Chartered Accountant Finance: [aaykarbhavan] Judgments

FII cannot have business profits – Derivatives income not taxable as speculation income to FIIs

Case of Hon'ble Bombay High Court viz Bharat Ruia (supra) is not applicable to the facts and the issue involve as the assessees are FII duly registered with SEBI. He further submitted that the assessee is allowed to invest in Indian Capital Market and the income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per section 115AD of the Act. He further submitted that assessee, FII is not allowed to do business in the security market. He further submitted that derivative is a security as per the clause (ia) to sub-section (h) of section 2 of The Securities Contracts (Regulation) Act, 1956 with effect from 22.2.2000. The said fact is not disputed by ld. DR that derivative " is a security" under The Securities Contracts (Regulation) Act, 1956. The ld. AR submitted that the Co-ordinate Bench of the Tribunal, has considered this aspect as well vide its earlier order dated 5.12.2012 (supra) in which the earlier decision of co-ordinate Bench in the case of LG Asian Plus Ltd V/s ADIT (International Taxation) (2011) 46 SOT 159 was also considered.

We have carefully considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We have also considered the earlier orders of the Tribunal, (supra) relied upon by ld. AR and also the decision of Hon'ble Jurisdictional High Court in the case of Bharat Ruia(supra). We agree with ld. AR that the decision relied upon by ld.DR is not relevant to the facts of the fact of the case before us. Further, the issue is squarely covered by the decision of the Tribunal, order dated 5.12.2012 which has been decided by considering the earlier order of co-ordinate Bench in the case of LG Asian Plus Ltd(supra).

INCOME TAX APPELLATE TRIBUNAL , MUMBAI

BEFORE S/SHRI B.R.MITTAL,(JM) AND N.K.BILLAIYA (AM)

I.T.A.No.2787/M/2012 – Assessment Year:2006-07)

I.T.A.No.2788/M/2012- Assessment Year:2006-07)

Platinum Asset Management Ltd.

Vs.

Dy. Director of Income Tax (International Taxation)

Date of Pronouncement : 04.12.2013

O R D E R

Per B.R.MittaI, JM

These appeals are filed by assessee against orders of ld. CIT(A), both dated 2.1.2012 relating to assessment year 2006-07.

2. The assessee is a sub-account of the Foreign Institutional Investor (in short 'FII') registered in Australia and operating in India, Registered with Securities and Exchange Board of India (SEBI). The activity of assessee involved in purchase and sale of securities in India and trading in derivatives. Both assessee(s) have filed return (s) of income as under :

a) the assessee, sub-account Platinum Asia Fund (ITA No.2787/Mum/2012) declaring total income of Rs.NIL and claimed a refund of Rs.1,45,96,129/-. The said assessee also claimed carried forward short term capital loss of Rs.78,91,43,597/-. However, AO completed the assessment vide order dated 24.12.2010 u/s 143(3) r.w. section 147 of the Income Tax Act, 1961 (the Act) at an income of Rs.93,26,84,307/- after holding that the net loss of Rs.1,72,18,27,904/- arising from index derivative transactions as business loss and assessable under the head income from business or profession as against the claim of assessee as capital loss. Ld. CIT(A) also confirmed the findings of the AO;

b) similarly, in respect of sub-account Platinum International Brands Fund, (ITA No.2788/Mum/2012) the return of income was filed on 25.7.2006 declaring total income at Rs.NIL and claimed refund of Rs.16,02,881/-. It also claimed short term capital loss of Rs.5,42,36,870/-. However, the AO completed the assessment vide order dated 24.12.2010 passed u/s 143(3) r.w.s.147 of the Act at an income of Rs.17,62,78,618/- by treating net loss of Rs.23,05,15,488/- arising from index derivative transaction as business loss assessable under the head business or profession as against capital loss claimed by assessee. The ld. CIT(A) also confirmed the action of AO.

Hence, both assessees who are sub-account of FII M/s Platinum Asset Management Ltd, are in appeals before the Tribunal taking the following Grounds:

3. I.T.A.No.2787/M/2012

"1. On facts and in circumstances of the case and in law, the Commissioner of Income-tax (Appeals) -11, Mumbai, (hereinafter referred to as 'the CIT(A)') erred in confirming the re-opening of the case under section 147 of the Income Tax Act, 1961(the 'Act') by the Assessing Officer having failed to appreciate that there was no income which has escaped assessment.

Your Appellant submits that the re-assessment proceedings being bad in law should be quashed.

2. On facts and in circumstances of the case and in law, the learned CIT (A), Mumbai, erred in upholding the action of the Assessing Officer (AO) in treating the net loss of Rs 1,721,827,904/- arising from index derivative transactions as business loss as against capital loss, and assessable under the head 'Income from Business or Profession', having failed to appreciate that the derivatives are securities and so in case of your Appellant being a Foreign Institutional Investor, the derivatives are capital asset and not business / trading asset.

The CIT (A) ought to have held that the loss Rs. 1,721,827,904/- arising from index derivative transactions are short-term capital loss and so should be allowed set off against short-term capital gains arising on transfer of shares as per Section 70 of the Act and carry forward unabsorbed short-term capital loss on derivative transactions as per Section 74 of the Act.

3. Without prejudice to the above, on facts and in circumstances of the case and in law, the learned CIT(A) erred in holding that in absence of business connection in India or in absence of permanent establishment in India as per India Australia Double Taxation Avoidance Agreement, the business loss of Rs. 1,721,827,904 arising on transfer of derivatives cannot be determined and so the same is not allowable as set-off against the capital gains arising on sale of shares in India having failed to appreciate that the loss is arising through the transfer of capital asset situated in India and / or the loss is arising through or from source of income in India and so the loss arising on transfer of derivatives is determinable in India.

The CIT(A) ought to have held the business loss of Rs 1,721,827,904 arising on sale of derivatives can be determined and should be set off against short-term capital gains of Rs. 921,955,751 and long-term capital gains of Rs 10,728,556 and the balance loss of Rs.789,143,597 should be allowed to be carried forward to subsequent assessment years.

4. Without prejudice to the above, on the facts and in the circumstances of the case, the CIT(A) erred in not allowing set off of business loss of Rs. 1,721,827,904 arising on derivative transactions against capital gains arising on sale of shares under section 71 of the Act and carry forward of balance unabsorbed business loss as per section 72 of the Act in view of the provisions of section 90(2) of the Act

5. The CIT(A) ought to have held the business loss of Rs 1,721,827,904 arising on sale of derivatives should be set off against short-term capital gains of Rs. 921,955,751 and long- term capital gains of Rs 10,728,556 and the balance loss of Rs. 789,143,597 should be allowed to be carried forward to subsequent assessment years.

Your Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide this appeal according to law."

I.T.A. No.2788/M/2012

Your Appellant submits that the re-assessment proceedings being bad in law should be quashed.

2. On facts and in circumstances of the case and in law, the learned CIT (A), Mumbai, erred in upholding the action of the Assessing Officer (AO) in treating the net loss of Rs 230,515,488/- arising from index derivative transactions as business loss as against capital loss, and assessable under the head 'Income from Business or Profession', having failed to appreciate that the derivatives are securities and so in case of your Appellant being a Foreign Institutional Investor, the derivatives are capital asset and not business / trading asset.

The CIT (A) ought to have held that the loss Rs.230,515,488/- arising from index derivative transactions are short-term capital loss and so should be allowed set off against short-term capital gains arising on transfer of shares as per Section 70 of the Act and carry forward unabsorbed short-term capital loss on derivative transactions as per Section 74 of the Act.

3. Without prejudice to the above, on facts and in circumstances of the case and in law, the learned CIT(A) erred in holding that in absence of business loss of Rs. 230,515,488/- arising on transfer of derivatives cannot be determined and so the same is not allowable as set-off against the capital gains arising on sale of shares in India having failed to appreciate that the loss is arising through the transfer of capital asset situated in India and / or the loss is arising through or from source of income in India and so the loss arising on transfer of derivatives is determinable in India.

The CIT(A) ought to have held the business loss of Rs 230,515,488 arising on sale of derivatives can be determined and should be set off against short-term capital gains of Rs. 165,781,163 and long-term capital gains of Rs 10,497,455 and the balance loss of Rs.54,236,870/- should be allowed to be carried forward to subsequent assessment years.

4. Without prejudice to the above, on the facts and in the circumstances of the case, the CIT(A) erred in not allowing set off of business loss of Rs. 230,515,488/- arising on derivative transactions against capital gains arising on sale of shares under section 71 of the Act and carry forward of balance unabsorbed business loss as per section 72 of the Act in view of the provisions of section 90(2) of the Act

The CIT(A) ought to have held the business loss of Rs 230,515,488 arising on sale of derivatives should be set off against short-term capital gains of Rs. 165,781,163 and long- term capital gains of Rs 10,497,455 and the balance loss of Rs. 54,236,870/- should be allowed to be carried forward to subsequent assessment years.

3. At the time of hearing, the ld. AR of the assessee submitted that Ground No.1 of both the appeals is not pressed for. Hence, Ground No.1 of both appeals is rejected as not pressed.

4. The ld. AR of the assessee submitted that Ground No.2 in both the appeals is covered by the decision of Platinum Investment Management Ltd., A/c Platinum International Fund V/s DDIT(International Taxation) in ITA No.3598/Mum/2010 (AY-2007-08)order dated 5.12.2012 in favour of the assessee. He filed a copy of the said order to substantiate his submissions.

5. On the other hand, ld. DR relied on the order of ld. CIT(A). He further submitted that the Hon'ble Jurisdictional High Court in the case of CIT vs. Bharat R. Ruia (HUF) 337 ITR 452 (Bom) has held that the transaction in derivative are entered into without taking any delivery of stock and shares or commodity and periodically or ultimately settled. Hence, Transactions in respect of derivative is a speculative transaction. He submitted that prior to amendment made by Finance Act, 2005 in section 43(5) trading in derivative was a speculative transaction and after insertion of clause (d) to sub-section 43(5) by Finance Act, 2005 w.e.f. 1.4.2006, the transaction in respect of derivative at a recognized Stock Exchange is a business transaction and cannot be considered as an investment.

6. In rejoinder, the ld. AR submitted that the said case of Hon'ble Bombay High Court viz Bharat Ruia (supra) is not applicable to the facts and the issue involve as the assessees are FII duly registered with SEBI. He further submitted that the assessee is allowed to invest in Indian Capital Market and the income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per section 115AD of the Act. He further submitted that assessee, FII is not allowed to do business in the security market. He further submitted that derivative is a security as per the clause (ia) to sub-section (h) of section 2 of The Securities Contracts (Regulation) Act, 1956 with effect from 22.2.2000. The said fact is not disputed by ld. DR that derivative " is a security" under The Securities Contracts (Regulation) Act, 1956. The ld. AR submitted that the Co-ordinate Bench of the Tribunal, has considered this aspect as well vide its earlier order dated 5.12.2012 (supra) in which the earlier decision of co-ordinate Bench in the case of LG Asian Plus Ltd V/s ADIT (International Taxation) (2011) 46 SOT 159 was also considered.

7. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We have also considered the earlier orders of the Tribunal, (supra) relied upon by ld. AR and also the decision of Hon'ble Jurisdictional High Court in the case of Bharat Ruia(supra). We agree with ld. AR that the decision relied upon by ld.DR is not relevant to the facts of the fact of the case before us. Further, the issue is squarely covered by the decision of the Tribunal, order dated 5.12.2012 which has been decided by considering the earlier order of co-ordinate Bench in the case of LG Asian Plus Ltd(supra). We consider it prudent to reproduce paragraph 8 of the said order of the Tribunal dated 5.12.2012 which read as under :

"8. We have considered the rival submissions of the parties as well as relevant material on record. As regards the observation of the Assessing Officer that the derivative were sold on same day, we find that there is a factual error on this point because the derivative were settled/closed on various dates, either by subsequent purchases or on the expiry of period within the month. This fact is clear from the details of page Nos.49 and 65-69 of paper book. On the issue of capital gain or business income, we note that an identical issue has been considered by the coordinate Bench of this Tribunal in the case of LG Asian Plus Ltd. (supra), one of us the Judicial Member is party to the decision. Though the Ruling of the Authority for Advance Ruling has a persuasive value, however, when a direct decision of the coordinate Bench of this Tribunal is on the identical issue then as per the rule of uniformity, the same is binding on us in the absence of any contrary decision of Tribunal or the High Court. The coordinate Bench of this Tribunal has considered and decided the issue after a detail and elaborate discussion of the relevant provisions and aspect relating to the transactions of derivatives by FII. The relevant concluding part of the order from para 8.12 to 11 is as under :-

8.11. From the Memorandum explaining the provisions of the Finance Bill, it is palpable that the foreign institutional investors shall be allowed to invest in the country‟s capital market. Income in respect of securities and income from transfer of securities has been made the subject matter of sec. 115AD. As per this provision, the income arising from the transfer of such securities is to be considered as short-term or long-term capital gain.

8.12. Thus, on a close scrutiny of the SEBI (FII) Regulations, 1995 together with section 115AD seen in the light of the Memorandum explaining this provisions of the Finance Bill, 1993, it is visible that a FII is allowed to invest only in the `securities‟ and further the income from securities, either from their retention or from their transfer, is to be taxed as per this section alone. Coming to income arising from the transfer of securities, it has been provided in section 115AD that it shall be charged as short-term or long-term capital gain, which depends upon the period of holding of such securities. A FII is not allowed by the Central Government to do `business‟ in the `securities‟. Once it is noticed that a FII can only `invest‟ in `securities‟ and tax on the income from the transfer of such securities is covered by a special provision contained in section 115AD, the natural corollary which follows is that tax should be charged on income arising from transfer of such securities as per the prescription of this section alone, which refers to income by way of short term or long term capital gains.

8.13. The ld. D.R. has relied on sub-section (2) of sec. 115AD for contending that the existence of `Business income‟ from dealing in securities is also envisaged. We find that sub-sec. (2) of sec. 115AD has two clauses. Clause (a) provides that where the gross total income of a FII consists only of income in respect of security referred to in clause (a) of sub-sec. (1) (i.e. income received in respect of securities, otherwise than from their transfer ), then no deduction shall be allowed to it under sections 28 to 44C or section 57 or Chapter VI-A of the Act. It is but natural that when a lower rate of tax has been provided in respect of income earned by a FII from securities, then that rate of tax is final and the assessee cannot claim double benefit, firstly by being taxed at lower rate and secondly by claiming normal deductions etc. against this income. As sec. 115AD(2)(a) refers to income received in respect of securities and not from their transfer, the same would have no application to the instant case. According to clause (b) of sub-sec. (2) of sec. 115AD, where the gross total income includes any income referred to in clause (a) or clause (b) of sub-sec. (1) (i.e. income received in respect of securities by either retaining them or from their transfer), then the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income so reduced is the gross total income of the FII. A plain reading of sub-sec. (2) makes it manifest that the gross total income of a FII may include income other than that received in respect of securities or from the transfer of such securities. The emphasis of the ld. DR is on this part of the provision to bring home the point that a FII may also have `Business income‟ arising from the transfer of securities. The argument is that a FII may have income from securities as falling under the head `Capital gains‟, which is covered under section 115AD(1)(b) and also business income, as comes out from sec. 115AD(2)(b). This argument though looks attractive at first flush, but does not stand scrutiny in depth. The rationale behind section 115AD(2)(b) is that the income of a FII, other than that arising from the holding or transfer of securities, should find its place in the total income and the deductions under Chapter VI-A be allowed by considering gross total income net of income received in respect of securities or arising from the transfer of such securities. It is quite possible that a FII may deposit its surplus funds in banks resulting into interest income. Such interest income, which shall not fall under sub-sec. (1) of sec. 115AD, shall constitute part of the gross total income. It is a simple and plain interpretation of sub-sections (1) and (2) of sec. 115AD. We want to make it clear that the question before us is not to determine whether a FII can have any business income or not. We are confined to determining whether the income from the transfer of securities would fall under sub-section (1) or (2). If it is presumed as a hypothetical case that a FII may also have any business activity, whether legal or illegal, then the income from such activity shall be considered as `Business income‟ covered under subsection (2)(b). The only embargo against the above presumption is that the business should not be that of dealing in `securities‟. Once there is a special provision slicing away the income to a FII from the transfer of `securities‟ from the other income, it has to find its home only under sub-section (1)(b), irrespective of the fact that the securities are viewed as `Investment‟ or `Stock in trade‟. If the Revenue ventures to make a distinction between such securities as constituting capital asset or stock in trade, which is not contemplated by the Central Government as is evident from SEBI(FII) Regulations and the definition of FII in Explanation (a) to sec. 115AD, then this provision will become otiose. In our considered opinion if a FII receives any income in respect of securities or from the transfer of such securities, the same can be considered under sub-sec. (1) alone and sub-sec. (2)(b) cannot be invoked to construe it as `Business income‟ .

8.14. The position has been clarified by way of a Press Note : F No. 5(13)SE/91-FIV dated 24.03.1994 issued by the Ministry of Finance, Department of Economic Affairs (Investment Division) , New Delhi, the relevant part of which is as under :

"The taxation of income of Foreign Institutional Investors from securities or capital gains arising from their transfer, for the present, shall be as under:-

(i) The income received in respect of securities (other than units of off-shore funds covered by section 115AB of the Income-tax Act) is to be taxed at the rate of 20%;

(ii) Income by way long-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 10%;

(iii) Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%;

(iv) The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income tax Act.

2. The expression "Foreign Institutional Investor" has been defined in section 115AD of the Income tax Act to mean such investors as the Central Government may, by notification in the Official Gazette, specify in this behalf. The FIIs as are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purpose of section 115AD." 8.15. From the above Press Note, it is abundantly clear that FIIs have been considered as "investors" (and not as traders). Secondly, income from transfer of securities has been viewed as chargeable to tax under the head `capital gains‟ as long-term or short-term capital gain depending upon the period for which such securities are held.

8.16. In view of the above discussion, it is out-and-out that income arising to a FII from the transfer of `securities‟ as specified in Explanation (b) to sec. 115AD can only be considered as short-term or long-term capital gain and not as „business income‟. As the `derivatives‟ have been included in the definition of „securities‟ for the purposes of this section, the income from derivatives shall also be considered as short-term or long-term capital gain depending upon the period of holding. If the viewpoint of the Department, to the effect that income from transfer of shares or debentures etc. should be considered as short-term or long-term capital gain (as has been accepted by the AO in the instant case) but that from derivatives should be considered as `Business income‟ (speculation business), then it would mean considering shares and debenture etc. as distinct from derivatives. Moreover there is nothing on record to demonstrate that the assessee was visited with any consequences as per Regulation 7A for violation of Regulations 15 or 16. It shows that the regulations have been conscientiously followed by the assessee as per which it simply made only Investment in securities and there is nothing of the sort of trading. Although in common parlance, the shares or debentures etc. are distinct from derivatives, and their taxation may also differ in the case of non¬FIIs, but such distinction is obliterated in the context of FIIs due to the inclusion of both shares and debentures etc. on one hand and derivatives on the other, in the definition of "securities" for the purpose of sec. 115AD and subsection (1) providing for the income from their transfer to be considered as long term or short term capital gain.

8.17. It is noticed that sec. 115AD falls in Chapter XII which deals with the determination of tax in certain special cases. This Chapter consists of sections 110 to 115BBC. Each section contains special provisions dealing with specific types of incomes for which a specified rate of tax is provided. If a particular item of income is covered in any of these sections, it shall be strictly governed by the prescription of that relevant section alone. We are reminded of the legal maxim `Generalia specialibus non derogant‟, which means that special provisions override the general provisions. It is a well settled legal position that specific provisions override the general provisions. In other words, if there are two conflicting provisions in an enactment, the special provisions will prevail and the subject matter covered in such a special provision shall stand excluded from the scope of the general provision. The Hon‟ble Supreme Court in the case of Britannia Industries Ltd. vs. CIT (2005) 278 ITR 546 (SC) has held that expenditure towards rent, repairs, maintenance of guest house used in connection with business is to be disallowed u/s. 37(4) because this is a special provision overriding the general provision."

9. Coming back to our context, it is seen that income arising from the transfer of securities of the FIIs has been included under sec. 115AD(1)(b) to be categorized as short-term or long-term capital gain depending upon the period of holding. In such a situation, it is impermissible to consider such income as falling under the head "Profits and gains of business or profession". Such income arising from the transfer of securities shall be charged to tax under the head "capital gains" alone. Once inclusion of such income from the transfer of securities is held to be falling only under the head "Capital gains", it cannot be considered as `Business income‟, whether speculative or non-speculative.

10. The heading of section 43 is : `Definitions of certain terms relevant to income from profits and gains of business or profession‟. The opening part of this section is : "In sections 28 to 41 and in this section, unless the context otherwise requires-". Thereafter, six subsections have been given, of which sub-sec. (5) defines "speculative transaction". It is, therefore, clear that sec. 43(5) defining "speculative transaction‟ is relevant only in the context of income under the head `Profits and gains of business or profession‟. It rules out its application to income under any other head. If that be the position, the picture is clear that sec. 43(5) has no application to FIIs in respect of "securities" as defined in Explanation to sec. 115AD, income from whose transfer is considered as short term or long term capital gains.

11. We, therefore, hold that the ld. CIT(A) was not justified in holding that income from Index based or non-Index based derivatives be treated as „business income‟, whether speculative or non speculative. The impugned order is, therefore, set aside by holding that income from derivative transaction resulting into loss of Rs.11.27 crores is to be considered as short-term capital loss on the sale of securities which is eligible for adjustment against short-term capital gains arising from the sale of shares."

In view of above order and respectfully following the decision of Co-ordinate Bench of the Tribunal (supra), we decide Ground No.2 of the appeal in favour of assessee. Accordingly, we hold that the income arising from transaction in derivative by assessee(s), being sub-account FII cannot be treated as business profit or loss.

8. Hence, Ground No.2 is decided in favour of assessee in both the appeals.

9. At the time of hearing, it was submitted that if ground No.2 is decided in favour of assessee, the ground Nos.3 to 5 in appeal No.2787/Mum/2012 and Ground Nos.3 and 4 in appeal No.2788/Mum/2012 become infructuous and no need to be adjudicated. Since, we have decided the nature of transaction as an investment and profit and loss has to be considered as capital profit or loss, Ground Nos 3 to 5 of Appeal No.2787/Mum/2012 and Ground Nos. 3 and 4 in Appeal No.2788/Mum/2012 have become infructuous.

10. In the result, both the appeals of assessee are allowed in part.

Order pronounced in the open court on 4th day of December 2013.

1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 10601 OF 2013
[ARISING OUT OF S.L.P. (C) NO. 20381 OF 2012]
CHIRONJILAL SHARMA HUF ... APPELLANT(s)
Versus
UNION OF INDIA AND OTHERS ... RESPONDENT(s)
J U D G M E N T
R.M. LODHA,J.
Leave granted.
2. The brief facts necessary for consideration
of the issue raised in the appeal are these: In the
search conducted in the house of the appellant on
31.1.1990, a cash amount of Rs. 2,35,000/- was
recovered. On 31.5.1990, an order under Section
132(5) of the Income Tax Act, 1961 (for short "the
Act") came to be passed. The Assessing Officer
calculated the tax liability and the cash seized in
the search from the appellant's house was
appropriated. However, the order of the Assessing
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Officer was finally set-aside by the Income Tax
Appellate Tribunal (for short "the Tribunal") on
20.2.2004. The revenue accepted the order of the
Tribunal. Consequently, the appellant has been
refunded the amount of Rs. 2,35,000/- along with
interest from 4.3.1994 (date of last of the regular
assessments by the Assessing Officer) until the date
of refund.
3. The appellant (assessee) claims that he is
entitled to interest under Section 132B(4)(b) of the
Act which was holding the field at the relevant time
for the period from expiry of period of six month's
from the date of order under Section 132(5) to the
date of regular assessment order. In other words,
the order under Section 132(5) of the Act having been
passed on 31.5.1990, six months expired on 30.11.1990
and the last of the regular assessments was done on
4.3.1994, the assessee claims interest under Section
132B(4)(b) of the Act from 1.12.1990 to 4.3.1994.
4. Section 132 of the Act deals with search and
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seizure. Sub-section (5) thereof, which is relevant
for the purposes of the present appeal, reads as
under:
(5): Where any money, bullion, jewellery or
other valuable article or thing (hereafter
in this section and in sections 132A and
132B referred to as the assets) is seized
under sub-section (1) or sub-section (1A),
as a result of a search initiated or
requisition made before the Ist day of
July, 1995, the Income-tax Officer, after
affording a reasonable opportunity to the
person concerned of being heard and
making such enquiry as may be prescribed,
shall, within one hundred and twenty days
of the seizure, make an order, with the
previous approval of the Joint
Commissioner)-
(i) estimating the undisclosed income
(including the income from the
undisclosed property) in a summary manner
to the best of his judgment on the basis
of such materials as are available with
him;
(ii) calculating the amount of tax on
the income so estimated in accordance
with the provisions of the Income Income-
Tax Act, 1922 (11 of 1922), or this Act;
(iia) determining the amount of interest
payable and the amount of penalty
imposable in accordance with the
provisions of the Indian Income-Tax Act,
1922 (11 of 1922), or this Act, as if the
order had been the order of regular
assessment;
(iii) specifying the amount that will be
required to satisfy any existing
liability under this Act and any one or
more of the Acts specified in clause (a)
of sub-section (1) of section 230A in
respect of which such person is in
default or is deemed to be in default,
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and retain in his custody such assets/or
part thereof as are in his opinion
sufficient to satisfy the aggregate of the
amounts referred to in clauses (ii), (iia)
and (iii) and forthwith release the
remaining portion, if any, of the assets to
the person from whose custody they were
seized:
Provided that if, after taking into account
the materials available with him, the
Income Tax Officer is of the view that it
is not possible to ascertain to which
particular previous year or years such
income or any part thereof relates, he may
calculate the tax on such income or part,
as the case may be, as if such income or
part were the total amount chargeable to
tax at the rates in force in the financial
year in which the assets were seized and
may also determine the interest or penalty,
if any, payable or imposable accordingly:
Provided further that where a person has
paid or made satisfactory arrangements for
payment of all the amounts referred to in
clauses (ii), (iia) and (iii) or any part
thereof, the Income-Tax Officer may, with
the previous approval of the Chief
Commissioner or Commissioner, release the
assets or such part thereof as he may deem
fit in the circumstances of the case."
5. Section 132B deals with the payment of
interest on delayed assessment. Omitting the
unnecessary part, the relevant provisions of Section
132B(4)(a) and(b) of the Act read as under:
132B: Application of retained assets........
(4)(a) The Central Government shall pay
simple interest at the rate of fifteen per
cent per annum on the amount by which the
aggregate of money retained under Section 132
and of the proceeds, if any, of the assets
sold towards the discharge of the existing
liability referred to in clause 3 of subsection
(5) of that section exceeds the
aggregate of the amounts required to meet the
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liability referred to in clause (i) of sub--
section (1) of this section.
(b) Such interest shall run from the
date immediately following the expiry of the
period of six months from the date of the
order under sub-section 5 of section 132 to
the date of the regular assessment or
reassessment referred to in clause (i) of
sub-section (1) or, as the case may be, to
the date of last of such assessments or reassessments.
5. A close look at the above provisions and,
particularly, clause (b) of Section 132B(4) of the
Act clearly shows that where the aggregate of the
amounts retained under Section 132 of the Act exceeds
the amounts required to meet the liability under
Section 132B(1)(i), the department is liable to pay
simple interest at the rate of fifteen percent on
expiry of six months from the date of the order under
Section 132(5) of the Act to the date of the regular
assessment or re-assessment or the last of such
assessments or reassessments, as the case may be. It
is true that in the regular assessment done by the
Assessing Officer, the tax liability for the relevant
period was found to be higher and, accordingly, the
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seized cash under Section 132 of the Act was
appropriated against the assessee's tax liability but
the fact of the matter is that the order of the
Assessing Officer was over-turned by the Tribunal
finally on 20.2.2004. As a matter of fact, the
interest for the post assessment period i.e. from
4.3.1994 until refund on the excess amount has already
been paid by the department to the assessee. The
department denied the payment of interest to the
assessee under Section 132B(4)(b), according to Mr.
Arijit Prasad, learned counsel for the revenue on the
ground that the refund of excess amount is governed
by Section 240 of the Act and Section 132B(4)(b) of
the Act has no application. But, in our view, Section
132B(4)(b) deals with pre-assessment period and there
is no conflict between this provision and Section 240
or for that matter 244(A). The former deals with preassessment
period in the matters of search and seizure
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and the later deals with post assessment period as per
the order in appeal.
7. The view of the department is not right on the
plain reading of Section 132B(4)(b) of the Act as
indicated above.
8. We, accordingly, allow the appeal and setaside
the impugned order and hold that the appellant
is entitled to the simple interest at the rate of
fifteen percent per annum under Section 132B(4)(b) of
the Act from 1.12.1990 to 4.3.1994.
9. The revenue shall calculate the interest
payable to the assessee as above and pay the same to
the appellant (assessee) within two months from today.
No costs.
............................J.
(R.M. LODHA)
............................J.
(MADAN B. LOKUR)
...........................J.
(KURIAN JOSEPH)
NEW DELHI;
NOVEMBER 26, 2013.
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Sufficient cause not a license to file belated appeal and to get the delay condoned

We are aware that adopting a liberal view in condoning delay is one of the guiding principles in the realm of belated appeals, but liberal approach cannot be equated with a licence to file appeals at will-disregarding the time limits fixed by the statutes. No doubt that assessees are entitled to wait until the last date of the limitation for filing of the appeal, but when they allow the limitation to expire and come forward with a explanation enumerating reasonable causes for not filing the appeal within the time prescribed under the statute, then the causes, so shown, must establish that because of some event or circumstances arising before limitation expired. Except for the inaction and negligence of the assessee, there are no other reason for filing a belated appeal. We have avoided using adjectives before the words inaction and negligence, which are generally used by the higher forums of judiciary when they find that delay is result of total lack of prudence. Timely action is the essence of day-today activities of human being – a farmer not sowing his fields in time after the rains has to suffer. Principles of nature are equally applicable to human behaviour, including the judicial system. No action was taken by the assessee for a long period to follow up his appeal.So, if the FAA found that no satisfactory cause, not to speak of sufficient cause, has been shown by the assessee, then fault does lies with the assessee and not with him. Assessee, itself has to be blamed for the uncomfortable situation in which it finds now. For a period of more than three years, it did not bother to find out the outcome of the appeal it had filed and that also when recovery proceedings were being undertaken by the department. Bank account of the assessee were attached as per the documents available in the PB. It contacted AO, TRO and the CIT for staying demand, but no effort was made to find out the fate of the appeal. In our opinion behaviour of the assessee can be termed as personified inaction and negligence. Courts are of unanimous opinion that act of negligence and inaction do not constitute reasonable cause. We are also of the opinion that by not filing appeal in time before the FAA, assessee had allowed the State to believe that it had a vested right in its favour. Rights of the Sovereign are as important as that of the tax-payeres. In matter of condonation of delay both have to show a sufficient cause which a prudent person can believe. In the case under consideration same is absent.

We are aware that affidavits explaining the delay is not a pre-condition for accepting belated appeals. But, affidavits throw light on the surrounding circumstances and thought process of an assessee. In the case before us, we find that no affidavit was filed before the FAA or us. We are not deciding the case against the assessee because of the said reason alone, but affidavit would have helped us to find whether or not any sufficient cause was there, if we were aware of sequences of the events and the circumstances that led to delay.

An assessee who claims that it had won the case at the level of the Hon'ble Apex Court or was successful before the ITAT, cannot be treated an ignorant assessee as the appellants of the case of Ramnath Sao(supra). Besides, the assessee was aware that the CBDT has issued instruction with regard to stay of demand. Assessee, a corporate-assessee filing returns of income of lacs of Rupees and assisted by highly qualified professionals cannot take shadow of umbrella of ignorance of the provisions of law. It is also not the case of the assessee that it was guided by the wrong advice of the professional or it took time to consult professsionals. An individual of a small place and an ISO 9001-2000-company cannot be equated, while considering the condonation of delay.

Therefore, considering the peculiar facts and circumstances of the case we uphold the order of the FAA and decide the effective ground of appeal against the assessee.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 7167/Mum/2011, Assessment Year-2005-06

Prashant Projects Limited V/s. DCIT

Date of Pronouncement: 04-09-20 13

Order u/s. 254(1)of the Income-tax Act, 1961(Act)

Per Rajendra, A. M.

Challenging the order dt. 04-08-2011 of the CIT(A)-22, Mumbai, Assessee has filed following Grounds of Appeal:

"1. (a) The learned CIT(A) erred in not admitting the appeal on the grounds of delay when the appellant had in fact filed the appeal with the Dy. CIT 10(3) within the statutory time limit of 30 days period and duly acknowledged. (b)The second set of appeal was filed in view of the Dy. CIT 10(3) not forwarding the said appeal to the CIT (A) in charge.

2. The learned CIT(A) erred in not adjudicating on other grounds of appeal here under.

a. On the facts and in the circumstances of the case the learned assessing officer erred in disallowing and making addition of Rs. 55, 69, 138/-out of Direct Expenses (Rs. 39, 45, 687/-) and out of Administrative Expenses (Rs. 16, 23, 451/-) which be set aside.

i. The learned assessing officer has made the addition arbitrarily, based on conjectures and surmises by estimating without bringing any details or facts on record.

ii. The learned assessing officer erred in not considering the voluminous details including bills, vouchers, payments made etc., in support of all the expenses incurred and has erred in observing that no proper supporting details produced. iii. The appellant prays that the addition of Rs. 55, 69, 138/- be set aside. iv. Without prejudice, the addition made on estimate basis being on higher side is to be reduced.

b. On the facts and in the circumstances of the case the learned assessing officer erred in not giving deduction u/s 80G on the donation of Rs. 1 0, 40, 000/- given to Rangachary Trust which is eligible and exempt. The appellant prays that the learned assessing officer be directed to give such deduction.

3. The appellant craves leave to add amend or alter any or all of the grounds of appeal. "

Facts of the case :

2. Assessee-company, engaged in the business of construction of storage handling Terminal of Petroleum Products, filed its return of income on31. 10. 2005 declaring total income of Rs. 45. 49 lacs. Assessing Officer (AO) finalised the assessment order u/s. 143(3) of the Act, on 3 1. 12. 2007, determining the total income at Rs. 1, 1 1, 17. 010/-. Assessment order was received by the assessee on 25. 01. 2008 and accordingly appeal was to be filed by 24. 02. 2008, but, appeal was filed on 09. 06. 2011. Thus, there was delay of more than 3 years. As per the assessee, by mistake it filed appeal in the office of the ACIT. Later on in May, 2011, when it came to know that appeal was to be filed before the FAA, an application was moved by it to the AO for transferring the appeal to the office of the FAA. After considering the submissions of the assessee, FAA dismissed the appeal filed by it.

2. 1. Effective Ground of appeal is about not admitting the appeal by the FAA on the ground of delay. Assessee moved an application before the him for condoning delay stating that by mistake appeal was filed before the AO, that once the assessee became aware of the mistake it moved an application for transferring the appeal to the office of the FAA. After considering the submission of the assessee he held that the application to AO had been filed after more than 3 years from the date of filing of appeal at wrong place, that assessee had not explained as to why it was not aware of the so called mistake committed till 3 years and how the same was realised after more than 3 years, that the assessee was assisted by the CAs who were aware of the procedure of filing of appeal since the assessment as well as appellate proceedings were being represented by the duly authorised CA, that huge gap of more than 3 years which had not been explained by the assessee which proved that there was no diligence on the part of the assessee, that the assessee was totally negligent, that the cause of delay explained by the appellant in filing appeal was avoidable by due care and attention, that there was no reasonable cause within the meaning of provisions of section 249(3) of the Act. He relied upon the decision of D Bench of ITAT Chennai pronounced in the case of Sri. Venkatesa Paper & Boards Ltd. (98 lTD 200) and dismissed the appeal filed by the assessee, as stated earlier.

2. 1. Before us, Authorised Representative submitted that appeal was filed before the AO by mistake, that mistake came to its notice when it contacted office of the FAA, that once mistake was noticedassessee requested the AO to transfer it to the FAA, that dealy in filing appeal was because of bona fide belief that appeal has been filed before the right forum, that FAA should have condoned the delay, that a liberal view should be taken. He referred to pages no. 1086, 109 1 of the Paper Book(PB) as well as the letters written by him to the officers of the department on various occasions. He also relied upon the cases of Ram Nath Sao(3 SCC 195), Mst. Katiji(167 ITR471), N. Balkrishnan (7SCC123), Sankar Rao(AIR 1987 SC1726), Bharat Auto Center (282 ITR366-All. ), Cheminor Drugs Ltd(105 ITD 613 -Hyd)General Williams Masonic (ITAT Del). Departmental Representative (DR) submitted that FAA has held that no sufficient cause of delay was shown by the assessee, that there was negligence on part of the assessee, that assessee itself had admitted that it had field appeal before the FAA, that delay was not explained by the assessee.

2. 2. We have heard the rival submissions and perused the material before us. Before proceeding further, we would like to discuss philosophy and history of law of condonation of delay along with a few cases for better understanding of the subject. Seeds of condonation of delay can be seen in Act No. XXXII of 1860. Part XII, section CIX, of the Act mentions that appellate authority, hearing the appeal against the order of Punchayat, may allow a person to file appeal even after fifteen days(period stipulated for filing appeals as per the provisions of the said Act)for 'special reasons. Act No. XVI 1870, Act No. XII 1870 also had similar provisions. But, section 25(2) of the Act II of 1886 clearly mentioned that there should be sufficient cause for not presenting petition with in time. Discretion was given to the Presiding officer to accept the belated petition. Indian Income-tax, 1922 is more or less same as the present Act. Section 30(2)of the said Act is almost identical to section 249(3)of the Act. Both the Acts allow the assessee to file appeals after expiry of specified dates, if they can show sufficient cause for not filing appeals in time.

It is said that the law of limitation is enshrined in the maxim that it is for the general welfare that a period be put to litigation. Rules of limitation are not meant to destroy the rights of the parties, rather the idea is that every legal remedy must be kept alive for a legislatively fixed period of time. But, said rules are meant to see that the parties seek their remedy promptly. Condonation of delay is the discretion of the Presiding Officers of judicial forums and is governed by section 5 of the Limitation Act, 1963. Courts are of the view that the words 'sufficient cause' of the said Act, should receive a liberal construction, so as to advance substantial justice. Once a judicial forum accepts the explanation as sufficient, it is the result of positive exercise of discretion. These provisions do not envisage that such a discretion can be exercised only if the delay is within a certain limit. The length of the delay is not the matter, acceptability of the explanation is the only criterion. Following the spirit of advancing substantial justice, Act has included discretionary powers for condoning delay in filing appeals. Section 249(3)of the Act, that allows the FAA to admit belated appeals, reads as under :

"(3) The Commissioner (Appeals) may admit an appeal after the expiration of the said period if he is satisfied that the appellant had sufficient cause for not presenting it within that period. "

2. 3. a. Now, we would like to discuss a few cases relevant for deciding the issue at hand. In the case of Office of the Chief Post Master General v. Living Media India Ltd. (348ITR7)appeals were filed by the Postal Department before the Hon'ble Supreme Court by way of special leave along with an applications for condoning delay of 427 days. Dismissing the appeal Hon'ble apex Court held as under :

….. Neither the Department nor the person in-charge had filed an explanation for not applying for the certified copy within the prescribed period. The other dates mentioned in the affidavit clearly showed that there was delay at every stage and there was no explanation as to why such delay had occasioned. The Department or the person concerned had not evinced diligence in prosecuting the matter to the court by taking appropriate steps. (emphasis by us). The persons concerned were well aware or conversant with the issues involved including the prescribed period of limitation for taking up the matter by way of filing a special leave petition in the Supreme Court. In the absence of plausible and acceptable explanation, the delay could not be condoned mechanically …………………………………… Though in a matter of condonation of delay when there was no gross negligence or deliberate inaction or lack of bona fide, a liberal concession had to be adopted to advance substantial justice (emphasis by us)….. Considering the fact that there was no proper explanation offered by the Department for the delay except mentioning of various dates, the Department had failed to give acceptable and cogent reasons sufficient to condone such a huge delay. " (emphasis by us).

2. 3. b. In a recent judgment, (5^thAug., 2013)Hon'ble Supreme Court has again considered the issue of condonation of delay. In that matter the petitioner had filed a writ petition before the Delhi High Court against an order passed by the Commissioner of Customs, Kanpur. The Delhi High Court converted the writ petition into statutory appeal under the Customs Act, 1962. Department raised an objection about the territorial jurisdiction of that Court. Petitioner withdrew the appeal with liberty to approach the jurisdictional High Court. Hon'ble Delhi High Court dismissed the appeal as withdrawn with the following observations:

"It is for jurisdictional High Court to decide the prayer for waiver/exclusion. However, it does appear that the appellant in the present case had bonafidely filed the appeal in this Court and has been pressing the same, as the Tribunal is located in Delhi. "

Appellant then filed appeal before the Hon'ble Allahabad High Court and applied for condonation of delay of 697 days. Dismissing the appeal Court observed as under:

"The appellant was assisted and had the services of the counsel's, who are expert in the central excise and customs cases. They first filed a writ petition, and then without converting it into appeal obtained an interim order. They kept on getting the matter adjourned and thereafter in spite of specific objection taken, citing the relevant case law, which is well known, took time to study the matter. Thereafter, they took more than one year and three months, to study the matter to withdraw the appeal. They took a chance, which apparently looking to the facts in Ketan V. Parekh 's case and this case appear to be the practice of the counsels appearing in such matters at Delhi High Court and succeeded in getting interim orders. The Supreme Court has strongly deprecated such practice of forum shopping. In this case also there is no pleading that the writ petition and thereafter appeal was filed in Delhi High Court, under bonafide belief that it had jurisdiction to hear the appeal and that the appellant was pursuing the remedies in wrong court with due diligence. The appellant, thereafter, caused a further delay of 20 days in filing this appeal, which he has not explained. For the aforesaid reasons, we are of the opinion that the appellant is not entitled to the benefit of Section 14 of the Limitation Act. This appeal is barred by limitation by 697 days, which has not been sufficiently explained by the appellant. "

Appellant challenged the order of the Hon'ble High Court before the Hon'ble Supreme Court. Not only Special leave petition, filed by the appellant, was dismissed by the Hon'ble Apex Court, but cost of Rs. 25, 000/- was also imposed on the appellant. (2013-TIOL-36-SC-CUS)

2. 3. c. In the case of Balwant Singh (Dead. ) v. Jagdish Singh(8 SCC 685), issue before the Hon'ble Apex court was condonation of delay of 778 days in bringing the legal heirs of the appellant on record. In that the applicants contended that they were not aware of the pendency of the appeal earlier and that they had come to know of it only in the month of March, 2010, where after, the application was filed on April 15, 2010. Hon'ble Court noticed contradictions in the stand taken to explain the delay and concluded that the applicants had acted irresponsibly and with negligence and, thus, there was an ex facie lack of bona fide. It was held that the conduct of the legal representatives of the sole deceased evinced that they had acted with callousness. It was in that factual context, that the Hon'ble Apex court on an exhaustive survey of its earlier decisions on the issue declined to condone the delay. While emphasising that the expression 'sufficient cause', implies the presence of legal and adequate reasons to advance substantial justice, which presupposes no negligence or inaction on the part of the applicant(emphasis by us). It was also enunciated that the word sufficient signified adequacy to answer the purpose intended. Hon'ble court further observed that the sufficient cause should be such as it would persuade the court, in the exercise of its judicial discretion, to treat the delay as an excusable one. In conclusion, Ho'ble Court reiterated that the word 'sufficient cause' should be understood and applied in a reasonable, pragmatic, practical and liberal manner and that the extent and degree of leniency to be shown by a court would depend on the nature of the application and facts and circumstances of the case(emphasis by us).

2. 3. d. In Indian Oil Corporation Ltd. v. Subrata Borah Chowlek 3 GLR 312, there was delay of 59 days. Explanations furnished by the applicant revealed, that not only the applicant whiled away time at various intervening stages even after the expiry of the period of limitation, it waited for the summer vacation of the Hon'ble Supreme Court of India and the Delhi High Court to be over to have the matter attended to by their counsel.

2. 3. e. In the case of Ajit Singh Thakur Singh & Anr. vs. State of Gujarat the Hon'ble Supreme Court has explained as what constitutes sufficient cause. It was held that when a party allows limitation to expire and pleads sufficient cause for not filing the appeal earlier, the sufficient cause must establish that because of some event or circumstances arising before limitation expired it was not possible to file the appeal within time. (1 SCC 495)

2. 4. After considering the above referred judgments, we are of the opinion that delay can be condoned only if there is no gross negligence or deliberate inaction or lack of bona fide. Secondly, assessee should furnish acceptable and cogent reasons sufficient to condone delay. These are the pre-requisites for condoning delay. Besides the above referred basic principle of condonation delay certain other general principles on the subject, culled out from various case laws, can be summarised as under:

i). If sufficient cause for excusing delay is shown, discretion is available to the FAAs to condone the delay and admit the appeal.

ii). The expression 'sufficient cause' is not defined, but it means a cause which is beyond the control of anassessee. For invoking the aid of the section any cause which prevents a person approaching the FAA within time is considered sufficient cause. In doing so, it is the test of reasonable man in normal circumstances which has to be applied. The test whether or not a cause is sufficient is to see whether it could have been avoided by the party by the exercise of due care and attention. In other words, whether it is bona fide cause, inasmuch as nothing shall be deemed to be done bona fide or in good faith which is not done with due care and attention. What may be sufficient cause in one case may be otherwise in another. What is of essence is whether it was an act of prudent or reasonable man. [Ashutosh Bhadra v. Jatindra Mohan Seal (AIR 1954 Cal. 238) and Hisaria Plastic Products v. CST AIR 1980 (All. ) 185]. Subsequent decision of a Court cannot constitute sufficient cause.

iii). In every case of delay, there is some lapse on the part of the assessee. If there are no mala fides and it is not put forth as part of a dilatory strategy, the FAA should consider the application of the assessee. But when there is reasonable ground to think that the delay was occasioned otherwise than a bona fide conduct, then the FAA should lean against acceptance of the explanation.

iv) Section 249(3)of the Act is discretionary in nature and the assessee cannot seek condonation of delay under this provision as a matter of right, but has to satisfy the FAA by explaining the sufficient cause for the delay.

v). Just because there is merit in the appeal filed by the assessee, any amount of delay, however, negligently caused, cannot be condoned.

vi). Requirement of sufficient cause for delay cannot be ignored and it becomes very important and significant when the delay is inordinate and abnormal.

vii). In the matter of J. B. Advani & Co. (P. ) Ltd. (72 ITR 395)Hon'ble Supreme Court had held that explanation of delay for the entire period is necessary. In other words what is expected of the appellant in such matters is to show that delay was occasioned due to some sufficient cause. The cause pleaded should not only be a probable one but it should be real and sufficiently reasonable. It would not be any sort of assertion that would amount to sufficient cause and would justify the condonation of delay. The cause pleaded must fit in the facts and circumstances of the given case and the explanation offered regarding the delay occasioned by such cause should appeal to reasons so as to get judicial approval. In short in matters of delay it is neither practicable nor desirable to explain minute-to-minute/hour-to-hour delay, but delay has to be explained.

viii). When an application for condonation of delay is made to consider whether a sufficient cause has been made out by the assessee; the order of the FAA should disclose that he had applied his mind to the question raised before it. Due exercise of judicial discretion is a pre-condition for allowing! refusing an application filed for condoning delay.

ix). The application for condonation of delay should contain substantially all the relevant material and as far as possible it should be supported by affidavit, showing that there is sufficient cause for condonation.

x). If the delay is not vitiated by any error of law it should be condoned.

xi). Any event, cause or circumstance arising after the expiry of the limitation period cannot constitute a sufficient cause.

xii). It is said that non-filing of appeal before the FAA, before the end of limitation period, creates a vested right in favour of the Revenue. As a result of not filing of an appeal by an assessee, Department, gets a legitimate and undisputed right over the tax-revenue accruing to it in pursuance of the order of the AO. This right cannot be disturbed in a light-hearted manner.

xiii). In the cases of belated appeals matters have to be essentially analysed in the facts of each case-no general formula can be or should be applied, so as to ensure that an otherwise genuine cause of justice is not defeated by adherence to technical precedence.

xiv). Condonation of delay, though an equitable relief, however, cannot be accorded merely on sympathy or compassion and the grounds offered have to be evaluated to test whether the party in default had been guilty of conscious and deliberate inaction, culpable negligence and inexcusable indifference to the period of limitation mandatorily prescribed by law.

3. If above general principals are analysed, it becomes clear that touchstone for condonation of delay is 'sufficiency/reasonableness of the cause'. Filing of an appeal in time is a normal judicial process, whereas filing a belated appeal is an abnormal step. It is said that extraordinary remedies need existence of extraordinary circumstances. Therefore, assessee has to prove that abnormal circumstances really and factually existed in a particular case. Now, we would like to deliberate upon the issue as whether extra ordinary circumstances existed in the case under consideration.

3. 1. Now we would like to discuss the cases relied upon by the Authorised Representative (AR). Facts of the case of Ramnath Sao (Supra) were that after the death of some litigants, legal heirs were to be brought on record and there was delay in completing the formalities. It was submitted that the persons who had to be brought on record were 'rustic' and 'illiterate villagers' belonging to 'different families, different villages within the different police stations'. It was also submitted that delay was not intentional or they were not negligent or there was no allegation of inaction of any inaction on their part. Considering the above facts Hon'ble Supreme Court had condoned the delay. In the case under consideration it cannot be said that assessee was not knowing the procedure of filing of appeal was illiterate. It was represented by a professional during the assessment proceedings as well as the stay proceedings. It is a corporate entity and is assisted by qualified professionals. In our opinion facts of both the cases are totally distinguishable.

In the case of Mst. Katiji(supra) delay of 4 days was condoned by the Supreme Court because important question as regards principle of valuation was involved. It was found that there was upward revision of the order of compensation by 800 % and this revision raised an important question about valuation. Therefore, Hon'ble Apex Court delayed the condonation. It was also observed by the Hon'ble Court that appellant was a government body and that the experience showed that on account of impersonal machinery and the inherited bureaucratic hurdles delay was less difficult to understand though more difficult to approve. Thus, the facts of the case of Mst. Katiji are not relevant in deciding the issue the in matter under consideration-here no important legal issue has to be decided.

Next case relied upon by the assessee is of N. Balkrishana (supra). In that case delay was caused by misrepresentation/inaction of the Advocate. Assessee had approached the Consumer Protec – tion Court and was awarded compensation by District Forum from the Advocate. In those circumstances Hon'ble Supreme Court held that there was sufficient cause for filing belated appeal. It was also held that the assessee was not an 'irresponsible' litigant. The Hon'ble Apex Court also found that explanation for delay was found satisfactory by the Trial Court, whereas Hon'ble High Court had reversed the finding of the Trial Court. Considering these particular circumstances, delay was condoned. We are of the opinion that there is no similarity between the case under consideration and that of N. Balkrishnan(supra).

In the case of Sankar Rao(supra), the appeal was lodged in the Court of the Additional District & Sessions Judge instead of the court of District Judge. The Appeal memo was returned for presentation of the court of District Judge and on the very same date and appeal was filed.

Clearly, there is no similarity between the case relied upon by the assessee and the case under consideration.

Next case relied upon by the assessee is of Bharat Auto Centre(supra). In that case Hon'ble Allahabad High Court had found that the delay was caused because of seeking of legal opinion and consultation with several counsels including the retired judges considering the peculiar facts of the case Hon'ble Court had arrived at the conclusion that delay was not caused because of negligence and allowed the appeal filed by the assessee.

In the case of Cheminor Drugs Ltd. (Supra) appeal was filed before the Tribunal due to wrong advice. Considering the totality of the facts and circumstances of that case Tribunal had condoned the delay. In case of General Willium Mesonic Polly Clinic (Supra) it was found that society was represented by non-professional in Income Tax matters and not by Income Tax experts, that instead of filing of appeal before the proper Forum assessee had moved a fresh application before the DIT(Exemptions), that later on some professional advice the society to prefer an appeal before the right Forum, considering these facts delay was condoned.

From the above discussion, it is clear that none of the case relied upon by the AR of the assessee is applicable to the facts of the case under consideration.

3. 3. Here, we would also like to mention a few facts which are useful in deciding the appeal. We find that AO had informed the assessee, as early as 31. 12. 2007, to file an appeal before the CIT(A). While issuing notice of demand u/s. 156 of the Act, vide paragraph no. 5, he specifically mentioned as under:

" If you intend to appeal against the assessment/fine/penalty you may present an appeal under para-1 of Chapter XX of the Income Tax Act, 1961 to the CIT(A)-10 within 30 days of the receipt of this notice "

After that assessee applied for stay to various authorities of department. On 15. 05. 2008 in his letter to the Tax Recovery Officer(TRO), assessee had mentioned that it had filed an appeal with the Commissioner of Income Tax, Mumbai. He further mentioned that it strongly believed that the appeal of the Commissioner of appeal could be favourable and the tax demand would become Nil. Finally he requested the TRO to stay recovery proceedings till the appeal was heard and determined. Assessee claims itself an ISO 900 1-2000 Company. With regard to stay of demand, Assessee's C. A. had appeared before the CIT(A)-10, Mumbai as evident from the order of the Commissioner dated 12. 11. 2008, In his order, he held that a portion of demand would be kept in abeyance till 3 1. 01. 2009 or the receipt of the order of the appeal from the CIT(A) which ever was earlier. On 22. 03. 20 10 in its letter to ACIT-10 (3) in para-2, assessee mentioned that it had preferred an appeal to the CIT(A) against the order of DCIT-10(3) in respect of AY 2005-06. It was also mentioned that matter in appeal had not been taken for hearing even after lapse of 2 years and that it was sure about disallowance made by the AO to be set-aside in appeal. It was further mentioned that company would follow up the matter with the CIT(Appeals) for taking up the case for hearing at the earliest. Vide its letter dated 12. 03. 2011 to the ACIT-10-3, Mumbai, assessee informed that for earlier years matter was pending before the ITAT/FAA. We find that in its letter, dated 08. 04. 2011 to the TRO (10) (3), assessee-company had mentioned that it had been able to win case in the Hon'ble Supreme Court, that the departmental appeal against it was rejected for the earlier years in appeal by the ITAT, Mumbai. The letter also talks about pendency of appeal for AY 2005-06 in the office of the FAA and guideline issued by the CBDT also refer to in the said letter. From these letters on thing becomes clear that assessee is well aware of procedural aspect and legal provisions of the Act.

3. 3. We are aware that adopting a liberal view in condoning delay is one of the guiding principles in the realm of belated appeals, but liberal approach cannot be equated with a licence to file appeals at will-disregarding the time limits fixed by the statutes. No doubt that assessees are entitled to wait until the last date of the limitation for filing of the appeal, but when they allow the limitation to expire and come forward with a explanation enumerating reasonable causes for not filing the appeal within the time prescribed under the statute, then the causes, so shown, must establish that because of some event or circumstances arising before limitation expired. Except for the inaction and negligence of the assessee, there are no other reason for filing a belated appeal. We have avoided using adjectives before the words inaction and negligence, which are generally used by the higher forums of judiciary when they find that delay is result of total lack of prudence. Timely action is the essence of day-today activities of human being – a farmer not sowing his fields in time after the rains has to suffer. Principles of nature are equally applicable to human behaviour, including the judicial system. No action was taken by the assessee for a long period to follow up his appeal.

So, if the FAA found that no satisfactory cause, not to speak of sufficient cause, has been shown by the assessee, then fault does lies with the assessee and not with him. Assessee, itself has to be blamed for the uncomfortable situation in which it finds now. For a period of more than three years, it did not bother to find out the outcome of the appeal it had filed and that also when recovery proceedings were being undertaken by the department. Bank account of the assessee were attached as per the documents available in the PB. It contacted AO, TRO and the CIT for staying demand, but no effort was made to find out the fate of the appeal. In our opinion behaviour of the assessee can be termed as personified inaction and negligence. Courts are of unanimous opinion that act of negligence and inaction do not constitute reasonable cause. We are also of the opinion that by not filing appeal in time before the FAA, assessee had allowed the State to believe that it had a vested right in its favour. Rights of the Sovereign are as important as that of the tax-payeres. In matter of condonation of delay both have to show a sufficient cause which a prudent person can believe. In the case under consideration same is absent.

Therefore, considering the peculiar facts and circumstances of the case we uphold the order of the FAA and decide the effective ground of appeal against the assessee.

As a result, appeal filed by the Assessee stands disallowed.

Amount paid for supply of software which is not embedded in equipment is taxable as royalty

Posted In Income Tax Case Laws | Judiciary | No Comments »

Reliance Infocom Ltd. (now known as Reliance Communications Ltd.) & others. vs. DDIT(IT). ITA No. 730/Mum/09, Date of Decision 06/09/2013, ITAT-Mumbai

Facts : Briefly stated, Reliance Infocomm Ltd., now known as Reliance Communications Ltd. wanted to establish wireless telecommunications network in India. As a part of that it has entered into a Wireless Network General Terms and Conditions contract and Wireless Software contract dated 3 1.07.2002 with Lucent Technologies Hindustan Pvt. Ltd. (LTHPL), an Indian company of M/s. Lucent group, USA. Wireless software Assignment and Assumption agreement dated 05.08.2002 with LTHPL and Lucent Technologies GRL LLC (LTGL) USA towards supply of software required for telecom network. When Reliance placed first supply orders for software for an amount of US$1 1,06,56,855, it made applications under section 195(2) before DDIT-2(1) Mumbai requesting payment for purchase of software without deduction of tax at source. It was Reliance's contention that it was for purchase of software and LTGL has no PE in India and as per DTAA between India and USA, the amount paid is not taxable in India. AO after examining the details of agreements held that the assessee was getting only license to use the software and is in the nature of royalty, taxable at 20% in India under the provisions of Income tax Act 1961. Not only in the case of Lucent, Reliance also similarly placed orders with various other suppliers of telecom software in other countries and sought no deduction certificates on similar contentions. AO passed similar orders in all the cases where Reliance was to remit the monies over a period of time. After deducting tax as directed by the AO, Reliance however preferred appeals before the Ld.CIT(A) as per the then existing provisions of section 248 of the IT Act. The learned CIT(A), vide his orders, held that the amounts paid cannot be considered as royalty as Reliance purchased 'goods' which is a copyrighted article and so, since the seller do not have PE in India the amount is not taxable. Accordingly, he gave relief to Reliance. The Revenue is aggrieved on these orders. The lead order of the AO and CIT(A) pertains to ITA No. 837/Mum/2007 in which the AO' order under section 195(2) dated 12.03.2003 was considered by the CIT(A) in his appeal No. CITA XXXI/DDIT (IT) 2(1)/IT – 448/02-03/06-07 dated 26.10.2006. It was admitted that the facts are more or less similar to the above appeal and main arguments were rendered in this appeal.

Held :- In view of the agreement and various judicial pronouncements the hon'ble tribunal has held that there is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. In the case, where the software is an integral part of the supply of equipment, the consideration for that is not assessable as "royalty". However, in a case where the software is sold separately, the consideration for it is assessable as "royalty". On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident and the supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was "for the use of or the right to use copyright" and constituted "royalty" under s. 9(1)(vi) of the Act and Article 12(3) of the India-USA DTAA.

Excise & Customs : In absence of any specification of appropriate authority for filing of refund claim by SEZ units, refund claim by SEZ unit was directed to be filed before Department of Commerce

■■■

[2013] 38 taxmann.com 416 (Gujarat)

HIGH COURT OF GUJARAT

DIC Fine Chemicals (P.) Ltd.

Union of India*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

SPECIAL CIVIL APPLICATION NO. 10381 OF 2013

JULY 17, 2013

Section 27 of the Customs Act, 1962 read with section 51 of the Special Economic Zone Act, 2005 - Refund - General - Assessee, a unit located in Special Economic Zone (SEZ), had paid export duty on clearances from Domestic Tariff Area (DTA) to SEZ - In view of judgment in Essar Steel Limited v. Union of India 2010 (249) E.L.T. 3 (Guj.) that clearances by DTA to SEZ cannot be charged to export duty, assessee applied for refund of export duty borne by it - Refund application was kept pending for want for appointment of appropriate authority for deciding refund claim - HELD : Refund application was pending since many years and despite sufficient time being granted to Union of India to clarify who will be appropriate authority to decide refund application, no action had been taken by Union of India - In view of letter F.No. DGEP/SEZ/25/2011/1551 to 1585, dated 1-11-2012 and judgment dtd. 19/6/2013 in Special Civil Application No. 6795 of 2013, matter was directed to be taken up before Department of Commerce - Department was at liberty to file an application for review of this judgment in case judgment dtd. 19/6/2013 in Special Civil Application No. 6795 of 2013 was reviewed/modified or Union of India comes up with authority empowered to decide refund application [Para 4] [In favour of assessee]

Circulars and Notifications : F.No. DGEP/SEZ/25/2011/1551 to 1585, dated 1-11-2012

EDITOR'S NOTE

Paras 1 and 2 of letter F.No. DGEP/SEZ/25/2011/1551 to 1585, dated 1-11-2012 (excerpts) pose the problem as follows —

"…. in some zones refund claims relating to excess Customs Duty paid by SEZ entities have been received. Such refund claims are reportedly not being disposed of by the CBEC field formations on the ground that as per Section 27 of the Customs Act, 1962 all refund of Customs duties are to be dealt with by Deputy / Asstt. Commissioner of Customs in whose jurisdiction the goods are imported and that the refund claims that arise out of such Bills of Entry should be submitted to the Specified Officer of the SEZ not to any officer in or field formation.

… On the other hand, the SEZ officers are not accepting/disposing off refund claims due to lack of any provision in the SEZ laws to deal with refund claims."

Hasit Dilip Dave for the Petitioner. P.S. Champaneri and Y.N. Ravani for the Respondent.

ORDER

M.R. Shah, J. - By way of this petition under Article 226 of the Constitution of India, the petitioner has prayed for appropriate writ, order and/or direction directing the respondents to immediately refund the amount of export duty collected by them with interest which deem fit and release their bank guarantee, if any, and other surety and bond, if so enforced in this regards.

2. The petitioner is engaged in manufacture and exports of chemicals etc. having their unit at Dahej Special Economic Zone w.e.f. 2003. A grievance which is voiced in the present Special Civil Application is that the respondents have collected export duty which is found to be illegal pursuant to the decision of this Court dtd. 4/11/2009 rendered in Special Civil Application No. 9656 of 2008 and other allied petitions and therefore, the petitioner was entitled to refund of the aforesaid export duty. It is the case on behalf of the petitioner that they have submitted application for refund, but the same is not adjudicated upon and kept pending. It is submitted that one another unitholder approached this Court by way of Special Civil Application No. 6795 of 2013 and considering communication issued by Additional Director, Directorate General of Export Promotion (Ministry of Finance), Department of Revenue, Union of India dtd 1/11/2012, this Court directed the authority mentioned in 'the said communication to adjudicate upon and decide the refund application. Therefore, it is requested to direct the appropriate authority as mentioned in the communication issued by Additional Director, Directorate General of Export Promotion (Ministry of Finance), Department of Revenue, Union of India dtd. 1/11/2012, to adjudicate the refund application of the petitioner accordingly.

3. On advanced copy being given, Mr.Champaneri, learned Assistant Solicitor General of India, submitted that the authority mentioned in the aforesaid communication would not have any jurisdiction and/or authority to adjudicate the refund application with respect to units situated in SEZ. He also submitted that unless and until SEZ is amended by Circular, such authority cannot be vested in favour of the authority under the SEZ Act. It was submitted that even the amendment in the SEZ Act is also contemplated.

4. Considering the above, and considering the fact that the refund application is pending since many years, we granted sufficient time to the Union of India to clarify the position and inform the Court who will be the appropriate authority to decide the refund application, as there cannot be vacuum and the applications for refund cannot be kept pending for unreasonable period. However, till date and though sufficient opportunity has been given, Union of India has neither filed any Affidavit-in-reply nor even submitted before the Court who will be the appropriate authority to decide the refund application. On the contrary in Special Civil Application No. 6795 of 2013 along with the Affidavit-in-reply filed by the Assistant Commissioner (Refund), Customs House, Kandla, communication from the Directorate General of Export Promotion (Ministry of Finance), Department of Revenue, Union of India was placed on record and on the basis of which, we disposed of the aforesaid Special Civil Application directing the authorities mentioned in the said communication to decide the refund application. The communication of the Additional Director, Directorate General of Export Promotion (Ministry of Finance), Department of Revenue, Union of India dtd. 1/11/2012 reads as Under

"DIRECTORATE GENERAL OF EXPORT PROMOTION

(MINISTRY OF FINANCE),

DEPARTMENT OF REVENUE,

HOTEL JANPATH (1st FLOOR),

JANPATH, NEW DELHI 110 001.

F.No. DGEP/SEZ/25/2011/1551 to 1585.

To,

The Commissioner of Customs (All),

The Commissioner of Central Excise (All),

The Commissioner of Central Excise & Customs (All).

Madam/Sir,

Sub : Customs - SEZ refund of excess Customs Duty paid & 5% SAD by SEZ Units - reg.

Kindly refer to DGEP letter F.DGEP/SEZ/25/2011 dated 03.05.2012 on the above subject requesting for views on issue regarding proper officer for sanction of refund of Customs Duties paid on clearance made from SEZ. The report received from the Chief Commissioners indicates that in some zones refund claims relating to excess Customs Duty paid by SEZ entities have been received. Such refund claims are reportedly not being disposed of by the CBEC field formations on the ground that as per Section 27 of the Customs Act, 1962 all refund of Customs duties are to be dealt with by Deputy / Asst. Commissioner of Customs in whose jurisdiction the goods are imported and that the refund claims that arise out of such Bills of Entry should be submitted to the Specified Officer of the SEZ not to any officer in or field formation. The proper officer to decide such refund claims is Special Officer as defined in the SEZ Rules. The Board's Circular No.53/2005-Customs dated 29.12.2005 on administrative control was issued before the SEZ Rules came into force in 2006. As per Section 51 of the SEZ Act (Act to have overriding effect), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in with other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. On the other hand, the SEZ officers are not accepting/disposing off refund claims due to lack of any provision in the SEZ laws to deal with refund claims.

2. In view of the above, the matter has been taken up with Department of Commerce for incorporation of provisions relating to refund as well as appeal and review in the SEZ law to ensure disposal of cases related to these issues. In the light of the same it is requested that in case any such refund application/request is received or is pending, these may be returned to be concerned parties and they may be suitably advised to approach the Department of Commerce as the issue has already been taken up with DOC by DOR for speedy settlement of their cases. Similarly, if any appeal / request for accepting appeal is received or is pending, the parties may be similarly advised to approach DOC for settlement of their case.

This issues with the approval of Member (Customs/EP)

Yours faithfully,

Sd/-

01/11/12

(Jitendra Kumar)

I/C. Addl. Director.

1/11/2012."

Under the circumstances and so long as the order passed by this Court dtd. 19/6/2013 passed in Special Civil Application No. 6795 of 2013 stands, we dispose of the present Special Civil Application by directing the authority mentioned in the communication dtd. 1/11/2012 to adjudicate, decide and dispose of the refund application of the petitioner in accordance with law and on merits at the earliest. However, it is clarified that in case order passed by this Court dtd. 19/6/2013 passed in Special Civil Application No. 6795 of 2013 is reviewed and/or modified and/or the Union of India comes with a case that any appropriate authority other than the authority mentioned in the communication dtd. 1/11/2012 is the authority and/or empowered to decide the refund application, an appropriate review application may be submitted.

5. With this present Special Civil Application is disposed of.

VINEET

*In favour of assessee.

IT : Where assessee, a contractor, at time of entering into contact with contractee had given bank guarantee [performance guarantee] and contractee due to non-performance of contract by assessee encahsed bank guarantee and recovered amount, assessee would be entitled to deduction of said amount as business expenditure under section 37(1)

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[2013] 37 taxmann.com 57 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax -1

Neo Structo Construction Ltd.*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 641 OF 2012†

JULY 9, 2013

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Compensation] - Assessment year 2006-07 - Assessee, a contractor, entered into a contract with a contractee 'O' - At time of entering into contract, it had given bank guarantee, which was furnished as performance guarantee - Subsequently assessee having noticed that it would not be possible for it to perform contract took decision not to proceed further with contract and informed contractee accordingly - Due to non-performance of contract, contractee encashed bank guarantee and recovered amount - Assessee claimed deduction of said amount as business expenditure - Whether assessee would be entitled to deduction of said amount as business expenditure under section 37(1), as same was compensatory in nature - Held, yes [Para 10] [In favour of assessee]

FACTS

■		The assessee-company was engaged in the business of construction and erection of plants. It entered into a contract with a contractee 'O'. At the time of entering into the contract, it had given bank guarantee, which was furnished as performance guarantee. Subsequently the assessee having noticed that it would not be possible for it to perform the contract took decision not to proceed further with the contract and informed 'O' accordingly. Due to non-performance of the contract, 'O' encashed the bank guarantee and recovered the amount. The assessee claimed deduction of the said amount as business expenditure.
■		The Assessing Officer held that the expenditure claimed towards encashment of the bank guarantee by the contractee 'O' was not admissible as business expenses under section 37(1). He, therefore, added the said amount to the income of the assessee.
■		On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
■		On second appeal, the Tribunal held that during the continuity of the business, if in a particular contract, the assessee had to compensate for its own default, by offering performance guarantee, which was a contractual obligation, and that the said business continued later on, then the disallowance for a particular contract be not considered separately, that too, to treat the same as capital expenditure. It, therefore, held that the assessee was entitled to the deduction of the said amount under section 37(1).
■		On appeal to High Court:

HELD

■		The contractee 'O' encashed the bank guarantee, which was furnished by the assessee as performance guarantee, due to the non-fulfilment of the contract by the assessee. It can be said to be compensatory in nature and not penal in nature. The Tribunal has rightly held that the assessee would be entitled to the deduction of the same as business expenditure under section 37(1). Therefore, the assessee will be entitled to the deduction of the said amount as business expenditure under section 37(1), as the same is compensatory in nature. [Para 10]
■		Therefore, the appeal of the revenue was liable to be dismissed. [Para 11]

CASE REVIEW

Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192 (FB) (Punj. & Har.) (para 10) and Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684/67 Taxman 546 (SC) (para 10) followed.

CASES REFERRED TO

Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192 (FB) (Punj. & Har.)(para 7) and Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684/67 Taxman 546 (SC) (para 8).

Manav A. Mehta for the Appellant.

JUDGMENT

M.R. Shah, J. - Present Appeal has been preferred by the Revenue challenging the impugned judgment and order passed by the Income Tax Appellate Tribunal (hereinafter referred to as "the ITAT") dated 24.2.2012 raising following question:-

"Whether the Hon'ble Tribunal has erred in law by allowing encashment of bank guarantee as business expenditure as per section 37(1) of the I.T. Act?"

2. The facts leading to the present appeal in nutshell are as under:-

2.1 The assessee company is engaged in the business of construction and erection of plants excluding civil instrumentation and electric works mainly in respect of public sector units like ONGC, HPCL, KRIBHCO, CRL etc. and also for private sector.

2.2 That the assessee filed return for the Assessment Year 2006-07 showing total income of Rs. 7,05,44,680/-.

2.3 That the assessee company debited Profit & Loss Account by Rs.70,75,392/- towards encashment of bank guarantee by ONGC. On being questioned about the aforesaid expenditure being laid out or expended wholly exclusively for the purpose of business or profession, it was stated on behalf of the assessee that during the year under scrutiny, the company accepted one off-shore job-work with ONGC. However, due to some technical reasons, company was not able to complete the job in time and was incurring heavy expenses on it, and therefore, as a prudent business policy, company decided to give up that job for which ONGC encashed bank guarantee even at the time of accepting the job and the same was debited to the Profit and Loss Account as expenses.

2.4 That the Assessing Officer held that the expenditure claimed towards encashment of the bank guarantee by the contractee (ONGC) is not admissible as business expenses under section 37(1) of the IT Act and, therefore, while passing the order of assessment, amount of Rs. 70,75,392/- came to be disallowed and added to the total income of the assessee.

3. Feeling aggrieved by and dissatisfied with the order passed by the Assessing Officer in disallowing the aforesaid amount of Rs. 70,75,392/- as business expenditure and adding it to the total income of the assessee, the assessee preferred the appeal before CIT (Appeals) and CIT (Appeals), by order dated 23.9.2009, partly allowed the said appeal. However, CIT (Appeals) dismissed the appeal with respect to the disallowance of the aforesaid amount of Rs. 70,75,392/-.

4. Feeling aggrieved by and dissatisfied with the order passed by CIT (Appeals) dated 23.9.2009, the assessee preferred appeal before the ITAT and by the impugned judgment and order, the ITAT has allowed the said appeal by holding that during the continuity of the business, if in a particular contract, the assessee had to compensate for its own default, by offering performance guarantee, which was a contractual obligation, and that the said business continued later on, then the disallowance for a particular contract be not considered separately, that too, to treat the same as capital expenditure and consequently it is held that the assessee was entitled to the deduction of Rs. 70,75,392/- under section 37(1) of the I.T. Act and consequently directed to delete the disallowance of aforesaid amount and adding the same in the total income of the assessee.

5. Feeling aggrieved by and dissatisfied with the impugned judgment and order passed by the ITAT, the Revenue has preferred the present appeal raising the aforesaid question of law.

6. Heard Mr. Manav Mehta, learned counsel appearing for the Revenue.

7. At the outset it is required to be noted that the assessee entered into contract with ONGC and at the time of entering into the contract "performance guarantee" was given to ONGC. Due to certain technical reasons, it was felt by the assessee that it will not be possible for them to perform the contract, and therefore, as a prudent business policy they took a decision not to proceed further with the contract and informed ONGC accordingly and due to non-performance, ONGC encashed bank guarantee of Rs. 70,75,392/- which was given as "performance guarantee". Thus, the aforesaid amount was recovered by ONGC by encashing the bank guarantee due to non-performance of the contract by the assessee. The assessee claimed the aforesaid amount of Rs. 70,75,392/- as deduction under section 37(1) of the I.T. Act. Relying upon the decision of the Full Bench of Punjab and Haryana High Court in the case of Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192, wherein the High Court held that damages for breach of contract is allowable as business expenditure if not incurred for contravention of any law. The ITAT has allowed the appeal and held that the assessee shall be entitled to the deduction of the aforesaid amount under section 37(1) of the I.T. Act.

8. Identical question came to be considered by the Hon'ble Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684/67 Taxman 546. It is held by the Hon'ble Supreme Court in the said decision that deduction under section 37(1) of the I.T. Act can be allowed when it is found that it is wholly compensatory. It is held by the Hon'ble Supreme Court in the said decision that :—

"Whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, 1961, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities have to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature."

9. Dealing with the identical question, the Full Bench of Punjab and Haryana High Court has held as under:—

'In view of the authoritative pronouncements of the apex court and also of this court, it would thus, be concluded that whenever an assessee has indicated any amount, which had been paid either by way of damages or penalty, to be an allowable expenditure under section 37(1) of the Act, the assessing authority is obliged to discover the nature of such amount vis-a-vis two prominent aspects, whether it is compensatory or penal. The assessing authority would there upon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment of damages. However, any statutory amount paid by the assessee which is sought to be claimed as an allowable expenditure on account of penalty, in that eventuality, the same shall be disallowed being payment of infraction of law. A situation may arise where an assessee might have to make a composite payment being "compensatory" and "penal character" both. In that situation, the assessing authority would, of course, be required to segregate the amount containing two characters. After undertaking this exercise, the amount that is held to be of compensatory nature shall be countenanced as allowable expenditure whereas the other portion of the amount, which is penal in nature, shall be refused to be an allowable expenditure.'

10. Considering the aforesaid decision of the Hon'ble Supreme Court and the Full Bench decision of the Punjab and Haryana High Court and the facts of the case under our consideration it appears that ONGC encashed the bank guarantee, which was furnished by the assessee (performance guarantee) due to the non-fulfilment of the contract by the assessee. It can be said to be compensatory in nature and not penal in nature, the ITAT has rightly held that the assessee would be entitled to the deduction of the same as business expenditure under section 37(1) of the I.T. Act. Considering the aforesaid facts and circumstances of the case, we are also of the opinion that the assessee will be entitled to the deduction of the amount by way of the encashment of bank guarantee as business expenditure under section 37(1) of the I.T. Act as the same is compensatory in nature.

11. We see no reason to interfere with the impugned judgment and order passed by the ITAT as there is no question of law, much less any substantial question of law that arises in the present appeal and hence the present Tax Appeal deserves to be dismissed and the same is accordingly dismissed.

CIT Vs Dulla Ram, Labour Contractor

Income Tax - Sections 68, 260A - undisclosed income - unexplained credit - Whether after rejection of books of accounts, an Assessing Officer can make any further addition on account of unexplained entries treating them as undisclosed income from other sources by invoking Section 68 of the Act - Whether account books once rejected are ruled out of consideration - Whether they can be further considered by the assessee or revenue, during assessment proceedings - Whether in case account boo ks are rejected, entries in the account books whether suspicious or not cannot be relied upon. - Revenue's appeal dimissed:PUNJAB & HARYANA HIGH COURT

IT : Where assessee filed return of income on 28-9-2009 and paid self-assessment tax under section 140A on 19-1-2010, since assessee had paid self-assessment tax immediately when fact regarding non-payment came to its notice, it was not liable for penalty to be levied under section 221(1)

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[2013] 39 taxmann.com 124 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'A'

Agio Pharmaceuticals Ltd.

Assistant Commissioner of Income-tax -8(1)*

I.P. BANSAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER

IT APPEAL NO. 6911 (MUM.) OF 2011
[ASSESSMENT YEAR 2009-10]

SEPTEMBER 4, 2013

Section 221, read with section 140A, of the Income-tax Act, 1961 - Collection and recovery of tax - Penalty payable where tax in default [Effect of payment of self-assessment tax] - Assessment year 2009-10 -Assessee filed return of income on 28-9-2009 and paid self-assessment tax under section 140A on 19-1-2010 - Accordingly Assessing Officer levied penalty under section 221(1) upon assessee - Whether since assessee had paid self-assessment tax immediately when fact regarding non-payment came to its notice, it could not be said that assessee's act was deliberate in defiance of law - Held, yes - Whether, therefore, assessee was not liable for penalty to be levied under section 221(1) - Held, yes [Para 6.1] [In favour of assessee]

FACTS

■		For the assessment year 2009-10, the assessee filed the return of income on 28-9-2009. However, it paid the self-assessment tax under section 140A on 19-1-2001. Accordingly the Assessing Officer levied the penalty under section 221(1) upon the assessee.
■		On appeal, the Commissioner (Appeals) upheld the penalty order.
■		On second appeal:

HELD

■		According to section 221(1) when an assessee is in default or is deemed to be in default in making payment of tax, he shall, in addition to the amount of arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, provided that the total amount of penalty in case of continuing default does not exceed amount of tax in arrears. In the instant case, it is not a continuing default and penalty has been levied by Assessing Officer at the rate of 10 per cent of the tax in arrears. The first proviso to section 221(1) provides that a reasonable opportunity of hearing should be given to the assessee before levying such penalty. Second proviso to section 221(1) describe that penalty shall not be levied in a case where the assessee is able to prove to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons. Explanation to second proviso, for the purpose of removal of doubt, declares that the assessee shall not be ceased to be liable for penalty under section 221(1) merely by reason of the fact that before levy of such penalty the assessee has paid the taxes. Therefore, the assessee can escape from levy of penalty only in the circumstances if he is able to prove to the satisfaction of Assessing Officer that the default was for good and sufficient reasons. [Para 6]
■		Provisions of section 221(1) are not absolute as the word used in the provisions is not 'shall' but 'may'. This give a discretion to the authority vested with the power of levy of penalty not to levy penalty also. The assessee was saddled with a tax liability of more than Rs. 55 lakhs in respect of earlier years in view of retrospective amendment into the statute. The assessee has been paying said liability in instalments and in the process it is possible that it may have forgotten to make the payment of self-assessment tax which was paid immediately when the fact regarding non-payment came to its notice. Therefore, it cannot be said that the assessee's act was deliberate in defiance of law or the assessee is guilty of a conduct which is contumacious or dishonest. Therefore, the assessee was not liable for penalty to be levied under section 221(1). [Para 6.1]

CASE REVIEW

Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (para 6) followed.

CASES REFERRED TO

Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (para 4).

M. Subramanium for the Appellant. S.S. Rana for the Respondent.

ORDER

I.P. Bansal, Judicial Member - This is an appeal filed by the assessee. It is directed against the order passed by Ld. CIT(A)-16, Mumbai dated 05/07/2011 for assessment year 2009-10. Ground of appeal reads as under:

"On the Facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals) XVI erred in wrongly upholding the penalty of Rs. 51,338/ - (Fifty one thousand three hundred and thirty eight only) u/s. 22 1(1) of the Income tax Act 1961, imposed by the Ld. Assessing Officer which Your Honour is requested to order to delete and oblige".

2. It may be mentioned here that there is a delay of one day in filing the appeal. The assessee filed an application for condonation of delay. After hearing both the parties we condone the delay and proceed to decide the appeal filed by the assessee on merits.

3. According to computation of income filed along with return the assessee was required to pay an amount of Rs.5,13,380/- on account of self assessment tax payable under section 140A of the Income Tax Act, 1961(the Act). The return was filed on 28/9/2009. However, self assessment tax was not paid. It was paid on 19/01/2010. Accordingly, AO initiated penalty proceedings under section 221(1) of the Income Tax Act, 1961 vide notice dated 12/1/2010, asking the assessee to show cause as to why such penalty should not be levied. In response to such notice the representative of the assessee filed a copy of challan evidencing payment of Rs.5,13,381/- paid on 19/1/2010 and it was requested that penalty proceedings should be dropped. It was further submitted that assessee was going through a rough phase due to the action of the Government regarding withdrawal of deduction under section 80HHC on DEPB from retrospective effect. However, AO did not accept such submission of the assessee on the ground that financial position of the assessee is sound and he proceed to levy the penalty, which is computed @10% of the amount payable under section 140A. Ld. CIT(A) has sustained such penalty. Assessee is aggrieved, hence, in appeal.

4. After narrating the facts it was submitted by Ld. AR that as a result of retrospective amendment the tax liability of the assessee in respect of assessment year 2000-01, 2001-02 and 2003-04 was cumulatively at a sum of Rs.55,09,840/-. The assessee started paying the said liability in installments in respect of all these years. He in this regard referred to the following chart:

Assessment Year	Other Payments	Payable in installment		TOTAL
		Installment Amount	No. of installments
2000-01	702,568.00	97,207.00	48	5,368,504.00
2001-02	2,907,272.00	-	0	2,907,272.00
2002-03	-	47,282.00	48	2,269,536.00
2003-04	1,900,000.00	41,010.00	48	2,868,480.00
2004-05	-	12,361.00	39	482,079.00
Total	5,509,840.00	197,860.00		14,895,871.00

The chart is placed at page 7 of the paper book and details of payments made in respect of aforementioned installments are placed at page 8 to 16 of the paper book. It is the case of Ld. AR that default of the assessee in non-payment of self assessment tax was a venial breach of provisions of law. It was not deliberate and according to the decision of Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, no penalty should have been levied.

5. On the other hand, Ld. DR relied upon the order passed by AO and Ld. CIT(A).

6. We have heard both the parties and their contentions have carefully been considered. According to section 221(1) when an assessee is in default or is deemed to be in default in making payment of tax, he shall, in addition to the amount of arrears and the amount of interest payable under sub-section (2) of section 220 be liable, by way of penalty, to pay such amount as the AO may direct, provided that the total amount of penalty in case of continuing default does not exceed amount of tax in arrears. In the present case, it is not a continuing default and penalty has been levied by AO @10% of the tax in arrears. The first proviso to section 221(1) provides that a reasonable opportunity of hearing should be given to the assessee before levying such penalty. Second proviso to section 221(1) describe that penalty shall not be levied in a case where the assessee is able to prove to the satisfaction of AO that the default was for good and sufficient reasons. Explanation to second proviso, for the purpose of removal of doubt, declares that assessee shall not be ceased to be liable for penalty under section 221(1) merely by reason of the fact that before levy of such penalty the assessee has paid the taxes. Therefore, the assessee can escape from levy of penalty only in the circumstances if he is able to prove to the satisfaction of AO that the default was for good and sufficient reasons. There cannot be any doubt that provisions of section 221(1) are penalty proceedings, therefore, are in the nature of quasi criminal proceedings. Such penalty is leviable in respect of failure of the assessee to carry out a statutory obligation and according to aforementioned decision of Hon'ble Supreme Court such penalty should not be ordinarly imposed unless the party obliged, either acted, deliberately in defiance of law or was guilty of conduct of contumacious or dishonest, or acted in a conscious disregard of its obligation. It is also held that penalty will not also be imposed merely because it is lawful to do so. It is a matter of discretion of the authority to be exercised judiciously and on consideration of the relevant circumstances. It is also held that even if minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is technical or venial breach of the provisions of the Act or where breach flows from a bonafide belief the offender is not liable to act in the manner prescribed by the statute.

6.1 Looking into the facts of the present case in the light of aforementioned decision of Hon'ble Supreme Court, we are of the opinion that levy of penalty is not justified. Provisions of section 221(1) are not absolute as the words used in the provisions is not "shall" but "may". This give a discretion to the authority vested with the power of levy of penalty not to levy penalty also. The assessee was saddled with a tax liability of more than Rs.55.00 lacs in respect of earlier years in view of retrospective amendment into the statute. The assessee has been paying said liability in installments and in the process, it is possible that assessee may have forgotten to make the payment of self assessment tax which was paid immediately when the fact regarding non-payment came to the notice of the assessee. Therefore, according to the facts of the case it cannot be said that the assessee's act was deliberate in defiance of law or assessee is guilty of a conduct which is contumacious or dishonest. Therefore, we hold that assessee is not liable for penalty to be levied under section 221(1) of the Act. We delete the same and the appeal is allowed.

7. In the result, the appeal filed by the assessee is allowed.

S.K.J.

*In favour of assessee.

Olga Case - Penalty on traders of smuggled Chinese Silk textiles under Section 112(b) of Customs Act, 1962 - Difference of opinion - Matter referred to President

By TIOL News Service

NEW DELHI, DEC 05, 2013: THE appellant are traders in Chinese Silk textiles having their business in Chandni Chowk, New Delhi. During 1998-2000, Chinese Silk textiles were smuggled through IGI Airport, New Delhi by a lady passenger, Olga Kozireva. In adjudication of the case, penalties were imposed on the appellants under Section 112(b) of the Customs Act, 1962, for their involvement in acquiring and trading of these smuggled goods.

In the first round of litigation, the Tribunal upheld the penalties imposed and dismissed the appeals. However the High Court of Delhi observed that the Tribunal did not specifically deal with the contentions raised by the appellants and remanded the matter to Tribunal.

While deciding the matter in remand proceedings, the Member (T) held that imposing penalty under Section 112(b) of the Customs Act, 1962 is justified for the following reasons:

Revenue proved acquaintance, contacts, conscious knowledge of the appellant including the nature and character of the offending goods dealt by him. Mamoor Khan, Dil Agha and Abdul Qahar as well as Wali who were member of the smuggling racket exposed the appellant to broad day light as to his deal with contraband goods which came to India by the racketeers. He no more became stranger to the deal. He failed to prove that he had no hand in glove with the racketeers in the deal.

Revenue led cogent evidence against the deals of the appellant which remained un-rebutted except technical pleas raised on flimsy grounds. Evidence gathered by Revenue was not mere piece of papers but well founded and stand to reason. Even statement recorded from Dil Agha who was produced before Metropolitan Magistrate on 16.07.2001 self speak appellant's active role in abetment of disposal of the smuggled goods knowing character thereof. He could not go out of the mess of smuggling racket having frequent telephonic contacts with them before and after arrival of smuggled goods into India. His proximity to the offence was so nearer he could not remain far from the deal.

Investigation was not required to prove its case with mathematical precision or accuracy and need not be required to prove every link in the chain. Failure of the appellant to come out with clean hands implicated him to charges rightly leveled against him in adjudication.

Penalty against the appellant was imposed under section 112(b) of the Act. If any person acquires possession of or in any way is concerned in carrying, removing, depositing, harboring, keeping, concealing, selling or purchasing or in any other manner dealing with any goods which he knows or has reason to believe are liable to confiscation under section 111 of the Act, he is charged by that section. In the present case conscious knowledge of the trader appellant about character and nature of the goods illicitly imported and his deal thereon was established by the seller racketeers. His ill will and deal satisfied essential ingredients of section 112 (b) of the Act.

However, Member( J) differed with the above view and held that the appellant traders are not liable for penalty under Section 112(b) of the Customs Act, 1992 on the following grounds:

When there is no recovery of any un-accounted imported Chinese Silk fabrics from the Appellants, merely on the basis of the statements of Sh. Abdul Qahar, Sh.Walliullah and Sh.Dil Agha, out of which the statement of Sh. Abdul Qahar has been retracted, it would not be correct to conclude that the appellants had purchased smuggled Chinese Silk from Mamoor Khan/Dil Agha,

There is need for testing the probative value of their statements by permitting their cross examination which had been requested but was not allowed the Commissioner and he has not given any finding on the point as to whether the request for cross examination is acceptable and if not, why.

Since for testing the probative value of the statement of Sh. Abdul Qahar, Sh. Dil Agha and Sh. Walliullah, it was necessary to permit their cross examinations, and the same in spite of being requested, has not been permitted, these statements cannot be used against the Appellants

In this case, even if on the basis of the record of telephonic contacts between Sh. Mamoor Khan/Sh. Dil Agha and the Appellants, at the most, it is presumed that they were buying some quantity of smuggled goods from Sh. Mamoor Khan/Sh. Dil Agha, no presumption can be made about the knowledge or reason to believe of the Appellants about smuggled origin of the goods.

The sum total of the evidence on record against the Appellants does not establish preponderance of probability in support of the allegation against them. The sum total of evidence only creates suspicion against the Appellants but the same does not constitute preponderance of evidence which is the standard of proof required for proving the change against them.

In view of the difference of opinion, the matter has been referred to the President to resolve the difference in terms of Section 129C( 5) of the Customs Act, 1962.

(See 2013-TIOL-1812-CESTAT-DEL)

--
Regards,

Pawan Singla

BA (Hon's), LLB

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Chartered Accountant Finance

Thursday, December 5, 2013

[aaykarbhavan] Judgments

FII cannot have business profits – Derivatives income not taxable as speculation income to FIIs

Sufficient cause not a license to file belated appeal and to get the delay condoned

Amount paid for supply of software which is not embedded in equipment is taxable as royalty

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