IT: No additions merely due to lower GP ratio if no defect was pointed out in provisional audit report
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[2013] 39 taxmann.com 106 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax-I
v.
U.P. State Food & Essential Commodities*
RAJIV SHARMA AND DR. SATISH CHANDRA, JJ.
IT APPEAL NO. 64 OF 2008†
SEPTEMBER 10, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of profit [Lower G.P. rate] - Assessment year 2002-03 - Assessee-Government undertaking was engaged in purchase and supply of essential commodities on rate cheaper than market rate, showed continuous decline in G.P. rate for last few years on ground that fuel and mandi charges were escalating - This contention was not verified - Though in provisional audit report, no defect had been pointed out, Assessing Officer made addition taking G.P. rate of previous year - Whether estimation of G.P. rate was a question of fact; neither could lower GP rate be ground for rejection of books nor any addition could be made merely on basis of it - Held, yes [Para 7] [In favour of assessee]
CASES REFERRED TO
Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj. & Har.) (para 5), Hargopal Singh v. CIT [2005] 273 ITR 507/[2004] 141 Taxman 207 (Punj. & Har.) (para 7), Kansara Bearings (P.) Ltd. v. Asstt. CIT [2004] 270 ITR 235/[2003] 132 Taxman 63 (Raj.) (para 7), International Forest Co. v.CIT [1975] 101 ITR 721 (J&K) (para 7) and Motiram v. CIT [1984] 149 ITR 786 (MP) (para 7).
D.D. Chopra for the Appellant. S.C. Dixit for the Respondent.
ORDER
Dr. Satish Chadra, J. - Present Appeal is filed by the department under Section 260A of the Income-tax Act, 1961, against the judgment and order dated 07.09.2007 passed by the Income Tax Appellate Tribunal, Lucknow in I.T.A. No.591/Luck/2006 for the assessment year 2002-03.
2. On 19.02.2008, a co-ordinate Bench of this Court has admitted the instant appeal on the following substantial questions of law:
| "i. | Whether on the facts and in the circumstances of the case Income-tax Appellate Tribunal was justified in deleting the additions made by the Assessing Officer on the unaudited provisional profit and loss account and the balance sheet, by taking instance of the gross profit rate of the earlier year prompted by the unverifiable substantial increase in certain expenses, especially when such finding of the Assessing Officer has not been controverted by the Income Tax Appellate Tribunal ? | |
| ii. | Whether on the facts and in the circumstances of the case where audited profit and loss account and the balance sheet in compliance to the section 44AB of the Income-tax Act, 1961 has not been filed, no addition on account of low gross profit rate can be made especially when the assessee has no details to establish the veracity of abnormal increase in certain expenses ?" |
3. The brief facts of the case are that the assessee is a Government undertaking and is engaged in the purchase and supply of essential commodities to the peoples on rates cheaper than the market rate through its units located in various parts of the State. For the assessment year under consideration, the A.O. found that the G. P. Rate shown by the assessee is 0.96% as against 1.16% of the earlier assessment years. So, the A.O. has made the additions of Rs.2,56,64,318/-. The First Appellate Authority has given a partial relief to the assessee. However, the Tribunal has deleted the said addition. Being aggrieved, the department has filed the present appeal.
4. With this background, Sri D. D. Chopra, learned counsel for the department has justified the order passed by the A.O. He, at the strength of the written statement, submits that in the earlier financial years i.e. 1998-99; 1999-2000; 2000-01; 2001-02, the G. P. rates were 1.13%; 1.30%; 1.16% and 0.96% and, as such, in every year, the G.P. Rate is declining. He also submits that the audit report under section 44AB has not been filed and the G.P. Rate shown by the assessee was on lower side. He further submits that the profit and loss account and balance-sheet were provisional and the assessee was unable to provide various documents to prove his submission. Lastly, he justified the impugned order.
5. On the other hand, Sri S.C. Dixit, learned counsel for the assessee has justified the order passed by the Tribunal. He submits that the provisional audit reports were furnished and the accounts were also audited under the Companies Act and the copies were submitted. He also submits that the assessee is a Government undertaking. The auditors will have to be appointed by the Government. So, the provisional audit report was submitted and no defect was found. To support his argument, he relied on the ratio laid down in the case of Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj. & Har.).
6. After hearing both the parties and on perusal of record, it appears that the books of account were not rejected in the instant case. However, the A.O. has taken the G.P. Rate of the previous years. The G. P. Rate was declining every year due to escalation in the fuel charges i.e. Petrol, Diesel etc. and also Mandi Fee.
7. Needless to mention that estimation of the G.P. Rate is a question of fact and no substantial question of law arose as per the ratio laid down in the cases of Hargopal Singh v. CIT [2005] 273 ITR 507/[2004] 141 Taxman 207 (Punj. & Har.); and Kansara Bearing (P.) Ltd. v. Asstt. CIT [2004] 270 ITR 235/[2003] 132 Taxman 63, (Raj.).The lower G.P. Rate never attracts the addition and it cannot be a ground for rejection of the books as per the ratio laid down in the cases of International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) as well as Moti Ram v. CIT [1984] 149 ITR 786 (M.P.)
8. Moreover, in the instant case, provisional audit reports were filed and the A.O. has not pointed out any defect. Reasons for lower G.P. Rate were given but the same were not examined by the A.O. When it is so, then we find no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein.
9. The answer to the substantial question of law is in favour of the assessee and against the department.
In the result, the appeal filed by the department is dismissed.
IT: No additions merely due to lower GP ratio if no defect was pointed out in provisional audit report
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[2013] 39 taxmann.com 106 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax-I
v.
U.P. State Food & Essential Commodities*
RAJIV SHARMA AND DR. SATISH CHANDRA, JJ.
IT APPEAL NO. 64 OF 2008†
SEPTEMBER 10, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of profit [Lower G.P. rate] - Assessment year 2002-03 - Assessee-Government undertaking was engaged in purchase and supply of essential commodities on rate cheaper than market rate, showed continuous decline in G.P. rate for last few years on ground that fuel and mandi charges were escalating - This contention was not verified - Though in provisional audit report, no defect had been pointed out, Assessing Officer made addition taking G.P. rate of previous year - Whether estimation of G.P. rate was a question of fact; neither could lower GP rate be ground for rejection of books nor any addition could be made merely on basis of it - Held, yes [Para 7] [In favour of assessee]
CASES REFERRED TO
Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj. & Har.) (para 5), Hargopal Singh v. CIT [2005] 273 ITR 507/[2004] 141 Taxman 207 (Punj. & Har.) (para 7), Kansara Bearings (P.) Ltd. v. Asstt. CIT [2004] 270 ITR 235/[2003] 132 Taxman 63 (Raj.) (para 7), International Forest Co. v.CIT [1975] 101 ITR 721 (J&K) (para 7) and Motiram v. CIT [1984] 149 ITR 786 (MP) (para 7).
D.D. Chopra for the Appellant. S.C. Dixit for the Respondent.
ORDER
Dr. Satish Chadra, J. - Present Appeal is filed by the department under Section 260A of the Income-tax Act, 1961, against the judgment and order dated 07.09.2007 passed by the Income Tax Appellate Tribunal, Lucknow in I.T.A. No.591/Luck/2006 for the assessment year 2002-03.
2. On 19.02.2008, a co-ordinate Bench of this Court has admitted the instant appeal on the following substantial questions of law:
| "i. | Whether on the facts and in the circumstances of the case Income-tax Appellate Tribunal was justified in deleting the additions made by the Assessing Officer on the unaudited provisional profit and loss account and the balance sheet, by taking instance of the gross profit rate of the earlier year prompted by the unverifiable substantial increase in certain expenses, especially when such finding of the Assessing Officer has not been controverted by the Income Tax Appellate Tribunal ? | |
| ii. | Whether on the facts and in the circumstances of the case where audited profit and loss account and the balance sheet in compliance to the section 44AB of the Income-tax Act, 1961 has not been filed, no addition on account of low gross profit rate can be made especially when the assessee has no details to establish the veracity of abnormal increase in certain expenses ?" |
3. The brief facts of the case are that the assessee is a Government undertaking and is engaged in the purchase and supply of essential commodities to the peoples on rates cheaper than the market rate through its units located in various parts of the State. For the assessment year under consideration, the A.O. found that the G. P. Rate shown by the assessee is 0.96% as against 1.16% of the earlier assessment years. So, the A.O. has made the additions of Rs.2,56,64,318/-. The First Appellate Authority has given a partial relief to the assessee. However, the Tribunal has deleted the said addition. Being aggrieved, the department has filed the present appeal.
4. With this background, Sri D. D. Chopra, learned counsel for the department has justified the order passed by the A.O. He, at the strength of the written statement, submits that in the earlier financial years i.e. 1998-99; 1999-2000; 2000-01; 2001-02, the G. P. rates were 1.13%; 1.30%; 1.16% and 0.96% and, as such, in every year, the G.P. Rate is declining. He also submits that the audit report under section 44AB has not been filed and the G.P. Rate shown by the assessee was on lower side. He further submits that the profit and loss account and balance-sheet were provisional and the assessee was unable to provide various documents to prove his submission. Lastly, he justified the impugned order.
5. On the other hand, Sri S.C. Dixit, learned counsel for the assessee has justified the order passed by the Tribunal. He submits that the provisional audit reports were furnished and the accounts were also audited under the Companies Act and the copies were submitted. He also submits that the assessee is a Government undertaking. The auditors will have to be appointed by the Government. So, the provisional audit report was submitted and no defect was found. To support his argument, he relied on the ratio laid down in the case of Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj. & Har.).
6. After hearing both the parties and on perusal of record, it appears that the books of account were not rejected in the instant case. However, the A.O. has taken the G.P. Rate of the previous years. The G. P. Rate was declining every year due to escalation in the fuel charges i.e. Petrol, Diesel etc. and also Mandi Fee.
7. Needless to mention that estimation of the G.P. Rate is a question of fact and no substantial question of law arose as per the ratio laid down in the cases of Hargopal Singh v. CIT [2005] 273 ITR 507/[2004] 141 Taxman 207 (Punj. & Har.); and Kansara Bearing (P.) Ltd. v. Asstt. CIT [2004] 270 ITR 235/[2003] 132 Taxman 63, (Raj.).The lower G.P. Rate never attracts the addition and it cannot be a ground for rejection of the books as per the ratio laid down in the cases of International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) as well as Moti Ram v. CIT [1984] 149 ITR 786 (M.P.)
8. Moreover, in the instant case, provisional audit reports were filed and the A.O. has not pointed out any defect. Reasons for lower G.P. Rate were given but the same were not examined by the A.O. When it is so, then we find no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein.
9. The answer to the substantial question of law is in favour of the assessee and against the department.
In the result, the appeal filed by the department is dismissed.
IT: Interest relating to pre-construction period of house property is not part of cost of acquisition but allowable under section 24(b)
IT : Assessee living with his wife in house occupied by her and paying rent to her through bank transfers would be entitled to exemption under section 10(13A)
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[2013] 37 taxmann.com 186 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'C'
Bajrang Prasad Ramdharani
v.
Assistant Commissioner of Income-tax, Circle -14, Ahmedabad*
A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
IT APPEAL NO. 715 (AHD.) OF 2013
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
JULY 12, 2013
I. Section 55, read with section 24, of the Income-tax Act, 1961 - Capital gains - Cost of acquisition [Interest on pre-construction period] - Assessment year 2009-10 - Whether interest of pre-construction period of house property cannot form part of cost of acquisition for computing gain on sale of that property but would be allowable as deduction under section 24(b) - Held, yes [para 5][In favour of assessee]
II. Section 10(13A) of the Income-tax Act, 1961 - House rent allowance [Conditions precedent] - Assessment year 2009-10 - Assessee's claim for exemption under section 10(13A) was disallowed on ground that rent was paid by assessee as tenant to his wife who was landlord and both were living together - Whether since house was owned by wife of assessee and assessee had paid rent to her through bank transfer entry, assessee had fulfilled twin requirements of section 10(13), i.e., occupation of house and payment of rent and, thus, would be entitled to exemption under section 10(13A) - Held, yes [Para 7][In favour of assessee]
FACTS-II
| ■ | Assessing Officer disallowed the assessee's claim for exemption under section 10(13) on the ground that assessee and his wife were living together and claim of payment of rent to assessee's wife was just to avoid payment of taxes and to reduce the tax liability. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the disallowance. | |
| ■ | On second appeal: |
HELD-II
| ■ | The Assessing Officer and the Commissioner (Appeals) have disallowed the claim of the assessee on ground that assessee and his wife are living together but not on the ground that in return of income a house owned by him is declared as self-occupied. However, in the remand report, the Assessing Officer has commented that it is not ascertainable whether the assessee stayed with his wife at her house or at his own house which he claimed self-occupied and claimed the relief under section 24. [Para 7] | |
| ■ | From the reading of the section 10(13A), it is clear that the requirement of the section is that any allowance (by whatever name called) is granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed. However, the exemption is not available in case the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. Admittedly, the Assessing Officer has given a finding of fact that the assessee and his wife are living together as a family. Therefore, it can be inferred that the house owned by wife of the assessee is occupied by the assessee also. In remand report it has been submitted that the assessee has submitted the rent receipt(s) and stated that the payments have duly been paid through bank transfer entry. A verification of the said entry shows the transfer on the given dates. Therefore, the assessee has fulfilled twin requirements of the provision, i.e., occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled to exemption under section 10(13A). [Para 7.1] |
CASES REFERRED TO
CIT v. K. Raja Gopala Rao [2001] 252 ITR 459/[2002] 125 Taxman 148 (Mad.) (para 4) and CIT v. Sri Hariram Hotels (P.) Ltd. [2010] 325 ITR 136/188 Taxman 170 (Kar.) (para 4).
Ms. Nikita Brahmbhatt for the Appellant. D.K. Singh for the Respondent.
ORDER
Kul Bharat, Judicial Member - This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-XXI-Ahmedabad ('CIT(A)' for short) dated 27.12.2012 for Assessment Year 2009-10.
2. Facts in brief are that the case of assessee was picked up for scrutiny assessment and the assessment was framed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The Assessing Officer (AO) has made various additions on account of short-term capital gain, disallowance of interest claimed u/s.24, disallowance of exemption u/s.10(13A) and addition u/s.68 of the Act. The assessee feeling aggrieved by this order, filed an appeal before the ld.CIT(A) who after considering the submissions of the assessee, partly allowed the appeal.
3. While allowing the appeal, ld.CIT(A) confirmed the addition of Rs.42,371/- in respect of the disallowance of interest and the disallowance u/s.10(13A) of Rs.1,11,168/-. Against these two confirmation of additions, the assessee is further in appeal before this Tribunal.
4. The first ground relates to the disallowance of Rs.42,371/- being disallowance of interest while computing the capital gain from sale of house-property. The Ld. counsel for the assessee submitted that the ld. CIT(A) erred in confirming the addition. Ld. counsel for the assessee submitted that admittedly this amount pertained to previous year and the interest being related to the pre-construction period on borrowed capital. She submitted that the interest on borrowed capital of pre-construction period is allowable u/s.24(b) of the Act. She further submitted that since the property was sold, therefore this pre-construction interest period should form part of the cost of acquisition of property. She submitted that alternatively this interest amount is allowable u/s.24(b) of the Act. In support of her contention about pre-construction period, interest ought to have been allowed as a cost of acquisition of property and relied on the decision of Hon'ble High Court of Madras rendered in the case of CIT v. K. Raja Gopala Rao [2001] 252 ITR 459/[2002] 125 Taxman 148 and also the decision of Hon'ble High Court of Karnataka rendered in the case of CIT v. Sri Hariram Hotels (P.) Ltd. [2010] 325 ITR 136/188 Taxman 170.
4.1 On the contrary, ld. Sr. DR supported the orders of the authorities below and submitted that this amount cannot form part of the cost of acquisition as the assessee himself has claimed it as an interest of pre-construction period.
5. We have heard the rival submissions, perused the material available on record and the judgements relied upon by the Ld. counsel for the assessee. We find that the AO disallowed this claim of the assessee without assigning any reason and the ld. CIT(A) has simply confirmed the amount without assigning reason as to how this amount is not admissible. The contention of the counsel is that the assessee has paid interest on borrowed capital for construction of house to City Bank of Rs. 52,964/-which was related to pre-construction period. The assessee has claimed this interest as part of cost of construction and accordingly claimed in the return of income. It is further submitted that the interest expense related to pre-construction period either can be added to cost of construction or can be claimed 1/5th every year. The assessee has claimed the interest as part of cost of construction and assessee could avail the deduction only once and, therefore, the unabsorbed interest of Rs.42,371/- shall become part of the cost of the property. It is also submitted that this cost towards unabsorbed interest should be considered as cost of acquisition of property and allowed to be deducted at the time of sale of the property. Alternatively, it is submitted by the Ld.counsel for the assessee that even if adverse view is taken deduction u/s.24 of the Act is allowable. So far the contention of the assessee is concerned that this amount is required to be treated as cost of acquisition of granting deduction qua the interest on borrowed capital related to pre-construction period is allowable u/s.24(b) of the Act. However, this claim of the assessee would be allowable u/s.24(b) of the Act, therefore, in our considered opinion, the assessee is entitled for deduction u/s.24(b) of the Act. The AO is directed accordingly and the addition is hereby deleted. This ground of appeal is allowed.
6. Now coming to the second ground which relates to the disallowance of exemption u/s.10(13A) of the Act of Rs.1,11,168/- for house rent allowance. Ld.counsel for the assessee submitted that the assessee claimed deduction u/s.10(13A) of the Act amounting to Rs.1,11,168/- in respect of house rent allowance and the authorities below grossly erred in not allowing the exemption. She further submitted that a bare reading of the provision would make it ample clear that the assessee is entitled for exemption u/s.10(13A) of the Act. She submitted that in support of the expenditure of house rent, requisite details and evidences were filed before the ld. CIT(A) who had called for a remand report from the AO. She submitted that the reasoning given by the AO and the ld.CIT(A) are different in disallowing the exemption.
6.1 On the contrary, Sr.DR for the Revenue supported the orders of the authorities below. Sr.DR pointed out that the AO in the remand report has submitted that the assessee has claimed the house owned by him as self-occupied and therefore, the authorities below were justified in disallowing the claim of the assessee.
7. We have heard the rival submissions, perused the material available on record and the orders of the authorities below. We find that the AO disallowed the claim of the assessee on the ground that the assessee has not given details of payment and evidences and also on the basis that the assessee and his wife are living together, hence the claim of payment of rent is just to avoid payment of taxes and to reduce the tax liability. Ld.CIT(A) confirmed the addition on the ground that the rent is paid by the assessee as a tenant to his wife who is a landlord and he found that the landlord and tenant are living together in the same house-property and the very fact that the landlord and tenant are staying together which indicates that the whole arrangement is of the nature of colourable device as pointed out by the AO. He observed that since it is evidently a colourable device, even though the amount purportedly paid as a rent will not qualify for exemption u/s.10(13A). The AO and CIT(A) have disallowed the claim of the assessee on the ground that assessee and his wife are living together but not on the ground that in return of income a house owned by him is declared as a self-occupied, however, we find a mention in the remand report (annexed at page-61), where the AO has commented that it is not ascertainable whether the assessee stayed with his wife's house or at his own house which he claimed self occupied and claimed the relief u/s.24 of the Act. Under these circumstances, we have to only examine whether the assessee is entitled for exemption u/s.10(13A) or not. For the sake of clarity, section 10(13A) is reproduced hereinbelow:-
"(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
| (a) | the residential accommodation occupied by the assessee is owned by him; or | |
| (b) | the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him;" |
7.1 From the reading of the above section, it is clear that the requirement of the section is that any allowance (by whatever name called) granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed. However, the exemption is not available in case the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. Admittedly, the AO has given a finding of fact that the assessee and his wife are living together as a family. Therefore, it can be inferred that the house owned by wife of the assessee is occupied by the assessee also and in remand report it has been submitted that the assessee has submitted the rent receipt(s) of Rs.15,000/- dated 3.7.2008 and Rs.1,65,000/- dated 31.3.2009 and stated that the payments have duly been paid through bank transfer entry. A verification of the said entry shows the transfer on the given dates but the receipts date and amount of Rs.1,65,000/- not reflecting as transfer. Therefore, in our considered opinion, the assessee has fulfilled twin requirements of the provision, i.e. occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled for exemption u/s.10(13A) of the Act. Since we have observed that the ld.CIT(A)'s chose not to make enhancement and disallow the relief u/s.24 of the Act, therefore we cannot comment upon this aspect of the matter. In this view of the matter, we delete the addition and direct the AO to allow exemption u/s.10(13A) of the Act to the assessee. This ground is also allowed as indicated above.
8. In the result, appeal of the assessee is allowed.
VERSHA X - Racks & Trolleys manufactured with aid of fabricators - since appellant supplied materials, fabricators are only hired labour - demand correctly raised - however, since Racks & Trolleys (Ch. 93) were used for goods falling under Chs 51 & 58, appellant would be eligible for benefit of exemption notification 67/95: CESTAT
By TIOL News Service
MUMBAI, DEC 03, 2013: THE appellants are manufacturers of excisable goods falling under Chapters 51, 55 and 58 .On a visit to the appellant's factory, the CE officers discovered that the appellant had got racks and trolleys [SH 9403]fabricated within their own factory premises out of the raw materials supplied by the appellant and based on their own drawings and specifications. It was further found that the appellant had also supplied consumables such as welding rods, cutting gas etc., required for such fabrication work.
These facts were corroborated by the Dy. Manager (Commercial) of the appellant-firm and the representative of the fabricators in their statements recorded under Section 14 of the CEA, 1944. The appellant, however, did not file any classification or price declaration as envisaged under the CER, 1944 nor did they file any statutory returns in respect of the said activity.
Therefore, a SCN dated 08/03/2001 for recovery of Central Excise duty amounting to Rs.18,43,877/- was issued.
The appellant argued on the point of limitation and also submitted that since the trolleys and racks were consumed within the factory production, they are eligible for the benefit of duty exemption under Notification No. 67/95-CE dated 16/03/1995.
None of these submissions found favour with the lower authorities and, therefore, the appellant filed an appeal before the CESTAT in the year 2004.
The appellant submitted that they had engaged fabricators to undertake fabrication work within their factory and since these fabricators are independent entities, they are to be treated as manufacturers and hence duty demand on the appellants is not sustainable in law. Reliance is placed on a plethora of judgments in this regard. So also, the appellants are eligible for benefit of exemption under Notification No. 67/95-CE dated 16/03/1995 as the 'Racks and trolleys' fall under Heading 9403 and are covered within the category of 'inputs' for manufacture of final products falling under Chapters 51 and 58 .
The Revenue representative submitted that since the fabricators have supplied only labour and the goods were manufactured out of the raw materials/consumables provided by the appellant and as per the drawings and instructions of the appellant, therefore, the appellant is liable to pay excise duty on the racks and trolleys fabricated by the fabricators. Reliance is placed on the decision of the Tribunal in the case of MarutiUdyog Ltd. vs. Collector of Central Excise, New Delhi - (2002-TIOL-450-CESTAT-DEL-SB) wherein it was held that when fabrication work is undertaken by the job-worker out of raw materials supplied by a person in his factory, the fabricators are only hired labour and not independent manufacturers. In the matter of their claim for exemption under notification 67/95-CE, it is submitted that apart from the goods of chapter 51 & 58, the appellant also manufactures goods falling under chapter 55 and which stands in the excluded list of 'final products' to the notification and hence the benefit is not available and the appellant is liable to pay excise duty.
The Bench while negating the claim of the appellant that they are not the manufacturers of the Racks and Trolleys distinguished the case laws relied upon by them and drew support from the Tribunal decision in MarutiUdyog Ltd. (supra) cited by the Revenue representative wherein it is held that the fabricators are only hired labour and not independent manufacturers. Inasmuch as the demand had been correctly raised against the appellant by the lower authority, the Bench observed.
However, in the matter of their claim for the benefit of Notification 67/95-CE, the Bench did not agree with the submission made by the Revenue representative by observing thus -
"5.4 …The racks and trolleys manufactured by the appellant is held to be classifiable under Heading 9403 of the Central Excise Tariff which is one of the inputs specified in the said Notification. It is also a fact that the appellants are manufacturing goods falling under Chapter 51, 55 and 58 of the Central Excise Tariff. In the said Notification only Chapter 55 is excluded but goods falling under Chapters 51 and 58 are notified final products. It is not the case of the Revenue that the racks and trolleys which the appellant got manufactured in the factory were used exclusively for the manufacture of products falling under Chapter 55 nor any evidence has been adduced by the Revenue in this regard. Therefore, if racks and trolleys were used in or in relation to the manufacture of goods falling under Chapter 51 and 58, the appellant would be eligible for the benefit of the aforesaid Notification. Therefore, denial of benefit of exemption under Notification 67/95-CE by the lower appellate authority is not sustainable in law."
In fine, the order was set aside and the appeal was allowed.
Income Tax
Whether in case of refund of excess amount, provisions of Sec 132(4)(b) have any application to decide interest liability for pre-assessment period - YES: Supreme Court
THE Revenue conducted a Search & Seizure on the premises of the assessee, an HUF, and seized cash of Rs. 2,35,000/-. On 31.5.1990, an order under Section 132(5) of the Income Tax Act, 1961 came to be passed. The Assessing Officer calculated the tax liability and the cash seized in the search from the assessee's house was appropriated.
The issues before the Bench are - Whether in case of refund of excess amount the provisions of Sec 132(4)(b) have any application to decide the interest liability for the pre-assessment period and Whether provisions of Sec 132(4)(b) deal with pre-assessment period and provisions of Ss 240 and 244A deal with post-assessment period. And the verdict goes in favour of the assessee.
VCES, 2013 - Payment of 'tax dues' through CENVAT Credit before ST VCER, 2013 were notified
--  |  TIOL-DDT 2243 03.12.2013 Tuesday THE Service Tax VCES, 2013 came into effect on 10.05.2013 and the Service Tax Voluntary Compliance Encouragement Rules, 2013 came into force w.e.f 13.05.2013 by Notification 10/2013-ST. Rule 6 of the Rules reads - 6. Payment of tax dues.-
As the aforesaid condition of "non-utilisation of CENVAT credit" for payment of tax dues under the Scheme was formulated only on 13.05.2013, in case a declarant has paid "such tax dues" by utilizing CENVAT credit during the period 10.05.2013 to 12.05.2013, what should he do? Take a re-credit in his CENVAT account and pay afresh in cash? Re-credit, the department will not allow by citing the LB decision in BDH Industries [2008-TIOL-1211-CESTAT-MUM-LB]. So, what is the solution? Will the CBEC please clarify? |
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
Drastic Amendment in Punjab Agricultural Produce Market General Rules, 1962
Drastic Amendment in Punjab Agricultural Produce Market General Rules, 1962 by Virtue of notification dated 31.10.2013
Government need funds for various purposes like maintenance of law and order, health services, education etc. and for this obtains funds from various sources and out of which Mandi board also plays vital role, Which deals with levy of fees on agriculture produce but now Punjab Government has inserted new rule after rule 30-A i.e. 30AA which specifically deals with sale or purchase of any agriculture produce brought into the state of Punjab from outside. Any agriculture produce, which is notified by the state government, by notification in the official gazette, from time to time, when brought into the state of Punjab/ from outside the state, shall be deemed to have been purchased or sold in the notified market area , where it has been bought. It is worth while to mention here that no exemption shall be given to such produce, from the payment of market fee under rules 29,30,&30-C or any other rule, and the dealer who has brought such purchase in any notified market area of the state of Punjab shall be liable to pay due market fee, under the rules. Which clearly reflects that by virtue of this notification the price of agricultural produce will increase which will ultimately effect the general public at large. Moreover in lieu of this fees no additional benefits was granted, why so reasons best known to the department of agriculture.
Copy of notification is reproduced:
PUNJAB GOVT. GAZ. NOVEMBER 15,2013 , 1269(KRTK 24,1935 SAKA)__________________________________________________PART IIIGOVERNMENT OF PUNJABDEPARTMENT OF AGRICULTURE(MANDI BRANCH)
The 31st October 2013No. G.S.R. 57/P.A.23/1961/S.43/Amd.(73)/2013,- In exercise of the power conferred by section 43 of the Punjab Agricultural Produce Markets Act, 1961 ( Punjab Act No. 23 of 1961) and all other powers enabling him in his behalf, the Governor of Punjab is pleased to make the following rules further to amend the Punjab Agricultural Produce markets (General) rules, 1962 namely:-RULES
(1) These rules may be called the Punjab Agricultural Produce Markets (General) (Third Amendment) Rules, 2013.(2) They shall come into force at once.
2. In The Punjab Agricultural Produce Markets (General) Rules,1962 (hereinafter referred to as said rules), in rules 17,in sub rule (1), for the words "five thousand rupees and also furnishes a bank guarantee of rupees Ten thousands or an amount equal to two percent of the annual turnover of the previous year which ever is more," the words "twenty thousand rupees, or an amount equal to two percent of annual turnover subject to maximum of rupees five lac, whichever is more"3. In the said rules, after rule 30-A the following rule shall be inserted, namely:-"30-AA. sale or purchase of any agriculture produce brought into the state of Punjab from outside. Any agriculture produce, which is notified by the state government, by notification in the official gazette, from time to time, when brought into the state of Punjab/ from outside the state, shall be deemed to have been purchased or sold in the notified market area , where it has been bought. No exemption shall be given to such produce, from the payment of market fee under rules 29,30,&30-C or any other rule, and the dealer who has brought such purchase in any notified market area of the state of Punjab shall be liable to pay due market fee, under the rules.SURESH KUMAR,Financial Commissioner Development andPrincipal Secretary to Government of Punjab,Department of Agriculture.
Shocking amendment in section 66-Analysis of Punjab VAT (Second Amendment) Act, 2013-part 4
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Amendment in section 51- Person in-charge included transporters: Section 51 which relates to the road side checking law has been amended so as to provide that the person incharge of goods shall also include the carrier of goods or agent of transport company or booking agency or any other bailee for transportation and in-charge or owner of a bonded warehouse or of any other warehouse.
Heavy Penalty u/s 51 on the transporter as well: Sub-section 12-A of section 51 has been introduced providing for levy of additional penalty on the transporter as well if the same is found to be involved in committing the offense of transporting the goods on an escape route. The condition for levy of penalty on transporter is that penalty u/s 51(7)(c) exceeding Rs. 2 lacs has already been imposed.
Penalty leviable u/s 51(12-A) on transporter is leviable at the rate of 25000/- in case the offence is committed for the first time. However if the same vehicle is again found to be involved in the same like offence and a penalty exceeding two lacs is again imposed, then the goods vehicle shall be confiscated and sold in the public auction.
Heavy Penalty on for fraudulently claiming wrong refund: Section 56 has been amended so as to provide that a poerson who has availed of a refund under a star rating/fast track refund scheme, as may be prescribed, is subsequently found to have willfully or fraudulently claimed refund which was not due to him, he shall be liable to pay penalty subject to a maximum of five times the refund amount so claimed as may be prescribed the State Government, in addition to the payment of refund amount and interest payable thereon.
Attempt at ractification of the cases already decided by Tribunal: In a very derogatory amendment the provisions of section 66(2) of Punjab VAT Act which relates to ractification of mistakes by the Tribunal, has been amended whereby the period of ractification of mistakes apparent on record has been enhanced from 3 years to 6 years.
The most shocking amendment is in the explanation added to sectioon 66(2) which provides that "Error apparent from the record in an order shall include an order that has become erroneous as a result of amendment of this Act."
The implication of the amendment would be that an order which has been passed by the Tribunal on the basis of the law which stood at the time of passing of the order would be considered as an errorneous order as a result of amendments made in Punjab VAT (Second Amendment) Act, 2013.
That means the assessment orders which were quashed due to the fact that they were barred by limitation period of three years as provided in section 29(4) before the amendment, can be restored in the Tribunal by moving a ractification application by stating such quashing of orders as errorneous in view of the amendment in section 29(4) under which the period of assessment has been enhanced from 3 years to 6 years.
It seems very unfair if the orders which have attained finality, would be considered as erroneous after the amendment and would be open for ratification in view of the new amendment.
Also Read :-
Excise & Customs : Where relevant law has not been considered and judgments relied upon by parties have not been dealt upon and considered, said judgment contains error apparent on face of record and has to be recalled and decided afresh
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[2013] 39 taxmann.com 54 (Jharkhand)
HIGH COURT OF JHARKHAND
Chief Commissioner of Central Excise & Service Tax, Ranchi
v.
Ranchi Club Ltd.*
BHAGWATI PRASAD, CJ.
AND PRAKASH TATIA, J.
AND PRAKASH TATIA, J.
CIVIL REVIEW NO. 51 OF 2008
APRIL 21, 2011
Section 35G of the Central Excise Act, 1944, read with section 83 of the Finance Act, 1994 and section 130 of the Customs Act, 1962 - Appeals - Rectification of mistakes/review - High Court - A judgment proceeding simply on basis of admission cannot be considered to be a correct interpretation of law - Where relevant law has not been considered and judgments relied upon by parties have not been dealt upon and considered, said judgment contains error apparent on face of record and has to be recalled and decided afresh [Paras 4, 9 and 10] [In favour of revenue]
CASES REFERRED TO
Jt. Commercial Tax Officer v. Young Men's Indian Association (Regd.), Madras [1970] 11 SCC 462 (para 8).
Ratnesh Kumar for the Petitioner. B. Poddar for the Respondent.
ORDER
1. Heard learned counsel for the parties.
2. The parties have gone up to the Supreme Court and in that it was observed by the Hon'ble Supreme Court that the applicant may apply for review. The matter has come up before us in review.
3. We have heard the learned counsel for the parties. Our attention has been drawn to the submission made by the parties in this review application and the decision. The part of the decision which requires consideration is quoted hereinbelow:—
'"…In this counter-affidavit the respondents have not disputed the legal position that the petitioner's club is not liable to pay service tax for the services rendered to its member under the provisions of law. However, it has been asserted that the petitioner provides and allows the services for outsiders and receives money on this score for which it is liable to pay Service Tax as per law "
"…When the matter was taken up for admission in presence of the parties, the learned counsel for the petitioner Sri Binod Kumar Poddar, Sr. Advocate and counsel for the respondents Mr. Mokhtar Khan agreed that "Mandap Keeper" under the provisions of the Act and as per decisions cited by the petitioners annexed with this writ petition vide annexures-2, 3, 4 & 9 is not liable to pay Service Tax under the provisions of Section 65(66)(67) of the Finance Act, 1994 when the services were utilized by the members of the club. Therefore the admitted position of law remains that the petitioner's club is not liable to pay Service Tax for the services provided to its members under the Act and this position of law does not require any clarification in the admitted facts"….'
4. This argument and the observation of the learned Judges have been quoted hereinabove. What we found in the judgment is that the relevant law has not been considered neither the judgments relied upon by the parties have been dealt upon and considered. The judgment has proceeded squarely on the basis of admission of the parties.
5. The learned counsel for the petitioner submitted before us that the law relied upon stood amended in the year 2005 whereby the service tax has been imposed and the amendment was made in Section 65 wherein Explanation was added. The Explanation reads as follows :—
"Explanation.- For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration."
6. According to the learned counsel for the petitioner, if any case was decided prior to the year 2005, it would have no relevance to decide the case of the club. In the instant case what appears is that while the case was being argued perhaps the Explanation was not looked into and the law as laid down by the Court prior to the year 2005 was perhaps known to the members of the Bar and the same was not brought to notice of learned Judges. The Court proceeded to decide the issue without noticing the Explanation. In that view of the matter, the case came to be decided only on the basis of admission. This prima facie is not correct position of law and therefore, the judgment deserves to be set aside. The applicability of the service tax has to be seen in the light of Explanation added to in Section 65 of the Service Tax Law after 2005.
7. Another aspect which the learned counsel for the petitioner brought to our notice is that the provision of Section 65(105)(zzze) also makes it incumbent on clubs and associations to make the Service Tax.
8. Replying to the argument of the learned counsel for the petitioner, the learned counsel for the respondent-club asserted that the arguments are not sustainable in view of the law as laid down in the case of Jt. Commercial Tax Officer v. Young Men's Indian Association (Regd.) Madras [1970] 1 SCC 462 and other judgments relied upon by him. Even if the learned judges have not considered and dealt upon the cases the correct position of law as agreed upon by the counsels remains and therefore the judgment came.
9. Having considered the aforesaid submission of the parties, we are persuaded that a judgment proceeding simply on the basis of admission cannot be considered to be a correct interpretation of law.
10. In that view of the matter, it is required that the law should be considered and only then the issue should be decided. Therefore, the judgments having proceeded only on admission cannot be considered to be a judgment decided in accordance of law and in that view of the matter, we find that there is an error on the face of the record. Therefore, in relation to the question of law, it is required to be decided afresh.
11. In that view of the matter, the judgment in question is set aside and the writ petition is required to be heard afresh. The parties will address the Court on writ petition on 29-4-2011.
VINEET Excise & Customs : If, owing to default in paying duty, assessee's facility of monthly payment of duty is withdrawn and even then, assessee pays duty using Cenvat credit, assessee can be asked to pay duty in cash/through PLA with interest and penalty, but, credit earlier utilized must be allowed as re-credit
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[2013] 38 taxmann.com 417 (Ahmedabad - CESTAT)
CESTAT, AHMEDABAD BENCH
Fortex Remedies (P.) Ltd.
v.
Commissioner of Central Excise, Valsad*
H.K. THAKUR, TECHNICAL MEMBER
FINAL ORDER NO. A/10652/2013 -WZB/AHD
APPEAL NO. E/3069/2005
APPEAL NO. E/3069/2005
MAY 10, 2013
Rule 8, read with Rule 25, of the Central Excise Rules, 2002 and section 11A of the Central Excise Act, 1944 - Payment - Withdrawal of Facility of Monthly Payment of Excise Duty - Assessee's facility to pay duty on monthly basis and facility of use of Cenvat credit was withdrawn - Despite that, assessee paid duty utilizing Cenvat credit - Department demanded duty in cash with interest and penalty - HELD : During period of withdrawal/forfeiture of facility of monthly payment of duty, duty must be paid in cash or through Account Current (PLA) and any default would render goods to be treated as goods cleared without payment of duty and other consequences shall follow - Said consequences would mean discharge of duty along with interest and also a liability to face penalty - Therefore, confirmation of demand and interest was rightly made but, on paying duty in cash/through PLA with interest, assessee will be entitled to re-credit of credit utilised by him earlier - Assessee was also liable to penalty under Rule 25 of Central Excise Rules, 2002, but, since all transactions were properly recorded, it was not obligatory to levy penalty equal to duty and penalty was reduced accordingly [Paras 7 & 8] [Partly in favour of assessee]
CASES REVIEW
Elson Packaging Inds. (P.) Ltd. v. CCE 2004 (169) ELT 171 (Trib. - Mum.) (paras 1,5) and Elson Packaging Industries (P.) Ltd. v. CCE 2010 (257) ELT 509 (Guj.) (paras 1, 3, 6 and 7) followed.
CASES REFERRED TO
Elson Packaging Inds. (P.) Ltd. v. CCE 2004 (169) ELT 171 (Tri. - Mum.) (para 1), Noble Drugs Ltd. v. CCE 2007 (215) ELT 500 (Trib. - Mum.) (LB) (para 1) and Elson Packaging Industries (P.) Ltd. v. CCE 2010 (257) ELT 509 (Guj.) (para 1).
J. Nagori for the Respondent.
ORDER
1. This appeal was filed by the appellant against OIA No. NS/256/DAMAN/2005, dated 24-5-2005 issued on 3-6-2005. Under this OIA, the order-in-original passed by the adjudicating authority; confirming demand of Rs. 5,57,138/-, along with interest and penalty of Rs. 5,57,138/-; was upheld. The issue involved is whether appellant was required to pay duty only through PLA when facility to pay the duty under fortnightly basis not available during the forfeiture period. As per order dated 4-6-2007, this Bench held that demand of duty and interest is not sustainable against the appellant and penalty was also reduced from Rs. 5,57,138 to Rs. 40,000. Department took the case to Hon'ble High Court of Gujarat vide Tax Appeal No. 1686 of 2007. The Hon'ble High Court vide order dated 18-2-2009 remanded the matter to CESTAT with the directions to decide this case after considering the decision of CESTAT, Mumbai in the case of Elson Packaging Indus. (P.) Ltd. v. CCE [2004 (169) ELT 171 (Tri.-Mum.)]. This case was again decided by CESTAT Ahmedabad vide order dated 28-8-2009 in the light of the Larger Bench judgment in the case of Noble Drugs Ltd. v. CCE 2007 (215) ELT 500 (Tri.-Mum.). Department again took the case to Hon'ble High Court of Gujarat in Tax Appeal No. 719/2010 agitating that the case ofElson Packaging Indus. (P.) Ltd. (supra) has also been confirmed by the Hon'ble High Court as in Elson Packaging Industries (P.) Ltd. v. CCE2010 (257) ELT 509 (Guj.), and Hon'ble CESTAT has not followed High Court's directions. The Hon'ble High Court vide order dated 6-8-2012 again remanded the case back to CESTAT to reconsider this case in the light of law laid down in the case of Elson Packaging Inds. (P.) (supra).
2. The case was fixed for hearing on 8-2-2013 and 12-2-2013 but on both occasions appellant sought adjournments. During the hearing fixed on 7-5-2013 also none appeared on behalf of the appellants.
3. Heard the learned AR. He argued that in view of the order dated 9-5-2005, in the case of Elson Packaging Indus. (P.) Ltd. (supra)duty cannot be paid from Cenvat credit Account and therefore, penalty was correctly imposed.
4. During the relevant period, as per Rule 173G(l)(e) of the Central Excise Rules, 1944, the following restrictions were applicable :—
"(e) If the manufacturer defaults on account of any of the following reasons, namely :—
| (i) | Full payment of any one instalment is discharged beyond a period of thirty days from the date on which the instalment was due in a financial year, or | |
| (ii) | The due date on which full payment of instalment are to be made is violated for the third time in a financial year, whether in succession or otherwise, |
then the manufacturer shall forfeit the facility to pay the dues in instalments under this sub-rule for a period of two months, starting from the date of communication of an order passed by the proper officer in this regard and during this period the manufacturer shall be required to pay excise duty for each consignment by debit to the account current referred to in Clause (b) and in the event of any such failure it will be deemed as if such goods have been cleared without payment of duty and the consequences and penalties as provided in the Central Excise Rules shall follow."
5. The above provisions were interpreted by CESTAT in the case of Elson Packaging Indus. (P.) Ltd. (supra) as follows in Para 8 :—
"8. As is seen the requirement of the above rule is to pay duty for each consignment by debit to the account current referred in clause (b) of Rule 173G(1) which is to the effect that the manufacturer shall maintain an account current with the Commissioner and shall discharge his duty liability by debiting such account current or by utilizing Cenvat Credit (emphasis provided.) As such, the said rule refers to two modes of payment of duty i.e. either by debiting account current or by utilizing credit leading to the conclusion that the reference is to two distinct, independent and identifiable accounts, Now when Rule 173G(1)(e) makes reference to only one such account in contradistinction to the two made in clause (b), it has to be necessarily concluded that out of the two modes referred in clause (b), only one has been intentionally chosen in clause (e). The said clause can be safely termed as more or less as penal clause providing penalty in the shape of withdrawal of facility of payment of duty on fortnightly basis in case of default by the assessee. Being penal in nature, it also withdraws the facility to use credit during this period of two months of withdrawal. Otherwise, we cannot find any reason to pick only expression 'account current' out of the two expression used in clause V, if the same was not meant for any distinction. As such, reference by the learned Advocate to Rule 9 and pre 2000 Rule 173G to impress upon his arguments that debit in credit account is also utilisation of account current cannot be accepted."
6. When the case was taken before the Hon'ble High Court of Gujarat by Elson Packaging Indus. (P.) Ltd. (supra), the issue was interpreted by High Court in Para-2 of the order dated 9-5-2005 Elson Packaging Industries (P.) Ltd. (supra) as follows :—
"2.On going through the impugned order of the Tribunal it is apparent that on plain reading of provisions of Rule 173G(1)(e) of the Central Excise Rules, 1944 (the Rules) there is no infirmity in the order of the Tribunal which would give rise to any question of law. The Tribunal has correctly read the rule to mean that out of two different modes of payment of duty viz. (1) by debit to account current, or (2) while utilising Cenvat credit as provided in Rule 173G(l)(b) of the Rules one of the modes viz. by utilising the Cenvat credit, is not permitted for the limited period during which a manufacturer defaults in terms of Rule 173G(l)(e) of the Rules and forfeits the facility to pay the dues in instalments for a period of two months. This prohibition per se does not take away or affect the right of the appellant assessee to Cenvat credit which may be available to him in accordancewith Cenvat credit Scheme and there is no conflict between the rules commencing from Rules 57A to 57V of the Cenvat Credit Scheme and Rule 173G of the Rules."
7. A combined reading of the order passed by CESTAT and the Hon'ble High Court in the case of Elson Packaging Industries (P.) Ltd.,(supra)clearly convey that during the forfeiture period duty had to be paid only through Account Current (PLA) and any default on that aspect will make the goods cleared as a case of clearance without payment of duty and other consequences and penalties as provided in the Central Excise Rules shall follow. The consequences of goods cleared without payment of duty on the said defaults will mean discharge of duty along with interest and also a liability to face penalty. Therefore, confirmation of demand and interest have been correctly made by Commissioner (Appeals) in his order-in-appeal dated 24-5-2005. There is no doubt that appellant will be entitled to the credit what he has utilised in payment of Central Excise duty earlier when the entire default period duty and interest is paid in cash or through PLA.
8. So far as imposition of equivalent penalty upon the appellant is concerned, it is held that penalty is imposable under Rule 173Q(1) of Central Excise Rules, 1944 or Rule 25(1) of the Central Excise Rules, 2001 because appellant's conduct has led to an act which is deemed to be clearances without payment of duty and also the act on the part of the appellant is liable to penalty. However, it is not obligatory to impose penalty equivalent to the duty demanded under Rule 173Q of the Central Excise Rules. As all the transactions were properly recorded by the appellant, therefore, a penalty of Rs. One lakh upon the appellant will meet the ends of justice. Penalty of Rs. 5,57,138 is thus ordered to be reduced to Rs. 1,00,000 (Rupees one lakh).
9. Appeal filed by the appellant is thus disposed of in the above terms.
Service Tax
ST - Builders/Developers are not liable to pay Service Tax under the category 'Maintenance or Repair services' on the 'One-time maintenance charges' collected from flat buyers: CESTAT
THE appellants are builders/developers of residential flats and various commercial complexes. They sell the residential flats to various customers over a period of time. After sale of all the flats, a Co-operative Housing Society is formed by the owners of the flats; thereafter the title of land etc. is passed on to the Flat Owners Co-operative Housing Society. The appellants are recovering a one-time maintenance deposit from each of the customers to whom they have sold the flats. The said amount is kept in a separate bank account as fixed deposit. From the interest earned on the said deposit, the appellants are expected to pay for various charges such as common electricity bill, water charges, security charges etc. After the flat owners co-operative housing society is formed, whatever balance is left in the said bank account the same is handed over to the Flat Owners Co-operative Housing Society.
The CCE, Pune-III was of the view that the appellants are required to pay Service Tax on the deposits made by various purchasers of the flats on the ground that the appellants are providing "Maintenance and Repair" service.
ST : Clubs and their members are one and the same person governed by principle of mutuality; hence, prior to 1-7-2012, services provided by club to its members cannot be charged to service tax
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[2013] 35 taxmann.com 557 (Gujarat)
HIGH COURT OF GUJARAT
Sports Club of Gujarat Ltd.
v.
Union of India & 3*
RAVI R. TRIPATHI AND R.D. KOTHARI, JJ.
SPECIAL CIVIL APPLICATION NOS. 13654 TO 13656 OF 2005
MARCH 25, 2013
Section 65(25aa) of the Finance Act, 1994 - Club or association's services - Assessee argued that section 65(25aa) (erstwhile section 65(25a)) read with section 65(105)(zzze) purporting to levy service tax on services provided by club to its members was unconstitutional in view of judgment in Ranchi Club Ltd. v. Chief CCE & ST [2012] 36 STT 64 (Mag.)/22 taxmann.com 217 (Jharkhand) - Department argued that said judgment had been challenged before Supreme Court - HELD : Merely because said judgment is not accepted by Department, its persuasive value is not lost and it can always be considered for its persuasive value, more particularly when said judgment had relied upon various precedents - Department's argument that there is no question of mutuality because club is a legal entity as it is incorporated under Companies Act, was unacceptable following judgment in Ranchi Club Ltd. (supra) - Hence, section 65(25aa) (erstwhile section 65(25a)), section 65(105)(zzze) and section 66 of the Finance Act, 1994 as incorporated /amended by Finance Act, 2005 upto extent they purport to levy service tax in respect of services purportedly provided by club to its members, were ultra vires - However, present judgment was stayed for six weeks so as to enable Department to carry matter further [Paras 7 to 8.1] [In favour of assessee]
EDITOR'S NOTE
| ■ | The judgment in Ranchi Club Ltd. v. Chief CCE & ST [2012] 36 STT 64 (Mag.)/22 taxmann.com 217 (Jharkhand) appears to be incorrect for the reasons already stated in Article titled "Services provided by clubs/associations to members thereof liable to service tax even prior to 1-7-2012 - Judgment in Ranchi Club needs review !!" as reported in [2012] 23 taxmann.com 252 (Article). Accordingly, this judgment following Ranchi Club Ltd. (supra) doesn't appear to have laid down correct law and ignores the deeming fiction of law, which empowers the Government to override principle of mutuality. | |
| ■ | Even under the income-tax law, some of the mutual incomes are liable to income-tax due to overriding provisions of the law. | |
| ■ | The Department appears to have failed to produce arguments properly assailing the judgment in Ranchi Club Ltd. (supra), otherwise there would been a discussion over the provisions of the law. The Department may lose the case before the Supreme Court, if the case is not argued properly. |
CASE REVIEW
Ranchi Club Ltd. v. Chief CCE & ST [2012] 36 STT 64 (Mag.)/22 taxmann.com 217 (Jharkhand)(para 7.1) followed.
CASES REFERRED TO
Ranchi Club Ltd. vs. Chief CCE & ST [2012] 36 STT 64 (Mag.)/22 taxmann.com 217 (Jharkhand) (para 4) and CIT v. Ranchi Club Ltd.[1992] 196 ITR 137/64 Taxman 433 (Pat.) (FB) (para 7).
S.N. Soparkar , V.N. Nair and Mihir Joshi for the Appellant. Jitendra Malkan, R.J. Oza and Y.N. Ravani for the Respondent.
JUDGMENT
Ravi R Tripathi, J. - Three different clubs of City of Ahmedabad, named, Sports Club of Gujarat Limited, Rajpath Club Limited and Karnavati Club Limited are before this Court making almost identical prayers. Prayer made in SCA No. 13654 of 2005 by petitioner - Sports Club of Gujarat Limited in Para 16(A) is as under :
"16(A) Your Lordships be pleased to issue a writ of or in the nature of mandamus declaring Section 65(25a), Section 65(105) (zzze) and Section 66 of the Finance (No. 2) Act, 1994 as incorporated/amended by the Finance Act, 2005 to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members, as being ultra vires, beyond the legislative competence of the Parliament, unconstitutional, illegal and void. "
2. It is also prayed in Clause (B) that,
"16(B). Your Lordships be pleased to issue a writ of or in the nature of mandamus commanding the respondents to forebear from imposing or enforcing the provisions of the Finance (No.2) Act, 1994 as amended by the Finance Act, 2005 or Rules, Notifications or Orders thereunder so as to levy service tax in respect of services purportedly provided by the petitioner club to its members."
3. Heard learned Senior Advocate Mr. S.N. Soparkar with learned advocate Mr. V.N. Nair for petitioner in SCA No. 13654 of 2005, learned Senior Advocate Mr. Mihir Joshi with learned advocate Mr. V.N. Nair for petitioner in SCA No.13655 of 2005 and learned Senior Advocate Mr. S.I. Nanavati with learned advocate Mr. V.N. Nair for the petitioner in SCA No.13656 of 2005.
4. Learned Senior Advocates for the petitioners made a common argument that the matters are covered by the judgments which are more than one in number but, last in the line is the judgment of the Division Bench of Jharkhand High Court at Ranchi in the matter of Ranchi Club Ltd. v. Chief CCE & ST [2012] 36 STT 64 (Mag.)/22 taxmann.com 217. Learned Senior Advocates submitted that the principle which fell for consideration of the Division Bench of Jharkhand High Court was the principle of mutuality and in this regard, learned Senior Advocates invited attention of the Court to the facts set out in the said judgment in Para.3 which reads as under:
"As we have noticed that petitioner's contention is that petitioner is a club and also registered company under the Companies Act, 1956. The petitioner is giving service to its members but the club is formed on the principle of mutuality and, therefore, any transaction by the club with its member is not a transaction between two parties. However, being a company, it may enter into a transaction with anybody, a 3rd person, not a member, then in that situation, this club becomes a legal entity and can certainly enter into any transaction and such transaction are not on the principle of mutuality and, therefore, may be liable to any tax as a transaction between two parties. However, when the club is dealing with its members, it is not a separate and distinct individual. It is submitted that in identical facts and circumstances, however, in the matter of imposition of sales tax, when the club was expressly included in the statutory definition of 'dealer' under Madras General Sales Tax Act, 1959, so as to bring the club within the purview of taxing statute of the Madras Sales Tax, the Hon'ble Supreme Court, in the case of the Joint Commercial Tax Officer v. The Young Mens' Indian Association, considered the definition of the 'dealer' by which the club was declared "dealer" and after considering the definition of "sale" as given in the Act of 1959 and explanation-I appended to Section 2(n), specifically declaring the "sale" or "supply or distribution of goods by a club" to its members whether or not in the course of business was declared deemed to be a "sale" for the purpose of the said Act. In that situation, Hon'ble Supreme Court considered the issue that the club is rendering service or selling any commodity to its members for a consideration then whether that amounts to sale or not. Hon'ble Supreme Court held that it is a mutuality which constitutes the club and, therefore, sale by a club to its member and its services rendered to the members, is not a sale by club to the members. In sum and substance, the ratio is that for a transaction of sale, there must be two persons in view of this judgement as well as in view of the Full Bench Judgement of this Court delivered in the petitioner's own case i.e., Commissioner of Income Tax v. Ranchi Club Limited reported in 1992(1)PLJR 252 (Pat) (Fb). The Full Bench of this Court while considering the identical issue in the matter of imposition of income tax, observed that no one can earn profit out of himself on the basis of principle of mutuality and held that income tax cannot be imposed on the transaction of the club with its members." [Emphasis supplied.]
5. Learned Senior Advocates for the petitioners invited attention of the Court to Para.15, 16 and 17 which are reproduced for ready perusal.
"15. The question which was considered by the Hon'ble Supreme Court in the case of Joint Commercial Tax Officer, Harbour Division, II- Madras v. The Young Men's Indian Association reported in 1970(1) SCC 462 was that whether the supply of various preparations by each club to its members involve a transaction of sale within the meaning of Sales of Goods Act, 1930. Hon'ble Supreme Court held that -
'Thus in spite of the definition contained in Section 2(n) read with Explanation I of the Act if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court'.
16. The Hon'ble Supreme Court held so after considering the English Law also and observed that the law in England has always been that members' clubs to which category the clubs in the present case belong cannot be made subject to the provisions of the Licensing Acts concerning sale because the members are joint owners of all the club property including the excisable liquor. The supply of liquor to a member at a fixed price by the club cannot be regarded to be a sale. If, however, liquor is supplied to and paid for by a person who is not a bona fide member of the club or his duly authorised agent, there would be a sale. With regard to incorporated clubs a distinction has been drawn. Where such a club has all the characteristics of a members' club consistent with its incorporation, that is to say, where every member is a shareholder and every shareholder is a member, no licence need to be taken out if liquor is supplied only to the members. If some of the shareholders are not members or some of the members are not shareholders, that would be the case of a proprietary club and would involve sale. Proprietary clubs stand on a different footing. The members are not owners of or interested in the property of the club and then the Hon'ble Supreme Court observed that above view was accepted by the various High Courts in India. The Hon'ble Supreme Court, relying upon other judgements held that members' club is only structurally a company and it did not carry on trade or business so as to attract the corporation profit tax. Therefore, in spite of specific inclusion of the club in the definition of the dealer in the Madras General Sales Tax Act, 1959 by providing an explanation to include the clubs which are selling or distributing the goods to its members for cash have been included in the definition of dealer and by explanation I to Section 2(n) defining the sale the statutory provision was made to include any transfer of property by club to its members to be a sale for the purpose of the said Act, Hon'ble Supreme Court categorically held that in absence of two, there cannot be transaction of transfer of property.
17. The Full Bench of Patna High Court in the case of writ petitioner itself i.e., in the case of Commissioner of Income Tax v. Ranchi Club Limited (Supra), after finding that Ranchi Club is a limited company incorporated under the Indian Companies Act, considered the various clauses of the main objects of the club and relying upon various judgements, in paragraph 12 observed as under:-
12. Therefore, by applying the principle of mutuality Members' Clubs always claim exemption in respect of surplus accruing to them out of the contributions received by the clubs from their members. But this principle cannot have any application in respect of the surplus received from non-members. It is not difficult to conceive of cased where one and the same concern may indulge in activities which are partly mutual and partly non-mutual. True, keeping in view the principle of mutuality, the surplus accruing to a Members' Club from the subscription charges received from its members cannot be said to be income within the meaning of the Act. But, if such receipts are from sources other than the members, then still can it be said that such receipts are not taxable in the hands of the club? The answer is obvious. No exemption can be claimed in respect of such receipts on the plea of mutuality. To illustrate, a Members' Club may have income by way of interest, security, house property, capital gains and income from other sources. But such income cannot be said to be arising out of the surplus of the receipts from the members of the club and answered the question in affirmative and questions referred were as under-
| (I) | Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-club is a 'mutual concern'? | |
| (II) | Whether, on the facts and circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax? | |
| (III) | Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands?" |
6. Learned Senior Advocates submitted that after the careful consideration of the facts of the case, the Division Bench of the Jharkhand High Court held as under:
"18. However, learned counsel for the petitioner submits that sale and service are different. It is true that sale and service are two different and distinct transaction. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transaction requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members' club has been already considered and decided by the Hon'ble Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res Integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax."
7. Learned advocate Mr.Ravani appearing for the Authorities i.e. Union of India, Commissioner of Central Excise, and Deputy Commissioner/Assistant Commissioner, Service Tax Cell, vehemently opposed the petitions and submitted that the Department has not accepted the aforesaid judgment. Learned advocate submitted that the Department has filed SLP before the Hon'ble Apex Court and the judgment is under challenge. Merely because the judgment is not accepted by the Department, its persuasive value is not lost and it can always be considered by this Court for its persuasive value, more particularly when the said judgment has relied upon a decision of the Full Bench of Patna High Court in the matter of CIT v. Ranchi Club Ltd. [1992] 196 ITR 137/64 Taxman 433, which is referred to by the Division Bench.
7.1 Learned advocate for the Department also submitted that there is no question of mutuality because the club is a legal entity as it is incorporated under the Companies Act. This Court is unable to accept the submissions made by learned advocate for the Department because they were the very facts before the Division Bench for consideration and learned advocate for the Department could not set out any convincing grounds on which this Court should not follow the decision of the Division Bench of Jharkhand High Court.
8. In the result, these petitions are allowed and it is hereby declared that Section 65(25a), Section 65(105) (zzze) and Section 66 of the Finance (No.2) Act, 1994 as incorporated/amended by the Finance Act, 2005 to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members, to be ultra vires. Rule is made absolute with no order as to costs.
8.1 At this juncture, learned advocate for the Department prays that this judgment be stayed for a period of six weeks so as to enable the Department to carry the matter further. Request is granted.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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