income Tax (appeals)'s orders are reproduced as under:

"I have gone through the submission filed by the appellant and do not agree that the said addition arising out of the disallowance of brought forward loss and brought forward depreciation cannot be made u/s 153A. It has been held in the case of Harvey Heart Hospitals Ltd. Asstt. CIT (2010) 130 TTJ (Chennai) 700. "It is clear that section 153C, read with section 153A brings into the purview of assessment both regular and undisclosed income subsequent to action u/s 132 or section 132A upon invocation of section 153A or section 153C. The proviso to section 153A clearly mandates the Assessing Officer to assess or reassess the total income in respect of each assessment year falling within six assessment years. The next proviso further mandates that any assessment or reassessment in respect of any those six years which are pending shall abate. Hence, it is clear that under such circumstances, assessment or reassessment will be done pursuant to section 153A or section 153C. It will not be correct to interpolate that no regular assessment or reassessment can take place u/s 153A and 153C. There is no reference to incriminating search materials as in earlier section 158BB/158BC, to which the assessment has to be confined. Thus, assessment or reassessment u/s 153C/153A does not have to be based on incriminating material found during search."

Futher, the Delhi Tribunal in the case of Shivnath Rai Harnarain (India) Ltd. Vs. DCIT (2009) 17 ITD 74 (Delhi) has observed that:
"Sec. 153A, r.w.s.132 of the IT Act,1961- Search and seizure- Assessment in case of-Assessment years 1999-2000, 2002-03 and 2003-04- A search and seizure operation u/s 132 was conducted at business premises of assessee- company on 18/06/2003-Subsequently notice u/s 153A was issued to it on 31/05/2005 wherein it was required to file returns for relevant assessment years-Assessee filed returns and assessment were framed thereon-On appeal, assessee contended that as there was no seized material based on which assessment had been completed by Assessing Officer in its case, assessment so framed by Assessing Officer u/s 153A should be held to be null and void- Whether since there is no requirement for an assessment made u/s 153A being based on any material seized in course of search, contention raised by assessee was invalid- Held, yes – Whether, further, under second proviso to sec.153A pending assessment or reassessment proceedings in relation to any assessment year falling within period of six assessment years, referred to in sec,153A(b), shall come to an end (abate), which means that Assessing Officer gets jurisdiction for said six assessment years, for making an assessment or reassessment- Held, Yes- Whether, therefore, Assessing Officer was perfectly justified in framing as assessment u/s 153A for assessment years under consideration- Held, yes."

7. Aggrieved with the decision of CIT (A), the asessee is in appeal before us. At the outset, the Ld. AR submitted that search in this case was conducted on 12.09.2007 & during search neither any undisclosed income/ property nor any undisclosed account book/ documents were found pertaining to the brought forward losses of amalgamating company, which were disallowed by Assessing Officer u/s 153A /143(3). He further submitted that audited balance sheet including auditor's report was submitted along with original return filed on 31.10.2004 and item no.2 to notes to the accounts clearly indicated that pursuant to the scheme of amalgamation of M/s Compact Motors Ltd., the accounts were prepared after giving affect to the scheme of amalgamation and all assets, liabilities and losses were taken over at their book values. Our attention in this respect was invited to paper book page 16 wherein the relevant notes of the accounts were placed. In view of the above, it was pleaded that facts regarding amalgamation and taking over of assets and liabilities including losses of amalgamating company were before Ld. Assessing Officer before the search and before original assessment which was completed u/s 143(3) on 18.12.2006 and in this respect our attention was invited to paper book page 24 where original assessment passed u/s 143(3) was placed. Our attention was specifically invited to paper book page 25 wherein Assessing Officer had allowed the set off of business loss, and unabsorbed depreciation.

8. Continuing his arguments, he submitted that assessment u/s 153 is different from regular assessment and it is made only where a search is initiated u/s 132. Quoting from provisions of section 153A, the Ld. AR submitted that second proviso to section 153A (1) states that assessment or reassessment if any relating to any assessment year falling within the period of 6 assessment years pending on the date of initiation of search shall abate and in view of this provision he argued that completed assessment u/s 143(3) will not abate and in the case of assessee the assessment was not pending as it was already completed on 18/12/2006. He further argued that for assessment u/s 153A purpose of section 132 has to be considered which is that for completed assessments additions can only be made on the basis of undisclosed income or undisclosed property found during search. In view of the above, the Ld. AR argued that basic purpose of assessment u/s 153A is to tax the undisclosed income and not to review/ examine the completed assessments and argued that it is the reason that legislature has not provided for abatement of completed assessments.

9. Reliance in this respect was placed on the case law of All Cargo Global Logistics Ltd. vs. DIT, 2012-TIOL-391-ITAT-MUM -Special Bench, wherein it was held that in case of completed assessments the assessment u/s 153A has to be made on the basis of incriminating material only. The Ld. AR further invited our attention to Hon'ble Delhi High Court's order in the case ofCIT vs Anil Kumar Bhatia, ITA No. 1626/2010 = (2012-TIOL-641-HC-DEL-IT), wherein the issue regarding additions to be made in a completed assessment where no incriminating material was found was left open and in this respect our attention was invited to para 23 of the said order. The Ld. AR further invited our attention to the judgment on this issue by Hon'ble ITAT (M) dated 19.12.2012 in the case of ACIT vs. M/s Pratibha Industries Ltd., ITA No. 2197 to 2199/Mum/ 2008 = (2013-TIOL-50-ITAT-MUM), wherein it was held that in the case of completed assessment where no incriminating material was found, the assessment u/s 153A has to be made on originally assessed income only. In this respect, the Ld. AR read out the relevant extract from this order and in view of that argued that assessment u/s 153A in the case of completed assessment can only be made in case some incriminating document/ material were found during the search. The Ld. AR further relied upon the judgment dated 16.11.2012 from Hon'ble ITAT Mumbai in the case of Shri Gurinder Singh Bawa vs. Dy. CIT, ITA No. 2075/Mum/2010 and submitted that in this case the assessment was completed under summary scheme u/s 143(1) and time limit for issue of notice u/s 143(2) had expired on the date of search and, therefore, Hon'ble Mumbai Tribunal had held that there was no assessment pending and hence there was no abatement, and addition could only be made on the basis of incriminating material found during search.

10. Reliance was further placed in the following case laws:

a) LMJ International Ltd. Vs. DCIT, (2008) 119 TTJ (Kol) 214
b) Anil P. Khimani vs. DCIT, 2010-TIOL-177-ITAT-MUM. In view of all these legal arguments, the Ld. AR argued that assessment u/s 153A where no incriminating material was found during search has to be completed on the originally assessed income only.

11. Arguing on the second ground of appeal regarding disallowance of set off of loss despite directions of Hon'ble High Court of Delhi, the Ld. AR read from the order of High Court dated 27.09.2004 and invited our attention to paper book page 45 which read as under:

" That not withstanding anything contained in any provision of the Income Tax Act,1961 the accumulated loss and the unabsorbed depreciation of M/s Compact Motors Ltd. the Transferor Company shall be deemed to be the loss or as the case may be, allowance for depreciation of M/s MGF Automobiles Ltd., the Transferee Company for the year in which the amalgamation is effected from the appointed date w.e.f. 01.04.2003 and other provisions of the Income Tax Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly."

In view of these findings of Hon'ble High Court, it was argued that as per scheme of amalgamation the accumulated loses and unabsorbed depreciation of M/s Compact Motors Ltd. were deemed to be loss/ unabsorbed depreciation of appellant for assessment year 2004-05 irrespective of provisions of Income Tax Act. He further argued that Hon'ble High Court has given its sanction to the scheme of amalgamation and therefore its terms of sanction were binding on concerned parties. Our attention was also invited to paper book page 63 where copy of letter written by DCIT, Circle -6(1), New Delhi, conveying it's no objection to the merger was placed.

12. On the other hand, the Ld. Departmental Representative referred to the case law of Anil Kumar Bhatia decided by Hon'ble Delhi High Court and read para 18 to 23 of the said order and relied heavily on it wherein the Hon'ble Court had held that in view of provisions of section 153A the assessment has to be reopened for six years. The Ld. Departmental Representative further relied upon section 72A and argued that assessee was not fulfilling the conditions as it was engaged in the sale and service of vehicles whereas, section 72A is applicable in the case of industrial units only. With respect to no objection issued by Department placed on paper book 63, the Ld. Departmental Representative submitted that Department had no objection to the merger subject to compliance of statutory provisions of Income Tax Act.

13. We have heard the rival parties and have gone through the material placed on record. We find that the assessment of assessee for assessment year 2004-05 was completed u/s 143 (3) vide assessment order dated 18.12.2006. The search u/s 132 was conducted on 12.09.2007, therefore, assessment for the year under consideration had to be re-opened as per the provisions of section 153A. The proviso to section 153A reads as under:

"Provided that the Assessing Officer shall assessee or reassess the total income in respect of each assessment year falling within such six assessment years:

Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this ( sub-section) pending on the date of initiation of the search u/s 132 or making of requisition u/s 132A, as the case may be, shall abate."

The above proviso clearly States that assessments for six years pending on the date of initiation of search will be reopened which further implies that assessments not pending or completed assessments will not be reopened. The special Bench, Mumbai decision in the case of All Cargo Global Logistics Ltd. has dealt with this issue and has held that completed assessments falling within six year can only be reopened if some incriminating material is found during search. The Hon'ble Delhi High Court in the case of CIT vs Anil Kumar Bhatia had also considered the same situation and held that assessment for six years has to be re-opened, but left the question regarding additions to be made in a completed assessment where no incriminating material was found. The relevant extract of Hon'ble High Court is as under:

" Where no incriminating material was found during the search conducted u/s 132 of the Act. We therefore, express no opinion as to whether section 153A can be invoked then in such a situation that question is therefore left open."

14. Hon'ble ITAT (Mum) in the case ACIT vs. Pratibha Industries Ltd., ITA No.2197 to 2199/Mum/2008 = (2013-TIOL-50-ITAT-MUM) has considered the case law of Anil Kumar Bhatia as decided by Hon'ble Delhi High Court and after considering the findings of the court has arrived at the following findings in similar situations:

"4.1 On going through the provisions of section 153A, 2nd proviso and the various decisions cited before us, three possible circumstances emerge on the date of initiation of search u/s 132 (1) of the Income Tax Act, (a) proceedings are pending; (b) proceedings are not pending but some incriminating material found in the course of search, indicating some income and/or assets not disclosed in the return and (c) proceedings are not pending and no incriminating material has been found.

4.2 When we treat to trace the correct and logical answers to the above circumstances, circumstances (a) is answered by the Act itself, that is, since the proceedings are still pending, all those pending proceedings are abated and the Assessing Officer gets a free hand to make the assessment. Circumstances (b) has been answered by the courts, interpreting 2nd proviso along with clause (b) to section 153A, wherein the Hon'ble Delhi High Court observes and hold, "where the assessment or reassessment proceedings have already been completed and assessment orders have been passed determining the assessee's total income and such orders are subsisting at the time when the search or the requisition is made, there is no question of any abatement since no proceedings are pending. In this latter situation, the Assessing Officer will reopen the assessments or reassessments already made (Without having the need to follow the strict provisions or complying with the strict conditions of section 147, 148 and 151) and determine the total income of the assessee. Such determination in the orders passed u/s 153A would be similar to the orders passed in any reassessment, where the total income determined in the original assessment order and the income that escaped assessment are clubbed together and assessed as the total income. But when we come to third circumstance i.e. circumstance (c), we find that this has been left unanswered. Para 23 of the judgment, the Hon'ble Delhi High Court mentions that the issue is left open.

4.3 This, has been explained in the graphic made below and the relevant portion is in italics therein. This can be explained through this graphic:

4.4 To answer the question, as to what shall be the assessment of total income, where there is/ are no pending proceedings and no incriminating material, we have to trace out the logical conclusion, by harmonizing the legislative intendments and the judicial decisions, as held by the Hon'ble Supreme Court of India in the case of K P Verghese (Supra), wherein it was observed, so as to achieve the obvious intention of the Legislature and produce a rational construction. When we look into the decision of the Hon'ble Delhi High Court in Anil Kumar Bhatia (Supra), we find that the Hon'ble Court has pointed out that in case where there is no abatement, total income has to be determined by clubbing together the income already determined in the original assessment order and the income that escaped assessment (Situation 2A in the Graphic). In the circumstance, what we are dealing in instantly, there are finalized assessment proceedings and no incriminating material indicating any escaped income (Situation 2B in the graphic). Taking a cue from the decision of Hon'ble Delhi High Court in the case of Anil Kumar Bhatia (Supra) we can tread on the same premise and hold that on clubbing, what remains in the income originally determined or assessed (i.e. income originally determined+Zero= income originally determined- as there was no incriminating material)."

15. Similar views were held by ITAT (Mum) in the case of Shri Gurinder Singh Bawa Vs. Dy. CIT, ITA No. 2075/Mum/2010 and LMJ International Ltd. Vs. DCIT,(2008) 119 TTJ (Kol) 214 and in the case of Anil P. Khimani vs. DCIT, 2010-TIOL-177-ITAT-MUM. During proceedings before us the bench had asked a question to Ld. AR as to whether any statement u/s 132(4) was recorded during search to which the Ld. AR replied in negative and Ld. Departmental Representative also showed his ignorance about such statement. This question was asked because the view of the Bench is that if during course of search some statement is recorded u/s 132(4) and, in that statement certain facts are recorded from the interpretation of which Assessing Officer could conclude that there was some undisclosed income, then that statement can be considered as incriminating material. Recently, Hon'ble Rajasthan High Court in judgment delivered on 24.05.2013 in the case of Jai Steel (India) u/s ACIT has also dealt with similar circumstances and has held that where no incriminating document is found during search, addition cannot be made. In this case, on the reopening of cases u/s 153A, the assessee had claimed certain deductions which were not claimed in original assessment proceedings, however Hon'ble Court has held that Assessing Officer is not free to disturb the income, expenditure or deduction de hors any incriminating material while making the assessment u/s 153A. The relevant findings of the court are as under:

"In a case where nothing incriminating is found though s. 153A would be triggered and assessment or reassessment to ascertain the total income is required to be done, the same would not result in any addition and the assessments made earlier may have to be reiterated-Argument of the counsel that the Assessing Officer is free to disturb the income, expenditure or deduction de hors any incriminating material while making the assessment u/s 153A is not borne out from the scheme of the said provisions of ss.153A to 153C cannot be interpreted to be further innings for the Assessing Officer and/or the assessee beyond the provisions of ss.139, 147 and 263-A harmonious construction of the entire provisions of s. 153A would lead to an irresistible conclusion that the word 'assessee' has been used iii the context of abated proceedings and 'reassess' has been used for completed assessment proceedings which do not abate as they are not pending on the date of initiation of the search or making of requisition and can be tinkered only on the basis of incriminating material found during the course of search or requisition of documents therefore, it is not open to the assessee to seek deduction or claim relief not claimed by it in the original assessment which already stands completed in an assessment u/s 153A made in pursuance of a search or requisition."

In the present case it is apparent that on the date of search be on 12/09/2007, the assessments for assessment year 2004-05 & 2005-06 were already completed. There was no incriminating material found during search for these years as is apparent from arguments of Ld. AR and from records and Ld. Departmental Representative did not bring to our notice regarding any incriminating material having been found during search. Therefore following the Judicial Precedents, we are of the opinion that though assessments for the above year were bound to be reopened but additions could be made only if some incriminating document was found during search.

In view of the above, ground no.1 of appeal filed by assessee is allowed and we hold the assessment orders for above years as null and void ab inito.

16. In view of our findings in respect of Ground No.1 of appeals which are in favour of assessee, Ground No.2 becomes infructuous and hence are dismissed. Ground No.3 is consequential and do not require any adjudication. Ground No.4 is general in nature and do no require any adjudication.

In view of the above, the appeals filed by the assessee are partly allowed.

(Order pronounced in Open Court on 28.6.2013)

ST: Housekeeping services for cleaning factory shed, event management services for organizing function for rewarding employees and legal services in connection with tax disputes are eligible for input service credit

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[2013] 36 taxmann.com 425 (New Delhi - CESTAT)

CESTAT, NEW DELHI BENCH

Delphi Automotive Systems (P.) Ltd.

Commissioner of Central Excise, Noida*

RAKESH KUMAR, TECHNICAL MEMBER

STAY ORDER NOS. 55353-55354/2013 (PB)
APPLICATION NOS. E/STAY/4304 & 4313 OF 2012
APPEAL NOS. E/3378 & 3389/2012-SM(BR)

JANUARY 4, 2013

I. Rule 2(l) of the Cenvat Credit Rules, 2004 - CENVAT Credit - Input service - House-keeping services - Stay order - Assessee availed credit of service tax paid on house-keeping and cleaning service availed for cleaning of factory shed - Department denied credit holding that said services had no relation with manufacture - HELD : Keeping factory neat and clean is a statutory requirement in terms of section 11 of Factories Act, 1948 - Hence, this service has to be treated as service having direct nexus with manufacture of final product, as without compliance with provisions of Factories Act, no manufacturer can engage in manufacturing activity - Accordingly, credit was, prima facie, available [Para 6] [In favour of assessee]

II. Rule 2(l) of the Cenvat Credit Rules, 2004 - CENVAT Credit - Input service - Event management services - Stay order - Assessee availed credit of event management services availed for recognising outstanding performance of some employees by honouring them in a function - HELD : This activity was meant to encourage employees to increase their productivity and had direct nexus with manufacturing activity, as same is meant to enhance productivity of personnel - Therefore, prima facie, this service was eligible for input service credit [Para 7] [In favour of assessee]

III. Rule 2(l) of the Cenvat Credit Rules, 2004 - CENVAT Credit - Input service - Legal Services - Stay order - Assessee availed credit of legal service availed in connection with various tax disputes - HELD : Legal service is specifically covered by definition of 'input service' and, further, it is an activity related to business - Hence, it is covered by definition of 'input service' [Para 8] [In favour of assessee]

CASE REVIEW

CCE v. Andhra Pradesh Paper Mills Ltd. 2010 (254) ELT 354 (Tri-Bang.) (paras 3 & 8) relied on.

CASES REFERRED TO

CCE v. Andhra Pradesh Paper Mills Ltd. 2010 (254) ELT 354 (Tri-Bang.) (para 3).

Anandh Venkataramani for the Appellant. B.B. Sharma for the Respondent.

ORDER

1. The appellant are manufacturers of automobile parts. The period of dispute in this case is from April 2007 to October 2008 and from April 2010 to June 2011. The dispute for the first period i.e. from April 2007 to October 2008 is as to whether during this period, the appellant were eligible for Cenvat credit of Service Tax paid on house-keeping and cleaning service availed for cleaning of the factory shed, legal services and event management service availed for organising functions for honouring the employees for their outstanding work. The Cenvat credit availed in respect of these services is Rs. 3,29,193/-. The point of dispute in respect of the second period of dispute i.e. from July 2010 to June 2011 is as to whether the appellant during this period were eligible for Cenvat credit in respect of the service of house-keeping and cleaning for factory shed and event management availed. The event management service, has been availed up to March 2011. During this period also the event management had been availed for organising functions for honouring the employees for their outstanding performance. The Department in both the cases being of the view these services are not eligible the Cenvat credit, issued show cause notices for denying the Cenvat credit and its recovery alongwith interest and also for imposition of penalty. The show cause notice dated 22-6-2011 for the period from April 2007 to October 2008 was issued by invoking extended period under proviso to section 11A(1) of the Central Excise Act, 1944. Both the show cause notices were adjudicated by jurisdictional Assistant Commissioner who by two separate orders confirmed the above-mentioned Cenvat credit demands alongwith interest. While in respect of first period of dispute, penalty of equal amount was imposed, in the second period of dispute, penalty of Rs. 25,000/-was imposed. On appeal to Commissioner (Appeals), both the orders were upheld by two separate orders-in-appeal against which these appeals have been filed alongwith stay applications.

2. Heard both the sides in respect of stay applications.

3. Shri Anandh Venkataramani, Advocate, the learned Counsel for the appellant, pleaded that so far as the service of house-keeping and cleaning of the factory shed is concerned, the appellant in accordance with the provisions of section 11 of the Factories Act, 1948 are required to keep the factory clean and free from effluvia arising from any drain, privy or other nuisance and in particular the floor of every work room shall be cleaned at least once in every week, that in view of these provisions of Factories Act, keeping the factory shed neat and clean is statutory requirement and if the assessee fails to comply with these provisions, he will be liable for penalty under this Act, that in view of this, the service of house-keeping and cleaning has to be treated as service used in or in relation to the manufacture of final product as the same are direct nexus with the manufacture, that the service of event management had been availed for recognising the outstanding performance of some employees by honouring them in a function which is necessary for increasing the productivity and hence the same has to be treated as activity related to business, that as regards the legal service the same had been availed in connection with various tax disputes of the appellant, that this activity is also is covered by the expression "activity relating to business", that while w.e.f. the legal service is specifically covered by the definition of 'input service' in rule 2(l) of Cenvat Credit Rules, 2004, that in respect of the period prior to 1-4-2011, the Tribunal in the case of CCE v. Andhra Pradesh Paper Mills Ltd. 2010 (254) ELT 354 (Tri-Bang.) has held that the consultancy charges paid by the assessee to Chartered Accountant can be directly related to business, that in view of this, judgment during the period prior to 1-4-2011, the legal service availed by manufacturer has to be treated as related to manufacturing business, that the appellant, therefore, have a strong prima facie case and, hence, the requirement of pre-deposit of Cenvat credit demand, interest and penalty may be waived for hearing of their appeals and recovery thereof may be stayed till the disposal of the appeals.

4. Shri B.B. Sharma, the learned Departmental Representative, opposed the stay applications reiterating the findings of the Commissioner (Appeals) in the impugned order and pleaded that the services, in question, have no nexus with the manufacturing activity of the appellant and, hence, are not covered by the definition of input service. He, therefore, pleaded that these are not the cases for waiver from the requirement of pre-deposit.

5. I have carefully considered the submissions from both the sides and perused the record.

6. Prima facie, I find that so far as the service of house-keeping and cleaning availed in respect of the factory shed is concerned, keeping the factory neat and clean is a statutory requirement in terms of Section 11 of Factories Act, 1948 and, hence, this service has to be treated as service having direct nexus with the manufacture of the final product, as without compliance with the provisions of the Factories Act, no manufacturer can engage in the manufacturing activity. Therefore, the impugned order disallowing the Cenvat credit in respect of this service is not correct.

7. As regards the service of event management availed for organising functions for honouring the employees for their outstanding work, I am of the view that this activity being also meant to encourage the employees to increase their productivity had direct nexus with the manufacturing activity, as the same is meant to enhance the productivity of the personnel. Therefore, I am of prima facie view that this service is also covered by the definition of input service.

8. As regards the legal service for the period w.e.f. 1-4-2011, this service is specifically covered by definition of 'input service' and for the period prior to 1-4-2011, the Tribunal in case of Andhra Pradesh Paper Mills Ltd. (supra) has held that this service is an activity related to business and hence covered by the definition of 'input service'.

9. In view of the above discussion, I am of the prima facie view that the impugned orders denying the Cenvat credit in respect of the above-mentioned services are not correct and the appellant have strong prima facie case in their favour. Hence, the requirement of pre-deposit of Cenvat credit demands, interest thereon and penalty is waived for hearing of these appeals and recovery thereof is stayed till the disposal of the appeals. The stay applications are allowed.

IT : Where in support of loan transactions, assessee merely filed bank account details of alleged creditors, it could not be concluded that identity and capacity of creditors and genuineness of transactions were duly proved and, thus, addition made under section 68 in respect of loan amount was to be confirmed

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[2013] 36 taxmann.com 327 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'B'

Income-tax Officer

Gayatri Associates*

CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER

IT APPEAL NO. 1026 (HYD.) OF 2010
[ASSESSMENT YEAR 2005-06]

MARCH 11, 2013

Section 68 of the Income-tax Act, 1961 - Cash credits [Burden of proof] - Assessment year 2005-06- In course of assessment, Assessing Officer noticed that assessee had received unsecured loans from eight parties - Assessing Officer taking a view that loan transactions were not genuine, added said amount to assessee's taxable income under section 68 - It was apparent from records that in support of loan transactions, assessee had merely provided bank details of four parties and in such circumstances, Assessing Officer was not in position to make further enquiries - Whether an assessee is expected to establish identity of creditors, capacity of creditors and genuineness of transactions in order to discharge onus cast on it under section 68 - Held, yes - Whether by merely filing bank account details of alleged creditors, it could not be concluded that assessee had satisfied above ingredients and, therefore, impugned addition made by Assessing Officer was to be upheld - Held, yes [Para 12] [In favour of revenue]

FACTS

■		The assessee was engaged in the business of disposal of liquidated industrial undertakings. The Assessing Officer while completing assessment noticed that the assessee had received unsecured loans from the eight parties.
■		As the assessee failed to establish the identity, creditworthiness and genuineness of the transactions, the Assessing Officer treated the same as unexplained cash credit under section 68.
■		The Commissioner (Appeals) opined that as the assessee furnished details of all the eight parties along with cheque/demand draft details and bank account in respect of four parties and, it also explained circumstances under which the amount in question was received, impugned addition was not sustainable.
■		On revenue's appeal:

HELD

■		As per section 68 any cash credits which are not satisfactorily explained may be assessed as income. Where any sum is found credited in the books of account of the assessee, initial burden is on the assessee to offer an explanation of the nature and source of the cash credit. If the explanation is not found satisfactory or reasonable, the Assessing Officer can treat such money as the assessee's income from undisclosed sources. [Para 9]
■		In the instant case, the assessee furnished only details of bank account through which transaction took place only in respect of first four parties out of the 8 parties. In respect of remaining four parties, the assessee failed to submit any details. Even after considering this position, the Commissioner (Appeals) observed that the assessee has produced addresses of all the 8 parties and bank accounts of four parties of them and he is having no suspicion about the nature of credits. The Commissioner (Appeals) also recorded a finding that the assessee commenced its business only in the month of August, 2004 and the money received cannot be said as cash credits. This finding of the Commissioner (Appeals) is totally incorrect. [Para 10]
■		Under section 68 even in a case where an amount is credited on the very first day of the accounting year and the explanation offered by the assessee is not accepted, such amount may be assessed as income of the assessee of that accounting year for which the assessee maintained books of account.
■		Further, mere fact that some transactions which have taken place by cheque, it cannot be said that these transactions are genuine. It is the burden on the assessee to establish the identity of the creditors, capacity of the creditors to advance money and genuineness of the transaction. Once the assessee discharged the burden then the burden will shift to the Department. It is incorrect to state that the Assessing Officer is not entitled to reject the explanation of the assessee, if in his opinion the evidence produced by the assessee is not enough to believe that the transaction is genuine.
■		It is incumbent upon the assessee to prove that the credit entry in its books of account does not represent any income and that the party in whose name the amount is credited is not fictitious party but real, and the assessee is also required to prove that the entry made in the books of account is genuine.
■		Once the identity of the parties is established before the Assessing Officer by placing necessary evidence and the assessee proved that the entries are not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the creditors have given money to the assessee or how and why he received the advances from the parties.
■		As seen from the facts of the case, the assessee for the reasons best known to it, furnished only the bank account details of four parties and not furnished any details of the other four parties. In these circumstances, the Assessing Officer can make further enquiry and the argument of the assessee that it discharged the initial burden cast on it, is not correct. [Para 11]
■		In the present case, even assuming that the assessee has discharged the initial burden by proving the identity of the creditors and, therefore, the burden shifted to the department to show as to why the assessee's case should not be accepted, the Assessing Officer has no material to cause enquiry or to examine the creditors and for collecting relevant materials in support of the revenue's case.
■		The plea of the assessee that under section 68, it is not expected to establish the capacity of the creditors to advance money and genuineness of the transaction is not acceptable. The assessee is expected to establish proof of identity of the creditors, capacity of the creditors and genuineness of the transactions in order to discharge the onus cast on it. By merely filing bank account details of the alleged creditors, it was not enough to hold that the assessee had satisfied the above ingredients of section 68. [Para 12]
■		In view of the above, the order of the Commissioner (Appeals) has to be reversed and the order of the Assessing Officer has to be restored. [Para 13]
■		In the result, the appeal of the revenue is allowed. [Para 14]

CASES REFERRED TO

Mangilal Jain v. ITO [2009] 315 ITR 105 (Mad.) (para 6), Beerelli Damadar [IT Appeal No. 1648 of 2008, dated 9-4-2010] (para 6),CIT v. Bharat Engg. & Construction Com. [1972] 83 ITR 187 (SC) (para 7), A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC)(para 9) and R.B. Mittal v. CIT [2000] 246 ITR 283/112 Taxman 480 (AP) (para 13).

Smt. Amisha S. Gupt for the Appellant. S. Rama Rao for the Respondent.

ORDER

Chandra Poojari, Accountant Member - This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals), Tirupati, dated April 28, 2010 for the assessment year 2005-06.

2. The grievance of the Department in this appeal is with regard to deletion of addition of Rs. 64,00,000 made towards unexplained cash credits under section 68 of the Income-tax Act, 1961.

3. Brief facts of the issue are that the assessee is engaged in the business of disposal of liquidated industrial undertakings. The Assessing Officer while completing assessment under section 143(3) of the Act noticed that the assessee has received unsecured loans from the following parties :

S.No.	Name	Amount (Rs.)	Remarks
1.	Padmavathi	12,00,000	Loan
2.	K. Venubabu	8,00,000	Advance
3.	J. S. Chowdary	4,00,000	Advance
4.	P. Sailaja	1,61,335	Advance
5.	P. Sailal	6.38,665	Advance
6.	P. Sridevi	8,00,000	Advance
7.	Venkateswar Rao	16,00,000	Advance
8.	New Smile	8,00,000	Advance
	Total	64,00,000

4. As the assessee failed to establish the identity, creditworthiness and genuineness of the transactions before the Assessing Officer, the Assessing Officer treated the same as unexplained cash credit under section 68 of the Act.

5. On appeal, the Commissioner of Income-tax (Appeals) observed that the assessee furnished addresses and bank accounts of the respective parties. He observed that the Assessing Officer without examining the parties has rejected explanation of the assessee. According to the Commissioner of Income-tax (Appeals), the assessee has discharged the initial burden cast upon it. The Commissioner of Income-tax (Appeals) called for a remand report from the Assessing Officer. In the remand proceedings, the Assessing Officer confirmed the fact that the assessee has furnished bank accounts through which the transactions took place in respect of four parties out of 8 parties and in respect of the other four parties the assessee failed to produce bank accounts. After considering the remand report, the Commissioner of Income-tax (Appeals) observed that the assessee has commenced its business in August, 2004. The money received in the initial period cannot be treated as cash credits and it is a trade advance. He observed that the provisions of section 68 of the Act are not applicable and as the assessee has produced addresses of all the parties, identities of the parties is proved and also the bank accounts of four parties which did not reveal any suspicious features, therefore, section 68 of the Act is not applicable. Further, the Commissioner of Income-tax (Appeals) observed that as the assessee furnished details of all the eight parties along with cheque/ demand drafts details and also bank account in respect of four parties and also explained circumstances under which the cash credits were received, the Commissioner of Income-tax (Appeals) deleted the addition. Against the deletion of addition, the Revenue is in appeal before us.

6. The learned Departmental representative submitted that the assessee has not discharged the burden cast upon it with regard to identity and capacity of the parties and genuineness of the transactions. He submitted that bank statement for the complete year of those parties was not given. She also submitted that in those creditors' accounts cheque was issued to the assessee on the same day when the cash is deposited. According to her it gives the indication that these are accommodation transactions. She relied on the judgment of Madras High Court in the case of Mangilal Jain v. ITO [2009] 315 ITR 105. Further she submitted that in similar circumstances in the case of Beerelli Damadar in ITA No. 1648/Hyd/2008, the Tribunal vide order dated April 9, 2010 confirmed the addition made under section 68 of the Act by observing that even the credit entries in the accounts of the assessee in the first year was liable for addition under section 68 of the Act.

On the other hand, the learned authorised representative submitted that the assessee is mainly in the business of acquisition, dismantling and disposal of sick industrial undertakings in the open auction. The firm has been participating in the bidding process for disposal of sick units of M/s. Neyvelli Lignite Corporation, Chennai but the tender has gone in favour of M/s. Chitrahar Traders, Tirupur (CHT). Later CHT came into an under-standing with the firm on the condition of contributing Rs. 3 crores which would be adjusted against the disposal of material. As the assessee could not mobilise the entire Rs. 3 crores, as agreed, but only Rs. 2.36 crores, the CHT mobilised the balance amount from their known associates. Accordingly, the above 8 persons, as tabulated in the earlier paras, contributed Rs.64 lakhs. He submitted that the assessee has filed addresses of all the parties before the lower authorities and also bank accounts of four of them and established authenticity of the transactions. According to the authorised representative the assessee discharged the initial burden cast upon it and to prove it otherwise, the Assessing Officer shall bring the facts to show that the entries are bogus or accommodation entries. Further, he relied on the judgment of the Supreme Court in the case of CIT v. Bharat Engg. and Construction Co. [1972] 83 ITR 187 for the proposition that the assessee cannot derive huge profit within a few days of commencement of business and it is reasonable to presume that the cash entries are capital receipts and cannot be considered as unexplained cash credits under section 68 of the Act.

8. We have heard both parties and perused material on record. Section 68 of the Income-tax Act, 1961 reads as follows :

"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year."

9. As per section 68 any cash credits which are not satisfactorily explained may be assessed as income. Where any sum is found credited in the books of account of the assessee, initial burden is on the assessee to offer an explanation of the nature and source of the cash credit. If the explanation is not found satisfactory or reasonable, the Assessing Officer can treat such money as the assessee's income from undisclosed sources. It was held by the Supreme Court in the case of A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 that section 68 constitutes a charging provision which applies when the assessee's explanation regarding the cash credit is rejected as being unsatisfactory or when the assessee does not render any explanation. Section 68 provides that the Assessing Officer may bring to charge that sum as income of the previous year if (i) the sum is found credited in the books of the assessee for any previous year, (ii) the assessee offers no explanation about the nature of source of that sum, and (iii) the explanation is not, in the opinion of the Assessing Officer, satisfactory ; where the sum credited may be in the assessee's name or in the name of a third party, the assessee is liable to place necessary evidence in support of the claim to facilitate the Assessing Officer to cause the necessary enquiry. The Assessing Officer has every power to enquire into all the relevant facts brought on record by the assessee.

10. In the present case the assessee has taken a plea that the assessee has furnished requisite details to the Assessing Officer. But the facts brought on record by the Assessing Officer which is evidenced by the remand report dated February 4, 2010 placed at page 109 of the paper book shows that the assessee furnished only details of bank account through which transaction took place only in respect of first four parties out of the 8 parties tabulated in para 3 of this order. In respect of remaining four parties, the assessee failed to submit any details. Even after considering this position, the Commissioner of Income-tax (Appeals) observed that the assessee has produced addresses of all the 8 parties and bank accounts of four parties of them and he is having no suspicion about the nature of credits. The Commissioner of Income-tax (Appeals) also recorded a finding that the assessee commenced its business only in the month of August, 2004 and the money received cannot be said as cash credits. This finding of the Commissioner of Income-tax (Appeals) is totally incorrect.

11. First of all, the judgment relied on by the Commissioner of Income-tax (Appeals) in the case of Bharat Engg. & Construction Co.(supra) was delivered under the Income-tax Act, 1922. Under section 68 of the Income-tax Act even in a case where an amount is credited on the very first day of the accounting year and the explanation offered by the assessee is not accepted, such amount may be assessed as income of the assessee of that accounting year for which the assessee maintained books of account. Further some transaction, which have, taken place by cheque cannot be said that the transaction is genuine. It is the burden on the assessee to establish the identity of the creditors, capacity of the creditors to advance money and genuineness of the transaction. Once the assessee discharged the burden then the burden will shift to the Department. It is not correct to state that the Assessing Officer is not entitled to reject the explanation of the assessee, if in his opinion the evidence produced by the assessee is not enough to believe that the transaction is genuine. It is incumbent upon the assessee to prove that the credit entry in its books of account does not represent any income and that the party in whose name the amount is credited is not fictitious party but real, and the assessee is also required to prove that the entry made in the books of account is genuine. Once the identity of the parties is established before the Assessing Officer by placing necessary evidence and the assessee proved that the entries are not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the creditors have given money to the assessee or how and why he received the advances from the parties. As seen from the facts of the case, the assessee for the reasons best known to the assessee, furnished only the bank account details of four parties and not furnished any details of the other four parties. In these circumstances, the Assessing Officer cannot make further enquiry and the argument of the assessee's counsel that the assessee discharged the initial burden cast on it, is not correct.

12. In the present case, even assuming that the assessee has discharged the initial burden by proving the identity of the creditors and, therefore, the burden shifted to the Department to show as to why the assessee's case should not be accepted, we are of the opinion that the Assessing Officer has no material to cause enquiry or to examine the creditors and for collecting relevant materials in support of the Revenue's case. The plea of the authorised representative is devoid of merit. The plea of the authorised representative that under section 68 of the Act, the assessee is not expected to establish the capacity of the creditors to advance money and genuineness of the transaction is not acceptable. We are of the opinion that the assessee is expected to establish proof of identity of the creditors, capacity of the creditors and genuineness of the transactions in order to discharge the onus cast on the assessee. By merely filing bank account details of the alleged creditors, it is not enough to hold that the assessee has satisfied the above ingredients of section 68 of the Act.

13. Our view is fortified by the judgment of the jurisdictional High Court in the case of R. B. Mittal v. CIT [2000] 246 ITR 283/112 Taxman 480 (AP) wherein similar view has been taken. In view of the above discussion, we are inclined to reverse the order of the Commissioner of Income-tax (Appeals) and restore the order of the Assessing Officer.

14. In the result, the appeal of the Revenue is allowed.

IT: Where assessee society was engaged in providing services to public to facilitate them in obtaining different kinds of licences, ration card, marriage certificate etc., in view of fact that for said purpose assessee was charging service fee from its customers over and above prescribed amount, assessee's activity could not be considered as charitable in nature under section 2(15) and, therefore, its application seeking registration under section 12A was to be rejected

■■■

[2013] 36 taxmann.com 326 (Amritsar - Trib.)

IN THE ITAT AMRITSAR BENCH

Sukhmani Society for Citizen Services

Commissioner of Income-tax (No.2)*

H.S. SIDHU, JUDICIAL MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER

IT APPEAL NO. 297 (ASR.) OF 2012

APRIL 22, 2013

Section 2(15), read with section 12A, of the Income-tax Act, 1961 - Charitable/religious purpose [Object of general public utility] - Assessee-society was engaged in providing services to public to facilitate them in obtaining different kinds of licences, permission of registration like birth, death, marriage certificates, driving licences, ration cards, arms licences and senior citizen card, etc., by charging a fee for each type of services - Whether since assessee-society was charging service fee from customers for obtaining approval of competent authority over and above prescribed amount, such activity could not be considered charitable in nature within meaning of section 2(15) and consequently, assessee was not entitled to registration under section 12A - Held, yes [Paras 19 to 21] [In favour of revenue]

FACTS

■		The assessee society was engaged in providing services to the public to facilitate them in obtaining different kinds of licences, permission of registration like birth, death, marriage certificates, driving licences, ration cards, arms licences and senior citizen card, etc., but by charging a fee for each type of services.
■		It sought registration under section 12A on the ground that it was engaged in advancement of an object of general public utility.
■		The Commissioner held that the society was giving services to the general public by charging fees and thus it became an activity in the nature of a business and hence by virtue of amendment to section 2(15), the activity no longer fell in the ambit of the definition of section 2(15). Therefore, he refused to grant registration to the assessee-society.
■		On appeal:

HELD

■		The object of the assessee-society clearly mentions that it is charging service fee or user chargers from the customers for the approval of the competent authority and the concerned departments/ organizations over and above the prescribed bill amount/ fee/statutory fee for providing the services through Sukhmani Centres/financial institutions or franchisees. [Para 19]
■		Thus, this society has been established for maintaining the agencies and franchisees in the district to conduct business of the society, which clearly establishes that the present society is doing business with other agencies and franchisees in the district. No object of the society shows that the present society is doing any charitable activities for the general public utility.
■		Even otherwise the assessee-society has failed to establish before the Commissioner as well as before the Tribunal that the assessee-society is doing any charitable work keeping in view its object. Merely mentioning about various objects in the nature of charitable activities in the memorandum of association, does not mean that the society is doing any charitable activities as general public utility and is entitled for registration under section 12A(a) [Para 20]
■		Accordingly, it is held that the activities of the assessee-society are not charitable in nature within the meaning of provisions of section 2(15) and it does not qualify to be treated as charitable institution.
■		In the result, no interference is called for in the well reasoned order passed by the Commissioner. [Para 21]

CASES REFERRED TO

Sukhmani Society for Citizen Services v. CIT [2012] 139 ITD 307/27 taxmann.com 199 (Asr.) (para 9).

Nirmal Mahajan for the Appellant. Tarsem Lal for the Respondent.

ORDER

1. The assessee has filed the present appeal against the impugned order dated April 26, 2012 passed by the Commissioner of Income-tax-I, Jalandhar, on the following grounds :

"(i)		The Commissioner of Income-tax-I, Jalandhar, is wrong in rejecting the application of the assessee for registration under section 12AA of the Income-tax Act, 1961 and his order is against the law and facts of the case.
(ii)		Any other ground which may be raised at the time of hearing."

2. There is a delay of two days in filing the present appeal and the assessee has filed application dated August 27, 2012 requesting for condonation of delay of two days on the ground that the assessee had handed over the documents to his counsel for preparing the appeal well in time but the counsel being unwell could not prepare the appeal in time that led to the delay of two days in filing the present appeal. Therefore, the assessee requested to condone the delay of two days in filing the present appeal.

3. On the other hand, learned Departmental representative has not raised any objection on the request of the assessee's counsel.

4. Keeping in view the reasons mentioned by the assessee in the application for condonation of delay dated August 27, 2012, we are fully convinced with the same and condone the delay of two days in filling the present appeal by admitting the present appeal.

5. In the present case, the assessee-society was created on February 22, 2006 and got registered on the same day with the Additional Registrar of Societies, Nawanshahar. The assessee-society filed an application under section 12A(a) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") in the prescribed pro forma on November 29, 2011 for registration of the society along with certified copy of memorandum of articles of association, copy of audited accounts for the period ending March 31, 2009 and March 31, 2010, list of members of the managing committee and copy of the certificate of registration by the Additional Registrar of Societies.

6. The assessee stated that the society is engaged in providing service to the public to facilitate them in obtaining different kinds of licences, permission and registration like birth, death, marriage certificates, driving licenses, ration-cards, arms licences and senior citizen card, etc., but by charging a fee for each type of services. The fee is fixed by the regulatory authority of the Government of Punjab. The assessee further stated that at present the society is running nine centres and the head office is at Nawanshahar and the branch offices are at Banga, Balachaur, Rahon, Aur, Mukandpur, Saroya, Sahiba and Kathgarh. The assessee-society is engaged in advancement of an object of general public utility and hence it requested for registration under section 12A(a) of the Act.

7. After examining the contents of the application along with the documentary evidence filed by the assessee-society, the learned Commissioner of Income-tax-I, Jalandhar, held that in view of the amendment to section 2(15) of the Act which has taken place with effect from April 1, 2009 and as per which, an object of general public utility which involves carrying on of an activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity has ceased to be a charitable purpose. The learned Commissioner of Income-tax-I, Jalandhar, further held that the society is giving services by charging fees and thus it becomes an activity in the nature of a business and hence by virtue of this amendment, the activity no longer falls in the ambit of the definition of section 2(15) of the Act. Therefore, he refused to grant registration to the assessee-society vide his impugned order dated April 26, 2012.

8. Being aggrieved with the impugned order dated April 26, 2012, the assessee filed the present appeal.

9. At the time of hearing, the learned Departmental representative, Sh. Tarsem Lal, raised the a preliminary objection that exactly a similar issue came up for hearing before this Bench, i.e., Sukhmani Society for Citizen Services v. CIT [2012] 139 ITD 307/27 taxmann.com 199 (Asr), and this Bench vide its order dated September 26, 2012, has decided the issue in dispute against the assessee by dismissing the appeal filed by the assessee-society. Thus, the learned Departmental representative requested that the present appeal filed by the assessee may also be dismissed on the similar terms.

10. Learned counsel for the assessee-society relied upon his written submission dated April 3, 2013 and stated that the present appeal may be decided after considering his written submission.

11. We have heard both the parties and perused the relevant records available with us which includes small paper book filed by the assessee containing pages from 1 to 47 in which the assessee has attached the copy of form No. 10A; copy of certificate of registration of societies; copy of memorandum of association; copy of rules of society; copy of auditor's report, balance sheet and income and expenditure account for the period ended March 31, 2009 ; copy of auditor's report, balance sheet and income and expenditure account for the period ended on March 31, 2010; copy of the auditor's report, balance sheet and income and expenditure account for the period ended on March 31, 2011; copy of reply dated April 19, 2012 and copy of order under section 12AA(a)(b)(i) of the Income-tax Act, dated September 26, 2007.

12. We have thoroughly gone through the written submission filed by learned counsel for the assessee along with the decision of this Bench cited by him, i.e., Sukhmani Society for Citizen Services (supra). As stated by the learned Departmental representative that this Bench exactly in a similar issue, which came up for hearing, had decided the issue against the assessee by dismissing the appeal filed by the assessee-society, we are of the view that the facts and circumstances of the present case as well as the case cited above by the learned Departmental representative, i.e., Sukhmani Society for Citizen Services (supra), are almost similar and this Bench has already adjudicated almost similar written submission filed by the assessee-society and decided the issue in dispute against the assessee.

13. Learned counsel for the assessee has also not distinguished the decision of this Bench passed in I. T. A. No. 551(Asr)/2011 on September 26, 2012 in his written submission. As stated above, learned counsel for the assessee has attached the income and expenditure account for the period ending on March 31, 2009; March 31, 2010 and March 31, 2011, particulars and amounts of income earned and the expenditure incurred by the assessee-society. For the sake of convenience, income and expenditure accounts for the years ending on March 31, 2009; March 31, 2010 and March 31, 2011, are reproduce below :

Suwidha Society D. C. Office, Nawanshahr

Income and expenditure account

For the year ending on 31st March, 2009

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To advertisement	38,406.00	By affidavit attestation fee	15,48,660.00
To bank charges	700.00	By Airtel bill fees	115.00
To cleaning and sanitation	25,943.00	By arms licence fee	4,03,600.00
To data entry charges	4,10,290.00	By attestation document fee	1,73,195.00
To depreciation	23,28,629.67	By attestation of marriage document	1,06,905.00
To diesel expenses	1,16,743.00	By birth and death certificate	18,30,383.00
To electricity expenses	7,89,289.00	By character verification certificate	4,730.00
To form contract fee	1,35,000.00	By copying tehsil fee	29,380.00
To insurance charges	19,954.00	By copy of public grievances fee	13,790.00
To intt. on bank loan	15,255.00	By countersign	7,79,960.00
To intt. on PLRS loan	9,301.00	By D.S.S.O.	154.00
To misc. exp.	17,564.00	By DTO office Nawanshahr	79,056.00
To paper and periodicals	33,432.00	By electricity bill charges fee	1,93,600.00
To photostat expenses	1,526.00	By forms sale	12,51,359.00
To POL (vehicles)	1,79,422.00	By group photo of marriage	98,500.00
To postage expenses	2,38,847.00	By late entry of court order	6,280.00
To printing of forms	2,17,752.00	By licence for stamp vendor	200.00
To rent paid	3,60,000.00	By licence for fertilizer (Agri.)	19,970.00
To repair and maintenance (vehicles)	14,196.00	By loud speaker fee (SDM)	45,610.00
To repair and maintenance	1,40,758.00	By marriage certificate (Tehsildar)	9,86,300.00
To salary	30,02,571.00	By miscellaneous branch fee	1,08,550.00
To stationery	8,34,840.00	By NOC for building plan	31,500.00
To tea material	73,185.00	By non-encumbrance certificate	1,24,740.00
To telephone expenses	1,30,445.00	By passport fee	9,30,200.00
To uniform expenses	22,000.00	By photo counter (passport size)	3,175.00
To surplus (excess of income over expenditure)	32,61,772.97	By photostat fee	17,733.00
		By police clearance certificate fees	99,600.00
		By ration card fee	23,920.00
		By rent received	84,600.00
		By special marriage (DC) Sannat	34,200.00
		STD PCO telephone charges	7,484.00
		By sub copying agency fee	63,260.00
		By Suwidha Centre Aur.	48,969.00
		By Suwidha Centre Balachaur	17,41,021.00
		By Suwidha Centre Banga	605,798.00
		By Suwidha Centre Kathgarh	69,390.00
		By Suwidha Centre Mukandpur	75,145.00
		By Suwidha Centre Rahon	1,29,937.00
		By Suwidha Centre Sahiba	74,604.00
		By Suwidha Centre Saroya	86,659.00
		By tea charges fees	80,853.00
		By service charges	3,24,725.00
		By typing document fee	38,093.00
		By water supply connection fee	12,780.00
		By misc. income	4,100.00
		By bank interest	3,183.64
		By commission (profit) from stamp paper sale	21,855.00
	1,24,17,821.64		1,24,17,821.64

Date : 29-06-2009

Place : Nawanshahr

Sd/./-

In-charge

Sd/./-

Member Secretary

Sd/./-

President

Auditors Report

As per our report of even date

For Yogesh Ramesh & Associates

Chartered Accountant

Sd/./-

(Yogesh Kumar)

(Prop.)

Suwidha Society D. C. Office, Nawanshahr

Income and expenditure account

For the year ending on 31st March, 2010

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To advertisement To audit fee	46,655.00 15,000.00	By affidavit attestation fee By arms licence fee	14,04,960.00 3,82,730.00
To bank charges	39,971.00	By attestation document fee	1,76,650.00
To cleaning & sanitation	10,530.00	By attestation of marriage document	95,250.00
To depreciation	20,25,082.00	By birth and death certificate	13,83,366.00
To diesel expenses	25,013.00	By copying tehsil fee	25,870.00
To electricity expenses	5,03,051.00	By copy of public grievances fee	8,900.00
To form contract fee	1,70,000.00
To head office PSEG	45,85,336.00	By countersign	5,64,810.00
To insurance charges	15,775.00	By DTO office Nawanshahr	3,01,947.00
To intt. on bank loan	19,722.00	By electricity bill charges fee	2,60,775.00
To misc. expenses	14,933.00	By forms sale	13,10,209.00
To paper and periodicals	7,236.00	By group photo of marriage	93,850.00
To photostat expenses	4,993.00	By late entry of court order	5,070.00
To POL (vehicles)	1,52,048.00	By licence for fertilizer (Agri.)	15,500.00
To postage expenses	1,44,305.00
To printing of forms	1,64,716.00	By loud speaker fee (SDM)	32,710.00
To profession charges	10,000.00	By marriage certificate (Tehsildar)	9,38,000.00
To provident fund	12,16,960.00
To rent paid	2,40,000.00	By miscellaneous branch fee	97,680.00
To repair & maintenance	1,30,444.00	By NOC for building plan	28,000.00
To salary	33,35,820.00	By non-encumbrance certificate	1,17,930.00
To stationery	6,27,350.00	By passport fee	4,68,800.00
To tea material	89,039.00	By photo counter (passport size)	1,700.00
To telephone expenses	80,749.00	By photostat fee	20,992.00
		By police clearance certificate fees	68,910.00
		By ration card fee	29,020.00
		By rent received	2,38,000.00
		By special marriage (DC) Sannat	26,220.00
		By sub copying agency fee	42,590.00
		By Suwidha Centre Aur.	55,413.00
		By Suwidha Centre Balachaur	17,33,367.00
		By Suwidha Centre Banga	4,54,325.00
		By Suwidha Centre Kathgarh	45,205.00
		By Suwidha Centre Mukandpur	88,600.00
		By Suwidha Centre Rahon	1,13,492.00
		By Suwidha Centre Sahiba	95,454.00
		By Suwidha Centre Saroya	1,31,023.00
		By tea charges fees	1,07,797.00
		By services charges -(Tehsil)	2,78,731.00
		By typing document fee	33,215.00
		By water supply connection fee	20,820.00
		By Misc. income	8,067.00
		By bank interest	132.00
		By commission (profit) from stamp paper sale	28,756.00
		By deficit (being excess of exp. over income)	23,39,892.00
	1,36,74,728.00		1,36,74,728.00

Date : 25-08-2010

Place : Nawanshahr

Sd/./-

In-charge

Sd/./-

Member Secretary

Sd/./-

President

Auditors Report

As per our report of even date

For Yogesh Romesh & Associates

Chartered Accountant

Sd/./-

(Yogesh Kumar)

(Prop.)

Suwidha Society for Citizen Services D. C. Office, Nawanshahr

Income & expenditure account

For the year ending on 31st March, 2011

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To advertisement	38,806.00	By advertisement income	45,000.00
To audit fee	15,000.00	By affidavit attestation fee	8,70,278.00
To bank charges	1,571.00	By arms licence fee	3,89,258.00
To cleaning and sanitation	40,938.00	By attestation document fee	1,01,825.00
To depreciation	16,68,525.00	By attestation of marriage document	82,762.00
To diesel expenses	11,658.00
To electricity expenses	9,13,602.00	By birth and death certificate	8,85,828.00
To entertainment	3,693.00	By copying tehsil fee	23,421.00
To form contract fee	4,95,000.00	By copy of public grievances fee	9,478.00
To head office PSEG	9,09,577.00
To insurance charges	14,428.00	By countersign	5,96,641.00
To int. on bank loan	2,08,079.00	By DTO office Nawanshahr	1,00,000.00
To legal fee	10,000.00	By electricity bill charges fee	2,00,215.00
To misc. expenses	18,699.00	By forms sale	14,68,144.00
To paper and periodicals	13,660.00	By group photo of marriage	83,702.00
To POL (vehicles)	1,94,905.00	By late entry of court order	36,842.00
To postage expenses	1,68,860.00	By licence for fertilizer (Agri.)	16,390.00
To printing of forms	1,71,239.00
To provident fund	5,13,891.00	By loud speaker fee (SDM)	29,243.00
To registration ISO	41,362.00	By marriage certificate (Tehsildar)	8,42,362.00
To rent paid	2,30,000.00
To repair and maintenance	2,39,174.00	By miscellaneous branch fee	1,66,826.00
To repair and maintenance (vehicle)	20,594.00
By NOC for building plan	22,099.00
To salary	37,71,732.00	By non-encumbrance certificate	74,971.00
To stationery	6,21,265.00
To tea material	43,050.00	By passport fee	3,36,257.00
To telephone expenses	1,32,620.00	By photo counter (passport size)	1,468.00
To travelling & conveyance	1,00,750.00	By photostat fee	38,550.00
To TDS on FDR	52,770.00	By police clearance certificate fees	58,670.00
		By ration card fee	14,334.00
		By rent received	2,96,300.00
		By special marriage (DC) Sannat	34,008.00
		By sub copying agency fee	41,674.00
		By Suwidha Centre Aur.	55,891.00
		By Suwidha Centre Balachaur	12,46,310.00
		By Suwidha Centre Banga	4,48,558.00
		By Suwidha Centre Kathgarh	57,710.00
		By Suwidha Centre Mukandpur	1,02,750.00
		By Suwidha Centre Rahon	84,650.00
		By Suwidha Centre Sahiba	1,11,543.00
		By Suwidha Centre Saroya	1,33,823.00
		By tea charges fees	70,481.00
		By services charges (Tehsil)	3,00,673.00
		By typing document fee	10,052.00
		By water supply connection fee	7,944.00
		By misc. income	6,212.00
		By bank interest	4,27,305.27
		By commission (profit) from stamp paper sale	32,937.00
		By deficit (being excess of exp. over income)	7,52,052.73
	1,06,65,448.00		1,06,65,448.00

Date : 5-07-2011

Place : Nawanshahr

Sd/./-

In-charge

Sd/./-

Member Secretary

Sd/./-

President

Auditors Report

As per our report of even date

For Yogesh Romesh & Associates

Chartered Accountant

Sd/./-

(Yogesh Kumar)

(Prop.)

14. We have also perused the income and expenditure accounts which are reproduced above as well as the impugned order along with the relevant provisions of section 12AA and section 2(15) of the Act. For the sake of convenience, the provision of section 12AA and section 2(15) of the Act are reproduced as under :

"Section 12AA. (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of sub-section (1) of section 12A, shall—

(a)		call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deemed necessary in this behalf ; and
(b)		after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he-

(i)		shall pass an order in writing registering the trust or institution ;
(ii)		shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and copy of the such order shall be sent to the applicant.

Section 2(15) : 'charitable purpose' includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility."

15. Keeping in view the aforesaid discussion as per record as well as the documentary evidence given by the assessee, we find that the assessee-society was created on February 22, 2006 and got registered on the same day with the Additional Registrar of Societies, Nawanshahr. The assessee-society filed an application under section 12A(a) of the Act in the prescribed pro forma on November 29, 2011 for registration of society along with certified copy of memorandum of articles of association, copy of audited accounts for the period ending March 31, 2009 and March 31, 2010. The assessee itself stated that the society is engaged in providing services to the public to facilitate them in obtaining different kinds of licences, permission of registration like birth, death, marriage certificates, driving licences, ration cards, arms licences and senior citizen card, etc. but by charging a fee for each type of services. This fee is fixed by the regulatory authority of the Government of Punjab. As per the argument advanced by learned counsel for the assessee that the society is engaged in advancement of an object of general public utility and hence it is entitled for registration under section 12A(a) of the Act. But keeping in view the amendment of section 2(15) of the Act that has taken place with effect from April 1, 2009, according to which, an object of general public utility which involves carrying on of an activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity has ceased to be a charitable purpose. In the present case, there is no doubt that the assessee-society is giving services but by charging fees. It is pertinent to mention here that the assessee's counsel has not filed any chart of services and charges against the services rendered by the society but as we stated above that the facts of the present case and the facts of the case of Sukhmani Society for Citizen Services (supra), are similar. In the case of Sukhmani Society for Citizen Services (supra), the assessee's counsel has filed a chart of services and charges against the services rendered by the society that are about 36 in number. For the sake of convenience, a chart of 17 services rendered by the society and the charges taken by the society is reproduced hereunder (page 448) :

Sukhmani Society for Citizen Services v. CIT, Bathinda ITA No. 551/ASR-2011
Service		Facili. charges	Time frame	Financial year 2008-09		Financial year 2009-10		Financial year 2010-11
Service		Rs.	Days	No. of cases	% age of total	No. of cases	% age of total	No. of cases	% age of total
1	Issuance of nationality certificate	20	15	0	0	0	0.00%	11856	24.70%
2	Issuance of birth certificate	20	7	5001	32.46%	5419	11.62%	7462	15.55%
3	Driving licences related services	20	7	0	0.00%	20041	42.96%	7326	15.26%
4	Arm licences related services	500	45	4282	27.79%	5855	12.55%	5173	10.78%
5	Issuance of affidavits	20	same day	1036	6.72%	4258	9.13%	5011	10.44%
6	Registration of vehicle services	100	5	0	0.00%	6096	13.07%	4675	9.74%
7	Issuance of copy of a document	30	7	1473	9.56%	1257	2.69%	1904	3.97%
8	Issuance of death certificate	20	7	975	6.33%	951	2.04%	1577	3.29%
9	Submission of passport applications	100	20	2101	13.63%	1654	3.55%	1282	2.67%
10	Agriculture related	100	30	274	1.78%	779	1.67%	614	1.28%
11	Non-encumbrance certificate	20	0	0	0.00%	0	0.00%	374	0.78%
12	Form selling	0	0	0	0.00%	0	0.00%	160	0.33%
13	Issuance of surety bonds	50	same day	5	0.03%	29	0.06%	151	0.31%
14	Registration of marriage	500	same day	60	0.39%	88	0.19%	63	0.13%
15	Others	0	0	202	1.31%	218	0.47%	373	0.78%
16	NOC of petrol pump	1000	40	0	0.00%	0	0.00%	0	0.00%
17	NOC for building plan	500	30	0	0.00%	0	0.00%	0	0.00%
	Total			15409		46645		48001

(Counsel for the assessee)

(appellant)

16. A perusal of the above chart shows that the assessee-society charges as much as Rs. 1,000 for issuing NOC for petrol pump, Rs. 500 for registration of marriage, Rs. 500 for NOC on building plan and so on. It is pertinent to mention here that these charges are in addition to the statutory fees charged by the State Government Departments. These charges/fees are charged by the applicant for providing the alleged citizens services.

17. Learned counsel for the assessee has also filed balance sheet of March 31, 2009 to March 31, 2011 in which the assessee-society has shown liabilities and assets as well as income and expenditure accounts for the year ending March 31, 2009 to March 31, 2011. After going through the balance-sheet as well as income and expenditure accounts of the assessee for three years mentioned above, we have not found any expenditure incurred by the society on charitable public utility works. Almost, all the expenditures have been incurred by the assessee-society on printing and stationery, salary to their employees, bank expenditure, computer repair, audit fee, electricity bill, telephone, electric repair, travelling, miscellaneous expenditure, postage, etc.

18. As per section 12AA of the Act, learned Commissioner of Income-tax-I, Jalandhar, on receipt of an application for registration, can call for such documents or information from the present society as he thinks necessary in order to satisfy himself about the genuineness of the activities of the society and may also make such inquiries as he may deem necessary in this behalf. If the learned Commissioner of Income-tax-I, Jalandhar, is satisfied himself of the objects of the trust of this society and genuineness of its activities, he shall pass an order in writing registering the present society and if he is not satisfied then he shall pass an order in writing refusing to register the society after giving reasonable opportunity of being heard. In the present case, the learned Commissioner of Income-tax-I, Jalandhar, is fully satisfied that keeping in view the amendment of section 2(15) of the Act which has taken place with effect from April 1, 2009 as per which, an object of general public utility which involves carrying on of an activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity has ceased to be a charitable purpose. The learned Commissioner of Income-tax-I, Jalandhar, held that the society is giving services to the general public by charging fees and thus it becomes an activity in the nature of a business and hence by virtue of this amendment, the activity no longer falls in the ambit of the definition of section 2(15) of the Act. Therefore, he refused to grant registration to the assessee-society.

19. We have also thoroughly gone through the object of the assessee-society which clearly mentions that the assessee society is charging service fee or user chargers from the customers for the approval of the competent authority and the concerned departments/organisations over and above the prescribed bill amount/fee/statutory fee for providing the services through Sukhmani Centres/financial institutions or franchisees. For the sake of convenience, one of the main objects of the society from the written submission dated April 3, 2013, i.e., (e) is reproduced as under :

"(e) To work out and recommend the service fee or user charges that could be charted from the end customers for the approval of the competent authority and concerned departments/organisations over and above the prescribed bill amount/fee/statutory fee for providing the services through Sukhmani centres/financial institutions or franchisees."

20. Keeping in view the aforesaid object of the society, we are of the view that this society has been established for maintaining the agencies and franchisees in the district to conduct business of the society, which clearly establishes that the present society is doing business with other agencies and franchisees in the district. We have not seen any object of the society which shows that the present society is doing any charitable activities for the general public utility. Even otherwise the assessee-society has failed to establish before the Commissioner of Income-tax-I, Jalandhar, as well as before us that the assessee-society is doing any charitable work keeping in view its object. Merely mentioning about various objects in the nature of charitable activities in the memorandum of association, does not mean that the society is doing any charitable activities as general public utility and is entitled for registration under section 12A(a) of the Act.

21. Keeping in view of the aforesaid discussion, we are of the considered view that the activities of the assessee-society are not charitable in nature within the meaning of provisions of section 2(15) of the Act and it does not qualify to be treated as charitable institution. Since the assessee has not established that its society is formed with objects of any charitable purpose, then the question of discussion of citation relied upon by the assessee's counsel does not arise, even otherwise these judgments are different from the facts of present case and are not helpful to the society. The present society is doing its business and charging huge fees from the public which is in addition to the prescribed fee of the Punjab Government. Even otherwise, the fees charged by the present society are in addition to the burden forced upon the common man. Because of this, service has to be rendered by the Punjab Government free of cost to the public against the fee prescribed in the chart as reproduced in the foregoing paragraphs. We are of the considered opinion that no interference is called for in the well reasoned order passed by the learned Commissioner of Income-tax-I, Jalandhar. Therefore, we uphold the impugned order dated April 26, 2012 by dismissing the present appeal filed by the assessee-society.

22. In the result, the appeal filed by the assessee-society is dismissed.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

__._,_.___

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Chartered Accountant Finance

Wednesday, September 4, 2013

[aaykarbhavan] Judgments

Additional Depreciation can not be denied on the ground that electricity is not an article or thing

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