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Service Tax Audit Manual — Salient features

Circular No. 742/58/2003-CX., dated 3-9-2003

F.No. 206/3/2003-CX-6

Government of India

Ministry of Finance (Department of Revenue)

Central Board of Excise & Customs, New Delhi

Subject : Service Tax Audit Manual – Regarding.

I am directed to say that as you are aware that taxation of services was started in July, 1994 in a limited way with three services and since then the scope has been extended considerably. At present, 58 services are subjected to levy of Service Tax. The revenue from Service Tax sector has also been growing appreciably over the time. The audit of selected services (telephones, non-life insurance and stock brokers) was started in the year 1996. Subsequently, the same was extended in 2002 to cover certain selected service providers in four metropolitan cities.

Taking into account the peculiarities of service tax law, book keeping practices of service providers and the experiences gained during the course of auditing of selected service tax categories, it is felt necessary to prepare a comprehensive Service Tax Audit Manual following internationally recognized audit methodology to provide guidelines to the departmental officers to facilitate auditing of Service Tax-payers and to ensure uniformity. Accordingly, Director- General (Audit) has prepared and issued a comprehensive Service Tax Audit Manual. The Manual is for use of the departmental officers, which may be carefully studied. The suggestions to improve the Audit Manual and the difficulties experienced if any, may be brought to the notice of Director-General of Audit.

The salient features of the Audit Manual are :

(a) Legal provisions for levy and collection of service tax are indicated in one place.

(b) Principles of auditing of Service tax-payers based on modern methodology are enumerated.

(d) Detailed guidelines are provided for preparation of audit plan before the commencement of the actual audit.

(e) Various techniques of auditing such as 'walk through', ABC Analysis, Revenue Risk Analysis and Trend Analysis are explained.

(f) Specific guidelines are provided for conduct, preparation, reporting and follow up of audit.

(g) Formats for collection and compilation of data on service providers and maintenance of Master Files have been prescribed.

(h) Check list for service tax auditing has been provided.

(i) Detailed profiles for three major services namely, telephone, non-life insurance and stock brokers are made as part of the Manual for effective audit.

The Service Tax Audit Manual meets one of the most critical requirements of service tax administration. Considering the fact that the administration of service tax is fundamentally following the principle of believing in bona fides of the tax-payer and trust is reposed on voluntary compliance, it is expected that the Audit Manual shall be able to provide valuable guidelines.

Merchanting Trade Transactions – Revised Guidelines

Posted In RBI / FEMA | Notifications | No Comments »

The Reserve Bank of India today released the revised guidelines on Merchanting Trade Transactions. The earlier guidelines on the subject were issued in 2003. Merchanting or Intermediary Trade involves purchase of goods by Indian residents from non-residents and then reselling them to another non-resident directly without the goods touching the Indian ports. Although the merchanting trade transactions do not contribute to the exports from India, they result in net foreign exchange inflows. The Technical Committee on Services / Facilities to exporters (Chairman: Shri G. Padmanabhan) in its report (May 2013) recommended that the procedure be simplified.

Under the revised guidelines, total period of merchanting trade has been extended from six months to nine months and short term financing for both export and import leg has been enabled. Half yearly reporting of outstanding merchanting trade by AD Banks has also been prescribed to ensure better monitoring.

—————-

RBI/2013-14/452
A.P. (DIR Series) Circular No.95

January 17, 2014

All Category – I Authorised Dealer Banks

Merchanting Trade Transactions

Madam / Sir,

Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to A.P. (DIR Series) Circular Nos.106 & 4 dated June 19, 2003 and July 19, 2003 respectively, containing directions relating to merchanting or intermediary trade transactions. In the light of the recommendations of the Technical Committee on Services/Facilities to Exporters (Chairman: Shri G. Padmanabhan) to further liberalise and simplify the procedure, the existing guidelines for merchanting or intermediary trade transactions have been reviewed. Accordingly in supersession of the existing guidelines, the revised guidelines will come into effect immediately.

2. While handling merchant trade transactions or intermediary trade transactions, AD Category – I bank may keep the following guidelines in view:

Goods involved in the merchanting or intermediary trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, at the time of entering into the contract and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) are complied with for the export leg and import leg respectively;
Both the legs of a merchanting or intermediary trade transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents and satisfy itself about the genuiness of the trade.
The entire merchanting or intermediary trade transactions should be completed within an overall period of nine months and there should not be any outlay of foreign exchange beyond four months.
The commencement of merchanting or intermediary trade would be the date of shipment / export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment / export leg receipt or import leg payment, whichever is the last;
Short-term credit either by way of suppliers' credit or buyers' credit will be available for merchanting or intermediary trade transactions including the discounting of export leg LC by an AD bank, as in the case of import transactions ;
AD bank should ensure one-to-one matching in case of each merchanting or intermediary trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI on half yearly basis in the format as annexed. The deadline for submission of the report would be 15 calendar days after the close of each half year. In case of repeated defaults i.e. three cases or more in a year, ADs should restrain the traders from entering into any further transaction in merchanting or intermediary trade and consider recommending caution listing of the trader, to the Reserve Bank of India;

3. The merchanting traders have to be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. Authorised Dealer should satisfy itself about the capabilities of the merchanting trader to perform the obligations under the order. The transactions should result in reasonable profits to the merchanting trader.

4. The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favour of the merchant. On the strength of such LC the merchant in turn may open a LC in favour of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. The export LC should be issued in the name of original merchanting trader in India and import LC should be favouring the original supplier. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.

5. In case advance against the export leg is received by the merchanting trader, the advance payment may be held in a separate deposit / current account in foreign currency or Indian Rupees. The amount required for import leg should be earmarked till the payment of import and should not be made available to the merchanting trader for use, other than for import payment or short-term deployment of fund limited to the import payable, with the same AD for the intervening period. If advance for the import leg is demanded by the overseas seller, the same should be paid against bank guarantee from an international bank of repute;

6. Reporting for merchanting or intermediary trade for compilation of R-return should be done on gross basis, against the undernoted codes :

Trade	Purpose Code under FETERS	Description
Export	P0108	Goods sold under merchanting /receipt against export leg of merchanting trade
Import	S0108	Goods acquired under merchanting /payment against import leg of merchanting trade

7. AD Category-I banks may bring the contents of this circular to the notice of their constituents concerned and note the guidelines for strict compliance.

8. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,

(C. D. Srinivasan)
Chief General Manager

To tax the income Beneficial ownership is relevant than legal ownership

Posted In Income Tax | Judiciary | 1 Comment »

Issue : – The respondent in Tax References Cases Nos. 9-10 of 1986 is a company and an assessee under the Act (hereinafter called the "assessee"). It owns four flats bearing Nos. 231, 232, 241 and 242 in a building called "Silver Arch" on Nepean Sea Road, Bombay. The builders of the said building are Malabar Industries Pvt. Ltd. Out of the four aforesaid flats, two were directly purchased by the respondent-company from the builders and the other two were purchased by its sister concern and subsequently by the assessee. The possession of the flats was taken after payment of consideration in full some time in August, 1973. It is common ground that all these flats have been let out to various persons. The rental income from these flats was included in the return for the assessment years in question, namely, 1975-76 and 1976-77. It was the case of the assessee that the rental income from the flats was assessable as "income from other sources" under section 56 of the Act inasmuch as the assessee-company was not the "legal owner" of the property in the flats. Such a claim was put forward before the Assessing Officer mainly on the ground that the title to the property (four flats) had not been conveyed to the co-operative society which was formed by the purchasers of the flats and that so long as the ownership was not transferred in the name of the assessee, the rental income from the flats could not be assessed as "income from house property" (under section 22 of the Act).

Held : – We are conscious of the settled position that under the common law, "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, "to tax the income", we are of the view, "owner" is a person who is entitled to receive income from the property in his own right.

Supreme Court of India

Commissioner Of Income-Tax

M/S. Podar Cement Pvt. Ltd. Etc.

Date : 27 May, 1997

TAX REFERENCES CASE NOS. 9 AND 10 OF 1986 AND CA NOS. 4165 OF 1994 AND 4549 OF 1995

Equivalent citations: AIR 1997 SC 2523, 1997 226 ITR 625 SC

Author: K Venkataswami.

Bench: K Paripoornan, K Venkataswami, B Kirpal

ORDER

K. Venkataswami. J.

In all these case the scope of a 22 of the Income-tax Act, 1961 (hereinafter called the "Act") arises for consideration.

The brief facts are necessary to appreciate the question that arises for our consideration.

The respondent in Tax References Cases Nos. 9-10 of 1986 is a company and an assessee under the Act (hereinafter called the "assessee"). It owns four flats bearing Nos. 231, 232, 241 and 242 in a building called "Silver Arch" on Nepean Sea Road, Bombay. The builders of the said building are Malabar Industries Pvt. Ltd. Out of the four aforesaid flats, two were directly purchased by the respondent-company from the builders and the other two were purchased by its sister concern and subsequently by the assessee. The possession of the flats was taken after payment of consideration in full some time in August, 1973. It is common ground that all these flats have been let out to various persons. The rental income from these flats was included in the return for the assessment years in question, namely, 1975-76 and 1976-77. It was the case of the assessee that the rental income from the flats was assessable as "income from other sources" under section 56 of the Act inasmuch as the assessee-company was not the "legal owner" of the property in the flats. Such a claim was put forward before the Assessing Officer mainly on the ground that the title to the property (four flats) had not been conveyed to the co-operative society which was formed by the purchasers of the flats and that so long as the ownership was not transferred in the name of the assessee, the rental income from the flats could not be assessed as "income from house property" (under section 22 of the Act).

One other subsidiary question was also raised by the assessee that the rental income should be calculated on the bona fide annual value and not the actual rent received. As a matter of fact, the assessee has shown Rs. 49,800 as chargeable rent. The Income-tax Officer, however, has taken the annual letting value of those flats at Rs. 1,31,268 on the basis of rent receivable in respect of flats in an adjoining building. The Income-tax Officer also rejected the claim of the assessee that the income from the flats should be assessed under section 56 of the Act.

Aggrieved by the orders of the Income-tax Officer, the assessee preferred appeals to the Commissioner of Income-tax (Appeals), who by an order dated April 9, 1981, upheld in to the views as stated above by the Income-tax Officer. After receiving the orders from the appellate authority, the assessee filed miscellaneous applications dated September 14, 1981, before the appellate authority purporting to be under section 154 of the Act. It was contended before the appellate authority that in view of the decision of this court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700, the authorities were bound to take the annual letting value of those flats on the basis of the standard rent chargeable and in any case not on the basis of the actual rent receivable with regard to some other flats. The appellate authority accepted the assessee's miscellaneous applications by order dated March 17, 1982, and rectified its earlier order dated April 9, 1981. Still not satisfied with the appellate order, the assessee preferred two appeals against the order of the appellate authority contending that the income from the four flats should have been assessed under section 56 of the Act and not under section 22. The Revenue preferred two appeals against the rectification order dated March 17, 1982.

Those four appeals were considered by the Income-tax Appellate Tribunal (Bombay Bench "A"), Bombay, and the Tribunal by a common order dated May 8, 1986, purporting to follow several decisions of the Bombay High Court accepted the case of the assessee and held that the income from the flats could not be taxed as "income from house property" under section 22, but should be taxed as "income from other sources" under section 56 of the Act. The Tribunal, however, did not decide the other question, namely, whether the actual rental income should be taken into account for the computation or the chargeable rental value. We are not concerned with the latter question here.

The Tribunal, when moved by the Revenue under section 256(1) of the Act, referred the case straightaway to this court under section 257 of the Act in view of the conflicting decisions between the High Courts.

The question referred reads as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income derived by the assessee-company from flats from the building known as 'Silver Arch' of Bombay is taxable under the head 'Income from other sources' under section 56 of the Income-tax Act and not income from 'house property' under section 22 of the Income-tax Act, 1961?"

Civil Appeal No. 4165 of 1994 :

In this case the respondent-assessee, an individual, returned for the assessment year 1983-84, the rental income from two flats bearing Nos. 406 and 407 at Kailash Building, Curzon Road, New Delhi, and also parking space and claimed that the said income must be assessed as "income from house property". However, the Income-tax Officer took the view that the assessee only had tenancy rights and, therefore, the income could be assessed under the head "Income from other sources", namely, under section 56 of the Act.

Aggrieved by the order of the Assessing Officer, an appeal was preferred to the Commissioner of Income-tax (Appeals), New Delhi, who has accepted the case of the assessee and directed the assessment under section 22 of the Act.

The Revenue aggrieved by the appellate order preferred an appeal to the Tribunal. The Tribunal held that the appellate authority was right in holding that the income from the flats should be assessed as income from house property and not as income from other sources. For coming to this conclusion, the Tribunal, as a matter of fact, found that the assessee is the owner of the flats as well as the parking space in question. The Tribunal rejected an application for reference under section 256(1) and the High Court also rejected the reference under section 256(2). Hence, the present appeal by special leave by the Revenue.

Civil Appeal No. 4549 of 1995 :

The appellant in this case is an individual and the relevant assessment year is 1970-71. The appellant is the owner of three flats in a multi-storeyed building known as "Akash Deep". This multi-storeyed building has been constructed on a piece of land at Barakhamba Road which belongs to the Government but has been given under perpetual lease. The name of the original lessee was not known. However, the company known as Ansal and Sehgal Pvt. Ltd. entered into an agreement with the lessee and constructed a multi-storeyed building on the said piece of land. The assessee claimed, and it was not disputed, that he has paid the entire price thereof and got possession of the three flats. It is also the claim of the appellant that he had absolute rights of disposal over them and that he had let out these flats to different tenants and he was deriving income from the flats and was paying the municipal taxes in respect thereof. In the Income-tax return for the assessment year in question the appellant has shown a net income of Rs. 18,403 from these flats by way of rent. The said net income was arrived at after deducting the municipal taxes as well as the statutory deduction of one-sixth of the annual value on account of repairs as provided in section 24 of the Act. The Income-tax Officer while accepting the return denied the deduction for repairs claimed by the assessee on the ground that the income must be assessable under the head "Income from other sources" under section 56 of the Act.

Aggrieved by that, the appellant preferred an appeal to the Appellate Assistant Commissioner who was convinced by the claim of the appellant, directed the Income-tax Officer to assess the income under the head "Income from house property" and to allow statutory relief on account of repairs.

The Revenue preferred an appeal before the Tribunal. The Tribunal found as a fact that there was no sale deed as such in respect of the flats in favour of the assessee. There was only an agreement to sell coupled with the payment of the purchase price and the handing over of occupation or possession. The Tribunal further found that the super-structure of the multi-storeyed building including the flats vested originally with the company which had constructed the same and the assessee had only entered into an agreement to purchase the flats, though actually the assessee had paid all the installments of purchase price. The Tribunal was of the view that till regular sale deeds were executed in favour of the assessee, the title in the flats remained vested in the company and, therefore, the assessee could not in law claim as legal owner of those flats. The Tribunal, applying a decision of the Delhi High Court, upset the view taken by the Appellate Assistant Commissioner and restored the order of the Income-tax Officer. The appellant was successful in getting a reference under section 256(1) of the Act and the High Court in detail considered the matter. However, the High Court, in view of its earlier decisions confirmed the view taken by the Tribunal and held that the income in question was assessable under section 56 of the Act as income from other sources. Aggrieved by that, the present appeal is by the appellant by special leave.

It will be seen from the narration of facts in all these cases that a common question of law arises as regards the scope of section 22 of the Act vis-a-vis section 56 of the Act.

Mr. K.N. Shukla, learned senior counsel appearing for the Revenue, has advanced arguments in general, in view of the fact that the Revenue had not taken a uniform stand in assessing the owners of flats as seen from the facts given above. He submitted that the owners of flats as well as promoters are liable to be taxed under sections 56 and 22, respectively, of the Income-tax Act. In other words, the promoters are the legal owners and income from house property will have to be taxed at the hands of the promoters under section 22 of the Act and the owners of the flats being in beneficial enjoyment of the respective properties will have to pay tax under section 56 as "income from other sources". He invited our attention to a decision of this court in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570, rendered under the Income-tax Act and also a recent judgment in Mohd. Noor v. Mohd. Ibrahim, AIR 1995 SC 398; [1994] 5 SCC 562, rendered under the Rajasthan Tenancy Act, 1955. He also invited our attention to a judgment of the Bombay High Court in CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499. In general, he left it to the ultimate decision of the court on the issue in question without finally expressing his point of view in view of the conflicting stand taken by the Revenue while making the assessments under challenge.

Mr. Sharma, learned senior counsel, advanced the leading arguments and according to him, section 22 of the Act charges the income arising from house property and not the ownership of house property. Such income from house property can be real or notional. He also argued that income under the head "House property", real or notional, cannot escape taxation whoever may be regarded as the owner, but certainly it cannot have two owners at the same time. According to learned counsel, the owner is the person who in his own right can use the house property or derive income from it. Only such owner has to be taxed under the head "Income from house property". He alone has to be taxed under this head. If he cannot be taxed under this head, he cannot be taxed at all. In other words, he cannot be taxed under the head "Income from other sources" under section 56 of the Act. He also contended that income from house property cannot be taxed doubly, once in the hands of the legal owner under section 22 and again in the hands of the actual user and recipient of income under section 56 of the Act. Permitting such assessment would be opposed to equity and justice, which is not normally allowed by the courts. As a corollary from the last contention he submitted that it is well settled that the interpretation, which would avoid hardship and double taxation, should be preferred to the interpretation which would result in hardship and double taxation. Lastly, it was contended by Mr. Sharma that wherever Parliament found it necessary it had provided for avoidance of double taxation expressly like in sections 64(2), 69D, 93(2) and 94(4) but no such express provision was considered necessary as regards sections 22 to 27 as they thought in their wisdom that no authority of Income-tax would assess the same income twice, once in the hands of the legal owner on notional basis and again in the hands of the buyer on actual receipt of rent.

Mr. Sharma, learned senior counsel, in support of these arguments while placing heavy reliance on the judgment of this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570, also cited numerous judgments of the High Court which have applied the principles enunciated in the judgment of this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570. The judgments on which reliance was placed are the following:

1. Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 (All).

2. Smt. Kala Rani v. CIT [1981] 130 ITR 321 (P&H).

3. Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd. [1983] 144 ITR 357 (Patna).

4. Saiffuddin v. CIT [1985] 156 ITR 127 (Raj).

5. Madgul Udyog v. CIT [1990] 184 ITR 484 (Cal).

6. Maharani Yogeshwari Kumari v. CIT [1995] 213 ITR 541 (Raj).

7. CIT v. General Mktg. and Mfg. Co. Ltd. [1996] 222 ITR 574 (Cal).

8. CIT v. Krishna Lal Ajmani [1996] 222 ITR 653 (Patna).

Mr. H.N. Salve, learned senior counsel appearing for the respondent assessee in Tax References Cases Nos. 9-10 of 1986, took a different stand from that of Mr. Sharma and contended that the word "owner" in section 22 of the Income-tax Act should be understood in its general sense and not in the sense in which it was understood by this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570. According to learned counsel, the word "owner" can only refer to the legal owner and none else, as the concept of dual ownership is unknown in Indian jurisprudence. He invited our attention to the language of section 9(1) of the old Income-tax Act which corresponds to section 22 of the present Act and contended that the assessment does not depend on actual receipt of income from house property. He also submitted that the view taken by some of the High Courts that the owners of the flats even in the absence of any registered document of sale in their favour can be treated as owners in view of section 53A of the Transfer of Property Act is wholly wrong and unsustainable. That view, according to him, is contrary to the well settled position in law as laid down in several judgments of this court. Learned senior counsel submitted that the ownership is paramount title and it cannot be otherwise interpreted. Mr. Salve submitted that even if the interpretation suggested by him to section 22 results in double taxation, even then that has to be accepted as being the correct position in law. There is no equity in taxation law. In support of his arguments, he placed reliance on the following judgments of this court:

1. Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp. Cas. 563; AIR 1985 SC 520; [1985] 2 SCC 167.

2. Narandas Karsondas v. S.A. Kamtam, AIR 1977 SC 774; [1977] 2 SCR 341.

3. Bai Dosabai v. Mathurdas Govinddas, AIR 1980 SC 1334; [1980] 3 SCR 762.

4. Chhatra Kumari Devi v. Mohan Bikram Shah, AIR 1931 PC 196; [1931] 58 IA 279.

We are given to understand that an identical issue is pending before a Full Bench of the Delhi High Court and Mr. Syali, learned counsel appearing in that case, sought our permission to place his arguments. The question being of some importance, we permitted him to submit his arguments.

Mr. Syali, learned counsel, submitted that the Income-tax Act is a self-contained code, exhaustive of all matters dealt with therein and its provisions show an intention to depart from the common rule. In support of that, he placed reliance on a judgment of this court in Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163. According to learned counsel, the meaning of the word "owner" occurring in section 22 has to be understood contextually, purposively and only within the four corners of the Income-tax Act. Adopting a wider meaning, according to him, will not and cannot lead to rewriting the civil law. In a way, he supported the stand taken by Mr. Sharma, learned senior counsel, and he also placed heavy reliance on the judgment of Jodha Mal Kuthiala's case [1971] 82 ITR 570 (SC). In addition to the cases cited by Mr. Sharma, learned counsel, Mr. Syali, invited our attention to a case in Nawab Sir Mir Osman Ali Khan (Late) v. CWT [1986] 162 ITR 888 (SC). He also invited our attention to a recent judgment of this court in State v. S.J. Choudhary, AIR 1996 SC 1491; [1996] 2 SCC 428, to support his contention that words occurring in a statute should be so construed as to continuously update the wording in accordance with the changes in social conditions.

To appreciate the submissions made at the Bar, it is necessary to set out the relevant sections from the Act. We set out hereunder section 9(1) of the old Act, and sections 22, 27 and 56 of the new Act.

"9. (1) The tax shall be payable by an assessee under the head "Income from property" in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax.

22. Income from house property.— The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to Income-tax, shall be chargeable to Income-tax under the head 'Income from house property'.

27. 'Owner of house property', 'annual charge', etc., defined.—For the purposes of sections 22 to 26—…

(iii) a member of a co-operative society to whom a building or part thereof is allotted or leased under a house building scheme of the society shall be deemed to be the owner of that building or part thereof.

[before amendment]

(iii) a member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;

(iii a) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof;

(iii b) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof…

56. Income from other sources.—(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to Income-tax under the head 'Income from other sources', if it is not chargeable to Income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to Income-tax under the head "Income from other sources", namely:—…

(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to Income-tax under the head 'Profits and gains of business or profession'".

From the narration of the facts and the rival submissions it will be seen that the controversy revolves around the meaning to be given to the word "of which the assessee is the owner' occurring in section 22 of the Act. We may point out that section 9(1) of the old Act was substantially the same as section 22 of the new Act. We may also state that the whole of section 9 of the old Act has been split up and redrafted into several separate sections, namely, sections 22 to 27 under the new Act.

We have noticed the reliance placed by the Bar on the decision of this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570 which was concerned with the old section 9(1) of the Act. In that case, this court had occasion to consider the meaning to be given to the words 'of which he is the owner'. Of course, on the facts, the court was called upon to decide whether the erstwhile admitted owner of the property is liable to pay Income-tax on the house property under section 9, even after the said property has vested in the Custodian of Evacuee Property by virtue of section 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949. The contention of the Revenue in that was that notwithstanding the vesting of the house property in the Custodian, the legal ownership remained with the assessee therein and, therefore, section 9(1) of the old Act was attracted. This contention was repelled by this court. Hegde J., speaking for the Bench, observed at page 575 of 82 ITR:

"The question is who is the 'owner' referred to in this section? Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property? It must be remembered that section 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of section 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right".

The learned judge observed that "it is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice". Again at page 577, it was held that "for determining the person liable to pay tax, the test laid down by the court was to find out the person entitled to that income". Again at page 578 it was observed: "No one denies that an evacuee from Pakistan has a residual right in the property that he left in Pakistan. But the real question is, can that right be considered as ownership within the meaning of section 9 of the Act. As mentioned earlier that section seeks to bring to tax income of the property in the hands of the owner. Hence, the focus of that section is on the receipt of the income …The meaning that we give to the word 'owner' in section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act".

In our opinion, the above observations of this court clearly fix the liability on a person who receives—or is entitled to receive the income from the property in his own right. In spite of this, the Assessing Officers of various circles instead of uniformly following the ratio laid down in this case have taken different diametrically opposite views depending upon the pronouncements of the concerned High Courts in the circles, on the scope of section 22 of the Act. The High Courts of Allahabad, Punjab and Haryana, Rajasthan, Calcutta and Patna have taken the view, by correctly understanding the ratio laid down in Jodha Mal Kuthiala's case [1971] 82 ITR 570 (SC), and the High Courts of Bombay, Delhi and Andhra Pradesh have taken a different view wrongly distinguishing on facts Jodha Mal Kuthiala's case [1971] 82 ITR 570 (SC).

In Kala Rani's case [1981] 130 ITR 321, the Punjab and Haryana High Court, after referring to the judgment of this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570, observed as follows (page 325):

"Thus, it cannot be accepted that before a person can be assessed under section 22 of the Act, he must be the owner by virtue of a sale deed in his favour. As a matter of fact, what is being taxed under section 22 of the Act is the income from house property or the annual value of the property of which the assessee is the owner".

The High Court rejected the contention that the mere possession of the property in pursuance of an agreement to sell was not sufficient to burden the assessee with tax on any income under section 22 of the Act.

The High Court of Patna in Sahay Properties and Investment Co. P. Ltd.'s case [1983] 144 ITR 357 has elaborately dealt with this case. As a matter of fact, civil appeals were preferred by special leave against the judgment of the Patna High Court in Civil Appeals Nos. 5874-76 of 1983 (see [1983] 143 ITR (St.) 60). However, those appeals were dismissed as withdrawn on March 20, 1996, without deciding the issue.

The brief facts in that case were, the assessee-company acquired certain immovable property in February, 1962. The assessee paid the entire consideration and was in actual physical possession of the entire properties contracted to be sold. The assessee was empowered by the vendor to use the properties in whatsoever manner the assessee liked and to receive and enjoy the entire usufructs thereof, with the only reservation that a formal deed of conveyance with registration in conformity with the Indian Registration Act would follow at the request of the assessee and once that request was made, it was incumbent upon the transferor to execute such a deed of conveyance and to get it registered. The assessee was assessed under section 22 in respect of the income from the property but the Tribunal held that the assessee was not the owner of the property and was not liable to be assessed as such.

The Patna High Court has cited this court's judgment in Jodha Mal Kuthiala's case [1971] 82 ITR 570, and also a number of other judgments of different High Courts. The High Court had also gone into the concept of "ownership" and referred to passages from G.W. Paton on Jurisprudence, Dias on Jurisprudence, Stroud's Judicial Dictionary and Pollock on Jurisprudence. We may usefully extract certain passages from the judgment of the Patna High Court.

The learned judges observed at page 361:

"The emphasis, therefore, in this statutory provision is that the tax under the section is in respect of ownership. But this matter is not as simple as it looks. This leads us to a more vexed question as to what is ownership. Should the assessment be made at the hands of the person who has the bare husk of the legal title or at the hands of the person who has the rights of an owner of a property in a practical sense? Enjoyment as an owner only in a practical sense can be attributed to the term 'owner' in the context of this section — a person who can exercise the rights of the owner and is entitled to the income from the property for his own benefit. It is well-settled, and learned counsel for either side were not at loggerheads, that the section cannot be so construed as to make it an instrument of oppression, to use the language of Hegde J., in the case of Jodha Mal Kuthiala's case [1971] 82 ITR 570 (SC).

We are very much alive to the legal position that it is true that there is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in—nothing is to be implied. We can look only fairly at the language used. None the less, the tax laws have to be interpreted reasonably and in consonance with justice. This is well-settled by numerous decisions of the Supreme Court itself.

We have, therefore, to judge and interpret the language of section 22 of the Act in the context of that particular section, and that context we shall come back to hereinafter at a more appropriate place.

In the meantime, it would not be irrelevant to go into the concept of 'ownership'. What is ownership after all? Read from the Roman law up to the English law at the present stage, medieval stage having been interspersed with different formulae, the position that now juristically emerges is this. The full rights of an owner as now recognised are:

(a) The power of enjoyment (e.g., the determination of the use to which the res is to be put, the power to deal with produce as he pleases, the power to destroy);

(b) possession which includes the right to exclude others;

(d) power to leave the res by will.

One of the most important of these powers is the right to exclude others. The property right is essentially a guarantee of the exclusion of other persons from the use or handling of the thing…But every owner does not possess all the rights set out above—a particular owner's powers may be restricted by law or by an agreement he has made with another' (refer to G.W. Paton on Jurisprudence, 4th edn., pp. 517-18)".

While dealing with the concept of possession and enumerating the illustrative cases and rules in this respect, Paton says at p. 577 in clause (x):

'To acquire possession of a thing it is necessary to exercise such physical control over the thing as the thing is capable of, and to evince an intention to exclude others:…'

Reference in this connection has been made to the case of Tubantia: Young v. Hichens and of Pierson v. Post [1805] 3 Caines 175 (Supreme Court of New York)…

It would thus be seen that where the possession of a property is acquired, with a right to exercise such necessary control over the property acquired which it is capable of, it is the intention to exclude others which evinces an element of ownership.

To the same effect and with a more vigorous impact is the subject dealt with by Dias on Jurisprudence, (4th edn., at page 400):

'The position, therefore, seems to be that the idea of ownership of land is essentially one of the "better right" to be in possession and to obtain it, whereas with chattels the concept is a more, absolute one. Actual possession implies a right to retain it until the contrary is proved, and to that extent a possessor is presumed to be owner.'

'Again, at page 404, the learned author says:

"Special attention should also be drawn to the distinction between 'legal' ownership recognised at common law and 'equitable' ownership recognised at equity. This occurs principally when there is a trust, which is purely the result of the peculiar historical development of English law. A trust implies the existence of two kinds of concurrent ownerships, that of the trustee at law and that of the beneficiary at equity".

We are not concerned in this case with any case of trust either under the equitable principles or under the law as engrafted in the Indian Trusts Act. Because, the 'beneficiary might himself be a trustee of his interest for a third person, in which case his equitable ownership is as devoid of advantage to him as the legal ownership is to the trustee. So, when described in terms of ownership, the distinction between legal and equitable ownership lies in the historical factors that govern their creation and function; in terms of advantage, the distinction is between the bare right, whether legal or equitable, and the beneficial right' (vide pp. 404405 of Dias on Jurisprudence, 4th edn.).

We, therefore, need not go into the questions involving trusts where a person holds the property and receives the income in trust for others who are the legal beneficiaries. The crux of the matter is as to whether, as already stated above, the actual possession in a given particular case gives a right to retain such a possession until the contrary is proved and so long as that is not done, to that extent a possessor is presumed to be the owner.

Incidentally, although the Supreme Court in the case of Jodha Mal Kuthiala's case [1971] 82 ITR 570, merely mentioned that Stroud's Judicial Dictionary had given several definitions and illustrations of ownership, it refrained from going into the details on account of the practical approach that was made in that case, to which we shall hereinafter refer and dilate upon. We think it worthwile, the matter having been canvassed at length at the Bar, to give a full illustration of the definitions of 'ownership' as Stroud puts it. One such definition is that the 'owner' or 'proprietor' of a property is the person in whom (with his or her assent) it is for the time being beneficially vested, and who has the occupation, or control, or usufruct, of it, e.g, a lessee is, during the term, the owner of the property demised. Yet another definition that has been given by Stroud is that:

'"Owner applies to every person in possession or receipt either of the whole, or of any part, of the rents or profits of any land or tenement, or in the occupation of such land or tenement, other than as a tenant from year to year or for any less term or as a tenant at will' (Stroud's Judicial Dictionary, 3rd edn., Vol. 3, page 2060).

Thus, the juristic principle from the view-point of each one is to determine the true connotation of the term 'owner' within the meaning of section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately—a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a remainder man, say, at the end or extinction of the period of occupation after, again say, a thousand years? The answer to this question in favour of the assessee would not merely be doing palpable injustice but would cause absurd inconvenience and would make the Legislature to be dubbed as being a party to a nonsensical legislation. One cannot reasonably and logically visualise as to when a person in actual physical control of the property realising the entire income and usufructs of the property for his own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here. A plain reading of clause 4 of the agreement, as extracted above, clearly goes to show that the physical possession of the properties has passed on or is deemed to have passed on to the assessee to have and to hold for ever and absolutely with the power to use the same in whatsoever manner it thinks best and the assessee shall derive all income and benefits together with full power of disposal of the properties as well as the income thereof. Can it then be said that the recipient of the income being the assessee only having an absolute and exclusive control over the property without any let or hindrance on the part of the so-called vendor which, indeed, under law it was not entitled to do, as we shall presently show, shall be immune from the taxing provision in section 22 of the Act? The answer in our view is clearly in the negative. The reason is simple. The consideration money has been paid in full. The assessee has been put in exclusive and absolute possession of the property. It has been empowered to deal with the income as it likes. It has been empowered to dispose of and even to alienate the property. Reference to section 54 or, for that matter, section 55 of the Transfer of Property Act by the Tribunal merely emphasises the fact that the legal title does not pass unless there is a deed of conveyance duly registered. The agreement is in writing and the value of the property is admittedly worth more than hundred rupees. Section 54 of the Transfer of Property Act would, therefore, exclude the conferment of absolute title by transfer to the assessee. That, however, would not take away the right of the assessee to remain in possession of the property, to realise and receive the rents and profits therefrom and to appropriate the entire income for its own use. The so-called vendor is not permitted in law to dispossess or to question the title of the assessee (the so-called vendee). It was for this very practical purpose that the doctrine of the equity of part performance was introduced in the Transfer of Property Act, 1882, by inserting section 53A therein. The section specifically allows the doctrine of part performance to be applied to the agreements which, though required to be registered, are not registered and to transfers not completed in the manner prescribed therefore by any law. The section is, therefore, applicable to cases where the transfer is not completed in a manner required by law unless such a non-compliance with the procedure results in the transfer being void. There is, however, a distinction between an agreement void as such and an agreement void in the absence of something which the vendor could do and had expressly or impliedly contracted to do, and where a vendor agrees to sell his share of property, including sir land, there is an implied term in the contract that he will apply for sanction to the revenue authorities necessary for such transfers and the court will direct him to do so. It cannot be said that such an agreement is void because no sanction has been obtained. In the instant case, having reference to clause 5 of the agreement, it would be seen that the option was given to the assessee to demand at its pleasure a conveyance duly registered being executed in its favour by the Sahay family (the vendor) and to get its name mutated in the official records. The assessee has not exercised its option for reasons best known to it—presumably to have a double weapon in its hands to be used as and when circumstances so demanded. Can it yet be said that for the default on the part of the assessee itself it would be entitled to say that it is not the owner of the property for all practical purposes, receiving the rent all the time, appropriating the usufructs for its own purposes all the time and having no interference at the instance of the vendor? Can that be a practical and logical approach to the true construction and purport of the substance and spirit of section 22 of the Act? The answer, in our view, is clearly in the negative and against the assessee. Having taken all the advantages and still taking all the advantages under the contract without any hindrance or obstruction on the part of anyone including the vendor which the vendor could not do in view of section 53A of the Transfer of Property Act, the assessee cannot now turn back and say that because of its default in having a deed registered at its sweet will it was not an owner within the meaning of section 22 of the Act. It may bear repetition to say that it was on account of these facts that juristic principles have now emerged saying that one of the most important of the powers of ownership is the right to exclude others from possession and the property right is essentially a guarantee of the exclusion of other persons from the use or handling of the thing. In that sense, therefore, the assessee itself became the owner of the property in question. In our view, any decision to the contrary would not be in consonance with the juristic principle either at common law or in equity. In either case, it would not be subservient to the intent and purpose of section 22 of the Act, with regard to which, as we have already stated, we can fairly look at the language used and the tax laws have to be interpreted reasonably and in consonance with justice. So far we have dealt with the case in this respect on juristic principles as if it were a matter of first impression. We have, therefore, now to refer to the case law on the subject".

Ultimately, the learned judges held that the assessee in that case will fall under the true meaning of the term "owner" as used in section 22 of the Act and, therefore, liable to tax from income out of the house properly as owner thereof. This judgment of the Patna High Court was followed by the same High Court in the judgment in Krishna Lal Ajmani's case [1996] 222 ITR 653.

The Rajasthan High Court in Maharani Yogeshwari Kumari's case [1995] 213 ITR 541, again considered the same question and, after referring to various judgments, held as follows (page 548):

"Section 22 of the Income-tax Act has created a charge on the income in respect of annual value of the property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to Income-tax under the head 'Income from house property'. The question, therefore, arises as to whether the words 'of which the assessee is the owner' can be applicable only to a registered owner or also to such person in whose favour the registered sale deed has not been executed but a sale agreement has been executed, possession of the property has been given and consideration for sale has been paid. Section 53A of the Transfer of Property Act contemplates that when any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that the contract, though required to be registered, has not been registered, or where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract. The proviso to the aforesaid section contemplates that nothing in that section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof. If the view that without there being conveyance, the transferor continues to be the owner is taken, still a question arises that the income has not been received by the owner and, therefore, whether the assessment of the transferee could be made by considering that there was diversion of income or the transferor has ceased to have any right in respect of the income received? This section debars the transferor from enforcing his right to the property. In the case of Hamda Ammal v. Avadiappa Pathar [1991] 1 SCC 715, it was held by the apex court that the document after its registration relates back to the date of execution of the sale deed. Though under the Income-tax law, the benefit of ownership is unknown, but still if the income is assessed in the hands of the transferor who has not received the income from the property whether such a transferor can be made liable to make the payment of tax. Various decisions given by the different High Courts have taken different views. The view of the Calcutta, Bombay, Delhi and Allahabad High Courts as mentioned above is on one hand, whereas the view of the Andhra Pradesh Court in the case of CIT v. Nawab Mir Barkat Ali Khan [1974] TLR 90 and the Karnataka High Court in the case of Ramkumar Mills P. Ltd. v. CIT [1989] 180 ITR 464, is different. So far as the view taken by the apex court in the case of Nawab Sir Mir Osman Ali Khan [1986] 162 ITR 888 is concerned that was in the context of the Wealth-tax Act where the language of the section was different. Section 53A debars a transferor from exercising the rights of an owner after he has received full consideration and handed over possession under the contract. The transferor in a case where he has executed the document and received consideration and even handed over possession of the property, cannot exercise any right of an owner. This court in the case of Rajputana Hotels Pvt. Ltd. v. State of Rajasthan (D.B. Civil Writ Petition No. 511 of 1989— decided on May 27, 1992), while interpreting the provisions of the Rajasthan Land and Building Tax Act, 1964, has held that the person who is entitled to receive the rent is assessable in respect of a property even if it is not registered in his name.

The matter can be considered from another angle. Under the Income-tax Act, the assessing authority has power to assess the income in the hands of the real owner. If 'A' purchases the property in the name of 'X', simply because the property is registered in the name of 'X', 'A' cannot escape his liability. Secondly, there can be a partnership where the partners have contributed the property and the property has become the partnership property, then no registration is required, the income in such a case has to be assessed in the hands of the partnership firm and not the individuals who have contributed the property. Thirdly, the transferee who has received the income has already been assessed in respect of income derived from such property as income from the property, whether section 22 can again be invoked against the transferor in respect of such income, fourthly, in respect of a co-operative society the members thereof are given the property on the basis of allotment letters which may or may not be registered. The members thereafter transfer the property from one hand to another and if it is considered that it is only the registered owner or the society who can be assessed to tax, then the person who has enjoyed the income would escape liability to tax. Fifthly, if it is considered that the registered owner alone is liable to pay tax while the income is received by the transferee, the transferee would enjoy the income but the tax will be levied from the registered owner who may or may not be in a position to make the payment of tax. Sixthly, there could be diversion of income by overriding title as was considered in the case of Savita Mohan [1985] 154 ITR 449 (Raj), seventhly, if the property is in the name of a trust and the beneficiary is entitled to a specific share of the income, whether the other provisions of the Act can be said to be inoperative and, eighthly, there may be some similar other instances".

We do not think that it is necessary to set out extracts from the judgments of other High Courts taking a similar view.

The contrary view taken by the other High Courts was mainly based on the fact that unless there is a registered deed conveying the property, the person in possession/enjoyment of the property cannot be considered as legal owner and, therefore, he cannot be called upon to pay the tax under section 22 of the Act.

The law laid down by this court in Jodha Mal Kuthiala's case [1971] 82 ITR 570, according to us, has been rightly understood by the High Courts of Punjab and Haryana, Patna, Rajasthan, etc. The requirement of registration of the sale deed in the context of section 22 is not warranted.

At this juncture, we can also refer to the judgment cited by Mr. Syali regarding updating construction of the words used in the statute. In State (Through CBI/New Delhi) v. S.J. Choudhary, AIR 1996 SC 1491, 1494; [1996] 2 SCC 428, this court has quoted the following passage with approval in support of updating construction (page 433 of [1996] 2 SCC):

"Statutory Interpretation by Francis Bennion, 2nd edn. section 288 with the heading 'Presumption that updating construction to be given' states one of the rules thus (page 617):

(2) It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law.

In the comments that follow it is pointed out that an ongoing Act is taken to be always speaking. It is also, further, stated thus (pp. 618-19):

'In construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to be applied at any future time in such a way as to give effect to the true original intention. Accordingly the interpreter is to make allowances for any relevant changes that have occurred, since the Act's passing, in law, social conditions, technology, the meaning of words, and other matters. Just as the US Constitution is regarded as "a living Constitution", so an ongoing British Act is regarded as "a living Act". That today's construction involves the supposition that Parliament was catering long ago for a state of affairs that did not then exist is no argument against that construction. Parliament, in the wording of an enactment, is expected to anticipate temporal developments. The drafter will try to foresee the future, and allow for it in the wording.

An enactment of former days is thus to be read today, in the light of dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises processing by executive officials'".

Applying the above principle also, the view taken by the High Courts of Patna, Punjab and Haryana, etc., can be supported.

Assuming that there are two possible interpretations on section 22 of the Act, which is akin to a charging section, it is well settled, that the one which is favourable to the assessee has to be preferred. Even on that principle the view taken by the High Courts of Patna, Punjab and Haryana, etc., has to be preferred rather than the contrary view taken by the High Courts of Delhi and Andhra Pradesh.

Accordingly, we hold that the views taken by the High Courts of Allahabad, Patna, Rajasthan, Punjab and Haryana are the correct views. The contrary view taken by the Delhi High Court is not correct.

It may not be out of place to extract a passage from the judgment of the Delhi High Court (see [1986] 160 ITR 308) under appeal (C.A. No. 4549 of 1995). The High Court in a way conceded the correctness of the Patna view by observing as follows (page 314 of [1986] 160 ITR):

"It can be contended, in view of the agreements of sale and the handing over of the possession to various persons who are, in fact, entitled to enjoy these flats and the income therefrom in any manner they like and against whom the company has lost all rights of recourse because of the provisions of section 53A of the Transfer of Property Act, that the company is the owner of nothing but the husk of title over the property and should not be assessed on the principle of the decision of the Supreme Court and this contention may perhaps have to be accepted".

In spite of the above observation, the Delhi High Court took a contrary view mainly on the ground that the earlier decisions of that court has consistently taken such a contrary view which has to be followed.

The view expressed supra by us is strengthened/supported by a subsequent amendment to section 27 of the Act. The said amendment was introduced to section 27 of the Act by the Finance Act, 1987, by substituting clauses (iii), (iii a) and (iii b) in the place of old clause (iii) with effect from April 1, 1988.

In our view, the circumstances under which the amendment was brought into existence and the consequences of the amendments will have a greater bearing in deciding the issue placed before us. In other words, if after discussion we come to a conclusion that the amendment was clarificatory/declaratory in nature and, therefore, it will have retrospective effect, then it will set at rest the controversy finally.

We have seen that the High Courts are sharply divided on this issue, one set of High Courts taking the view that the promoters/contractors after parting with possession on receipt of full consideration thereby enabling the "purchasers" to enjoy the fruits of the property, even though no registered document as required under section 54 of the Transfer of Property Act was executed, can be "owners" for the purpose of section 22 of the Act. The other set of High Courts had taken a contrary view holding that unless there is a registered sale document transferring the ownership as required under the Transfer of Property Act, the so-called purchasers cannot become owners for the purpose of section 22 of the Act. As a matter of fact, the judgment of the Delhi High Court in Income-tax Reference No. 84 of 1977 in Sushil Ansal v. CIT [1986] 160 ITR 308, the appeal against which is C.A. No. 4549 of 1995, the learned judge has made the following observation (page 317):

"Before we conclude, we may mention that, during the course of the hearing, we suggested to the standing counsel for the Department that the Central Board should consider various practical aspects of this problem and formulate guidelines which would be equitable to the various classes of persons concerned. Perhaps, as suggested by this court in CIT v. Hans Raj Gupta [1982] 137 ITR 195, the time has even come for legislative amendment, if necessary, possibly with retrospective effect. Serious consideration at the highest administrative level was warranted in view of the recurrent nature of the problem, its magnitude and the conflict of judicial decisions. However, after taking sufficiently long adjournments, counsel informed us that no decision could be taken by the Board and requested that we should decide the reference. We have, therefore, proceeded to do so".

May be this is one of the reasons for Parliament to bring in the amendment referred to above to section 27 of the Act. At any rate the admitted position when the amendment was brought in, was that there was divergence of opinion between the High Courts on the issue at hand.

In the Memorandum Explaining the Provisions in the Finance Bill, 1987, concerning section 27 reads as follows (see [1987] 165 ITR (St.) 161):

"SIMPLIFICATION AND RATIONALISATION OF PROVISIONS

Enlarging the meaning of 'owner of house property'

27. Under the existing provisions of section 22 of the Income-tax Act, any income from house property is chargeable to tax only in the hands of the legal owner. As per section 27 of the Income-tax Act, certain persons who are not otherwise legal owners are deemed to be the owners for the purposes of these provisions.

Under the Transfer of Property Act, the transfer of ownership can be effected only by means of a registered instrument. However, in recent times various other devices are sought to be employed for transferring one's ownership in property. As a result, there are situations in which the actual owner, say, of an apartment in a multi-storeyed building, or a holder of a power of attorney is not the legal owner of a property. In some cases, pending resolution of disputes, the legal as well as the beneficial owners are assessed to tax in respect of the same income.

As a measure of rationalisation, the Bill seeks to enlarge further the meaning of the expression 'owner of house property', given in clause (iii) of section 27 by providing that a person who comes to have control over the property by virtue of such transactions as are referred to in clause (f) of section 269UA will also be deemed to be the owner of the property. The amendment also seeks to enlarge the applicability of this clause to a member of a company or other association of persons.

Corresponding amendments have also been proposed in regard to the definition of 'transfer' in section 2(47) of the Income-tax Act, section 2(m) of the Wealth-tax Act defining 'net wealth' and section 2(xii) of the Gift-tax Act defining 'gift'.

These amendments will take effect from April 1, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years".

If this much is clear, the next thing to be considered is what is the effect of the amendment.

In Crawford's Statutory Construction, at page 107, paragraph 74, reads as follows:

"74. Declaratory statutes. — Generally speaking, declaratory statutes can be divided into two classes: (1) those declaratory of the common law, and (2) those declaring the meaning of an existing statute. Obviously, those declaratory of the common law should be construed according to the common law. Those of the second class are to be construed as intended to lay down a rule for future cases and to act retrospectively. They closely resemble interpretation clauses, and their paramount purpose is to remove doubt as to the meaning of existing law, or to correct a construction considered erroneous by the Legislature." (emphasis applied)

In Francis Bennion's Statutory Interpretation (Second edition) 1992, page 105, the learned author says "Declaratory Acts—A declaratory Act or enactment declares what the law is on a particular point, often 'for the avoidance of doubt'".

In Justice G.P. Singh's (Sixth edition 1996) "Principles of Statutory Interpretation", under the heading "declaratory statutes", the learned author has summed up as follows:

"Declaratory statutes:

The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court: 'for modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word "declared" as well as the word "enacted"'. But the use of the words "it is declared" is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law".

The above summing up is factually based on the judgments of this court as well as English decisions.

A Constitution Bench of this court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas, AIR 1968 SC 1336; [1968] 3 SCR 623, while considering the nature of amendment to section 29(2) of the Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows (page 1339):

"The amending clause does not seek to explain any pre-existing legislation which was ambiguous or defective. The power of the High Court to entertain a petition for exercising revisional jurisdiction was before the amendment derived from section 115 of the Code of Civil Procedure, and the Legislature has by the amending Act not attempted to explain the meaning of that provision. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act".(emphasis applied)

From the circumstances narrated above and from the Memorandum explaining the Finance Bill, 1987 (see [1987] 165 ITR (St.) 161), it is crystal clear that the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word "owner" in section 22 of the Act. We do not think that in the light of the clear exposition of the position of a declaratory/clarificatory Act, it is necessary to multiply the authorities on this point. We have, therefore, no hesitation to hold that the amendment introduced by the Finance Bill, 1987, was declaratory/clarificatory in nature so far as it relates to section 27(iii), (iii a) and (iii b). Consequently, these provisions are retrospective in operation. If so, the view taken by the High Courts of Patna, Rajasthan, and Calcutta, as noticed above, gets added support and consequently the contrary view taken by the Delhi, Bombay and Andhra Pradesh High Courts is not good law.

We are conscious of the settled position that under the common law, "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, "to tax the income", we are of the view, "owner" is a person who is entitled to receive income from the property in his own right.

In the light of the above narration and discussion, we do not think it necessary to discuss any more separately the submissions advanced across the Bar.

In fine, we answer the question referred to this court in T.R.C. Nos. 9-10 of 1986 in the negative and in favour of the Revenue. Civil Appeal No. 4165 of 1994 filed by the Revenue stands dismissed and Civil Appeal No. 4549 of 1995 by the assessee stands allowed. However, there will be no order as to costs.

Know status of your PAN/ TAN on Phone

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Interactive Voice Response (IVR) for knowing the status of your PAN/ TAN application is now available at TIN call centre (TCC) in Hindi/English language. You may call on 020- 27218080 to check the status of your application.

CAG – EPFO did not follow prescribed pattern of investments

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Preface

The Report of the Comptroller and Auditor General of India for the year ended March 2012 containing the results of the Performance Audit of Employees' Provident Fund Organisation (EPFO) has been prepared for submission to the President of India under Article 151 of the Constitution.

The Performance Audit was conducted through test check of records of the EPFO and its Regional Offices (ROs) and Sub-Regional Offices (SROs) for the period 2006-07 to 2011-12. Audit observations were issued to EPFO as well as the Ministry and the replies have been considered and appropriately incorporated in the Report.

Executive Summary

The Government of India has enacted a number of legislations in the area of social security. Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is an important Act in this regard. The Act provides for compulsory provident fund, pension and deposit linked insurance in factories or establishments employing twenty or more employees in industries mentioned in Schedule I to the Act. The Government of India administers the Act through Employees' Provident Fund Organisation.

Important findings of the Performance Audit Report are given below:

• Wage limit for coverage of employees under EPF Scheme was 6500 which has been continuing since June 2001.

(Paragraph 2.1)

• There were consistent shortfalls in receipt of contributions from the Central Government.

(Paragraph 2.1.2).

• Income of EPFO collected by way of administrative charges, etc. has been more than its expenditure on running of schemes.

(Paragraph 2.1.3)

• The balance in the 'Interest Suspense Account' increased consistently from 12445.29 crore in March 2007 to 22461.15 crore in March 2011.

(Paragraph 2.3)

• The EPFO did not follow prescribed pattern of investments.

(Paragraph 2.5)

• Valuation of Employees Pension Fund is not being done in time, nor are the reports received in a time bound manner and there is significant delay in action on valuation reports.

(Paragraph 2.6)

• The EPFO was not very encouraging towards voluntary coverage of its schemes. Inspections of establishments were less than prescribed targets, which led to insufficient controls over establishments.

(Paragraphs 3.3 and 3.4)

• A sum of RS. 313.20 crore was recoverable on account of EPF arrears from 20974 establishments in selected ROs/SROs of the five States as on 31 March 2012.

(Paragraph 4.3)

• Outstandings towards realisation of damages from unexempted establishments increased from RS. 151.78 crore to RS. 265.75 crore during 2006-07 to 2011-12.

(Paragraph 4.5)

• Employers of exempted establishments did not deposit RS. 129.20 crore to their respective Boards of Trustees. An amount of RS. 299.78 crore was not invested by the BOTs of 249 exempted establishments which was in violation of the provisions of exemption.

(Paragraphs 4.6.1 and 4.6.2)

• More than 70,000 Subscribers' accounts had minus balances totalling RS. 45.06 crore, which is indicative of withdrawal in excess of available balance. Possibility of unauthorised withdrawals could not be ruled out.

(Paragraph 5.2)

• Balance in Inoperative/Unclaimed Deposit Account increased from RS. 332.14 crore to RS. 2948.11 crore during 2006-12. Further, number of inoperative accounts increased from 25,12,793 in 2006-07 to 73,00,262 in 2011-12.

(Paragraph 5.4)

Summary of Recommendations

• The wage limit may be suitably revised at regular intervals.

• Central Government should remit its contribution to EPFO in time.

• The EPFO may revise its administrative charges suitably.

• The EPFO may frame the budget estimates with due care as per provisions in GFRs. Ministry may scrutinize the budget proposals adequately before according sanction.

• The EPFO should prudently match its earnings with interest payouts to its subscribers.

• Government must immediately act on pending Valuers' report and decide its impact on EPS accounts and carry out necessary corrections. The valuation exercise should be done annually on regular and timely basis and the impact thereof should be disclosed.

• The Ministry may take appropriate action to reconcile the figures.

• The minimum number of meetings of the Committees should be held as per prescribed norms.

• The EPFO should closely monitor targets and ensure compliance for conducting regular surveys and inspections of establishments. Further, it needs to welcome establishments opting for voluntary coverage and ensure that notifications are issued in a time bound manner.

• The EPFO should ensure comprehensive updation of DCBRs, generate appropriate defaulters list and initiate necessary recoveries.

• The EPFO may monitor timely remittance of its deposits by SRI.

• The EPFO should evolve a procedure for constant monitoring and control mechanism to ensure that number of in-operative accounts are minimised.

• Updation of subscribers' accounts should be done on a regular basis.

Conclusion

The Employees Provident Fund Scheme together with the Employees Pension Scheme (EPS) and Employees Deposit Linked Insurance (EDLI) Scheme aims to provide social security to employees and their family members. It is, therefore, important that all establishments which satisfy the requirements of the EPF Act, are brought under its ambit without delays. EPFO ensures this through surveys and inspections. Significant shortfalls were noticed in this regard. Also, EPFO was not found to be very encouraging towards voluntary coverage of its schemes.

The Interest Suspense Account balance was not a true reflection of sums available for distribution as interest to subscribers, in the absence of updation of about 38.74 lakh subscribers' accounts as of March 2012. Further more than 70,000 subscribers' accounts reflected negative balances, indicating excess withdrawls. These reflected inadequate service to its subscribers. Its income was consistently more than expenditure on running of schemes. The EPFO also did not adhere to the investment pattern prescribed by the Ministry of Finance.

The revenue collection processes in the EPFO were deficient. Arrears in determination of dues, outstanding amount recoverable on account of administrative charges from the unexempted establishments, inspection charges from the exempted establishments were significant.

The EPFO did not exercise expected control on the employers of exempted establishments to ensure that the exempted establishments transferred the EPF accumumulations to their BOTs and the BOTs invested the money transferred to them.

Many of the weaknesses, in the implementation of scheme, included in this Report, have been persisting despite earlier assurances rendered to the PAC through Action Taken Notes.

Source- Report no.-32 of 2013-Union Government Civil Autonomous Bodies (Ministry of Labour and Employment)- Report of the Comptroller and Auditor General of India on Performance Audit of Employees' Provident Fund Organisation

Levy of Income Tax Penalties and administration of Prosecution – CAG Suggestions

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Summary of Recommendations

With reference to administration and levy of penalty

1. The entire process of initiation, levy and order of penal proceedings to be duly recorded so that proceedings do not suffer from procedural infirmities.

2. The Ministry may ensure that concealment of income is penalized as per the Act.

3. The Ministry may put in appropriate mechanisms to ensure that tax demands are collected on time and defaults penalized.

4. The Ministry may ensure coordination between various wings within ITD so that revenue efforts are synergized.

5. The Ministry may put in a mechanism for ensuring appropriate penalties for cash transactions relating to loans and deposits beyond prescribed limits.

With reference to administration of Prosecution

6. The Ministry needs to ensure instituting a more robust mechanism for identifying cases for prosecution which takes into account timeliness; quantum of tax evasion; and contemporary impact.

7. CBDT should ensure posting of a designated and experienced Nodal officer to handle prosecution at the field level with independent charge. CBDT is to ensure periodical interaction amongst authorities (like quarterly) so that status of a case is ascertainable at any point of time.

8. CBDT should take up work of cleaning of records and data bases to ascertain actual pendency and status of prosecution cases at various levels. CBDT should ensure maintenance of updated prosecution records at all levels.

9. CBDT should ensure periodical physical verification of prosecution related files.

10. Ministry needs to streamline the mechanism for appointment and evaluation of departmental counsels representing the ITD before judicial authorities. The remuneration rates also need a relook in accordance with the tasks associated so as to avail and retain the services of experienced counsels.

11. The Ministry may ensure regular coordination with the judicial machinery.

12. CBDT should perform one time exercise to identify the stage of pendency of all cases in the various Courts and follow it actively for resolution.

13. CBDT should consider compounding offences before launching the prosecution proceedings so that revenues are collected.

14. CBDT should deploy prosecution machinery for high impact cases and avoid focussing on low impact cases.

ITD not applies penalty provisions effectively – CAG

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Summary of CAG Report on Administration and Levy of Penalty and Administration of Prosecution is as follows :-

• The Income Tax Act, 1961 (Act) proposes imposition of penalty on an assessee, if the Assessing Officer (AO)/Commissioner of Income Tax-Appeals/Commissioner of Income Tax (CIT) is satisfied that there has been non-compliance with or violation of law and there is no reasonable cause for failure. Chapter XXII of the Act declares certain acts of omission and/or commission as punishable offences. Offences and Prosecution under the Act are read in conjunction with other laws such as Indian Penal Code (IPC), Code of Criminal Procedure (Cr PC) and Indian Evidence Act (IEA).

• The Wanchoo Committee Report of 1975 recommended that Income Tax Department (ITD) needs to evolve and pursue vigorous prosecution policies and emphasized that monetary penalties may always not be enough. The White Paper on Black Money of May 2012 by Ministry of Finance (Ministry) described that taxpayers may be willing to take a calculated risk of tax evasion and it may be more effectively deterred by effective prosecution. A committee headed by the Chairman of Central Board of Direct Taxes (CBDT) constituted in May 2011 recommended establishment of special judicial set up within the existing framework as also amendments to various fiscal statutes so that they become stronger. In response to these, ITD has also taken several efforts to streamline and strengthen the deterrent mechanisms against tax evasion in general and income tax in particular.

• As penalty and prosecution are important deterrent mechanisms, we felt it necessary to examine the administration and implementation of penalty and prosecution machinery, by the CBDT and its field formations for combating tax evasion. We sought to achieve this by examining current structures, its utilization and effectiveness. Our objective for examining penalty provisions inter alia was to whether the mechanism for administration and levy of penalties for various defaults existed and is functional and had a deterrent effect on tax evasion. In respect of prosecution, our focus was to examine the functional efficiency of the prosecution mechanism at various levels in ITD.

Administration and Levy of Penalty

• We studied the initiation and levy of penalty across all the States in audit during August 2012 and December 2012. We found that the ITD delayed in completion of penalty proceedings which led to potential loss of revenue (paragraph 2.3). ITD did not apply penalty as per provisions of the Act in cases such as (a) non-complying with filing requirements covering Income Tax Returns, Tax Audit Reports, Books of Accounts; (b) concealment of income and (c) failure to provide return for TDS/TCS (paragraphs 2.12, 2.14 and 2.15). ITD did not apply penalty provisions for cash transaction which led to tax effect of Rs. 56.60 crore (paragraph 2.16). We also found that the Act is silent on time-limit for initiation of penalties though it provides time-limit for completion of penalty proceedings (paragraph 2.8).

Administration of Prosecution

• We attempted to study the mechanism of prosecution as measured by the functional efficiency at various levels vis-a-vis roles and responsibilities fixed at various levels. Since prosecution was enforceable at the instance of the Court, the interplay with the judicial machinery was also part of our study.

• Our study revealed mismatches at every stage of selection, initiation, pursuance and disposal of cases as also at every level of monitoring and coordination. To handle prosecution cases, CBDT has not ensured posting of appropriate officers as Nodal Officers in its field formations (paragraph 3.2.1). There are discrepancies in figures of pending cases as reported by Officer in-charge (Prosecution) to CBDT questioning the authenticity and reliability of prosecution data (paragraph 3.2.3). ITD has not performed physical verification of prosecution records since FY 08 streamlining the record maintenance (paragraph 3.2.4). Nodal Officers have not maintained the prosecution registers despite various instructions issued by CBDT (paragraph 3.2.5). ITD has not given adequate priority in launching of prosecution as indicated by delay in initiation of cases and by not launching the prosecution even in approved cases (paragraph 3.3).

• Prosecution cases are being pursued on companies which have already been liquidated or have been declared sick by BIFR (paragraphs 3.4.6 and 3.4.7). CBDT is wasting resources in pursuing cases under repealed sections of the Act, dead assessees etc. (paragraph 3.4.3). CBDT did not utilize the prosecution mechanism for ensuring tax compliance under section 276CC of the Act (paragraph 3.4.5).

• We found that ITD's nominees are not attending regular hearing in the Courts impacting disposal of cases (paragraph 3.5.2). ITD has poor records maintenance and inadequate monitoring of prosecution cases pending in the Courts (paragraph 3.5.3). Poor record maintenance and delay in timely production of evidences has led to acquittal of assessees in prosecution related offences (paragraph 3.6). The enforcement of CBDT's policy and procedures on Prosecution Counsels has not been effective and has impacted the pursuance of cases (paragraph 3.7).

• ITD did not use the compounding of offences as alternate dispute resolution mechanism effectively to reduce the litigation and realize the due revenue (paragraph 3.9). ITD has acted not in consonance with the spirit of National Litigation Policy by wasting prosecution machinery on technical offences (paragraph 3.10). Prosecution machinery of ITD was used to handle individual assessees and low money value cases, not against systematically organized entities (paragraph 3.11). Central Economic Intelligence Bureau established for gathering, collation and dissemination of information among tax gathering agencies like CBDT, CBEC etc. has not worked in coordinated manner to arrest tax evasion by prosecution (paragraph 3.12).

• Therefore, ITD did not apply penalty as per provisions of the Act effectively. ITD has also not given adequate priority to the prosecution in tackling tax evasion and prosecution mechanism is not working effectively and efficiently.

Also Read - Levy of Income Tax Penalties and administration of Prosecution – CAG Suggestions

Report no.- 28 of 2013-Union Government (Department of Revenue-Direct Taxes) – Report of the Comptroller and Auditor General of India on Performance Audit on Administration of Penalty and Prosecution

Use of word 'National' in the names of Companies or Limited Liability Partnerships (LLPs)

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Circular No 2/2014, Dated the 11^th February, 2014

Sub : Use of word 'National' in the names of Companies or Limited Liability Partnerships (LLPs)

It has come to the knowledge of this Ministry that Companies / Limited Liability Partnerships are being registered with the word 'National' in their names. It is being intimated that no company should be allowed to be registered with the word 'National' as part of its title unless it is a government company and the Central / State government(s) has a stake in it. This should be stringently enforced by all Registrar of Companies (ROCs) while registering companies. Similarly, the word 'Bank' may be allowed in the name of an entity only when such entity produces a 'No Objection Certificate' from the RBI in this regard. By the same analogy the word "stock Exchange" or "Exchange" should be allowed in name of a company only where 'No Objection Certificate' from SEBI in this regard is produced by the promoters.

F No. 2/2/2014 – CL-V

Kamna Sharma

(Assistant Director)

23387263

Inter-unit transfer of goods manufactured by a 100% EOU – No requirement to pay SAD though no sales tax is paid – Tribunal sets aside demand

By TIOL News Service

AHMEDABAD, FEB 19, 2014: NOTIFICATION No 23/2003 CE dated 31.03.2013 exempts goods manufactured in a EOU and cleared in DTA from payment of excise duty equivalent to the Additional duty of Customs leviable under sub-section (5) of Section 3 of the Customs Tariff Act, 1975 subject to the condition that the goods cleared into the Domestic Tariff Area are not exempt by the State Government from payment of sales tax or value added tax. In case of inter-unit transfer of goods, no Sales Tax is paid as it is only a stock transfer. However, department took a view that the EOU has to pay Additional Duty of customs and confirmed demand in this case. This issue has already been decided in favour of the EOUs in case of 2014-TIOL-04-CESTAT-MUM. But, what is interesting is without making any reference to this precedent decision of the Mumbai Bench, the Ahmedabad Bench on independent analysis held that 4% duty need not be paid in case of stock transfers.

The Tribunal held:

It is the fact that the inter unit clearance from EOU to DTA are not exempted from payment of sales tax by the state government by any notification and revenue unable to bring on record any notifications issued by the state government or otherwise to indicate that inter unit transfers from EOU to DTA are exempted. It is an admitted fact that whenever there is an inter unit transfer, it is not sales transactions and hence the sales tax/CST/VAT may not get attracted does not mean ipso facto, it is an exemption granted by the state government. In the absence of any notification granting exemption for specified products by the state government from levy of sales tax on the finished goods cleared from 100% EOU, it would be incorrect to hold that the goods were exempted from sales tax, more so when the appellant has discharged the sales tax on the same products which were cleared to independent buyers. Secondly, the lower authority seems to have been guided by the argument that inter unit clearance are not taxed by the state government and is to be construed as an exemption granted. This is totally a wrong perception of the law in as much as that exemption if any, under statute needs to be granted in accordance with law ie ., by issuance of notification by the concerned authorities. It is no body's case that the state government has no power to exempt sales tax/VAT on specific products. In our view, the only question which needs to be addressed is whether the goods cleared into DTA to appellants sister units are exempted or not exempted, which in our considered view due to foregoing reasons, has to be held in favour of assessee, in the absence of any evidence on record to show that the said products is cleared to DTA is exempt from payment of sales tax.

For the purpose of taking benefit of Notification 23/2003/CE, as amended, the one and only condition specified in respect of the goods being cleared into DTA, is if the said goods are exempted by the state government from payment of sales tax/VAT; in the present case there is no such notification or order issued by the state government exempting impugned goods from the payment of sales tax/VAT. It is to be held that plain reading of notification No. 23/2003-CE as amended is applicable "QUA-GOODS" and exemption is across the Board and is applicable to all such goods which are not exempted by the state government by issue of notification or an order from payment of sales tax/CST/VAT.

The terms of reference to the larger bench in case of Moser Baer (I) Ltd being totally different than the facts of the issue which is raised in these appeals; the reliance placed by the revenue on the ratio of the larger bench decision will not carry their case any further.

(See 2014-TIOL-258-CESTAT-AHM)

I-T- Whether when Co had no income from main business of money lending but had earned interest and dividend by investing in shares, loan advanced to its MD is to be construed as deemed dividend in hand of MD - YES: HC

By TIOL News Service

ERNAKULAM, FEB 19, 2014: THE issue before the Bench is - Whether when the company had no income from its main business of money lending but had earned interest and dividend by investing in shares, the loan advanced to its MD is to be construed as deemed dividend in the hands of the MD. And the answer goes against the assessee.

Facts of the case

The assessee is an individual. In respect of AY 2003-2004, proceedings were initiated by issuing notice u/s 148. The assessee did not file any return of income. Hence, notice was issued to the assessee u/s 144. A reply was sent stating that the assessee expired on 26.5.2008 and he was represented by legal heir, who was his wife, that he had filed a return of income on 25.8.2003, which was to be treated as return for the purpose of Section 148. Thereafter, a notice u/s 143(2) was issued to the assessee. The Department had re-opened the assessment for the AY 2003-2004, observing that M/s. Thottakkad Estates (P) Ltd., Mannar, had advanced a loan to Sri. K.C. Oommen, its MD which was deemed dividend in the hands of the said K.C. Oommen u/s 2(22)(e). It was observed that the deemed dividend escaped assessment and hence the assessment was required to be re-opened.

The assessee objected to the same by contending that from 1996-1997 onwards, Thottakkad Estates (P) Ltd., was providing loans to Mannar Chit Fund, a proprietary concern of the assessee, and the returns along with relevant accounts were being filed by both the company as well as late Sri. K.C. Oommen showing the particulars of loan and other details. It was also contended that the amounts in question were advanced to M/s. Mannar Trust Fund as part of the money lending business of Thottakkad Estates (P) Ltd. In fact, Thottakkad Estates Limited had sold their property and they had not shown any income from agricultural operations. The AO found that the MD of the Company was the only person to whom the company advanced money and the company was fully engaged in activities like investment in shares and debentures and money lending was not its regular activity. In the said circumstances, the aforesaid amount was considered as deemed dividend and was treated as the income of the assessee. On appeal, the CIT(A) confirmed the order passed by AO. On further appeal before the Tribunal, the Tribunal also concurred with the said view.

Held that,

++ the matter is covered by the judgment of the SC in Asst. C.I.T. v. Rajesh Jhaveri Stock Broker (P) Ltd. (2007-TIOL-95-SC-IT). Insofar as the original assessment is not completed, it cannot be stated that an opinion was formed earlier to attract any limitation. Therefore, the short question to be considered in the above appeal is whether the alleged loans given by the company M/s. Thottek kad Estates (P) Ltd., to Sri. K.C. Oommen or the the proprietary concern of M/s. Mannar Trust Fund, is a deemed dividend. However, the argument of the counsel for the appellant is that the amount advanced is excluded as per the provision contained u/s 2(22)(e)(ii). The question is whether the company was dealing in lending of money or dealing in the business of lending of money and whether such business amounts to a substantial part of the business of the company. The counsel for the appellant placed reliance on the judgment of the SC in The CIT, Nagpur v. M/s. Sutlej Cotton Mills Supply Agency Ltd. (2002-TIOL-546-SC-IT). Reference is made to paragraph 10 to contend that it is not necessary to constitute trade that there should be a series of transactions, both of purchase and of sale. A single transaction of purchase and sales outside the assessee's line of business may constitute as adventure in the nature of trade. Even if the activity is not repeated or continued, nevertheless it constitutes a transaction which is an adventure in the nature of trade. On this basis, it is contended that even if the company had given loan only to one person during the relevant time, it amounts to a substantial business of the company;

++ we do not think that the facts involved in the above judgment of the SC has any application to the facts on hand. This is an instance where the only beneficiary of the loan was the Managing Director. It is not in dispute that after 1996, the company has not shown any income from agricultural operations. There is no material to indicate that it has any income from money lending business also. There is a clear finding by the assessing officer as well as the appellate authorities that the company basically invest in shares and debentures and earns income by way of interest and dividend. Therefore, when the assessing officer forms an opinion based on the materials on record that the company was fully engaged in activities like investing in shares and debentures and earns income by way of interest and dividend, in the absence of any other materials, a different finding is not possible. It is also not disputed that during the relevant time, the company had not given any loan to any other person other than the Managing Director. Certain materials had been produced to indicate that subsequent to the assessment year, certain loans were given to other persons. Such persons were all employees who were connected with the company. Since the Tribunal and the first appellate authority have considered the entire facts of the case and confirmed the order of the assessing officer, we do not think that any question of law arises for consideration in this case as there is no material to indicate that the appellant is entitled for the benefit of exclusion as stated in Section 2(22)(e)(ii). Under these circumstances, we do not think that the questions of law narrated by the appellant arise for consideration in this appeal. In the result, the appeal is dismissed.

(See 2014-TIOL-206-HC-KERALA-IT)

2014-TIOL-200-HC-MUM-IT

IN THE HIGH COURT OF BOMBAY

Writ Petition No. 137 of 2014

ARONI COMMERCIALS LTD

1. THE DY COMMISSIONER OF INCOME TAX-2, MUMBAI
2. THE UNION OF INDIA

Mohit S Shah, CJ And M S Sanklecha, J

Dated : February 11, 2014

Appellant Rep. by : Mr. Percy Pardiwala, Sr. Adv along with Mr. Atul K. Jasani
Respondent Rep. by : Mr. P.C.Chhotaray

Income tax – Sections 147, 148 – Whether when the assessee submitted that the its petition against notice issued u/s 148 is pending, the action of the AO in passing the order in undue haste even before expiry of four weeks from the date of receipt of order by petitioner rejecting the objections, is an attempt to overreach the Court – Whether when there is a change of opinion, the notice issued u/s 148 is not a valid notice and assessment is to be set aside.

A) The petitioner filed petition under Article 226 challenging the notice issued u/s 148 and the order passed by the AO under section 143(3) r.w.s. 147. Revenue raised an objection that as an assessment order has already been passed, the issue of challenge to reopening of assessment could be challenged by filing an appeal under the Act. Therefore, the petition be dismissed. Petitioner stated that in assessment proceedings, AO was intimated that notice 148 is challenged and also intimated the date of hearing on the petition filed. Further, AO rejected the objections raised by assessee on 20.11.2013 which was received on 22.11.2013 and passed order on 19th December, 2013. In view of the order of Asian Paints Ltd, when an assessment is sought to be reopened under Section 148 of the Act and the objections of the assessee have been over ruled by the Assessing Officer, then in such a case the Assessing Officer will not proceed further in the matter for a period of four weeks from the date of receipt of the order rejecting the objections of the assessee. AO without considering the same, passed an order in undue haste. Thus, it was contended by petitioner that the petition is maintainable due to the action of AO.

B) Petitioner contended that in the original assessment, assessee produced the documents relating to the capital gain offered by it in reply to specific query raised by the assessing officer. Assessee also pointed out to AO that it was engaged in the business of financing, trading and investment in shares and securities. It was explained in details as to why its profit on sale of investment should be taxed as capital gain and not as profits and gains of business. It furnished sample contract notes, Demat Accounts and shareholding pattern of the companies to whom loans were advanced. AO being satisfied accepted the claim of petitioner. AO disallowed certain expenses under Section 14A of the Act incurred in respect of the exempted income viz. long term capital gains as well as dividend income. Notice issued u/s 148 states that 'the assessee has manipulated the affairs in such a way that where scrip has been sold within twelve months, it is claimed as short term capital gains and taxed at a lower rate by applying section 111A. As assessee is engaged in share trading activity only, all income/receipts should be treated as business income including short terms capital gain.'

Petitioner stated that the notice for reopening was beyond 4 years from the end of the relevant assessment year. The very issue viz. of assessing gains arising from sale/ purchase of shares was assessable as capital gain or business profit had been examined by the Assessing Officer during the course of assessment. Thus, the reopening is only on the basis of change of opinion as there is no fresh tangible material which would warrant reopening of concluded assessment even within a period of 4 years from the end of the relevant assessment year. It was further contended that in preceding years and subsequent years, petitioner had been treated as investor in shares and not as trader. Further, the loss on short term capital account was not set off by revenue against business income. If the revenue had applied the same test which it seeks to apply i.e. profit/loss on sale of shares is on account of business then a set off would be permissible of the capital loss against business profits and no tax would be payable.

Revenue contended that in the original assessment, the income received on account of sale of shares is chargeable to tax as business income or not was not a subject matter of consideration as AO did not advert to this issue. The entire exercise for reopening assessment was on the basis of the audit objections from the Internal Audit Wing which pointed out that the petitioner had manipulated its account in such a manner that the regular business of the assessee of trading in shares was hidden resulting in business income of trading in shares being taxed as capital gain arising out of investment. Merely because the petitioner's claim for being charged to tax under the head 'capital gain' instead of the head "Profits and gains of business or profession had been accepted for earlier and subsequent years would not mean, that the same has to be blindly accepted.

After hearing both the parties, the High Court held that,

A) ++ it is axiomatic that the law declared by this Court is binding on all authorities functioning within the jurisdiction of this Court. It is not open to AO to feign ignorance of the law declared by this Court and pass orders in defiance of the law laid down by this Court. The submission made on behalf of the revenue that the AO was not aware of the decision of this Court in Asian Paints is not acceptable. On the contrary, it appears that the order dated 19 December 2013 was passed only to make the entire proceeding pending before this Court redundant and to present the Court with a fait accompli. This is particularly so as the petitioner had on 18 December 2013 informed the Commissioner of Income Tax that a writ petition has been filed challenging the order dated 20 November 2013 and is posted for admission on 23 December 2013. The passing of an order on 19 December 2013 by the Assessing Officer in undue haste and thereafter contending that in view of alternative remedy, the writ petition should not be entertained, does not appear bonafide. This order is an attempt to overreach the Court. Thus, the assessment order is set aside;

B) ++ the common jurisdictional requirement for reopening of assessment both within and beyond a period of 4 years has to be on the basis of reason to believe that income chargeable to tax has escaped assessment and the reason for issuing a notice to reopen are recorded before issuing a notice. However, there is one additional jurisdictional requirement to be satisfied while seeking to reopen the assessment beyond the period of 4 years from the end of the relevant assessment year viz. that there must have been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during the original assessment proceedings. In view of the decision of Apex court in the case of Kelvinator of India Ltd., the concept of change of opinion is excluded / omitted from the words reason to believe. Thus a change of opinion would not be reason to believe that income chargeable to tax has escaped assessment;

++ there is a sanctity bestowed on an order of assessment and the same can be disturbed by exercise of powers under Sections 147/148 of the Act only on satisfaction of the jurisdictional requirements. The reasons for reopening an assessment has to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under Section 148 of the Act seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and /or oral submissions. Moreover, the reasons for reopening an assessment should be that of the AO alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. At the stage of issuing notice u/s 148 to reopen a concluded assessment the satisfaction of AO issuing the notice is of primary importance;

++ in the present case, the impugned notice seeking to reopen the assessment was a notice within a period of four years from the end of the relevant assessment year. Therefore, in such a case the test of failure to disclose truly and fully all material facts necessary for assessment during the original assessment proceedings does not arise for consideration;

++ it is observed that in the original assessment, on a specific query made by AO, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. It also relied upon CBDT Circular No.4/2007 dated 15 June 2007. Therefore, it is noticed that the very ground on which the notice which seeks to reopen the assessment was considered by AO while originally passing assessment order. The notice issued u/s 148 is based on mere change of opinion. Once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. It is therefore, the reopening of the assessment by impugned notice is merely on the basis of change of opinion which does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment;

++ neither the audit report nor the ground for reopening assessment disclose any tangible material for the purpose of reopening the assessment but relies upon opinion/inferences drawn by the internal audit department on existing material and these inferences/opinion differ from the one drawn by the Assessing Officer. Tangible material would mean factual material and not inference/opinion on material already in existence and considered during the assessment proceedings. This is not a case of any new fact being available by virtue of internal audit which could lead to a reasonable belief that income chargeable to tax has escaped assessment;

++ it was urged by petitioner that for the earlier assessment year as well as subsequent assessment year the petitioner has been treated as investor in shares and not as trader. However, in subsequent year, the revenue had treated the petitioner's loss on sale of shares as loss on investment and classified it as short term capital loss and not as business loss because the revenue was conscious of the fact that if the capital gain/loss was to be treated as business loss then in that event the petitioner would have an opportunity to set off its profit on account of profit and gain of business from the losses suffered on sale/purchase of shares. In such a case no tax at all would be payable. This Court in the matter of Gopal Purohit has taken a view that though the principle of resjudicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and consistency in treatment. Thus, the fact that the revenue has been treating the profit on sale of shares as taxable under the head capital gain the same should be done in this year also in the absence of different facts. In view of the above facts, the notice issued by AO u/s 148 is set aside.

Petitioner's petition allowed

Cases followed:

Asian Paints Limited vs. Deputy Commissioner of Income Tax and anr. (2008) 296 ITR 90 (Bom)

CIT v/s. Gopal Purohit (2010-TIOL-129-HC-MUM-IT)

CIT vs. Kelvinator of India Limited (2010-TIOL-06-SC-IT)

JUDGEMENT

Per : M S Sanklecha, J :

Rule, returnable forthwith. By consent of the parties the petition is taken up for final disposal.

2) By this petition under Article 226 of the Constitution of India, the petitioner challenges the following:-

a) A notice dated 28 March 2013 under Section 148 of the Income Tax Act, 1961 ("the Act") seeking to reopen assessment for the Assessment Year ("A.Y".) 2008-09;

b) The order dated 20 November 2013 passed by respondent No.1Deputy Commissioner of Income Tax ("Assessing officer") rejecting the petitioner's objection to reopening of assessment for A. Y. 2008-09;

c) The assessment order dated 19 December 2013 passed by the Assessing Officer under Section 143(3) read with Section 147 of the Act for A. Y. 2008-09.

3) At the very outset, Mr. Chhotaray, learned Counsel for the respondentrevenue raises a preliminary objection to the petition viz. that as an Assessment Order dated 19 December 2013 has already been passed, the issue of challenge to reopening of assessment could be challenged by filing an appeal under the Act. Therefore, on this short ground alone, the petition be dismissed.

4) As against the above, Mr. Percy Pardiwala, learned Senior Counsel for the petitioner submits that the sequence of events in this case warrants this petition being entertained. It was by order dated 20 November 2013 that the Assessing Officer rejected the petitioner' objection to reopening of assessment for A. Y. 2008-09 by notice dated 28 March 2010. This Court in Asian Paints Limited vs. Deputy Commissioner of Income Tax and anr. (2008) 296 ITR 90 (Bom) has clearly laid down that when an assessment is sought to be reopened under Section 148 of the Act and the objections of the assessee have been over ruled by the Assessing Officer, then in such a case the Assessing Officer will not proceed further in the matter for a period of four weeks from the date of receipt of the order rejecting the objections of the assessee. In view of the above, it is submitted that the proceedings for reassessment itself could not be taken up for a period of four weeks from 22 November 2013 when the impugned order dated 20 November 2013 was served. Besides the Assessing Officer was informed at the hearing held on 10 December 2013 that the petitioners are in the process of challenging the reassessment proceeding for A.Y. 2008-09 in this Court. Moreover, on 18 December 2013 the Commissioner of Income Tax had been informed that the challenge to the order dated 20 November 2013 is posted for admission on 23 December 2013 in this Court. Inspite of the above, the Assessing officer has passed the assessment order dated 19 December 2013.

5) Mr. Chhotaray, the learned Counsel for the revenue on being confronted with the decision of this Court in Asian Paints (supra) submits that the aforesaid decision was not brought to the notice of the Assessing Officer. Therefore, not being aware of the decision of Asian Paints (supra) the Assessing Officer proceeded further in taking up the reassessment even though the period of four weeks from the date of the order dated 20 November 2013 over ruling the petitioner's objection had not expired. At this stage, we asked Mr. Chhotaray whether the Assessing Officer would withdraw his assessment order dated 19 December 2013 in view of the decision of Asian Paints (supra) being brought to his notice. However, Mr. Chhotaray expressed inability to withdraw the assessment order dated 19 December 2013.

6) It is axiomatic that the law declared by this Court is binding on all authorities functioning within the jurisdiction of this Court. It is not open to the Assessing Officer to feign ignorance of the law declared by this Court and pass orders in defiance of the law laid down by this Court. We do not accept this submission made on behalf of the revenue that the Assessing Officer was not aware of the decision of this Court in Asian Paints (supra). On the contrary, it appears that the order dated 19 December 2013 was passed only to make the entire proceeding pending before this Court redundant and to present the Court with a fait accompli. This is particularly so as the petitioner had on 18 December 2013 informed the Commissioner of Income Tax that a writ petition has been filed challenging the order dated 20 November 2013 in respect of A. Y. 2008-09 and is posted for admission on 23 December 2013. It is averred in the petition that the Assessing Officer was informed at the hearing held on 10 December 2013, that it is preparing a petition to challenge the reopening for A. Y. 2008-09 on identical grounds as done in earlier Assessment Year namely A. Y. 200708 which is pending in this Court and ad interim relief has also been granted, restraining the revenue from proceeding with the assessment for A. Y. 200708. The passing of an order on 19 December 2013 by the Assessing Officer in undue haste and thereafter contending that in view of alternative remedy, the writ petition should not be entertained, does not appear bonafide. This undue haste in passing the impugned order dated 19 December 2013 is an attempt to overreach the Court and to thwart the petitioner's challenge to the impugned order dated 20 November 2013 pending before this Court.

7) In the above circumstances, we set aside the order dated 19 December 2013 passed by the Assessing Officer under Section 143(3) read with Section 147 of the Act for A. Y. 2008-09.

8) We shall now deal with the petitioner's challenge to reopening of assessment for A. Y. 2008-09 by impugned notice dated 28 March 2013 and impugned order dated 20 November 2013 rejecting the petitioner's objection to its reopening. Facts relevant to the above challenge are as under:-

a) On 30 September 2008, the petitioner filed its return of income for A. Y. 2008-09. In its computation of income the petitioner has disclosed income from business and profession at Rs.28.71 lacs besides disclosing short term capital gains at Rs.3.68 crores and long term capital gain at Rs.3.71 crores.

b) Thereafter, on 17 August 2009, a notice under Section 143(2) of the Act was issued to the petitioner calling upon the petitioner to attend the office of the Assessing Officer and produce the copies of the balance sheet, Profit and Loss Account, Computation of income and Audit report. On 27 August 2009, the petitioner filed particulars asked for and attended the hearing with the Assessing Officer on 28 August 2009.

c) During the course of the assessment proceedings, certain details were sought for from the petitioner particularly a note on the nature of its activities. By its letter dated 9 July 2010 the petitioner pointed out that it was engaged in the business of financing, trading and investment in shares and securities.

d) In response to a query made by the Assessing Officer during the hearing in course of assessment proceedings, the petitioner by communication dated 8 September 2010 explained in detail as to why its profit on sale of investments should be taxed as capital gain and not as profits and gains of business. In support reliance was placed upon the CBDT Circular No.4/2007 dated 15 June 2007 wherein parameters have been laid down for the purpose of making a distinction between shares held as investment and shares held as stock in trade. Further by communication dated 13 September 2010, the petitioner furnished sample contract notes, Demat Accounts and shareholding pattern of the companies to whom loans were advanced.

e) The Assessing Officer was satisfied with the explanation offered by the petitioner with regard to its claim that purchase/sale of shares offered to tax under the head capital gain was a result of investment activity resulting in assessment order dated 12 October 2010 for A. Y. 2008-09. By the above assessment order the income was determined at Rs.4.15 crores under the normal provisions of the Act and at Rs.7.82 crores under Section 115JB of the Act. In fact, the assessment order also disallowed certain expenses under Section 14A of the Act incurred in respect of the exempted income viz. long term capital gains as well as dividend income.

f) On 28 March 2013 the Assessing officer issued a notice under Section 148 of the Act to the petitioner seeking to reopen the assessment for A.Y. 2008-09 for the purposes of reassessment. On receipt of the notice, the petitioner sought the reasons for the reopening of the assessment for A.Y. 2008-09. In response the Assessing Officer communicated the following reasons for reopening the assessment:-

"It is observed that the assessee is only engaged in the business of share trading and regularly doing purchase and sale of shares. The assessee has manipulated the affairs in such a way that where scrip has been sold within twelve months, it is claimed as short term capital gains and taxed at a lower rate by applying section 111A.As assessee is engaged in share trading activity only, all income/receipts should be treated as business income including short terms capital gain. Reliance is also placed on the Board's Circular No.4 dated 15 June 2007.

In view of the above, I have reason to believe that income chargeable to tax has escaped assessment for A.Y. 2008-09 by reason of the failure on the part of the assessee to disclose fully and truly the income under the correct head and all material facts necessary for the assessment of income, resulting in the income being assessed at low rate/claimed exempt. Accordingly, the assessment for A.Y. 2008-09 is reopened by issue of notice u./s. 148 of the Income Tax Act, 1961."

g) On 19 November 2013, the petitioner filed its objection to the reasons for reopening of the assessment for A.Y. 2008-09. In particular, it was stated that the notice for reopening was received by the petitioner only on 17 September 2013.Therefore, the notice was beyond 4 years from the end of the relevant assessment year. It was also pointed out that the very issue viz. of assessing gains arising from sale/ purchase of shares was assessable as capital gain or business profit had been examined by the Assessing Officer during the course of assessment. This was evident from the petitioner's letter dated 8 September 2010 to the Assessing Officer during the assessment proceeding leading to the assessment order dated 12 October 2010. In view of the above, it was submitted that the reopening is only on the basis of change of opinion as there is no fresh tangible material which would warrant reopening of concluded assessment even within a period of 4 years from the end of the relevant assessment year.

h) On 20 November 2013, the Assessing officer passed an order (received by petitioner on 22 November 2013) titled "order removing objections" holding that reopening of the assessments by notice dated 28 March 2013 was valid. The order dated 20 November 2013 holds that 'reopening is not due to any change of opinion but on clear observation that the assessee did not carry out any business activity other than Share Trading'. Further no details regarding computation of short term capital gain or sample copies of the purchase/sale note were furnished during the assessment proceeding. In the circumstances, according to the Assessing Officer reopening of the assessment was valid and justified.

9) Mr. Percy Pardiwala, learned Senior Counsel in support of the petition submits as under:

a) The impugned order dated 20 November 2013, rejecting the petitioner's objection to notice dated 28 March 2013 under Section 148 of the Act is unsustainable. This is for the reason that reopening is being done on mere change of opinion which does not constitute a reason to believe that income chargeable to tax has escaped assessment. The very basis of the reasons for reopening viz. the gains arising from purchase and sale of shares is taxable as business income and not as capital gain was examined during the course of assessment proceedings, leading to the assessment order dated 12 October 2010. This is evident from the petitioner's letter dated 8 September 2010 during Assessment proceedings. Thus, this notice for reopening is only on account of change of opinion i.e. a different interpretation/view of facts which were already examined in the original proceedings leading to order dated 12 October 2010.

b) The impugned order dated 20 November 2013 rejecting the petitioner's objections to reopening the assessment proceeds on a factually incorrect basis i.e. no sample copy of purchase/sale note or Demat statement was furnished by the assessee during the course of assessment proceeding. This, in spite of the fact that the petitioner by its letter dated 13 September 2010 had furnished copies of its Demat Account as well as sale/ purchase note during the proceeding leading to the assessment order dated 12 October 2013; and

c) The Assessing Officer completely ignored the fact that in assessment proceedings for earlier years i.e A.Y. 2005-06 and 2006-07 and even in the subsequent A.Y. 2009-10, the petitioner has been treated as investor in shares and not as trader in shares. In fact, attention was drawn to order dated 25 November 2011 for A. Y. 2009-10 where the petitioner had claimed a loss on short term capital account, it was not set off against business income. In fact, if the revenue had applied the same test which it now seeks to apply i.e. profit/loss on sale of shares is on account of business then a set off would be permissible of the capital loss against business profits and no tax would be payable. In the above circumstances, it was submitted that purchase/sale of shares as investments was to be taxed under the head 'capital gain' alone on the principle of consistency as held by this Court in CIT v/s. Gopal Purohit (2011) 336 ITR 287= (2010-TIOL-129-HC-MUM-IT).

10) As against the above, Mr. Chhotaray, learned Counsel appearing for the respondentrevenue in support of the impugned notice dated 28 March 2013 and the impugned order dated 19 November 2013 submits as under:-

a) The issue whether income received on account of sale of shares is chargeable to tax as business income or not was not a subject matter of consideration during the assessment proceedings leading to the order dated 12 October 2010 in respect of A.Y. 2008-09. This is evident from the fact that the assessment order dated 12 October 2010 does not even advert to this issue. In the circumstances, as this issue is being considered for the first time, no question of change of opinion on the part of the Assessing Officer can arise. It was submitted that during the original assessment proceedings leading to order dated 12 October 2010, no opinion has been formed on this issue by the Assessing Officer;

b) The entire exercise for reopening assessment for A.Y. 2008-09 was on the basis of the audit objections dated 29 September 2011 received by Assessing officer from the Internal Audit Wing of the respondent. A copy of the Audit report dated 29 September 2011 was handed across the bar. It was submitted that this audit report has pointed out that the petitioner had manipulated its account in such a manner that the regular business of the assessee of trading in shares was hidden resulting in business income of trading in shares being taxed as capital gain arising out of investment. It was on the basis of the aforesaid material received from the audit that notice to reopen the assessment for assessment year 2008-09 was issued. This was the tangible material before the Assessing Officer which warranted reopening the assessment for assessment year 2008-09 even if it is assumed that all facts were available to the Assessing Officer during the assessment proceedings leading to Assessment Order dated 12 October 2010; and

c) Merely because the petitioner's claim for being charged to tax under the head 'capital gain' instead of the head "Profits and gains of business or profession had been accepted for earlier and subsequent years by the revenue it would not follow that for assessment year 2008-09 under consideration, the same has to be blindly accepted. It is submitted that each assessment year is separate assessment year. Therefore, in the present facts the Assessing Officer has reasonable belief that income chargeable to tax has escaped assessment and on the basis of the such belief is entitled to reopen the Assessment.

11) In this case we are dealing with the reopening of assessment completed by order dated 12 October 2010 under Section 143(3) of the Act. The law with regard to reopening of assessment is fairly settled by decisions of Courts. The power of the Assessing Officers under Sections 147 and 148 of the Act to reopen an assessment is classified into two : -

(a) Reopening of assessment within a period of 4 years from the end of the relevant assessment year and

(b) Reopening of assessment beyond a period of 4 years from the end of the relevant assessment year.

The common jurisdictional requirement for reopening of assessment both within and beyond a period of 4 years has to be on the basis of reason to believe that income chargeable to tax has escaped assessment and the reason for issuing a notice to reopen are recorded before issuing a notice. However, there is one additional jurisdictional requirement to be satisfied while seeking to reopen the assessment beyond the period of 4 years from the end of the relevant assessment year viz. that there must have been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during the original assessment proceedings. Thus the primary requirement to reopen any assessment is a reason to believe that income chargeable to tax has escaped assessment. However, as observed by the Supreme Court in the case of CIT vs. Kelvinator of India Limited 320 ITR 561= (2010-TIOL-06-SC-IT) in the context of Sections 147/148 of the Act that reason to believe found therein does not give arbitrary powers to reopen an assessment. The concept of change of opinion is excluded/omitted from the words reason to believe. Thus a change of opinion would not be reason to believe that income chargeable to tax has escaped assessment. Besides the power to reassess is not a power to review. Further reopening must be on the basis of tangible material.

12) Therefore the power to reassess cannot be exercised on the basis of mere change of opinion i.e. if all facts are available on record and a particular opinion is formed, then merely because there is change of opinion on the part of the Assessing Officer notice under Section 147/148 of the Act is not permissible. The powers under Section147/ 148 of the Act cannot be exercised to correct errors/mistakes on the part of the Assessing Officer while passing the original order of assessment. There is a sanctity bestowed on an order of assessment and the same can be disturbed by exercise of powers under Sections 147/148 of the Act only on satisfaction of the jurisdictional requirements. Further, the reasons for reopening an assessment has to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under Section 148 of the Act seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and /or oral submissions. Moreover, the reasons for reopening an assessment should be that of the Assessing Officer alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the Assessing Officer comes to the reason to believe that income chargeable to tax has escaped assessment can come to him from any source, however, reasons for the reopening has to be only of the Assessing Officer issuing the notice. At the stage of issuing notice under Section 148 of the Act to reopen a concluded assessment the satisfaction of the Assessing Officer issuing the notice is of primary importance. This satisfaction must be prima facie satisfaction of having a reason to believe that income chargeable to tax has escaped assessment. At the stage of the issuing of the notice under Section 148 of the Act it is not necessary for the Assessing officer to establish beyond doubt that income indeed has escaped assessment.

13) Keeping in view the above broad parameters of the jurisdiction of the Assessing Officer to reopen assessments completed under Section 143(3) of the Act, the impugned notice and order have to be examined. Counsel for the parties proceeded on the basis that the impugned notice dated 28 March 2013 seeking to reopen the assessment for A.Y. 2008-09 was a notice within a period of four years from the end of the relevant assessment year. Therefore, in such a case the test of failure to disclose truly and fully all material facts necessary for assessment during the original assessment proceedings does not arise for consideration. In the present facts the notice to reopen the assessment for A.Y. 2008-09 was issued on 28 March 2013 and the reasons seeking to reopen the assessment is that the petitioner had so written/ manipulated its account that the normal business profits in share trading was claimed as short term capital gain so as to attract the lower rate of tax.

14) We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investment in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 of the Act seeking to reopen assessment for A.Y. 2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the same is not referred to in the assessment order dated 12 October 2010 passed for A.Y. 2008-09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceeding even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) of the Act. Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 of the Act, during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

15) It was contended by Mr. Chhotaray appearing for the revenue that this is not a case of change of opinion as the reopening is based on fresh tangible material namely audit report furnished by the internal audit department of the revenue. This material viz. audit report dated 29 September 2011 could never have been considered by the Assessing Officer while passing his assessment order dated 12 October 2010. We find that neither the reasons furnished to the petitioner disclose the material obtained from the audit report of the internal audit department of the revenue as the basis for reopening assessment nor the order dated 20 November 2013 rejecting the petitioner's objection state that the ground for reopening is the tangible material disclosed by the internal audit department of the revenue. This Court in the matter of Hindustan Lever Vs. Wadkar in 268 ITR 332 = (2004-TIOL-72-HC-MUM-IT) has held that the challenge to reopening of an assessment can only be resisted on the basis of the reasons recorded at the time of issuance of notice and no further reasons either orally at the bar or by filing of an affidavit can be considered to meet the challenge to reopening of an assessment. Therefore, it would not be permissible for Mr. Chhotaray to advance submissions on the basis of an audit report which was not basis of the reasons recorded at the time of issuing notice under Section 148 of the Act.

16) Be that as it may, even if, one examines audit report dated 29 September 2011 from the internal audit department it would be noticed that the basis of the audit report is the interpretation/inference drawn by the auditors from the accounts submitted by the petitioner to the department during the course of its assessment proceedings. The reasons as indicated in the audit report are similar to the reasons as set out in the grounds for reopening the assessment by the Assessing officer. Neither the audit report nor the ground for reopening assessment disclose any tangible material for the purpose of reopening the assessment but relies upon opinion/inferences drawn by the internal audit department on existing material and these inferences/opinion differ from the one drawn by the Assessing Officer while passing assessment order dated 12 October 2010. Tangible material would mean factual material and not inference/opinion on material already in existence and considered during the assessment proceedings. This is not a case of any new fact being available by virtue of internal audit which could lead to a reasonable belief that income chargeable to tax has escaped assessment. The internal audit report dated 29 September 2011 is an opinion/inference on facts i.e. the accounts and therefore, would not be tangible material to reopen an assessment.

17) One of the grounds set out in order dated 20 November 2013 for rejecting the petitioner's objection on reopening the assessment for A.Y. 2008-09 was that the petitioner had failed to furnish sample contract note, Dmet account and shareholding pattern of the companies to whom loans were advanced. This ground is factually incorrect. In fact, the petitioner by its letter dated 13 September 2010 had supplied the Assessing officer with sample of contract note, Demet account statement and also share holding pattern of the companies to whom the loans were advanced. It therefore, follows that grounds for rejecting the petitioner's objection to reopen the assessment are contrary to the facts on record and therefore, cannot be sustained.

18) It was also urged by the petitioner that for the earlier assessment year as well as subsequent assessment year the petitioner has been treated as investor in shares and not as trader. This would be a submission on merits of the matter and normally would not have been dealt with it in a challenge to reopening of assessment. However, we are considering the same as the peculiar facts of this case would indicate the absence of reason to believe that income has escaped assessment. This is so, as much after the objection of the internal audit dated 29 September 2011 the Assessing Officer while passing the assessment order dated 25 November 2011 for A.Y.2009-10 had treated the petitioner's loss on sale of shares as loss on investment and classified it as short term capital loss and not as business loss. This was only because the revenue was conscious of the fact that if the capital gain/loss was to be treated as business loss for A.Y. 2009-10 (as is now contended by the revenue for A.Y. 2008-09) then in that event the petitioner would have an opportunity to set off its profit of Rs.75.60 lacs on account of profit and gain of business from the losses suffered on sale/purchase of shares of Rs.1.59 crores. In such a case no tax at all would be payable. The aforesaid order dated 25 November 2011 for A.Y. 2009-10 by the Assessing Officer continues to reflect the view of the Assessing Officer that the profits and gains on account on sale of shares arises out of the petitioner's investment in shares and is not taxable as business income. This Court in the matter of Gopal Purohit (supra) has taken a view that though the principle of resjudicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and consistency in treatment. In view of the above, the fact that the revenue has been treating the profit on sale of shares as taxable under the head capital gain the same should be done in this year also in the absence of different facts.

19) On all the aforesaid grounds, we are of the view that the impugned notice dated 28 March 2013 under Section 148 of the Act seeking to reopen the assessment for A.Y.2008-09 and the order dated 20 November 2013 rejecting the petitioner's objection to reopen the assessment for A.Y. 2008-09 are not sustainable in law. The entire proceeding for reopening the assessment for A.Y. 2008-09 had emanated only on account of change of opinion on the part of the Assessing Officer.

20) In view of the discussion in Paragraphs 3 to 7 herein above, we set aside the assessment order dated 19 December 2013. We also hold that there was no reason for the Assessing Officer to have had a reasonable belief that income chargeable to tax has escaped assessment. Accordingly, we set aside the impugned notice dated 28 March 2013 issued under Section148 of the Act as well as the impugned order dated 20 November 2013 passed by the Assessing Officer rejecting the petitioner's objection to reopen the assessment for A.Y. 2008-09.

21) The petition is allowed. No order as to costs.

2014-TIOL-52-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' AHMADABAD

ITA No.2883/Ahd/2012
Assessment Year:2004-05

INCOME TAX OFFICER
WARD-5 (2), ROOM NO 314
3rd FLOOR, AAYKAR BHAVAN
MAJURA GATE, SURAT

SMT HETAL RAKESHBHAI DESAI
AT & POST - UMBHEL, DESAI FALIA
TALUKA- KAMREJ, SURAT-394325
PAN NO:AMJPD3869P

CO No.39/Ahd/2013
Assessment Years:2004-05

SMT HETAL RAKESHBHAI DESAI
AT & POST - UMBHEL, DESAI FALIA
TALUKA- KAMREJ, SURAT-394325
PAN NO:AMJPD3869P

INCOME TAX OFFICER
WARD-5 (2), ROOM NO 314
3rd FLOOR, AAYKAR BHAVAN
MAJURA GATE, SURAT

D K Tyagi, JM And T R Meena, AM

Date of Hearing: November 1, 2013
Date of Decision: January 10, 2014

Appellant Rep by: Shri P L Kureel, Sr. DR
Respondent Rep by: Shri Mehul R Shah, AR

Income Tax - Sections 50A, 55A, 142(A), 148 - Whether under old provisions, the A.O. can refer the property for valuation as on 01.04.1981.

The assessee had shown ancestral property. The A.O. issued notice u/s.148. The assessee filed return showing Long Term Capital Loss. The A.O. made reference to the Valuation Officer u/s. 142(A) for determination of fair market value of immovable property as on 01.04.1981 and 15.03.2004. The Valuation Officer determined the value .The A.O. held that valuation adopted by the Valuation Officer is more reliable as it has been taken with the comparable sale instances with supporting evidence. The A.O. calculated capital gain at Rs.40,37,860/-. The CIT(A) allowed the appeal and held that Section 142(A) doesn't deal with reference of Section 48 & 49. In fact, Section 55A deals with the reference to the Valuation Officer for the purpose of capital gain. He further held that reference to the Valuation Officer was not as per law and A.O. had exceeded his jurisdiction.

On Appeal before the Tribunal the DR submitted that the Registered Valuer had not considered any comparable case of land for determining the cost of assets as on 01.04.1981. He has considered gold price fixed by the R.B.I. for valuation of cost as on 01.04.1981. Thus, Registered Valuer cannot be accepted at all, which is technically defaulted. The A.R. submitted that no reference can be made u/s. 55A on 01.04.1981.

Having heard the parties, the Tribunal held that,

++ the Registered Valuer's report submitted by the assessee has major defect that no comparable case of land has been given. It is not possible that there was no sale in surrounding area of land. The A.O. has rightly referred the case to the DVO for determining the cost as on 01.04.1981 as well as on date of sale.

Revenue's appeal allowed

Cases followed:

ACC Ltd. vs. DVO, order dated 21st May, 2012 in W.P. NO. (c) 3795 of 2011

Vijay P. Karnik Vs. ITO in [2013] 37 Taxmann.com 48 (Mum.)

Pooranm Mal vs. Director of Inspection (2002-TIOL-221-SC-IT-LB)

DCIT vs. Chaturbhuj Vallabhdas HUF [2011] 130 ITD 230/9 taxmann.com 96.

ORDER

Per: T R Meena:

This appeal at the behest of Revenue and C.O. at the behest of assessee filed, which have emanated from the orders of CIT(A)-I, Surat, dated 10.10.2012 for A.Y. 04-05. Both were heard together and are being disposed of by way of this common order for the sake of convenience.

2. The effective grounds of Revenue's appeal and assessee's C.O. are as under:

Grounds of ITA No. 2596/Ahd/2012 (A.Y. 08-09)

"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.37,37,860/- made on account of long term capital gain.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in interpretation of section 55(A)(a) [newly insert and w.e.f. 01.07.2012], as the A.O. has refer the matter to the Valuation Officer, as per old provision of section 55(A)(a) of the Act, as the same is applicable in this case."

Grounds of C.O. No. 39/Ahd/2013

"1. With out prejudice to any other contention raised during the course of the appeal the main Grounds of appeal are as under:

2. On the facts and in the circumstances of the case the Ld. CIT(A) has rightly allowed the appeal and directed the ITO to re-work the Long term Capital gain on the basis of cost of acquisition claimed by the respondent (assessee) as per the valuation report of the registered valuer.

3. On the facts and circumstances of the case the Ground No. 1 taken by the ITO ward 5(2) (Appellant) in Appeal to the Tribunal be not considered as genuine.

4. The Ground no. taken by the ITO 5(2) in respect of interpretation of Section 5(A)(a) as the CIT(A) has rightly interpreted the relevant section considering the judgment of Krishnabai Tingre of Pune Bench and Chatrabhuj Vallabhdas (HUF) of Mumbai Bench."

3. Both the grounds of Revenue's appeal are interlinked and against deleting the addition of Rs.37,37,860/- made on account of Long Term Capital Gain and assessee's C.O. is in support of her claim. The A.O. observed that the assessee had shown ancestral property at Block 42 and 559B at Mota Varachha, Tal. Choriyasi, Dist. Surat, owned by late Shri Dinkarbhai M. Desai and his son later Rakeshbhai D. Desai. As per Satakhat dated 22.11.2003 made between assessee and Shri Karshanbhai D. Kakadia for the sale of property at Block No.42 and 559B for consideration of Rs.1,61,00,000/-. As per Satakhat, the assessee had received Rs.50,00,000/- in cash as advance and the balance of Rs.61,00,000/- was to be paid on 12.01.2004 and Rs.50,00,000/- on 22.05.2004. As per affidavit dated 23.11.2007 filed by the assessee, she admitted that she entered into the agreement for the sale with Shri Karshanbhai D. Kakadia for the said land. She also admitted that she had received advance of Rs.50,00,000/- from the buyer. As per the assessee's affidavit, the Block No. 559A was already sold and house no.316 was not in her possession. Therefore, it was stated by her that Shri Karsanbhai wanted to cancel the agreement. The assessee further stated that one Shri Babubhai Gajer intervened and the sale was agreed to be executed for the land at Block No.559B & 42 only for Rs.38,00,000/- (as on money). The assessee also stated that she had returned the balance of Rs.12 lacs to Shri Karsanbhai. Out of this (Rs. 38 lacs) she paid a commission of Rs.3 lacs to Shri Babubhai Gahera. Further, during A.Y. 04-05, the details of properties sold are as under:

1. The sale deed for property No.42 Survey No.51 (3315 sq.mt.) registered on 15.03.2004 between the assessee and Shri Karshanbhai D. Kakadia for Rs.1,48,725/- and stamp duty of Rs.16,700/- paid at 11.2% on Rs.1,48,725/-The additional stamp duty was charged at Rs.48,830/-. The total stamp duty paid for Block 42 was Rs.55,530/-.

2. The sale deed for the property for 559B, survey no.51 for land measuring 31859 sq.mt. was registered on 15.03.2004 for Rs.4,78,035/- between the assessee and Shri Karshanbhai D. Kakadia. Stamp duty of Rs.53,600/- was paid and additional duty was paid of Rs.1,24,875/-. Therefore the, total stamp duty paid was Rs.1,78,475/-. The value adopted as per stamp duty was Rs.15,93,450/-.

The A.O. after recording the reasons u/s.147, issued notice u/s.148 of the IT Act. The assessee filed return on 25.07.2011 showing Long Term Capital Loss of Rs.26,90,717/-. The case was scrutinized u/s. 143(2) of the IT Act. The assessee was also allowed reasonable opportunity of being heard, which was availed by her. The Deputy Director of Income Tax Investigation, Unit-II, had issued summons u/s. 131 to investigate the issue on 06.09.2007 and it was transpired during investigation that the assessee had entered into an agreement to sale and of agriculture land bearing no. 559A, 559B, 42 and one residential property bearing no.316 for an amount of Rs.1,61,00,000/-. It is further concluded by the A.O. that the agreement which was made between the parties was revised on account of dispute arise between the family members of the assessee and also with the purchaser. Out of total properties shown in the agreement, land bearing No.559-A was sold out by the Father in law of the appellant. Remaining two plots of land, the appellant was not in a position to execute the deed in favour of the purchaser as the name of brothers and sisters were enrolled in place of late father-in-law. As at the time of division/partition name of the father-in-law was common in all the properties belong to HUF. Similarly the house in question is also in the possession of the brother of late husband. Therefore, the assessee was not in a position to give peaceful possession to purchaser. Therefore, the purchaser was forcing the assessee to execute the deed or to cancel the agreement for refund of the payment with interest, which was paid as earnest money. The assessee was compelled to revise agreement for an amount of Rs.38 lacs for land only through intermediate Shri Chandubhai Gajera. For settlement of the case, the assessee had paid Rs.3 lacs to Chandubhai Gajera as a commission/brokerage. Thus, the assessee had received net consideration of Rs.35lacs against the sale of property i.e. land only. As property was ancestral for computation of capital gain, the cost of the land is to be determined as on 01.04.1981. The assessee has shown capital loss after considering the indexation on cost of land. The ld. A.O. made reference to the Valuation Officer u/s. 142(A) of the IT Act for determination of fair market value of immovable property situated as above, as on 01.04.1981 and 15.03.2004. The Valuation Officer determined the value as under:

*Sr. No.*	*Description of the Properties*	*Date of Valuation*	*Declared Value excluding stamp duty and other charges (Rs.)*	*Assessed Value excluding stamp duty and other charges (Rs.)*
1	Agg. Land at S. No.51, Block No.559B, Mota Varachha, Surat	01/04/1981	10,19,808	64,000
	-do-	15.03.2004 (as on date of sale)	4,78,035	19,12,000
2	Agg. Land at S. No.51, Block No.42, Mota Varachha, Surat	01/04/1981	--	20,000
		15.03.2004 (as on date of sale)	1,48,725	5,95,000

The ld. A.O. gave again show cause notice, after considering the valuation report. After considering the assessee's objection, the A.O. held as under:

"4.5 The objection raised by the AR in respect of valuation report submitted by the AVO is not acceptable as at the time of inspection the AR of the assessee has personally been attended. Moreover, on determining the valuation of both the property, the AVO has categorically given comparable sale instances of three land transactions considering all the factors which affect the land rates such as size, shape, situation, location, specification, time lag of the sale instance properties with respect to PUC and make it comparable by adjusting all advantageous and disadvantageous of the sale instances with the PUC whereas assessee's valuation report has not been provided any sale instances but only relied upon the gold price during the period from 01.04.1981 to 31.03.2002 and considered to be fair and reasonable transactions for fixing/estimating the land rate has been taken into consideration. In my opinion, valuation adopted by the Asstt. Valuation Officer is more reliable as it has been taken with the comparable sale instances with supporting evidence. Hence, to that extent, the value as on 01.04.1981 is accepted and considered as an Indexation Cost during the sale instances in this case."

After considering the assessee's reply, the A.O. calculated capital gain at Rs.40,37,860/-.

4. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had allowed the appeal by considering the assessee's submission and held that Section 142(A) doesn't deal with reference of Section 48 & 49 of the IT Act. In fact, Section 55A of the IT Act deals with the reference to the Valuation Officer for the purpose of capital gain. As per Section 55(A)(a), when the estimate of fair market value has been made on the basis of report of the Registered Valuer, reference can be made only, if the Assessing Officer is of the opinion that the value claimed is less than the fair market value. A reference cannot be made when the Assessing Officer feels that the valuation is more than the fair market value. This view has been taken by the judgment relied upon by the appellant in case of Smt. Krishnabhai Tingre Vs ITO, 101 ITD 317 (Pune). This view has been confirmed by the Hon'ble ITAT, Mumbai, in another judgment dated 20.12.2010 for A.Y. 2004-05 in case of Chaturbhuj Vallabhdas (HUF), 139 TTJ 29 (Mum). He further held that Section 55(A)(a) has amended with word 'variance with' the fair market value is less than the fair market value by Finance Act, 2012 w.e.f. 01.07.2012. Therefore, reference to the Valuation Officer was not as per law and A.O. had exceeded his jurisdiction. Thus, he allowed the appeal.

5. Now the Revenue is before us. Ld. Sr. D.R. has drawn our attention on page no.7 where A.O. had made comparison with valuation report of DVO with Registered Valuer report and pointed out the defects that the Registered Valuer even had not considered any comparable case of land for determining the cost of assets as on 01.04.1981. He has considered gold price fixed by the R.B.I. for valuation of cost as on 01.04.1981. Thus, Registered Valuer cannot be accepted at all, which is technically defaulted Whereas, Registered Valuer had considered the comparable case for determining the value of the cost of land as on 01.04.1981 as well as on date of sale. Thus, the order of the CIT(A) was not in accordance with law. Further, he also has drawn our attention on recently Hon'ble Delhi High Court decision in case of ACC Ltd. vs. DVO, order dated 21st May, 2012 in W.P. NO. (c) 3795 of 2011, has considered this issue whether u/s.50A before change in Section i.e. "variance with" has considered this issue whether the A.O. can refer the issue to determine the cost as on 01.04.1981 under the old provision, held – Yes. Thus, he requested to confirm the addition. At the outset, ld. A.R. supported the order of the CIT(A) and argued that no reference can be made u/s. 55A of the IT Act on 01.04.1981.

6. We have heard the rival contentions and perused the material on record. The Registered Valuer's report submitted by the assessee has major defect that no comparable case of land has been given. It is not possible that there was no sale in surrounding area of land. The A.O. has rightly referred the case to the DVO for determining the cost as on 01.04.1981 as well as on date of sale. The Hon'ble Delhi High Court in case of ACC Ltd. Vs. DVO (supra), had recently decided this issue in favour of the Revenue and held that even under old provision, the A.O. can refer the property for valuation as on 01.04.1981. The Co-ordinate Mumbai 'F' Bench in case of Vijay P. Karnik Vs. ITO in [2013] 37 Taxmann.com 48 (Mum.) has considered this issue and held that reference made by the A.O. to the DVO on the fact of the case is justified. It was further held that even reference made by the A.O. to the DVO was not in accordance with law or illegal, the valuation report obtained in pursuance of such a reference will be relevant and admissible evidence which can be used by the Revenue authority in the Income Tax proceeding. This is supported by the decision of Hon'ble Supreme Court in case of Pooranm Mal vs. Director of Inspection [1974] 93 ITR 505. = (2002-TIOL-221-SC-IT-LB) The same views have been taken by the Tribunal in case of DCIT vs. Chaturbhuj Vallabhdas HUF [2011] 130 ITD 230/9 taxmann.com 96. Thus, we reverse the order of the CIT(A).

7. In the result, the Revenue's appeal is allowed and Assessee's C.O. is dismissed.

(These Orders pronounced in open Court on 10.1.2014)

--
Regards,

Pawan Singla , LLB

M. No. 9825829075

2013-TIOL-53-SC-IT-LB

IN THE SUPREME COURT OF INDIA

Case Tracker

COMMISSIONER OF INCOME TAX Vs HIMATSINGKA SEIDE LTD [High Court]

Civil Appeal No. 1501 of 2008

SLP(C) No. 10359-10360 of 2011

SLP(C) No. 10990 of 2013
(With office report)

SLP(C) No. 11030 of 2011
(With appln. for c/delay in filing SLP)

Civil Appeal No. 147 of 2013
(With office report)

SLP(C) No. 15860 of 2013
(With office report)

SLP(C) No. 15950 of 2012
(With office report)

SLP(C) No. 17055 of 2013
(With office report)

SLP(C) NOs. 19182 to 19186 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) NOs. 19189 to 19195 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 19197 to 19202 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 19204 to 19208 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 19211 to 19212 to 19219 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 19221 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 19222-19223 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 20276 of 2013
(With office report)

SLP(C) No. 21454 of 2012
(With appln. for c/delay in filing SLP)

SLP(C) No. 25455 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 27297 of 2012
(With appln. for c/delay in filing SLP and c/delay in refiling SLP and
with office report)

SLP(C) No. 27469 of 2012
(With appln. for c/delay in filing SLP and c/delay in refiling SLP and
with office report)

SLP(C) No. 28980 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 29128 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 30188 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 30290 of 2012
(With appln. for c/delay in filing SLP and c/delay in refiling SLP and
with office report)

SLP(C) No. 32065-32066 of 2011
(With appln. for c/delay in filing SLP and c/delay in refiling SLP and
with office report)

SLP(C) No. 34824 of 2011
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 34850 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 35435 of 2012
(With office report)

SLP(C) No. 35439 of 2012
(With office report)

SLP(C) No. 3677 of 2012

SLP(C) No. 3797 of 2012

SLP(C) No. 3799 of 2012
(With office report)

SLP(C) No. 3803 of 2012
(With office report)

SLP(C) No. 3804 of 201
(With office report)

SLP(C) No. 5785 of 2013
(With office report)

Civil Appeal No. 7853 of 2012

Civil Appeal No. 7854 of 2012
(With appln. for revocation of leave)

Civil Appeal NOs. 8788 - 8791 of 2012

Civil Appeal No. 8912 of 2012
(With office report)

SLP(C) No. 9465 of 2012
(With Appln. for c/delay in filing SLP and with office report)

SLP(C) No. 24415 of 2013
(With office report)

SLP(C) No...CC 10147 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 10573 of 2012
(With appln. for c/delay in filing SLP and permission to raise addl.
question of law and with office report)

SLP(C) Nos...CC 10658-10659 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 10963 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 10971 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 11537 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 14412 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No...CC 17421 of 2012
(With appln. for c/delay in filing SLP and with office report)

SLP(C) No. 21931 of 2012
(With appln. for c/delay in filing SLP and office report)

SLP(C) No. 10097 of 2013
(With appln. for permission to file lengthy list of dates and with prayer
for interim relief and office report)

SLP(C) No. 11945 of 2013
(With office report)

M/S HIMATSINGKA SEIDE LTD

COMMISSIONER OF INCOME TAX

H L Dattu, Sudhansu Jyoti Mukhopadhaya And M Y Eqbal, JJ

Dated: September 19, 2013

Appellant Rep by: G Sarangan, Sr Adv. Sanjay Kunur, Adv. Ramesh Keswani, Adv. Arijit Prasad, Adv
S Wasim A Qadri, Adv. N Annapoorani, Adv. B V Balaram Das, Adv. Anil Katiyar, Adv. Farrokh Irani, Adv
K V Mohan, Adv. R K Raghavan, Adv. K V Balakrishnan, Adv.
Respondent Rep by: M S Syali, Sr Adv. SLPs.10097 &11945/13 Mayank Nagi, Adv.
Rameshwar Prasad Goyal, (A). Chythanya, Adv. S Sukumaran, Adv. Anand Sukumar, Adv.
Bhupesh Kumar Pathak, Adv. Meera Mathur, Adv. Chythanya, Adv. S Sukumaran, Adv.
Anand Sukumar, Adv. Bhupesh Kuamr Pathak, Adv. Meera Mathur, Adv. K R Vasudevan, Adv.
V Balachandran, Adv. S Ganesh, Sr (A). T Suryanarayan, (A). Kunal Verma, (A). Tanmayee, (A).
Arpita, (A). Vabhav Kulkani, (A). Kavita Jha, (A). Abhay A Jena, (A). Ranjit Raut, (A). Bina Gupta, (A).
Anuj Dhir, (A). Avinash Kr Lakhanpal, (A). R N Keshwani, (A). Sameer Goel, (A). Lalit Chauhan, (A).
Galav Shamra, (A). for M/s. Parekh & Co., Advs. Satyen Sethi, (A). A T Panda, (A). Rameshwar Prasad Goyal, (A).
R P Bhatt, Sr (A). Mukesh Butani, (A). Rahul Yadav, (A). H Raghavendra Rao, (A). Anuradha Dutt, (A).
Pawan Sharma, (A). Sachit Jolly, (A). B Vijayalakshmi Menon, (A). Senthil Jagadeesan, (A). S Ganesh, Sr (A).
Nandini Gore, (A). Debmalya Banerjee, (A). Dilpreet Singh, (A). Manik Karanjawala, (A). for Karanjawala & Co., (A).
Nikhil Nayyar, (A). Pritha Srikumar Iyer, (A). Dhananjay Baijal, (A). Nageswar Rao, (A). Sayaree Basu Mallik, (A).
Ambhoj Kumar Sinha, (A). Mohit Jolly, (A). Udit Mendiratta, (A). Sakya Singha Chaudhuri, (A). Jay Savla, (A).
Renuka Sahu, (A). Rajesh Mahale, (A). Pratap Venugopal, (A). Surekha Raman, (A). Meenakshi chauhan, (A).
Dheeraj Nair, (A). Smita Bhargava, (A). K T Anantha Raman, (A). Vasudevan Raghavan, (A).

Income tax - Sections 10A, 10B - Whether unabsorbed depreciation carried forward by the EoU unit from earlier years is to be set off against the profits before computing exemption benefits under Ss 10A/10B.

The assessee commissioned a 100% EOU in AY 1988-89 but did not claim Sec 10B benefits for lack of profits in A.Y 1988-89, 1989-90 and 1990-91. On the other hand, it claimed the said benefits for a connective period of 5 years starting from A.Y 1992-93. In A.Y 1994-95, Assessee had other income beyond the profits and gains of the export oriented commercial unit. Unabsorbed depreciation available to the Assessee in A.Y 1988-89 was carried forward to the current year and was claimed to be adjustable against the income from other sources, thereby it reduced income to NIL. The AO accepted the return and passes the order. The CIT invoked powers under section 263 to disallow the benefits. The Tribunal allowed the Assessee's appeal but the HC reversed the same.

On appeal, the Apex Court held that,

++ having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the Civil Appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.

Assessee's appeal dismissed

JUDGEMENT

1. We have heard learned counsel for the parties to the list.

2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the Civil Appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.

Ordered accordingly.

2014-TIOL-40-ITAT-BANG

IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE 'C' BANGALORE

ITA No.1087/Bang/2012
Assessment Year: 2009-10

M/s MINDTREE LTD
GLOBAL VILLAGE
RVCE POST MYSORE ROAD
BANGALORE-560059
PAN NO:AABCM8839K

ASSTT COMMISSIONER OF INCOME TAX
(LTU) BANGALORE

N Barthvajasankar, VP And George George K, JM

Date of Hearing: December 5, 2013
Date of Decision: December 5, 2013

Appellant Rep by: Shri Tata Krishna, Adv.
Respondent Rep by: Smt H L Sowmya Achar, DR

Income Tax - Section 10B - Whether the deduction u/s 10B is to be calculated without setting off of carried forward business loss and unabsorbed depreciation.

The assessee was engaged in software development and allied services. The return of income was filed claiming deduction u/s 10B amounting to Rs.13,50,89,407/-. The return was taken up for scrutiny. In the scrutiny assessment the AO had disallowed the relief claimed u/s 10B. The AO noticed that the assessee was having the total accumulated business loss brought forward from earlier years and the accumulated depreciation loss and hence, the income from business amounting to Rs.16,17,49,127/- has to be set off first against the brought forward business loss and unabsorbed depreciation and thereafter only, deduction u/s 10B to be calculated. Since, after the set off of brought forward loss and unabsorbed depreciation, the total income would be NIL, the AO held that the assessee was not entitled to any deduction u/s 10B.The CIT(A) dismissed the appeal of the assessee.

On Appeal before the Tribunal the AR submitted that the issue was squarely covered by the judgment of the jurisdictional High Court in the case of CIT v Yokogawa India Ltd. (2011-TIOL-711-HC-KAR-IT). The DR fairly agreed with it.

Having heard the parties, the HC held that,

++ the jurisdictional High Court in the case of Yokogawa India Ltd. categorically held that deduction u/s 10A is allowable without setting off the brought forward loss and unabsorbed depreciation of other units;

++ respectfully following the dictum laid down by the jurisdictional High Court in the case of Yokogawa India Ltd. (2011-TIOL-711-HC-KAR-IT), we hold that the deduction u/s 10B is to be calculated without setting off of carried forward business loss and unabsorbed depreciation. The assessee is entitled to deduction u/s 10B, provided the other conditions mentioned under the section are satisfied.

Assessee's appeal partly allowed

Case followed:

Yokogawa India Ltd. (2011-TIOL-711-HC-KAR-IT)

ORDER

Per: George George K:

1. This appeal of the assessee company is directed against the order of the CIT (A)-LTU, Bangalore, dated 21.6.2012. The relevant assessment year is 2009-10.

2. The concise grounds raised by the assessee, in its Memorandum of appeal, are as under:

(1) That the CIT (A)-LTU was not justified in sustaining the addition of Rs.1,29,473/- being 20% of Rs.6.47 lakhs incurred towards event management while computing the value of taxable Fringe Benefits [FB];

(2) That the CIT (A) was also not justified in upholding the additions of-
(i) Rs.6,87,089/- being 20% of Rs.34,35,443/- paid to Org. Indirect;

(ii) Rs.41,772/- being 20% of Rs.2,08,860/- paid to External faculties; &
(iii) Rs.38,38,958/- being 20% of Rs.1,91,94,739/- paid to Org. direct incurred towards staff training.

3. Briefly stated, the facts of the issues are as under:

The assessee is a company engaged in the business of software development and allied activities. During the year under dispute, the assessee had filed its return of fringe benefits on 30.9.2009, declaring taxable FB of Rs.8,85,08,943/- which was revised on 23.3.2010. During the course of proceedings, the assessee had furnished the reconciliation of FB with the financial statements. The AO had concluded the assessment u/s 115 WE(3) by making additions on the following expenses:

(i) Rs.1,29,473/- being 20% of Rs.6.47 lakhs incurred towards event management;
(ii) Rs.6,87,089/- being 20% of Rs.34.35 lakhs paid to Org. Indirect towards staff training;

(iii) Rs.41,772/- being 20% of Rs.2.08 lakhs paid to external faculties towards staff training; and
(iv) Rs.38,38,958/- being 20% of Rs.1.91 crores paid to Org. Direct towards staff training.

3.1. Aggrieved, the assessee took up the issues with the CIT (A)-LTU. After due consideration of the assessee's contentions, the CIT (A)-LTU had recorded her findings, under each item-wise, as under:

(i) Rs.1,29,473/- :

"4.2. (e) I am of the considered opinion that the nature of expenses listed in Table I above wherein the appellant has furnished the break-up of event management expenditure makes it abundantly clear that such expenses are in the nature of 'Entertainment' liable to be treated as a deemed benefit u/s 115WB(2)(A) rather than as expenditure incurred towards 'conference' liable to be taxed u/s 115WB(2)(C). It is quite evident from a plain reading of the Finance Minister's speech dt 28.2.2005 and from the Memorandum to the Finance Bill, 2005 that where the benefits are usually enjoyed collectively by the employees and where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature, such expenses would clearly fall within the purview of FBT. In the instant case, the expenses towards event management have been largely incurred towards inauguration of its Chennai Facility and the Cricket Match which were for the collective benefit of its employees between different project teams. Obviously, the very nature of the expenses incurred makes it crystal clear that the event management expenses incurred to the tune of Rs.6,47,363/- is a deemed fringe benefit liable for FBT u/s 115WB(2)(A). This is even more apparent from a perusal of the answer to Q No.49 of CBDT Circular No.8/2005 dt. 29.8.2005 which is reproduced below:

'49. What is the scope of the expression 'entertainment in clause (A) of section 115WB(2)?
Ans: The meaning of the word 'entertainment' in clause (A) of sub-section (2)(of s. 115WB is of wide import. It includes all expenditure in connection with exhibition, performance, amusement, game or sport, for affording some sort of amusement and gratification."

(emphasis supplies)
In view of the foregoing analysis, I have no hesitation in upholding the AO's stand in treating even management expenses to the tune of Rs.6,47,363/- as a deemed fringe benefit except that instead of bringing it to tax under the head 'conference' u/s 115WB(2(C), I am of the view that it should rightly be brought to tax under the head 'entertainment' u/s 115WB(2)(A)…"

(ii) Rs.6,87,089/-, Rs.41,772/- & Rs.38,38,958/- being 'staff training', 'staff training expenses – External Faculty & 'staff training expenses' respectively:

"5.2. As already pointed out in para 4.2, clauses (a) to (e), it was evident that the purpose or rationale behind introduction of FBT provisions was to tax a benefit which was enjoyed collectively by the employees which was enjoyed collectively by the employees which was hitherto untaxed in the hands of the employees and in r/o which the employer was claiming deduction. Likewise, an expenditure which did not result in any benefit to an employee would not be liable for FBT as FBT was leviable only in a case where expenditure was incurred by the employer ostensibly for the purpose of business but included partially a benefit of a personal nature which could not be attributed or was difficult to attribute. It is crystal clear from the Finance Minister's speech and Memorandum explaining the FBT provisions reproduced in para 4.2 above that the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the 'personal element' when there is collective enjoyment of such benefits and in attributing the same directly to the employee. It further provides that where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax benefits in the hands of the employee, it is proposed to levy a separate tax known as FBT on the employer on the value of such benefits provided or deemed to have been provided to the employees. Thus, the intention of creation of a deeming fiction under section 115WB(2) is to include an expenditure resulting in collective enjoyment of fringe benefits by the employees and it is difficult or not feasible to attribute such benefit personally to employees.

5.2.1. In the instant case, it is quite evident from the nature of the staff training expenses incurred by the appellant on its employees that both elements of employer – employee relationship as well as collective benefit to the employees are clearly visible and omnipresent though incidentally this may ultimately result in improving productivity in the long run. The appellant placed reliance on q No.51 of the Board's Circular wherein the Board clarified in its answer to the query as to whether expenditure incurred during in-house employee training would be considered as 'conference' expenses deemed to be a fringe benefit u/s 115WB(2)(C), the Board clarified that though FBT was not envisaged on expenditure incurred for purpose of imparting in-house training to employees, FBT would be payable on any expenditure incurred towards food & beverage, tour & travel and lodging & boarding in connection with such in-house training of employees. At the other end of the spectrum, it is pertinent to note that even with regard to expenditure incurred for attending training programs organized by Trade bodies or Institutions, vide answer to Q No.54, the Board clarified that since a training program entails a congregation of a number of persons for discussion or exchange of views, expenditure incurred for attending training programs organized by Trade Bodies or Institutions or any other agencies fell within the scope of provisions relating to expenditure incurred for purposes of conference contained in sec. 115WB(2)(C) and would be liable to FBT. However, it is abundantly clear that both the queries referred to above are in connection with the applicability or otherwise of the deeming provisions of sec.115WB(2)(C) which directly relates to 'conference' whereas the AO has clearly brought the other amounts to tax as 'employees' welfare' under the deeming provisions of sec. 115 WB(2)(E). Therefore, the whole argument of whether 'in-house' training includes within its ambit payment made to external faculty or not or merely denotes location is irrelevant. Under the circumstances, I am inclined to agree with the AO that staff training expenses, whether direct, indirect or external faculty, are all liable to FBT under the deeming provisions of sec. 115 WB(2)(E)."

3.2. Aggrieved, the assessee has come up with the present appeal. During the course of hearing, the learned AR, extensively quoting the Finance Minister's speech on 28.2.2005 as well as in the Lok Sabha on 2.5.2005, Memorandum to Finance Bill 2005 and also his interview with the Economic Times, it was contended that the fringe benefits can only mean privilege, service, benefit or amenity provided directly or indirectly by an employer to his employees by reason of their employment. Taking hint from the provisions of s. 115WB (2), it was submitted that the deeming fiction in s. 115 WB (2) is with a specific purpose. The FM speech and Memorandum explaining the FBT provisions state that the rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. It was submitted that the Memorandum states that FBT is sought to be levied where attribution of the personal benefit poses problems. Thus, it was contended that deeming fiction u/s 115 WB is attracted only when the expenditure results in some benefit to employees and/or it is difficult to isolate the personal element of enjoyment or benefit. Further, it was claimed that s. 115 WB (2) incorporating a deeming fiction should be read along with the intention of Legislature to tax the collective enjoyment of benefits by the employees and that u/s 115WB (2), the expenditure should be incurred in the capacity of 'employer' for his employees and, therefore, legitimate business expenditure bereft of any benefit to employees is outside the ambit of FBT. For this proposition, the learned AR relied on the case laws, namely, (i) CIT v. Karnataka Power Transmission Corporation Ltd (2012) 20 Taxmann.com 142 (Kar); (ii) M/s. Toyota Kirloskar Motor Pvt. Ltd v. Addl CIT - 2012-TIOL-313-ITAT-BANG; (iii) Bosch Ltd. v. DCIT (2011) 15 Taxmann.com 187 (Bang); (iv) DCIT v. Mescon -2010-TIOL-419-ITAT-BANG.

3.2.1. Referring to s. 115WB (1), it was submitted that the expression 'consideration for employment' will only consist of those benefits which the employee is entitled to as a matter of right or at his option to be exercised as an employees. In other words, it is that benefit which the employee can demand as his contractual right. It was, further, contended that the phrase 'consideration for employment' as used in s. 115WB (1) has to be read while interpreting the provision of s. 115 WB (2). In other words, it was explained, it is those expenditure which are incurred as 'consideration for employment' and enlisted under clauses (A) to (Q) in s. 115 WB (2) of the Act is subjected to FBT. For this proposition, the assessee has relied on the findings of the Pune ITAT reported in (2012) 149 TTJ (Pune) 365.

3.2.2. To drive home his point, the learned AR had averred that an expense would be subjected to FBT only if the following attributes are present, namely:

> Benefit is given in consideration for employment;

> Benefit is available to employee as a matter of right;
> Benefit is collectively enjoyed by the employees;

> Benefits enjoyed in the hands of the employee are quantified;
> Expenditure incurred by the employer is ostensibly for the purpose of business but includes an element of benefit of a personal nature which cannot be attributed or is difficult to attribute; &

> Payments were not made to third parties.

3.2.3. With regard to the sustaining of the addition of Rs.1,29,473/- by the CIT (A), it was argued that the CIT (A) ought not to have treated the expenditure of Rs.6.47 lakhs as 'entertainment expenditure' liable to be treated as deemed benefit u/s 115WB (2) as against the addition made by the AO as 'conference' expenditure liable to tax u/s 115WB(2)(C) without affording an opportunity to the assessee to explain its stand, even though the details of expenses were furnished to the AO as well as the CIT (A)-LTU. It was contended that s. 115WB (2) provides that the fringe benefit shall be deemed to have been provided by the employer to his employees, if the employer had incurred in the course of business or profession any expense on or made any payment for the purposed enlisted in clauses (A) to (Q). In this context, the assessee relies on the Circular No.8/2005 dt.29.8.2005 [Q No.11]. With regard to the expenses incurred in the inauguration of its Chennai Facility, it was contended that the same cannot be termed as entertainment as it was in the course of the expansion of the assessee's business and not meant for the employees and the employees were not benefited from such expenses and as such, the FBT is not attracted in the instant case. It was claimed, the CIT (A)-LTU erred in treating Rs.34000/- paid towards items hired for Panache Cricket match conducted between different project team also as 'entertainment'. Quoting the provisions of s. 115 WB(2)(E), it was argued that it was evident from the Explanation to clause (E) that if an employer organizes any sports event for employees, the amount expended on the said event shall not be considered as employee's welfare and thereby cannot be regarded as FB and the employer was not required to pay FBT on the same. In conclusion, it was argued that the sum of Rs.6,47,363/- incurred by the assessee cannot be regarded as FB and, thus, not chargeable FBT on the said amount.

3.2.4. In respect of the staff training expenses of Rs.34,35,443/-, staff training expenses – External faculty of Rs.2,08,860/- and Rs.1,91,94,739/- paid towards Org. direct under the head 'staff training expenses' for which 20% of the same were treated as liable to FBT, after explaining the graphic description of the staff training expenses and also elaborately quoting the clauses (A) to (Q) to s.115WB(2) of the Act, it was submitted that the authorities below were not justified in considering the aforesaid expenses as part of 'employee welfare' u/s 115WB (2)(E) of the Act as they have failed to appreciate that the expression 'welfare' in common parlance would mean the health, happiness and fortunes of a person or a group. Thus, it was argued, the expenses incurred towards staff training do not fall under the expression 'employee welfare'. It was, further, argued that the employee's welfare is a comprehensive expression which would include any expenditure where welfare of the employee is involved as medical reimbursement, recreation facilities offered for employees, incentive awards etc. In the instant case, staff training was provided by the assessee with an intention to increase the productivity of the employees which was evident from the above said description. It was argued that the CIT (A) had failed to appreciate that the purpose of providing the training was to equip the employees to perform their official duties efficiently. In other words, it was explained, the training provided was to improve the employee's productivity at the workplace by giving cutting-edge knowledge and ideas which directly benefits the assessee in carrying on its business more efficiently. It was, further, argued that the CIT (A) had failed to appreciate that if the purpose of incurring the expenses was to protect the employer's business interest and not the welfare of/benefit to the employees, the expenses incurred thereon would not be termed as 'employee welfare.' It was the stand of the learned AR that the Board's Circular (supra) has clarified that the expenses incurred for the purpose of imparting in-house training to employees would be out of the ambit of FBT and that the authorities below have to failed to see the reason that the imparting the knowledge was not meant for the welfare of the employees. Referring to the provisions of s. 115WB (2)(C), it was claimed by the learned AR that the said provision that the fee paid towards participation in conference would not be part of the deeming provision. The explanation to sub-section (C) enlists expenditure are not forming part of conference. Any fee paid towards the participation by the employees in any conference is excluded from the scope of s. 115 WB (2)(C) and, thus, the participation fee in respect of a conference organized by an outside entity was excluded from the purview of FBT. If it were so, even staff training provided by the employer should also be free from FBT. The purpose of participation, it was contended, in any conference organized by a third party cannot be different from purpose of training provided by the employer itself to its employees. If the former cannot be regarded as employee welfare, the latter also cannot be regarded as such. Without prejudice the ruling of the Hon'ble Calcutta High Court in the case of Ravi Marketing (P) Ltd v. CIT (2006) 280 ITR 519 (Cal) = (2006-TIOL-47-HC-KOL-IT), the learned AR submitted that the reply to Q. No.54 [Circular No.8/2005] doesn't apply to the present case for the following reasons:

(i) The aforesaid expenditure was not incurred by the assessee for attending training programmes organized by trade bodies or institutions; &

(ii) The training programmes as referred to in the above query are general in nature whereas in the present case, it was an in-house training provided to the employees of the assessee for improvement of productivity in the normal working hours.

3.2.5. In conclusion, it was submitted that the aforesaid expenses incurred towards staff training was not for the collective benefit/welfare of the employees and, thus, the same cannot be regarded as FB for the purpose of Ch., XII-H and not chargeable to FBT.

3.2.6. On the other hand, the learned DR supported the stand of the authorities below. The learned DR had, further, argued that the issue has since been dealt with elaborately and, subsequently, came to a right conclusion by the CIT (A) that the staff training expenses whether direct, indirect or external faculty were all liable to FBT under the deeming provisions of s. 115 WB (2)(E) of the Act. It was, therefore, pleaded that the stand of the CIT (A) requires to be sustained.

3.3. We have carefully considered the submissions of both the parties and also perused the relevant materials on record. It is an undisputed fact that the assessee had incurred the following expenses:

Lighting arrangements during Chennai event	Rs. 15,000
Items hired for Panache Cricket match finals for employees held in Bangalore between different project teams	Rs. 34,000
Aztecsoft with Mindtree	Rs. 71,617
Relates to Mindtree Chennai facility inauguration	Rs.5,26,310

3.3.1. The break-up of expenses grouped under Event Management Expenditure account along with documentary evidences were furnished before the AO as well as the CIT (A) by the assessee. However, the CIT (A)-LTU, after analysing the provisions of s. 115 WB (1), 115WB(1)(a) of the Act, was of the view that the nature of expenses claimed make it abundantly clear that such expenses were in the nature of 'entertainment' liable to be treated as a deemed benefit u/s 115WB (2)(A) of the Act rather than as expenditure incurred towards conference liable to be taxed u/s 115WB(2)(C) of the Act. However, on a careful consideration of the expenses incurred/claimed by the assessee clearly establish that the aforesaid expenses were incurred for the purposes of (i) lighting arrangements for Chennai event; (ii) Share-holders and creditors meet during merger of Aztecsoft with Mindtree and (iii) Mindtree facility inauguration.

3.3.2. From the above, it is abundantly clear that none of those expenses were incurred by the assessee to endure any benefit to the employees whatsoever.

(i) To illustrate further, the assessee had incurred an expenditure of Rs.34,000/-for organizing the cricket match. In this connection, we refer to Explanation to s."115 WB(2)(E) of the Act that –

Explanation – For the purposes of this clause, any expenditure incurred or payment made to-
(i)…………………………………………………

(vi) organise sports events for employees, shall not be considered as expenditure for employees' welfare;"
(ii) A sum of Rs.71,617/- and Rs.15,000/- were incurred for the purpose of organising shareholders and creditors meet during merger of Aztecsoft with Mindtree. In these events, the question of involvement of any employees' welfare doesn't arise. Therefore, invoking the provisions of s. 115 WB (2)(A) of the Act do not arise as there was no any involvement of entertainment on the issue.

(iii) Rs.5,26,310/- was claimed being expenses incurred towards the inauguration of Chennai facility. On a perusal of the Invoice produced during the course of hearing, we find that the expenses incurred towards organizing the inauguration of Chennai facility [Source: Page 65 & 66 of PB AR]. Hereto, we find there was no any element of 'entertainment' in the said expenses so as to bring it under the purview of s. 115 WB(2)(A) of the Act.

3.3.3. In substance, the entire expenses of Rs.6.47 lakhs incurred by the assessee cannot be regarded as FB and, therefore, FBT is not chargeable on the said sum. Therefore, the CIT (A) was not justified in invoking the provisions of s. 115 WB(2)(A) of the Act to bring the said sum of Rs.6.47 lakhs under the ambit of FBT. It is ordered accordingly.

4. With regard to the second ground of the assessee to the effect that the CIT (A) was not justified in sustaining the additions of Rs.6.87 lakhs, Rs.41,772/- and Rs.38.38 lakhs in respect of staff training etc., we would like to point out that the authorities below have justified in their stand that the aforesaid expenses as part of 'employee welfare' u/s 115WB(2)(E) of the Act. However, as rightly pointed out by the learned AR, they have failed to appreciate that the expression of 'welfare' in general parlance would mean the health, fortunes of a person or a group. Such being the scenario, they have failed to justify that the staff training falls within the sphere of 'employee welfare'. The purpose of providing training to its employees by its employer was to perform their official duties efficiently which will definitely enhance the productivity thereby the ultimate beneficiary would be the employer in carrying on its business more effectively and not the employees. If the purpose of incurring the expenses was to protect the employer's business interest and not the welfare of the employees and, as such, it cannot be termed as employees' welfare. These aspects have neither been considered by the AO nor by the CIT (A). Moreover, the comprehensive details of expenses incurred for the staff training have neither been furnished before the authorities below nor during the course of hearing before this Bench by the assessee to ascertain as to whether the assessee's claim that such expenses were not liable to FBT.

4.1. As could be seen from the order of the AO as well as the finding of the CIT (A), the issue has not been deliberated thoroughly by the authorities below before coming to an conclusion that the staff training expenses liable to FBT under the deeming provisions of s. 115WB (2)(E) of the Act, we are of the view that the issue requires a fresh and thorough verification at the level of the AO. To facilitate the AO to have a fresh look on the issue as directed (supra), the matter is restored on the file of the AO. In the meanwhile, the assessee through its learned AR is advised to furnish all the relevant details with supporting documentary evidence to enable the AO to carry out the directions of this Bench (supra) expeditiously. It is ordered accordingly.

5. In the result, the assessee's appeal is treated as partly allowed for statistical purpose.

(Order pronounced in the Open Court on 5.12.2013.)

Govt to restart tax talks with Vodafone soon?

New Delhi: The government appears to be willing to restart conciliation talks with UK-based Vodafone if the telecom firm makes up its mind to settle the Rs 20,000 crore tax dispute.

A day after finance minister P Chidambaram said it is up to the revenue department to enforce the tax notice on the company, highly placed sources said if Vodafone makes up its mind on conciliation, it can happen in a few days.

"If Vodafone decides to begin the conciliation, if two conciliators can be appointed, then the conciliation process should not take more than a few days," sources said.

The conciliation talks had broken down after Vodafone issued a supplementary notice to the government.

It invoked the Bilateral Investment Promotion and Protection Agreement (BIPA) and demanded that a separate transfer-pricing case be clubbed with the capital gains tax matter.

The finance ministry has already circulated a draft Cabinet note withdrawing the conciliation offer to Vodafone.

"In Vodafone's own words, they are unable to make up their mind whether they should go forward with conciliation. The conciliation did not even start," Chidambaram had told PTI on Tuesday.

The Cabinet had in June 2013 approved a finance ministry proposal to go in for conciliation with Vodafone to resolve the capital gains tax dispute related to its acquisition of Hutchison Whampoa's stake in Hutchison Essar in 2007.

While the basic tax demand for the acquisition is Rs 7,990 crore, outstanding dues, including a penalty of a similar amount and accrued interest, run into Rs 20,000 crore.

"There is no need for a fresh notice. The notice is already there," Chidambaram had said, adding that it is for the tax department to decide whether to enforce the notice.

According to sources, Vodafone wanted to club a Rs 3,700 crore transfer-pricing case of Vodafone India Services with the capital gains tax issue.

But its demand that was not acceptable to the finance ministry.

As the matter is pending in the Bombay High Court and the government of India is being represented by the finance ministry, the issue could not be included as part of the conciliation talks, sources said. —PTI

Published Date: Feb 20, 2014

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