[aaykarbhavan] Judgments and Information

No TDS on Service Tax if shown separately

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Pursuant to an important judgement of the Hon'ble Rajasthan High Court, in the case of Commissioner of Income Tax (TDS), Jaipur Vs. M/s. Rajasthan Urban Infrastructure [2013 (8) TMI 12 – RAJASTHAN HIGH COURT] holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Income Tax Act, 1961 ("the Act").

Earlier, vide Circular No. 4/2008 dated 28-04-2008 it was clarified that tax is to be deducted at source under Section 194-I of the Act, on the amount of rent paid/payable without including the service tax component. Representations/letters has been filed to CBDT seeking clarification whether such principle can be extended to other provisions of the Act also.

CBDT has examined the matter afresh and clarified vide Circular No. 1/2014 dated 13-1-2014 (Produced Below) -"TDS under Chapter XVII-B of the Income-tax Act, 1961 on service tax component comprised of payments made to residents" that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/ payable without including such service tax component.

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Related Circular is as follows :-

CIRCULAR NO. 1/2014 [, DATED 13-1-2014

Subject: TDS under Chapter XVII-B of the Income-tax Act, 1961 on service tax component comprised in the payments made to residents - clarification regarding

The Board had issued a Circular No.4/2008 dated 28-04-2008 wherein it was clarified that tax is to be deducted at source under section 194-I of the Income-tax Act, 1961 (hereafter referred to as 'the Act'), on the amount of rent paid/payable without including the service tax component. Representations/letters has been received seeking clarification whether such principle can be extended to other provisions of the Act also.

2. Attention of CBDT has also been drawn to the judgement of the Hon'ble Rajasthan High Court dated 1-7-2013, in the case of CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (Income-tax Appeal No.235, 222, 238 and 239/2011), holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Act.

3. The matter has been examined afresh. In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

4. This circular may be brought to the notice of all officer for compliance

F.NO.275/59/2012-IT(B)]

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Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
Mobile: +91 9810604563
E-mail: bimaljain@hotmail.com

IT: Where Assessing Officer allowed research & development expenses incurred by assessee in respect of in house research as revenue expenditure and subsequently, had initiated reassessment proceedings solely at instance of audit party by recording reasons for which he had no conviction, same was a colourable exercise of jurisdiction by Assessing Officer and could not be sustained

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[2013] 40 taxmann.com 309 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax, Ahmedabad -IV

v.

Shilp Gravures Ltd.*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 411 OF 2013†

OCTOBER  15, 2013 

Section 37(1), read with sections 35AB and 147, of the Income-tax Act, 1961 - Business expenditure - Allowability of [Re-assessment] - Assessment year 2004-05 - Assessing Officer allowed R&D expenses incurred by assessee in respect of in house research as revenue expenditure - Subsequently, audit party raised objection that as per section 35AB assessee was eligible for a deduction of 1/3rd of R&D expenses in previous year and balance amount in two succeeding previous year - Assessing Officer at instance of audit party applied section 35AB and issued notice under section 148 - Whether since Assessing Officer had initiated reassessment proceedings solely at instance of audit party by recording reasons for which he had no conviction, same was a colourable exercise of jurisdiction by Assessing Officer and could not be sustained - Held, yes [Para 8] [In favour of assessee]

FACTS

 

■		The assessee-company was engaged in the business of manufacturing and job work in electronically engraved copper rollers. It claimed expenses on in house research being in the nature of consumption of raw material on test production and salary/wages of personnel deployed for R&D activities as revenue expenditure.
■		During scrutiny assessment, the Assessing Officer allowed the R&D expenses incurred by assessee in respect of inhouse research as revenue expenditure.
■		Subsequently, the audit party raised objection that the allowance of deduction for entire expenditure on research and development resulted in an under assessment of income as according to section 35AB the assessee was eligible for a deduction of 1/3rd of R&D expenses in the previous year and the balance amount in equal instalments immediately in two succeeding previous years.
■		The Assessing Officer initially replied to the audit party that these expenses were rightly claimed as revenue expenditure and the same were also correctly allowed. However, the Assessing Officer issued notice under section 148 at the instance of audit party and applied section 35AB(2) and section 32A(2B).
■		On appeal, the Commissioner (Appeals) quashed the reassessment proceeding.
■		On revenue's appeal, the Tribunal confirmed the order of the Commissioner (Appeals).
■		On further appeal:

HELD

 

■		At the time of issuance of the notice under Section 148 and initiating the process under section 147 the Assessing Officer must have a reason to believe that the income chargeable to tax for any particular assessment year has escaped the assessment and as the notice is being issued by the Assessing Officer it should be his subjective satisfaction, which the law has made obligatory. [Para 7.4]
■		Any reassessment proceedings initiated at the instance of the audit party objection, without the Assessing Officer himself having reason to believe that the income chargeable to tax has escaped the assessment must fail and such issue is no longer res integra and requires no further elaboration except by reproducing relevant findings of this Court, in the case of Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Appln. 15566 of 2011, dated 14-12-2011] wherein it is held that any such initiation of reassessment proceedings solely at the instance of the audit objection would not be maintainable. [Para 7.5]
■		The subjective satisfaction of the Assessing Officer for the purpose of reopening of the assessment is lacking in the instant case and, therefore, the Officer having the jurisdiction to issue notice on the belief that the income has escaped the assessment in fact had no belief while issuing notice and, therefore, as held in the case of Adani Exports v. Dy. CIT [1999] 240 ITR 224 (Guj.) it was a colourable exercise of jurisdiction by the Assessing Officer by recording the reasons for which he obviously had no conviction, had initiated the reassessment proceedings solely at the instance of the audit party which cannot be sustained. [Para 8]

CASE REVIEW

 

Adani Exports v. Dy. CIT [1999] 240 ITR 224 (Guj.) (para 8) followed.

CASES REFERRED TO

 

Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Appln. 15566 of 2011, dated 14-12-2011] (para 7.5).

Varun K. Patel for the Appellant.

JUDGMENT

 

Ms. Sonia Gokani, J. - The following is the substantial question of law arising in this Tax Appeal preferred by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') aggrieved by the order passed by the Income Tax Appellate Tribunal ('ITAT' for short) dated 26/10/2012 in ITA No. 1138/Ahd/2010;

"Whether in the facts and circumstances of the case, the learned ITAT has erred in law in confirming the order of CIT(A) in holding the reopening of assessment under Section 147 by issuing notice under Section 148 of the Income Tax Act as invalid?"

2. The only question that we are required to deal with is as to whether notice of reopening issued under Section 148 of the Act and thereby seeking to reopen the assessment under Section 147 of the Act was at the instance of the audit objection or was there any subjective satisfaction of the Officer in issuance of such a notice.

3. Having heard learned Counsel, Mr. Varun Patel, appearing on behalf of the revenue, who has strenuously argued before us that once the audit objection was raised, it could be a starting point, however, eventually that has resulted into issuance of notice under Section 148 of the Act and, therefore, such a decision would not be liable to scrutiny and the same could be construed as subjective satisfaction of the Assessing Officer. He also has argued that the audit objection rightly had not allowed the R & D expenses as the revenue expenses and, therefore, the correspondence, which resulted into formation of the belief of the Assessing Officer, should be held to be his belief and, therefore, the quashing of the notice by the tribunal is not justifiable.

4. As can be noted from the record that for the Assessment Year 2004-05 the case of the assessee was taken in scrutiny and the assessment under Section 143(3) of the Act was completed on 29/12/2006 wherein while assessing income at Rs.1,74,89,890/- the R & D expenses to the tune of Rs.54.07 lakhs in respect of inhouse research was held allowable as the revenue expenses. Subsequently, when the audit objection was raised, the Assessing Officer initially replied to the audit party that these expenses were rightly claimed as revenue expenditure and the same were also correctly allowed. However, the Assessing Officer issued notice under Section 148 of the Act on 20/02/2009 at the instance of audit party and applied Section 35AB(2) and Section 32A(2B) of the Act. The Assessing Officer held in reassessment proceedings that the expenditure of Rs.54.07 lakhs incurred on inhouse research and development of various process was capital in nature and assessee having debited entire amount in P & L account treating the same as revenue expenditure was not accepted by the Assessing Officer. He consequently disallowed the amount of Rs.36.05 lakhs being 1/3rd of the total amount of Rs.54.07 lakhs.

5. The reassessment proceedings were thereafter challenged before the CIT(A). The CIT(A) quashed the said proceedings by holding that it was nothing but a mere change of opinion on the part of the Assessing Officer. It was further held that the assessee commenced its business in Assessment Year 1994-95 and Section 32A(2B) would not be applicable as the same applies to plant installed after 30/06/1977 and before 01/04/1987.

6. The said decision of CIT(A) same came to be challenged before the tribunal. The tribunal after examining the issue in detail concurred with the finding of the CIT(A) and confirmed the quashment of such proceedings. This is challenged in this Tax Appeal by raising the aforesaid proposed substantial question of law.

7. We have heard learned Counsel Mr. Varun Patel for the revenue and also deemed it fit to call for the files for our satisfaction. It could be noticed from the correspondence dated 09/02/2009 addressed to the Commissioner of Income-tax while seeking the permission for taking remedial action under Section 147 of the Act that an objection had been raised by the auditor in the following manner:

GIST OF AUDIT OBJECTION:—

The assessee-company engaged in the business of manufacturing and job work in electronically engraved copper rollers filed its return of income for assessment year 2004-05 declaring total income of Rs.1,54,66,000/-. The case was taken under scrutiny under Section 143(3) of the Act on 29/12/2006 and scrutiny was completed determining total income of Rs. 1,74,89,890/-.

The audit has found that the assessee has debited an amount of expenses of Rs.54.07 lakhs in Profit & Loss Account treating it as revenue expenditure. However, according to Section 35AB of the Act the assessee was eligible for a deduction of 1/3rd of Rs.54.07 lakhs paid in the previous year on research and development and the balance amount in equal instalments immediately in two succeeding previous years for which the working is given below:

	Total amount spent on R & D	Rs.54.07 lakh
	Less : 1/3rd (eligible deduction)	Rs.18.02 lakh
		Rs.36.05 lakh

Thus the allowance of deduction for entire expenditure of Rs.54.07 lakh against Rs.18.02 lakh resulted in an under assessment of income of Rs.36.05 lakh with consequential short levy of tax of Rs.25,78,929/-.

7.1 The Assessing Officer maintained the stand that the R & D expenses incurred by the Company on inhouse research, being in the nature of consumption of raw material on test production and salary/wages of personnel deployed for R & D activities, have been rightly claimed as revenue expenses. It also maintained the stand that the objections raised by the audit party is not acceptable.

7.2 However, such reply was not found acceptable by the audit party and, therefore, the only remedial action available was to initiate the action under Section 147 of the Act and, therefore, the permission was sought of the Commissioner of Income-tax.

7.3 Another communication dated 10/02/2009 by the Additional Commissioner of Income-tax), Range-8, Ahmedabad referring to the order passed by the Assistant Commissioner of Income-tax (OSD) Circle-8 also says that in view of the detailed facts mentioned by the Assistant Commissioner of Income-tax (OSD) Circle-8 the audit objection is not acceptable, however the remedial action as per the Board's instruction No. 9/2006 is required to be initiated and, therefore, it agreed with the view of the Assessing Officer that appropriate remedial action would be re-opening of the assessment under Section 147 of the Act.

7.4 These communications are clearly indicative of the fact that the Assessing Officer was not satisfied with the audit party having pointed to it the issue of allowability in respect of the R & D expenses. The Assessing Officer having reason to believe that the income chargeable for any assessment year is sine qua non for initiating the proceedings for reassessment, which as rightly held by both the CIT(A) and the tribunal is glaringly missing from the very record. In other words at the time of issuance of the notice under Section 148 of the Act and initiating the process under Section 147 of the Act the Assessing Officer must have a reason to believe that the income chargeable to tax for any particular assessment year has escaped the assessment and as the notice is being issued by the Assessing Officer it should be his subjective satisfaction, which the law has made obligatory.

7.5 Any reassessment proceedings initiated at the instance of the audit party objection, without the Assessing Officer himself having reason to believe that the income chargeable to tax has escaped the assessment must fail and such issue is no longer res integra and requires no further elaboration except by reproducing relevant findings of this Court, in the case of Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Appln. 15566 of 2011, dated 14-12-2011] wherein it is held that any such initiation of reassessment proceedings solely at the instance of the audit objection would not be maintainable.

'(i)		CIT v. Lucas T.V.S. Ltd. [2001] 249 ITR 306/117 Taxman 366 (SC) in which the Apex Court upheld the decision of the High Court in which the High Court had quashed the reopening proceedings wherein apart from the information furnished by the audit party, the ITO had no other information for reopening the assessment.
(ii)		Agricultural Produce Market Committee v. ITO [2011] 15 Taxmann.com. 170/[2012] 204 Taxman 22 (Guj.) wherein Division Bench of this Court was pleased to quash the notice for reopening where the only basis was the revenue audit objection as regards the eligibility of the assessee for exemption.
(iii)		Adani Exports v. Dy. CIT [1999] 240 ITR 224 (Guj.) wherein Division Bench of this Court held as under:
		"It is true that satisfaction of the AO for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of record, burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the AO did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him; in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the AO has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe any time that income has escaped assessment on account of erroneous computation of benefit under Section 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the office having jurisdiction to issue notice and recording under the office note on 8th Feb., 1997 that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the AO by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction under Section 80HHC, for the reasons stated by the audit. The reason is not far to seek."
		12. Under the circumstances, it clearly emerges from the record that the AO was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the AO, she held correspondence with the assessee. Taking into account the assessee's explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board's circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the AO, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the AO had acted at the behest of and on the insistence of the audit party. It is well-settled that it is only the AO whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decisions of the Apex Court in the case of P.V.S. Beedies (P.) Ltd. (supra) and Indian & Eastern Newspaper Society (supra), if the audit party brings certain aspects to the notice of the AO and thereupon, the AO form his own belief, it may still be a valid basis for reopening assessment However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the audit party cannot form the basis for the AO to reopen the closed assessment that too beyond four years from the end of relevant assessment year.'

8. As is amply made clear in the instant case from the discussion hereinabove that the subjective satisfaction of the Assessing Officer for the purpose of reopening of the assessment is lacking in the instant case and, therefore, the Officer having the jurisdiction to issue notice on the belief that the income has escaped the assessment in fact had no belief while issuing notice and, therefore, as held in the case of Adani Exports v. Dy. CIT [1999] 240 ITR 224 (Guj.) it was a colourable exercise of jurisdiction by the Assessing Officer by recording the reasons for which he obviously had no conviction, had initiated the reassessment proceedings solely at the instance of the audit party which cannot be sustained.

9. For the reasons stated hereinabove, this appeal deserves to be dismisses and the same is dismissed for having raised no substantial question of law.

RITESH

IT : Where assessee co-operative bank did not discontinue its business even after cancellation of its licence for banking activities and proceeded to claim deduction under section 80P, imposition of penalty was justified

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[2013] 38 taxmann.com 301 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'A'

Apex Urban Co-op. Bank of Maharashtra & Goa Ltd.

v.

Income-tax Officer -1(1) (3)*

D. MANMOHAN, VICE-PRESIDENT 
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER

IT APPEAL NO. 3003 (MUM.) OF 2013
[ASSESSMENT YEAR 2005-06]

SEPTEMBER  18, 2013 

Section 271(1)(c), read with section 80P, of the Income-tax Act, 1961 - Penalty for concealment of income [Wrong claim/bona fide claim, effect of disallowance of] - Assessment year 2005-06 - Assessee was notified as state co-operative Bank by Maharashtra Government and was granted license from RBI - Said notification of State Government was quashed - On appeal, Supreme Court upheld such action - Assessee's licence was cancelled by RBI and it was directed to sale all investments and to refund deposits - It was found that assessee continued to operate banking activities, even after striking down of notification preventing assessee to continue to operate as State Co-operative Bank and, thus, had not discontinued business as required under section 176(3) - Further, assessee proceeded to claim deduction under section 80P without considering advise of auditors that income was ineligible to be classified as banking income in conformity of Supreme Court judgment - Whether since assessee was fully aware of all facts, but claim for deduction was made, it was to be held to be a false claim made continuously and deliberately and, thus, amount claimed as deduction would be deemed to represent income in respect of which particulars had been concealed - Held, yes - Whether, therefore, penalty under section 271(1)(c) was justified - Held, yes [Paras 29 to 42] [In favour of revenue]

FACTS

 

■		The assessee was notified by Government of Maharashtra as a State Co-operative Bank on 30-12-1995.
■		On 22-3-1996, the RBI granted license under the Banking Regulation Act, 1949 to the assessee.
■		The said licenses issued by the RBI were challenged by Maharashtra State Co-operative Bank Ltd. before the High Court and thereby notification of Government was quashed. The High Court directed the RBI to review its decision. On appeal, the Supreme Court upheld order of High Court and thereby the RBI cancelled the license with effect from 30-10-2003.
■		Further, the Reserve Bank of India also directed the assessee in May 2004 to sale the investment and to refund the deposits.
■		Even thereafter for current assessment years the assessee filed the return claiming deduction under section 80P(2)(a)(i) declaring total income as NIL.
■		The Assessing Officer determined the assessed income at Rs. 97,75,14,603 after disallowing deduction under section 80P(2)(a)(i) and also allowed the claim of deduction only in respect of the income relatable to the interest of Rs. 1,26,03,473 earned on the credit facilities offered to the members.
■		On appeal, the Commissioner (Appeals) granted relief partly and modified income to Rs. 36.30 crores.
■		On appeal, the Tribunal modified the income to Rs. 46.37 crore.
■		Subsequent to the order of the Tribunal, the Assessing Officer imposed penalty of Rs. 11.31 crore on the ground that assessee was not a banking channel and income earned from such activity will not qualify for deduction under section 80P(2)(a)(i).
■		On appeal, the Commissioner (Appeals) confirmed the penalty.
■		On appeal before Tribunal, the case of the assessee was that the penalty was not leviable in the case considering the disclosure of accurate particulars in the return of income and also the Apex Court's judgment in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322, which was relevant for the proposition that the mere unsustainability of a claim made in the return should not attract the penal provision.

HELD

 

Supreme Court's decision about assessee's banking activity

■		The Supreme Court's directions are unambiguous that the assessee is prevented from doing banking activities in any State of India. On the issue of deposits and larger volume of the banking business, the Supreme Court questioned the contumacious attitude of the assessee in persisting the banking business merely based on a stay order. As per the Supreme Court, the assessee, being aware of the law, is not entitled to any concessions. In other words, the assessee knows that he is not on the side of the law and he also knows the consequences of such blatantly disobedience to the law of the land. [Para 31]
■		In the instant case, the explanation of the assessee, which revolves around the provisions of section 176(3A) is factually unsustainable, considering the Supreme Court ruling in the assessee's case relating to the cancellation of banking license and continuing to undertake any business activities despite the ban imposed by the Supreme Court.
■		The assessee was deliberately making a claim knowingly well in advance that the claim is unsustainable in law. It amounts not only to the breach of law but it amounts to a conscious breach of law together with an attitude of disregard to the express provisions of the Act contumaciously.
■		The provisions of Explanation 1 to section 271(1)(c) come into effect to the facts of this case where it is a conscious breach of law inasmuch as it is a wrong claim under section 80P(2)(a)(i). The penalty should be levied in a case where the assessee acted against the express provisions of law and made deliberate claims knowing fully well that the claim is unsustainable in law. [Para 34]
■		It is the opinion of the Commissioner (Appeals) that the penalty is leviable in this case where the assessee deliberately made an unsustainable claim of deduction knowing well that the same is against the law of the land. The Commissioner (Appeals) rejected the assessee's explanation that revolves around among others, a couple of submissions i.e., (i) disclosure of the facts in the return and (ii) provisions of section 176(3A). [Para 36]
■		From the Explanation 1 above, it refers to a couple of independent groups of cases, which narrate the deemed cases of concealment. They are : (A) This group covers cases, there are again two sub groups of persons and they are : (i) the persons, who fail to offer an explanation or (ii) the persons, who have offered an explanation which is found to be out right false by the revenue authorities; or (B) This group refers to cases where the explanation offered by the person is not found false out right, but those cases other than such false explanation cases. These are identified by the following symptoms. They are: (i) such person does not able to substantiate the explanation offered; and (ii) such person not only fails to prove that such explanation is bona fide but disclosed all the facts relating to such explanation and material to the computation of his total income. [Para 37]

Incorrect explanation of the assessee on the inapplicability of the provisions of section 176(3):

■

In the instant case and find the assessee's explanation, which revolves around the provisions of section 176(3) of the Act, are both false and unsubstantiated. [Para 38]

Incorrect explanation of the assessee - Assessee's Arguments on the disclosure of information in the return

■		Further, the assessee's explanation suffer from lack of credibility. How the assessee could go ahead and claim the deduction under section 80P(2)(a) in respect of the ineligible and so called banking income? How can cooperative society earn banking income with the banking license? The assessee consistently taking law into their hand and the same is evident from the observations of the Supreme Court's judgment extracted above. With this kind of conduct of the assessee, no amount of disclosure of particulars in the return of income shall save the assessee from the award of penalty. What is disclosed in the return is only the claim of deduction and disrespected advise of the Auditors. What is the use of such disclosure of information? As such, there is information on the return why he made such unsustainable claims of deduction. When the law does not permit assessee to undertake banking activities, it has done so contumaciously. Now when the provisions of section 80P(2) do not permit claim of deduction in respect of such ineligible income, it has done so again contumaciously, which is not permitted by the Tribunal. Further, the assessee wants to apply the provisions of section 176(3) of the Act, when the same are not at all applicable to the facts of the case. It is completely objectionable and deplorable. It is surprising that the assessee is persistently violating the law of the land i.e., first the provisions of the Banking Regulation Act, 1949 and then the provision of Income-tax Act, 1961. Any way, we now focus on the provisions of Income-tax Act, 1961, in general, and provisions of section 271(1)(c) of the Act, in particular. [Para 39]
■		Contents of the above paragraphs of this order amply suggest that the claim of deduction is not only unsustainable and such unsustainable claim of deduction is made with full knowledge of the assessee that the law is not on his side. None of the judgments relied upon by the assessee are comparable to the facts of this present case and therefore, they are distinguishable on facts. As such, finality on penalty proceedings are not only assessee-specific but also addition/disallowance-specific and are finalized after considering the facts of each case and such disallowance/additions. Therefore, the revenues fairly did not levy penalty in respect of the interest income from credit facility offered to the members. Therefore, the assessee's argumentative grounds are unsustainable in principle. [Para 40]
■		Further, on the experts' (Statutory Auditors) advise: It is reported fact that the management of the society knows that the income earned does not qualify the banking income and so is the auditors of the assessee. In a way, it is the case, where the assessee has not adopted the advise of the experts and proceeded to claim deduction under section 80P(2). Normally, the case is other way around and they issue certificates advising the claim of deduction and relevant cases are cited above. But in this case, Auditors advised that the impugned income is ineligible to be classified as banking income considering the judgment of the Supreme Court. But the assessee made a false claim of deduction and decided to provide false explanation in the penalty proceedings under section 271(1)(c). [Para 41]
■		Thus, it can be safely inferred that the assessee made a claim of deduction under section 80P(2)(a)(i) in respect of the sums totalling to Rs. 46,37,41,577 knowing very well the impugned income is not eligible for such deduction. The assessee is fully aware of this fact and therefore the claim is made contumaciously and deliberately having no regard for the law. The said amounts disallowed in computing the total income of the assessee as a result thereof shall, for the purposes of clause (c) of this section 271(1) be deemed to represent the income in respect of which particulars have been concealed. Therefore, for all the reasons discussed above, the order of the Commissioner (Appeals) does not call for any interference. [Para 42]

CASE REVIEW

 

CIT v. Nalin P. Shah (HUF), IT Appeal No. 49 of 2013, dated 4-3-2013 (para 34) and Shervani Hospitalities Ltd. v. CIT [2013] 35 taxmann.com 271 (Delhi) (para 34) distinguished.

CIT v. Zoom Communicate (P.) Ltd. [2010] 327 ITR 510/191 Taxman 179 (Delhi) (para 34) followed.

CASES REFERRED TO

 

CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194/118 Taxman 321 (SC) (para 7), Totgars Co-operative Sales Society Ltd. v.ITO [2010] 322 ITR 283/188 Taxman 282 (SC) (para 10), CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC)(para 15), CIT v. Zoom Communication (P.) Ltd. [2010] 327 ITR 510/191 Taxman 179 (Delhi) (para 18), CIT v. Anwar Ali [1970] 76 ITR 696 (SC) (para 21), Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (para 21), Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC) (para 21), Union of India v. Dharamendra textile Processors [2007] 295 ITR 244/[2008] 166 Taxman 65 (SC) (para 21), Asstt. CIT v. Supreme Industries Ltd. [2009] 28 SOT 19 (Mum.) (para 24), CIT v. Shahabad Co-op Sugar Mills Ltd. [2010] 322 ITR 73 (Punj. & Har.)(para 24), CIT v. Nalin P. Shah (HUF) [IT Appeal No. 49 of 2013, dated 4-3-2013] (para 24), Shervani Hospitalities Ltd. v. CIT [2013] 35 taxmann.com 271 (Delhi) (para 24), CIT v. Jakson Ltd. [2013] 214 Taxman 94 (Mag.)/31 taxmann.com 416 (Delhi) (para 24), CIT v. HCIL Kalindee ARSSPL [2013] 37 taxmann.com 347 (Delhi) (para 34), Shyam Behari v. Asstt. CIT [2011] 43 SOT 129/[2010] 8 taxmann.com 275 (Delhi) (para 36.1), Asstt. CIT v. Khanna & Annadhanam [2011] 48 SOT 120 (URO)/13 taxmann.com 94 (Delhi) (para 36.1).

Arun Sathe and Aarti Sathe for the Appellant. Pritam Singh for the Respondent.

ORDER

 

D. Karunakara Rao, Accountant Member - This appeal filed by the assessee on 18.4.2013 is against the order of CIT(A)-1, Mumbai dated 31.1.2013 for the assessment year 2005-2006.

2. In this appeal, assessee raised the following gourds which read as under:

"Ground No.1

In the facts and in the circumstances of the case and in law the CIT(A) erred in confirming the penalty levied u/s 271(1)(c). The assessee submits that, —

(i)		All the primary facts in regard to the income earned were placed on record.
(ii)		Throughout the assessment and appeal proceedings no addition was made so as to infer much less to conclude that particulars of income were not correctly filed.
(iii)		Explanations were given in penalty proceedings and AO did not find that any of the explanations was false or not bona fide.

The appellant therefore contends that the provision of section 271(1)(c) were not at all attracted.

Ground no. II

The CIT(A) misdirected himself in the fact and circumstances of the case and in holding that the assessee has failed to prove that its explanation is bona fide.

The CIT(A) failed to appreciate that,-

(i)		The assessee was entitled to deduction u/s 80P(2)(a)(i) in respect of income from providing credit facilities to members.
(ii)		In respect of his other income from investments etc he was entitled to such deduction by virtue of the deeming provision of section 176(3A).

The assessee, therefore contends that its claims for deduction were bona fide, within the frame work of law and therefore the CIT(A)'s observation to the contrary was perverse and does not flow from the fact of the case.

Ground No. III

The Ld CIT(A) has erred in fact and in law, in not accepting the assessee's submissions that,-

(a)		The assessee has not concealed any income.
(b)		The assessee has not submitted any inaccurate particulars of income.
(c)		AO has filed to establish that the assessee has furnished inaccurate particulars of income.
(d)		AO has not found that all the facts relating to the income and material to the computation of its total income were duly disclosed by the assessee.
(e)		That the assessee has fully cooperated in all proceedings before the AO and CIT (A) and all material facts were duly disclosed before these authorities.

Ground No. IV

Both authorities below have failed to appreciate that mere fact that a legal claim is not accepted, does not attract penal provisions under section 271(1)(c).

Ground No. V

The Ld CIT(A) ought to have held that issues involved were purely contested legal issues to be decided on interpretation of the provisions of the Act & merely because claims were not accepted cannot attract penal provisions."

3. Briefly stated, assessee was registered under Multi State Cooperative Societies Act, 1984 and was subsequently notified by Government of Maharashtra as a State Cooperative Bank. The Reserve Bank of India also gave the assessee license under the Banking Regulations Act, 1949. The said notification of the State Government of Maharashtra and the said license issued by the Reserve Bank of India were challenged by the Maharashtra State Cooperative Bank Ltd in a writ petition before the Hon'ble Bombay High Court. The Bombay High Court quashed the notification of the Government and directed the RBI to review its decision granting license to assessee. The assessee challenged this decision before the Hon'ble Supreme Court. The Supreme Court upheld the order of the Bombay High Court. The RBI cancelled the license w.e.f. 30.10.2003. Thus, the assessee is neither a State Cooperative Society nor it is a Bank under the Banking Regulation Act, 1949. We shall now discuss various developments during the assessment and appellate proceedings relating to quantum additions in the assessment and the other events leading to the levy of penalty u/s 271(1)(c) of the Act.

Assessment Proceedings- Denial of Deduction u/s 80P(2)(a)(i) of the Act:

4. Assessee filed the return of income declaring the total income "NIL" after making claim of deduction u/s 80P(2)(a)(i) of the Act. During the assessment proceedings u/s 143(2) of the Act, AO noticed that the RBI cancelled the assessee's license w.e.f. 30.10.2003 and the assessee was not permitted to carry on banking business under Banking Regulation Act (B.R Act), 1949, and he proposed to the assessee to disallow the claim of deduction under section 80P(2)(a)(i) of the Act. The assessee explained before the Assessing Officer that banking business was carried on special circumstances i.e. in the process of winding up the Bank. The Bank which carried banking business till 29.10.2003 cannot be suddenly said to be not carrying banking business on 30.10.2003. The business is to be carried on for some time for the sake of closure of the said banking activity. The nature of business i.e. banking, cannot change by mere cancellation of license by the RBI. The process of closing down or liquidating of business is natural to any de-licensed organization. The bank cannot stop making income which will continue to come by way of interest on investment already made or interest on loan/advances already given and outstanding as on the date of cancellation of the license. The assessee further submitted that the RBI cancelled the license and only denied the assessee from transacting business as mentioned under section 5(b) of the B.R. Act. The assessee was not barred from doing any form of business activities as mentioned in section.6 of the B.R. Act. AO rejected the said submissions of the assessee. Since the assessee has been barred from transacting banking business, benefit under section 5(b) is not available and as such benefit under section 6 will also not be available too.

5. AO further observed that Section 22 of the B.R. Act states that no company shall carry on a banking business in India unless it holds a license issued on that behalf by the RBI. The right to carry on activities mentioned in Section 6(a) to 6(o) of the B.R. Act, 1949 flows from the issue of license to any company. Section 80P of the IT. Act states that the income earned from the banking business by cooperative society will qualify for deduction. Since the assessee is not a banking company during the year under consideration, income earned from such activity will not qualify for exemption under section 80P(2)(a)(i) of the Act. The Assessing Officer further observed that the assessee's existence as a State Co-Operative Bank has ended as the relevant notification has been already struck down by the Bombay High Court. Since the assessee is not a banking company and also not a cooperative bank, the income earned from certain activities do not qualify for deduction under section 80(P)(2)(a)(i). Accordingly, he held the following income of the assessee as taxable.

S.No	Nature of income	Amount (Rs.)
1	Income on investments	10,07,82,579
2	Interest on balances with RBI and other bank funds	27,19,052
3	Commission, exchange & brokerage	3,11,942
4	Profit on sale of investments	86,69,70,200
5	Miscellaneous income	1,97,09,871

6. However, AO accepted assessee's plea that it is a cooperative society and undertook the activity of providing credit facilities to its members during the year under consideration. Further, he held that this status of the assessee continued to remain the cooperative society, even after its license to transact banking activity was cancelled by the RBI. Therefore, he accepted that income earned from providing credit facilities to its members qualifies for deduction under section 80P(2)(a)(i). Accordingly, he allowed deduction under section 80P(2)(a)(i) on an income of Rs 1,26,03,473/-, being interest earned by the assessee on the advances given to its members. Finally, AO concluded the assessment determining the assessed income at Rs. 97,75,14,603/- after allowing the deduction u/s 80P(2)(a)(i) only on said interest income relatable to the credit facilities amounting to Rs. 1,26,03,473/-.

Appellate Proceedings on Disallowance of Claim of Deduction

7. During the first appellate proceedings, it was contended that the assessee was a cooperative bank carrying on its banking activities in accordance with a validly granted license which was in operation and the activities were carried on validly pursuant to the license issued by the RBI and as such the assessee was entitled to exemption under section 80P(2)(a)(i). It was further contended that the assessee being a cooperative society is also involved in providing credit facilities to its members. Therefore, the claim is allowable on either of the activity i.e. banking or providing credit facilities. It was further submitted that the assessee is a cooperative society involved in either of the two activities, income from other sources are also exempted following the decision of the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194/118 Taxman 321. Considering the submissions of the assessee, the CIT gave relief by holding as under:

"3.9. I have carefully considered the submissions of the learned Authorized Representative and gone through the assessment order and the judicial decisions cited. Section 80P primarily refers to a cooperative society. Section 80P(2)(a)(i) specifically speaks about the cooperative society engaged in carrying on the business of the banking or providing credit facilities to its members. The appellant was registered as a State Cooperative Bank by the notification of Govt. of Maharashtra. In his assessment order at page 7 the Assessing Officer has accepted that it is a cooperative society which has granted loans to various member cooperative societies from which it was earning income....

3.10. Since the appellant is a cooperative society and has advanced loans to its members, it is entitled to deduction under section 80P(2)(a)(i). Cancellation of its banking license and its status as a Cooperative Bank by order of High Court and Supreme Court will not have any effect on the admissibility of deduction under section 80P of the Act. In view of this the AO is directed to allow deduction under section 80P(2)(a)(i) as claimed".

8. CIT(A) also granted deduction u/s 80P(2)(a) in respect of the receipts from investment amounting to Rs. 10,07,82,579/-. Consequent to above findings, the CIT (A) vide Para No.4.4 allowed deduction in respect of income arising out of investments with RBI holding that the receipts are from the investments in government securities compulsorily made by the banking company. Para No.4.4 is as under:

"4.4. I have carefully considered the submissions of the learned AR and gone through the facts of the case. The AO has already granted deduction under section 80P in respect of Rs. 1,26,03,473/- as income arising out of providing credit facilities to its members. In view of the decision of the Supreme Court and the decision of the ITAT cited by the learned AR, the balance sum of Rs 10,07,85,279/- will also be entitled to deduction under section 80P(2)(a) as the receipts are from the investments in Govt. Securities compulsorily made by the banking company. The AO is directed to allow the deduction in respect of this income".

9. Similarly the CIT(A) accepted that the assessee is a banking company and allowed the deduction under section 80P, on the incomes disallowed by the Assessing Officer except gains from sale of securities which he treated as Long Term Capital Gain vide the findings in Para 5.4. Therefore, both the assessee and revenue are contesting the issue on the directions of the CIT in this regard. Thus, after giving effect to the order of the CIT(A), the assessed income modified worked out to Rs. 36,29,58,998/-.

Proceedings before the Tribunal

10. During the appellate proceedings before the Tribunal on the merits of denial of claim of deduction u/s 80P(2)(a) of the Act, the Revenue contended that the impugned receipts tabulated in the subsequent paragraphs cannot be considered as income from banking business and relied on the judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282. It is the submission of the Revenue that since the assessee is a cooperative society, the income from the so called banking activities cannot be allowed as a deduction without there being any banking business.

11. On the other hand, Shri Arun Sathe & Aarti Sathe, Ld Counsels for the assessee submitted that even though the license was cancelled, as it is in the process of winding up and the income earned on the sale of investment should be considered as income arising in the course of banking business, not as capital gains as held by the CIT(A). Ld Counsel also relied on the provisions of section 176(3A) of the Act in this regard. Further, Ld Counsel relied on various jurisdictional High Court judgments in this regard. It is the claim of the assessee that assessee is entitled for deduction u/s 80P(2)(a)(i) in respect of the income earned on the banking business.

12. On hearing both the parties, the Tribunal noticed that for the AY 2005-06, assessee earned income to the tune of Rs. 100.30 Crs and the breakup is as follows.

(a)	Interest earned on loans and advances	Rs. 1,26,03,473
(b)	Interest on investments	Rs.10,07,02,579
(c)	Interest earned on balance with RBI and other interbank funds	Rs. 27,19,052
(d)	Commission Exchange and Brokerage	Rs. 3,11,942
(e)	Profit on sale of investment	Rs.86,69,70,200
(f)	Miscellaneous incomes	Rs.1,97,09,071

13. The Tribunal analyzed if the interest income on investment/advances & loans/balances/commission/others should be considered as income from banking business and, if so, whether deduction under section 80P(2)(a) on the above income is eligible for deduction u/s 80P(2)(a) of the Act. Eventually, Hon'ble Tribunal is critical of the relief granted by the CIT(A) in respect of the interest on investments and reversed the finding of the CIT(A) vide para 33 of the impugned order. Further, regarding the Profit on sale of investment of Rs. 86,69,70,200/-, which includes Rs. 5,33,56,510/- (profit in respect of shares held for lesser than one year), which is held by the CIT(A) as non-banking income but the capital gain income, the Tribunal confirmed the order of the CIT(A). Relevant discussion can be seen from para 35 of the Tribunal's order. Regarding the miscellaneous income of Rs. 1,97,09,071/-, which is an unclaimed dividend provided earlier, CIT(A) considered that this amount is merely write back of the earlier years should not be added to the income of the assessee. Tribunal confirmed the said decision of the CIT(A) as such interest earned on loans and advances amounting to Rs. 1,26,03,473/-.

14. Factually, AO allowed the claim of deduction u/s 80P(2)(a)(i) as it relates to the credit facilities to the members of the assessee. In the process, the Tribunal examined the provisions of section 80P(2)(a)(i) and sections 5 & 6 of the Banking and Regulation Act, 1949. Further, the Tribunal also considered the judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra). Tribunal explained the provisions of section 176(3A) of the Act and held that the said provisions will not be of any help to the assessee. In the result, the Tribunal dismissed the appeal of the assessee on merits vide its order dated 30.11.2011. At the end of the second appellate proceedings, the total income modified worked out to Rs. 46,37,41,577/-, which is the subject matter of penalty u/s 271(1)(c) of the Act. The break-up of the said income is as follows:

Banking Income	Rs. 10,07,82,579/-
LTCG as per order giving effect of CIT(A)'s order dated 2.12.2008	Rs. 30,94,03,456/-
STCG as per order giving effect of CIT(A)'s order dated 2.12.2008	Rs. 5,33,56,510/-
Income from other sources as per order giving effect of CIT(A)'s order dated 2.12.2008	Rs. 1,99,023/-
Revised Total Income	Rs.46,37,41,577/-

Penalty Proceedings u/s 271(1)(c) of the Act:

15. Subsequent to the said order of the Tribunal, AO issued show cause notice on 5.7.2012 and provided various issues to the assessee. To state briefly, AO informed the assessee about the determination of the assessed income of the assessee of Rs. 97,75,14,603/- against Rs. NIL income returned by the assessee. Assessee claimed a sum of Rs. 91,58,59,221/- as revised deduction u/s 80P of the Act. He also informed after giving effect to the order of the CIT(A), total income was reduced to Rs. 36,29,58,998/-. Further, after the decision of the Tribunal, the total income stands at Rs. 46,37,41,577/-. The AO informed the assessee that in view of the judgment of the Hon'ble Supreme Court cancelling the notification of the State Government as well as the cancelling the banking license by the RBI barring the assessee from doing the banking activities, the claim of deduction u/s 80P of the Act is not a bona fide claim as the assessee is not supposed to carry on banking business in India. AO is of the opinion that provisions of section 271(1)(c) of the Act are applicable to the facts of the case as the assessee made a wrongful claim in respect of the entire income u/s 80P(2)(a)(i) of the Act which amounts to furnishing of inaccurate particulars of income. In response to the said show cause notice, the assessee submitted that it is qualified for deduction u/s 80P(2)(a)(i) and mentioned that the order of the ITAT is incorrect and relied on the judgment of the Hon'ble Supreme Court in the case of CIT v.Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 and various other decisions. Finally, the AO considered the above reply of the assessee and eventually AO levied the penalty vide the order dated 27.7.2012.

16. In the impugned penalty order, AO discussed the circumstances led to the cancellation of the banking license of the assessee finally by the Apex Court and the developments before the AO, CIT(A) and the ITAT and discussed the total income enhanced from Rs. 36,29,58,998/- to Rs. 46,37,41,577/- at the stage of first appellate authority. AO discussed the contents of the show cause notice issued and the reply given by the assessee in this regard. Subsequently, in the penalty order, the AO incorporated the relevant findings of the ITAT and explained the provisions of sections 6, 22A and 56 of the Act. In para 8 of the penalty order, the AO discussed the facts about the cancellation of the banking license and discussed comments of the Auditors i.e., M/s. A.B. Mansinghka & Co., CAs. The said comments vide point 3(a) of the auditor's report read as under:

'3(a) Attention is drawn to the fact the accounts are prepared on going concern basis in spite of the fact that during the last year society, which was functioning as an Apex Bank since 1996, has got its banking license cancelled by the Reserve Bank of India from 30.10.2003 in compliance with the judgment of the Hon'ble Supreme Court of India. This also has the effect of putting an end to the principle of objects for which the society was formed.

The Reserve Bank of India has precluded the society from disbursing or passing funds or incurring liability or entering into compromise or arrangements to sell, transfer or otherwise dispose of any of its properties or assets except to the extent and in the manner provided by specific directives to be given by the Reserve Bank of India to the society from time to time.

Attention is also drawn to the fact that the accounts are prepared without considering the various norms for Asset Classification and Income Recognition prescribed by the Reserve Bank of India under the Banking Regulation Act, 1949 as the management of the society is of the opinion that in view of the fact that the Banking License is cancelled by the Reserve Bank of India, the provisions of the Banking Regulation Act, 1949 are no longer applicable to the Society as on 31st March, 2005.

8.1. The above factual position has been pointed out by the Auditors in the notes on Accounts vide point no.1, wherein it is stated as under:

"The Apex Urban Cooperative Bank of Maharashtra & Goa Ltd was functioning as an Apex Body of the Urban Cooperative Banks within the area of the state of Maharashtra & Goa from 22.3.1996 till 29.10.2003. The Reserve Bank of India has cancelled the banking license and prevented it from carrying on the banking business from 30.10.2003, in compliance with the judgment of the Hon'ble Supreme Court of India. The Reserve Bank of India has further directed that the society should follow specific Reserve Bank of India Directives issued to the society from time to time.'

17. In the penalty order, AO highlighted the fact that the assessee claimed deduction u/s 80P in respect of Rs. 91,58,59,221/- despite the advice of the accountants. Relevant comments of the AO vide para 8.2 are inserted as under:

"8.2 ....The above facts pointed out by the Auditors clearly show that 'State Cooperative Bank' in the FY 2004-05 relevant to AY 2005-06 and therefore, could not engage itself in any banking activity as the license was cancelled and, hence, is not eligible to claim deduction under section 80P(2)(a)(i) in respect of incomes arising from the business of banking which does not form part of 'providing credit facilities to its members'. In view of the above, and considering the fact the assessee was not permitted to carry on banking business under section 5(b) of Banking Regulation Act (B.R. Act) 1949 during the FY 2004-05 relevant to AY 2005-06, the claim made by the assessee in the return of income in respect of incomes arising from banking business is deliberate and intentional without any regard to the provisions of law."

18. In support of the above, Assessing Officer relied on the judgment of the Delhi High Court in the case of CIT v. Zoom Communication (P.) Ltd.[2010] 327 ITR 510/191 Taxman 179 for the proposition that "if the assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and explanation furnished by him for making such a claim is not found to be bona fide, Explanation-1 to section 271(1)(c) would come into play and assessee will be liable to penalty". In the penalty notice, AO asserted that the assessee is not a banking company and the income earned from such activity will not qualify for deduction u/s 80P(2)(a)(i) of the Act. Referring to the Wanchoo Committee recommendations on the amendments made in section 271(1)(c) by Taxation Law (Amendment) Act, 1975, the AO imported relevant lines mentioning that "the appropriate penal provisions form a necessary compliment to this approach of voluntary compliance of taxation laws". Relevant parts read as under:

"As the no. of tax payers increases, the tax administration has of necessity to rely more and more on voluntary compliance of tax laws by the assessee. Appropriate penal provisions form a necessary compliment to this approach as they impel compliance with the tax laws by imposing additional monetary burden on those who happen to go astry either inadvertently or by design."

19. Finally, as discussed in para 14 and 15 of the penalty order, AO imposed the penalty @ 100% amounting to Rs. 11,31,04,414/- on the total concealed income of Rs. 46,37,41,577/-. The relevant paras 14 and 15 read as under:

'14. In this case, the facts mentioned above clearly does not support the claim made by the assessee u/s 80P in the return of income as the assessee's license was cancelled by the RBI in the previous year relevant to the AY 2004-05. Hence, the assessee could not do banking business as it was not a State Cooperative Bank as held by the Hon'ble Supreme Court in the assessee's own case. Further, as per the provisions of Section 80P(2)(a)(i), a cooperative society engaged in providing credit facilities to its members cannot be considered as a cooperative society engaged in carrying on in the business of banking. Therefore, the incomes that will not form part of providing credit facilities t its members cannot be followed as a deduction under section 80P(2)(a)(i). The above factual position has also been certified by the Auditors and stated that "the Management of the Society is of the opinion that in view of the fact that the Banking License is cancelled by the Reserve Bank of India, the provisions of the Banking Regulation Act, 1949 are no longer applicable to the Society as on 31st March, 2005". Hence, there is no doubt that the deduction claimed in the return in respect of incomes arising from banking business during the previous year relevant to the AY 2005-06 is an intentional and deliberate attempt to not to pay the taxes due as per Law particularly when the assessee was well aware that it is not eligible to carry on banking business as it was not a State Cooperative Bank since its license was cancelled by the RBI in the previous year relevant to the AY 2004-05. It is also noted that the assessee has not offered any explanation, for claiming such deduction in the return for which it not eligible, in response to the show cause notice issued and has merely stated that the same do not warrant any comments.

15. In view of the above, I am satisfied that the assessee has committed default within the meaning the provisions of section 271(1)(c) of the Income Tax Act. Therefore, I am of the opinion that this is a fit case for levy of penalty u/s 3271(1)(c) of the Act. The penalty u/s 271(1)(c) of the Act is worked out as under: Minimum penalty @ 100% Rs. 11,31,04,414/- & Maximum Penalty @ 300% Rs. 33,93,13,242/-. Looking at the facts and circumstances of the case, I levy the minimum penalty of Rs. 11,31,04,414/- u/s 271(1)(c) of the Act.'

20. Aggrieved with the above order of the AO, assessee filed an appeal before the first appellate authority.

Before the CIT(A) - Penalty proceedings u/s 271(1)(c) of the Act:

21. During the proceedings before the CIT(A), assessee submitted that the assessee is not a defaulter qua the discloser of the details in the return and its annexures. Assessee argued that the AO has not discharged his onus that the particulars disclosed are inaccurate and relied on the judgment of the Hon'ble Supreme Court in the case of Reliance Petro Products (P.) Ltd. (supra), which is relevant for the proposition that the penalty cannot be levied even when the claim made by the AO is unsustainable. Regarding the applicability of the Delhi High Courts judgment in the case of Zoom Communications (P.) Ltd. (supra), assessee mentioned that the facts of the case are distinguishable. In the impugned order, CIT(A) discussed the provisions of section 271(1)(c) and relied heavily on the comments of the C.A.'s, which in a way is against making the claim of deduction u/s 80P(2)(a)(i) of the Act. The said comments are given vide in Col. No. 8(a) of Form No.3CD enclosed to the return of income. CIT(A) discussed the assessee's attitude of claiming the deduction u/s 80P(2)(a)(i) despite (i) the cancellation of banking license to the assessee thereby making assessee as a non-banking entity; (ii) binding judgment which goes against the assessee making banking activities; (iii) advise of the statutory auditors who had adequate reservations against the assessee categorizing the impugned income as banking income; (iv) despite the knowledge of the assessee on the un-sustainability of the claim of deduction u/s 80P(2)(a) of the Act etc. CIT(A) also discussed the cryptic and evasive replies of the assessee against the cited show cause notice issued by the AO. For example, from the assessee's reply, CIT(A) quoted few lines i.e. "all the facts stated in your notice to show cause in para 1 to 3 including sub para 7 do not warrant any reply form us" and thus, CIT(A) concluded by stating that the assessee has no justifiable reason for claiming of deduction u/s 80P(2) of the Act. Further, CIT(A) referred to the judgment of the Hon'ble Supreme Court in the case of CIT v. Anwar Ali[1970] 76 ITR 696 and also in the case of Reliance Petro Products (P.) Ltd. (supra) and distinguished them as they are not relevant to the facts of the present case. Ld CIT(A) analyzed the Explanation 1 to section 271(1)(c) of the Act and mentioned that the assessee is under obligation to furnish thebona fide explanation and in this case, he has failed to explain the same for claiming the said deduction. CIT(A) reasoned that when the Hon'ble Supreme Court has already cancelled the banking license, where is the scope for happening of the valid banking activities and therefore, the validity for earning of such income and therefore, the claim of deduction is vividly and patently unsustainable. The assessee is very well aware of these facts. On the disclosure-centric argument, CIT(A) reasoned that the said explanation is no defense considering the fact that the assessee is very well aware that the claim is unsustainable in law and his explanation on the penalty is only to be rejected, and held that the assessee was failed to prove that it had rendered a bona fide explanation by the Income tax Authorities. CIT(A) also distinguished the decisions in the cases of (i) Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC); (ii) Dilip N Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC); (iii) Union of India v. Dharamendra Textile Processors[2007] 295 ITR 244/[2008] 166 Taxman 65 (SC) and (iv) Reliance Petro Products (P.) Ltd. (supra). He also referred to the erroneous reliance of the assessee on the provisions of section 176(3A) of the Act and relied on the finding of the Tribunal vide para 28 of the order of the ITAT (supra), wherein it was held that these provisions have no application to the facts of the case as per the Tribunal. CIT(A) also dealt with the issue of debatability of the impugned additions and held that considering the binding judgments cited above, assessee is precluded from conducting the banking activities and when they are still done and earned the impugned income, the same is not qualified to be the banking income within the meaning of section 80P(2) of the Act. In that sense, there is no debate on the non-banking nature of the impugned income and the CIT (A) concluded by stating that to the extent of addition confirmed by the Tribunal i.e., Rs. 46.37 Crs, there is no debate exists on this issue. Accordingly, CIT(A) confirmed the penalty of Rs. 11,31,04,414/-. Aggrieved with the same, assessee filed the present appeal before the Tribunal with the above referred grounds.

Before the Tribunal

22. During the proceedings before us, Ld Counsel for the assessee narrated the above mentioned details and the facts of the case and stated that there is no concealment or deemed concealment of income and no furnishing of inaccurate particulars in this case. Therefore, the provisions of section 271(1)(c) are not properly invoked by the AO in levying the penalty of Rs. 11,31,04,411/-. In this regard, Ld Counsel reiterated all the arguments and the contentions made before the AO and the CIT(A) and relied heavily on them.

23. Briefly summarized, it is the case of the assessee that the assessee earned income by way of interest on the loans/advances, sale of investments, other receipts discussed above and all of them are incidental to the banking activities of the assessee. Consequently, the assessee is entitled to claim of deduction u/s 80P(2)(a)(i) of the Act. Further, assessee relies heavily on the provisions of section 176(3A) of the Act. Further, it is the case of the assessee that the claim may be wrong claim and the said claim ipso facto, do not invite the penal provisions of section 271(1)(c) of the Act, since, there is no mala fade in the said claim of deduction. The fact that the impugned income is undisputedly connected to the banking activities of the assessee and the same is accepted by the Revenue till the AY 2005-06, the said income shall become 'non-banking' in nature. Consequently, the said income should not become disentitled to the claim of deduction. Therefore, the income under consideration is bound to accrue without any efforts of the assessee in this transitional AY and the same is relatable to the process of winding up of the banking activities and therefore, the assessee's explanation submitted relying on the provisions of section 176(3A) of the Act, constitutes bona fide one and it should be accepted. These provisions provides for deeming any sum received after discontinuation of business and taxing the same as income of the assessee on receipt basis. There is discontinuation of business in the present case for invoking the said provisions. Further, the said section 176(3A) does not apply to the present situation, where the dispute revolves around (i) if the impugned income earned in the year under consideration constitutes 'income of banking business'; or (ii) if the assessee is justified in making such unsustainable claim despite the advice of an expert; (iii) if the said claim is made under bona fide belief etc. Of course, the Tribunal rejected this part of the submissions in quantum proceedings vide the contents of paragraph 29 of the order of the Tribunal.

24. Expanding and elaborating the above summarized arguments, Ld AR mentioned that, despite the judgment of the Hon'ble Supreme Court in the assessee's case on the dispute relating to cancellation of cited notification of the State Government and the license of Banking by the RBI, it is not in the hands of the assessee to not to earn the aforesaid banking income as the assessee is in the process of winding up the banking business activity. Further, he mentioned that the assessee is otherwise entitled for deduction u/s 80P(2)(a)(i) of the Act, which is evident from the decision of the AO/ITAT, wherein the interest earning from credit facilities offered to the members was held sustainable. Similarly, AO should have appreciated the claim of deduction in respect of the banking linked income receipts too instead of denying the deduction and levying the penalty u/s 271(1)(c) of the Act. Ld Counsel also stated that the order of the ITAT on the merits of the denial of deduction in respect of banking income, is not correct and therefore, the reliance placed by the CIT(A) on the said order of the ITAT is required to be reversed. He was also critical of the 'comments of the statutory auditors' discussed above and also the „decisions of the directors' of the assessee-society in this regard. Referring to the order of the Tribunal in the case of Asstt. CIT v. Supreme Industries Ltd. [2009] 28 SOT 19 (Mum.), where one of us (AM) is a party to the said decision, Ld Counsel mentioned that the facts of that case are distinguishable. Otherwise, the said decision is relevant for the proposition that "a patently wrong claim of deduction attracted penalty u/s 271(1)(c) Explanation 1, in cases falling under Explanation 1 to section 271(1)(c) where the AO does not have to prove the explanation of the assessee to be false or establish the mala fide on the part of the assessee in making such a wrong and patently impermissible claim, the amount disallowed is deemed to represent income in respect of which the particulars have been concealed".Further, Ld Counsel mentioned that the appeal by the assessee against the said decision of the Tribunal is admitted before the Hon'ble Bombay High Court and therefore, the ratio of the said decision need not be followed in confirming the penalty u/s 271(1)(c) of the Act in this appeal. Further, referring to the Delhi High Court in the case of Zoom Communication (P.) Ltd.(supra), Ld Counsel mentioned that the said judgment is distinguishable on facts, wherein it is held that "if the assessee makes claim which is incorrect in law and the explanation given by the assessee is not bona fide, Explanation-1 to section 271(1)(c) could come into play and the assessee will be liable to penalty". However, on the comments of the statutory auditors M/s. A.B. Mansinghka & Co (CAs) and the opinion of the management of the society referred to in the penalty order, Ld Counsel has nothing to state in specific. Further, he relied on the judgment of the Hon'ble Supreme Court in the case of Reliance Petro-products Ltd. (supra) as well as on the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Shahabad Co-op Sugar Mills Ltd. [2010] 322 ITR 73, which was decided based on the facts of making a wrong claim u/s 80P(2)(d) and the penalty u/s 271(1)(c) was deleted on the facts of that case. Ld AR also filed a copy of the order of the judgment of the Hon'ble Bombay High Court in the case of CIT v.Nalin P Shah (HUF) vide IT Appeal (No) No.49 of 2013, dated 4-3-2013 in support of his claim. Another judgment of the Hon'ble Delhi High Court in the case of Shervani Hospitalities Ltd. v. CIT [2013] 35 taxmann.com 271, which is relevant for the proposition that "mere making an unsustainable claim does not invite penalty when assessee furnished full particulars in the return itself and the claim enjoys debatability".Judgment of the Delhi High Court in the case of CIT v. Jakson Ltd. [2013] 214 Taxman 94 (Mag.)/31 taxmann.com 416 is also relevant for the identical proposition.

25. Per contra, Ld DR relied heavily on the penalty order of the AO, decision of the Tribunal relating to related quantum appeal on merits, the impugned order of the CIT(A) and stated that this is a case where the assessee deliberately made a claim of deduction knowing conclusively that the same is unsustainable in law as the assessee is prevented from doing the banking activities by none other than Apex Court of India. When the income claimed as deduction u/s 80P(2) of the Act, is not eligible to be called banking related income as the assessee no longer a banker, the impugned income shall not be termed as income from banking activities. Consequently, the said income is ineligible for the claim of deduction. In this regard, Ld DR mentioned that assessee was expressly prevented by the Apex Court vide its judgment dated 29.10.2003 treating the assessee is a non-banking entity. Ld DR also referred to the facts relating to comments of the statutory auditors in the TAR. He also mentioned about the fact that the management of the assessee-society is well aware of the fact that assessee is no longer a bank as per the Banking Regulation Act. In this regard, Ld DR also specified mentioning that the management of the society is aware of the fact that the assessee is prevented from continuing banking activities be it earning of the interest income, sale of the investment and other income which was treated by the assessee as banking income, therefore eligible for deduction u/s 80P of the Act. Further, it is relevant to mention that the Ld DR filed written submissions explaining the above point to make out that it is a fit case for levy of penalty u/s 271(1)(c) of the Act. In the written note, he also explained as to how this case is squarely covered by the judgment of the Hon'ble Delhi High Court in the case of Zoom Communication P. Ltd. (supra). As seen from para 7 of his note, Ld DR distinguished the case laws cited by the Ld AR. Paras 7.1 and 7.1.1 are relevant in this regard which read as under:

'7.1. The Id AR has relied on the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Shahabad Co-op Sugar Mills Ltdreported in 322 ITR 73 (P&H) in support of his contention that no inaccurate particulars of the income were filed by the appellant in its return of income filed making it liable for the levy of penalty u/s 271(1)(c) of the Act. However, on perusal of the said decision of the Hon'ble High Court, it is clear that in that case it is held that "there was no conscious breach of law which was required for the levy of penalty", meaning thereby the claim made by the assessee in that case was a mere wrong claim (where two views could be possible) but not admissible in law as also held by the Hon'ble Supreme Court in the case of Reliance Petroproducts Pvt Ltd (322 ITR 158). But, a material difference of facts as evident in the case of the present appellant which is not in dispute i.e. the claim made u/s 80P(2) of the Act in the return of income filed was not admissible was well known to the appellant as it was advised about the same by its auditors, tax consultants etc after the cancellation of the banking license given by RBI was confirmed by the Hon'ble Supreme Court, but still the assessee completely in disregard or defiance of the same still went ahead of claiming the said deduction in its return of income filed; which to my considered opinion does tantamount to furnishing of inaccurate particulars as also held by the Hon'ble Delhi High Court in the case of Zoom Communications (supra). Or in other words, in this case there was definitely conscious breach of law by the appellant inasmuch as its wrong claim u/s 80P(2) is concerned, which as discussed above is duly proved by the Revenue. Therefore, in this case although mensrea is not required to be proved in 271(l)(c) penalty (Dharmendra Textiles 306 ITR 277) being a civil liability still from the facts on record it appears that it is proved beyond doubt as the AR has not explained on what basis the appellant claimed a patently wrong claim knowing it fully well way before its filing of the return of income that it is not eligible for the same.

7.1.1. The reliance of the AR on Reliance Petroproducts (supra) is filed separately in a tabular form to this write up, the same may be considered accordingly. Further as directed in the last hearing, I am filing herewith a detailed chart explaining the computation of the income on which tax sought to be evaded is worked out by the AO based on the assessment records duly supported by the tax computation form (ITNS - I50A) forming part of the assessment order/appeal effect orders. In addition, I also rely on the following more case laws on this issue:

i.		Universal co-op L/C Society Ltd v. ITO 154 Taxman 35 (Asr)
ii.		Darwabshaw B. Kursetjee Sons Ltd. v. ITO 137 ITD 331 (Kol)
iii.		Chinnammal ENT Medical Education & Research Foundation v. ACIT 25 taxmann.corn 139 (Chenn)
iv.		Prem Prakash Gupta, Karta v. ITO 25 taxmann.com 447 (Chd)'

26. In connection with cited judgment in the case of Reliance Petroproducts (P.) Ltd. (supra), Ld DR made detailed write/table and demonstrated that the said judgment of the Apex Court is distinguishable on fact. We insert the said page in verbatim as under:

Sr. No.	Reliance Petroproducts Pvt Ltd	How it is not applicable in the case of the assessee.
1.	On the basis of the reported facts the issue involved in the case of Reliance Petroproducts Pvt. Ltd. was - levy of penalty on disallowance of interest expenditure incurred in respect of loan taken by the assessee for purchasing shares by way of its business policy.	However, in the case of the assessee, the penalty is levied on wrong claim of deduction u/s 80P(2) out of the taxable income knowing fully well that it is not available for such deduction during the year under consideration based on cancellation of RBI license issued for conducting banking business based on the judgment of the Hon'ble Supreme Court ; which was accordingly advised by its statutory auditors as well as tax auditors.
2.	All the details given in the ROI were correct (para-5)	Not so inasmuch as its claim of the deduction u/s 80P(2) was found incorrect - completely disregarding the Judgment of the Apex Court and the legal advice of its statutory and tax auditors.
3.	Interest expenditure was claimed on loan taken which was used for purchase of shares (para - 7) by way of its business policy. Two views could possible.	Wrong deduction claimed against taxable income; knowing fully well that it is not eligible for such deduction during the relevant assessment year, SC judgment, cancellation of banking license by RBI, reports of statutory auditors and tax auditors. Or in other words such blatant disregard of statutory provisions can never be a case where two views are possible.
4.	No information given in ROI was found incorrect pr inaccurate.	The entire claim of deduction u/s 80P(2) is an incorrect information. The verification and authentication of the return filed proved to be false.
5.	Conditions u/s 271(1)(c) must exist before the penalty is levied (para-8)	Here the basic information for its ineligibility of deduction u/s 80P(2) is based on cancellation of banking license based on the decision of the Hon'ble Apex Court which was known to the assessee much before the filing of its return of income as noted in statutory and tax audit reports. Therefore, the conditions u/s 271(1)(c) do exist before the filing of the ROI
6.	Details supplied in the ROI are not accurate (para-9)	The basic claim of the deduction u/s 80P(2) is incorrect or inaccurate inasmuch as the assessee knew it before filing the ROIU; still claimed the said deduction out of its taxable income- though not required ; nevertheless, even mens-rea is proved in the case of the appellant.
7.	Up-to the authorities to accept its claim in ROI or not.	No such discretion in the case of the assessee, after the SC/HC/audit reports, as noted above
8.	Merely because assessee claimed the expenditure, which claim was not accepted or was not acceptable to the revenue.	It is not a case of the claim of expenditure but claim of wrong deduction after the computation of taxable income. In this case no two views are possible, which even the assessee is aware of but still it went on claiming, such a wrong deduction; Apex Court already settled the law much before the filing of ROI, it is not a case of mere making of claim of expenditure; but claim of deduction which is already held to be patently wrong or incorrect. Both the claims cannot be equated inasmucn as expenditure is claimed before working of income whereas, deduction (80P) is claimed after computation of Income.

27. Thus, the case of the Revenue is that the assessee being a cooperative society is entitled to claim deduction u/s 80P in respect of income from credit facilities offered to its members. However, the assessee is prevented from doing banking activities and the judgment of the Hon'ble Supreme Court is clear on this issue. The banking license was canceled by the RBI. Under these circumstances, assessee's income, if any out of impugned income, is not eligible for deduction u/s 80P of the Act. When the management is aware of these facts and the statutory auditors have expressly advised the assessee on this aspect, making a claim of deduction u/s 80P of the Act in the return is a deliberate attempt to make an unsustainable claim which constitutes furnishing of inaccurate particulars attracting the penal provisions. It is not the case of making just an unsustainable claim but the claim in the return is much more considering the deliberate attempts of the assessee in making such unsustainable claim, which is barred under the Statute. The Revenue distinguished the judgment of the Hon'ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. (supra) as per the table given above and it relies heavily on the judgment of the Delhi High Court in the case of Zoom Communications (P.) Ltd. (supra) and the order of the ITAT in the case of Supreme Industries (P.) Ltd. (supra).

Decision of the Tribunal:

28. We have heard both the parties and perused the orders of the Revenue Authorities and the Tribunal. We have also examined the cited judgments by the Ld Representatives of both the parties and the written submissions.

29. Undisputed facts & summary of the proceedings: The undisputed facts relevant to the issue include that the assessee was originally registered under Multi State Cooperative Societies Act, 1984 on 10.10.1994. Subsequently, it obtained the status of State Cooperative Bank vide Notification dated 30.12.1995. On 22.3.1996, RBI granted license under Banking Regulation Act, 1949 for undertaking the banking business and commenced the banking activities. But, M/s Maharashtra State Cooperative Bank challenged the said notification dated 30.12.1995 and the litigation travelled to the High Court of Bombay and then to Supreme Court and the said notification was quashed and such quashing has become final at Supreme Court vide its judgment dated 29.10.2003. Further, on 30.10.2003, RBI cancelled the banking license and prohibited the assessee from carrying on the banking business. RBI also directed the assessee in May 2004 (AY 2005-06) to sale the investment and to refund the deposits. After the said binding judgments and after cancellation of the Banking License, assessee earned income by way of interest, profits on sale of shares/investments, brokerage commission and other miscellaneous income and treated them as banking related income in the Return filed on 31.3.2006. In the TAR of the Auditors, the non-banking nature of the assessee's activities was mentioned. Despite the active advise of the Auditors, assessee made a claim of deduction u/s 80P(20(a)(i) of the Act and filed the Nil return for the AY 2005-06. In the assessment, the AO determined the assessed income at Rs. 97,75,14,603/- after disallowing the deduction u/s 80P(2)(a)(i) of the Act. Of course, AO allowed the claim of deduction only in respect of the income relatable to the interest of Rs. 1,26,03,473/- earned on the credit facilities offered to the members of the society. On merits, CIT(A) granted relief partly and the modified income after the first appellate proceedings worked out to Rs. 36.30 cr. At the end of the second appellate proceedings, ITAT reversed some of the conclusions of the CIT(A) and consequently, the income modified worked out to Rs. 46,37,41,577/-, which is the subject matter of penalty u/s 271(1)(c) of the Act. The income assessed at the end of the second appellate proceedings is Rs. 46,37,41,577/- and the breakup was already provided in the paragraphs above. Subsequently, the AO initiated the penalty proceedings u/s 271(1)(c) of the Act and issued show cause notice alleging the impugned income of Rs. 46,37,41,577/- do not constitutes eligible 'banking income' for the purposes of deduction under section 80P(2) of the Act. In the process, AO relied on the said judgments of Hon'ble High Court of Bombay against the assessee, RBI notification cancelling the banking license, comments of the Statutory Auditors, order of the Tribunal in the assessee's own case on merits of disallowance of the claim etc and mentioned that the claim of deduction is not only unsustainable but also contumacious as the said unsustainable claim is deliberately done. In response, the assessee refuted the said views of the AO and mentioned that the banking business of the assessee cannot be simply shut down overnight and therefore, impugned income is earned continue to be the banking related income and consequently, it is entitled for deduction u/s 80P(2) of the Act. In the process, the assessee relied not only on the provisions of section 176(3) of the Act but also on the principles relating to disclosure and furnishing of particulars in the Return as well as on various favorable judgments. Assessee submitted for not levying the penalty u/s 272(1)(c) of the Act. Eventually, AO rejected the explanation of the assessee vide the Explanation 1 to section 271(1)(c) and mentioned that the assessee made the unsustainable claim of deduction knowing very well that the assessee is barred from doing the banking business and also knowing that the provisions of section 176(3) does not apply to its case. AO distinguished the Supreme Court's judgment in the case of Reliance Petroproducts (P.) Ltd. (supra) and relied heavily on the Delhi High Court's judgment in the case of Zoom Communications (P.) Ltd. (supra). Finally, he levied the penalty of Rs. 11,31,04,414/-. In summary, the case of the assessee is that the penalty is not leviable in the case considering the disclosure of accurate particulars in the return of income and also the apex court's judgment in the case of Reliance Petroproducts (P.) Ltd. (supra), which is relevant for the proposition that the mere unsustainability of a claim made in the return should not attract the penal provision. Therefore, we need to examine if the submissions of the assessee are valid legally. For this purpose, it is relevant to analyse the: (i) Relevant portions of the Supreme Court's Judgment dated 29th October, 2003 relating to the banking activities'; (ii) Relevant 'comments of the Statutory auditors'; (iii) scope of the provisions of Explanation to section 271(1)(c) of the Act, (iii) analyse the relevant judgmental laws on the topic; (iv) CIT(A)'s conclusions; (v) incorrect explanation of the assessee on the inapplicability of the provisions of section 176(3); (vi) Assessee's arguments on the disclosure of information in the Return.

(i) Relevant portions of the Supreme Court's Judgment dated 29th October, 2003 relating to the 'banking activities'

30. The genesis for all the problems on the issue of disallowance of claim of deduction and also the penalty u/s 271(1)(c) of the Act is the Judgment of the Apex Court dt 29.10.2003. Extracts from page 38 of the said Judgment:

"…it has been held that RBI could not have granted the license unless the appellants were first declared a state cooperative bank under the NABARD Act. As it is now being held that the appellants could not have been declared as a state cooperative bank under the NABARD Act and it is held that as such declaration was correctly struck down it will have to be held that the RBI cannot issue it a license to carry on banking business. In view of the contrary stand taken only RBI, it cannot now be left to discretion of RBI to cancel the license granted by it. It is held that the High Court was in error in not striking down the issuance of the license by RBI to the appellants. In view of what was have held, we direct the RBI to forthwith revoke the banking license granted to the Appellants."

30.1 Further, on the special request before the Supreme Court for allowing the operation of the banking activities in the state of Goa at least, the Supreme Court rejected the said prayer as follows,—

"In this case, the RBI was wrong in issuing a license to the Appellants for the States of Maharashtra and Goa when, admittedly, the appellants had not been declared a state cooperative bank in the state of Goa. Thus, it is held that the banking license could not have been issued for the State of Goa".

Before the Hon'ble Supreme Court, appellant prayed for allowing the assessee to do restrictive banking activities in the State of Maharashtra. It was submitted that at this stage, the Supreme Court should not strike down the Notification or the grant of license. Assessee cited the flowing as the reasons, namely (i) large deposits are already collected by the assessee in state of Maharashtra, which is the source for interest income one of the types of receipts under consideration; and (ii) carried on extensive business already in the State. In response, Honble Supreme Court held as follows,—

"Appellants have all along been aware that their status was under challenge in a Court of law. Thereafter, the High court struck down the Notification. Now the appellants know fully well that that was the law. Merely because on obtaining a stay from this court they continued to operate would not be circumstance which can be taken into consideration by this Court. The appellants cannot be allowed to continue to operate as a State cooperative Bank when in law they are not entitled to be one. We, therefore, do not accept this submission."

31. Thus, the Supreme Court's directions are unambiguous that the assessee is prevented from doing any banking activities in any State of India. On the issue of deposits and larger volume of the banking business, Supreme Court questioned the contumacious attitude of the assessee in persisting the banking business merely based a stay order. As per the Hon'ble Supreme Court, the assessee, being aware of the law, is not entitled to any concessions. In other words, the assessee knows that he is not on the side of the law and he also knows the consequences of such blatantly disobedience to the law of the land.

(ii) Comments of A.B. Mansinghka & Co., Auditors & Management of Society's Opinion' on the consequences of said Supreme Court's Judgment:

32. We have already discussed in the preceding paragraphs of this order that the Statutory Auditors have briefed the assessee about the making of the accounts not in accordance with the Banking Regulations/prudential guidelines considering the above discussed judgment of the Honble Supreme Court. Thus, in the opinion of the Auditors, the impugned income is not to be claimed as deduction u/s 80P of the Act. Para 6 of the impugned order refers to the comments of the auditors dated 30.4.2005 and point 3(a) of the said A.B. Mansinghka & Co., auditors' comments is reproduced here under:

"3(a) This also has the effect of putting an end to the principle objects for which the society was formed....

Attention is also drawn to the fact that the accounts are prepared without considering the various norms for Asset Classification and Income Recognition prescribed by the Reserve Bank of India under the Banking Regulation Act, 1949 as the Management of the Society is of the opinion that in view of the fact that the Banking License is cancelled by the Reserve Bank of India, the provisions of the Banking Regulation Act, 1949 are no longer applicable to the Society as on 31st March, 2005."

(iii) Scope of Explanation 1 to section 271(1)(c) of the Act:

33. The case of the Revenue is that it is the case of disallowance of an unsustainable claim in "computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub section, be deemed to represent the income in respect of which particulars have been concealed". The provisions of Explanation 1 to section 271(1)(c) of the Act apply. The said provisions were explained in the reported decision of the Tribunal in the case of Supreme Industries Ltd (supra) and the contents of para 8 are relevant. Considering its relevance here, the contents of para 8 to 10 of the said order of the Tribunal are reproduced here which reads as under,—

'8. In matters relating to the provisions of section 271(1)(c), the wilfulness of the assessee in concealing the income or in furnishing of inaccurate particulars, is not essential. Relevant provisions of said section and the Explanation 1 are important and they read as under.

"271. Failure to furnish returns, comply with notices, concealment of income, etc.— (1) If the assessing officer or the commissioner (Appeals) or the commissioner in the course of any proceedings under this Act, is satisfied that any person—

(a) to (b)**

**

**

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

(d)**

**

**

he may direct that such person shall pay by way of penalty,—

Explanation 1.— where in respect of any facts material to the computation of the total income of any person under this Act,—

(A)		such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or commissioner to be false, or
(B)		such person offers an explanation which he is not able to substantiate and fails to prove that the such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub section, be deemed to represent the income in respect of which particulars have been concealed."

9. ... From the Explanation 1 above, it refers to a couple of independent groups of cases, which narrate the deemed cases of concealment. They are: (A) This group covers cases, there are again two sub groups of persons and they are: (i) the persons, who fail to offer an explanation or (ii) the persons, who have offered an explanation which is found to be out right false by the revenue authorities; or (B) This group refers to cases where the explanation offered by the person is not found false out right, but those cases other than such-false-explanation cases. These are identified by the following symptoms. They are: (i) such person does not able to substantiate the explanation offered; and (ii) such person not only fails to prove that the such explanation is bona fide but disclosed all the facts relating to the such explanation and material to the computation of his total income.

10. On comparison, the assessee's case is found covered by the cases of group (b) above and the onus is on the assessee to substantiate the explanation or prove the bona fide and also the responsibility of full disclosure of all the facts relating to the explanation and materials as stated above. Per contra, the AO is not under obligation to prove the wilful attempt of the assessee in matter of concealment or the explanation of the assessee in this regard is not bona fide. Thus, it is the assessee's responsibility to meet the above requirements. Wilful concealment is not an essential ingredient for attracting civil liability such a penalty u/s 271(1)(c). The above view is fortified by the apex court judgment in the case of Union of India v. Dharamendra Textiles Processors 306 ITR 277 (SC) or 174 Taxmann 571(SC). This judgment has disapproved the judgment in the case of Dilip N Shroff (161 Taxmann 218) (SC) too. The gist of the said judgment in the case of Dharamendra Textiles Processors (supra) and relevant paragraphs are as under.

"Absence of specific reference to mens rea in provisions of penalties is not a case of casus omisus. In fact, the provisions with expression 'liable to pay penalty', by no stretch of imagination, be said that the adjudicating authority has even a discretion to levy less than what is legally ad statutorily leviable (para 12).

It is a well-settled principles, in law, that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is a determinative factor of the legislative intent (para 13).

It is significance to note that the conceptual and contextual difference between section 271(1)(C) and section 276C was lost sight of in Dilip N Shroff's case (para 24)

The explanations appended to section 271(1)(c) entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars of income while filing return. The judgment in Dilip N Shroff's case (supra) had not considered the effect ad relevance of section 276C. Object behind enactment of section 271(1)(c), read with the Explanations thereto, indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability, as is the case in the matter of prosecution under section 276C (para 25).'

34. Summary of other decisions cited before us: Further, we have examined the applicability of the judgment of the Hon'ble Supreme Court in the case ofReliance Petroproducts (P.) Ltd. (supra), which is relied heavily by the assessee's representative. We find that the said judgment is distinguishable on facts and we approve the list of differences traced by the Ld DR. of course, we have made the said difference as part of this order. Further, we have perused the judgment of the Hon'ble Delhi High Court in the case of CIT v. HCIL Kalindee ARSSPL [2013] 37 taxmann.com 347 and find the said judgments are in favour of the Revenue and are relevant for the proposition that the penalty u/s 271(1)(c) is found leviable on the facts of that case where the assessee made claim u/s 80IA of the Act on the strength of From No. 3CB, 3CD and 10CCB issued by the Auditors, when the contents are not in harmony with the ground realities. In those cases, the assessee did not execute the work; but claimed deduction on the basis of the said Auditors Reports. We find that Ld CIT(A) distinguished the Apex Court judgment in the case of Reliance Petroproducts (P.) Ltd. (supra) and relied on the judgments in the case of and Dilip N. Shroff (supra) and Dharamendra Textile Processors (supra) for confirming the penalty imposed by the AO. In the said judgment (Reliance Petro Products (P.) Ltd.) (supra), it is held vide para 7, when the relevant question to be asked and answered is whether the assessee has discharged the onus and satisfied the conditions mentioned in Explanation-1 to section 271(1)(c) of the Act.In the instant case, the explanation of the assessee, which revolves around the provisions of section 176(3A) of the Act is factually unsustainable, considering the Hon'ble Supreme Court ruling in the assessee's case relating to the cancellation of banking license and continuing to undertake any business activities despite the ban imposed by the Supreme Court. Further, we have also examined other decisions cited by the Ld AR i.e., in the case of Nalin P. Shah (HUF) (supra); Shervani Hospitalities Ltd. (supra) and other precedents and we find that these decisions are distinguishable from the angle of deliberately making a claim knowingly well in advance that the claim is unsustainable in law. It amounts not only to the breach of law but it amounts to a conscious breach of law together with an attitude of disregard to the express provisions of the Act contumaciously. We have also examined the judgment of the Hon'ble Delhi High Court in the case of Zoom Communications (P.) Ltd. (supra) and find that the provisions of Explanation-1 come into effect to the facts of this case where it is a conscious breach of law inasmuch as it is a wrong claim u/s 80P(2)(a)(i) of the Act. The penalty should be levied in a case where the assessee acted against the express provisions of law and made deliberate claims knowing fully well that the claim is unsustainable in law.

35. (iv) CIT(A) Conclusions: We have so far discussed the contents of the binding Judgment of the Supreme Court in assessee's own case and traced that the assessee is not on the side of the law when it undertook the banking activities. Hon'ble Supreme Court 'directed the RBI to forthwith revoke the banking license granted'. Further, we discussed the scope of the provisions of Explanation 1 to section 271(1)(c) of the Act and . Now we shall take up the relevant portions from the impugned order of the CIT(A) in general and the contents of para 11.5 to 13.3.1 in particular. Considering their importance, the said paras are reproduced here under:

"11.5 Thus it can be seen that pre amendment, while the assessee was required to furnish a bonafide explanation, after the amendment he is required to prove that his explanation is bonafide. In terms of this clause, the appellant was required to prove the bonafides of its claim under section 80P. Can it be said that a claim in utter disregard of Supreme Court's ruling be a bonafide claim? In my considered opinion, such a claim cannot be held as a bonafide one. The word bonafide means in "good faith". In this case the appellant being aware of Supreme Court decision, having been advised that its license to carry banking business was cancelled, still goes ahead and makes a claim. Thus appellant's conduct was certainly not bonafide. Therefore, I am of the considered opinion that appellant failed to prove that it had rendered a bonafide explanation...

12.1 In the case of Hindustan Steel, the Supreme Court held that penalty cannot be levied for a venial breach of law. However, the observations made by Supreme Court in this case are against the appellant.

An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. (Emphasis supplied)

Thus, as held above, the appellant clearly acted in conscious disregard of its obligation i.e., in claiming a deduction which it was not entitled to in law.

12.2 In the case of Dilip N. Shroff the Supreme Court held that mens rea is essential factor in deciding culpability for penalty u/s.271(1)(c). However, this case was overruled by the Supreme Court in U.O.I v. Dharmendra Textiles Processor 291 ITR 519….

12.3 The appellant relied on Reliance Petro Products P. Ltd. 322 ITR 158. This case has already been distinguished in para 9.3 above.

13.**

**

**

13.1.1 The appellant claims that he is carrying on two independent lines of business both entitled for deduction u/s. 80P(2)(a)(i). As discussed above, just because the AO allowed deduction in respect of credit facilities provided to its members, as held above, the assessee is not entitled to deduction u/s.80P(2)(a)(i) in respect of income from banking business even if business was forced to discontinue.

13.1.2 The appellant claims that since the business is discontinued, provisions of sec.176(3A) apply and therefore, income from banking even after discontinuance assumes the character income from banking. The Hon'ble ITAT has clearly held vide para 28 of its order (supra) that assessee's income from banking is not entitled to deduction notwithstanding section 176(3A). Therefore, this ground of appeal is dismissed.

13.2**

**

**

13.2.1 This contention of the appellant is not acceptable for the reason that income may be varied by appellate authorities but the important thing to see is whether conditions for levy of penalty are satisfied or not. Merely because income is varied does not absolve the appellant of its liability if other conditions are satisfied for levy of penalty. Therefore, this ground of appeal is dismissed.

13.3 Ground III: The AO erred in applying the decision of Delhi High Court in the case of CIT vs. Zoom Communication Private Ltd because of the following:

(i)		In the Zoom Communications case no explanation was given for the mistake in computing certain income, whereas, in this case explanation was given and was not found false by AO.
(ii)		The claim in this case was properly based on the provisions of Sec. 80P(2) read with the fiction created by provisions of sec. 176(3A) and was wholly supported in law.
(iii)		Malafide of claim is not properly established by the AO and the facts in both the cases being different that case cannot govern the proceedings in this case.

13.3.1 The AO has rightly placed reliance upon the decision of Delhi High Court in the case of Zoom Communications. As held above, the appellant has not substantiated its explanation at all. Its plea that the claim for deduction was based on the provisions of section 80P(2)(a)(i) r.w.s. 176(3A) is not based on correct application of law in the light of Supreme Court's decision that appellant was not entitled to carry on the business of banking. The plea that the A.O. has not properly established the mala fide nature of the claim would not succeed because it is held that the appellant has failed to prove that its explanation was bona fide. Therefore, this ground of appeal is dismissed."

36. From the above, it is the opinion of CIT(A) that the penalty is leviable in this case where the assessee deliberately made an unsustainable claim of deduction knowing well that the same is against the law of the land. CIT(A) rejected the assessee's explanation that revolves around among others, a couple of submissions i.e., (i) disclosure of the facts in the return and (ii) provisions of section 176(3A) of the Act. CIT(A) relied on the Delhi High Court's judgment in the case of Zoom Communications (P.) Ltd. (supra) and distinguished the Apex Court's judgment in the case of Reliance Petroproducts (P.) Ltd. (supra). Therefore, we shall now take up the analysis of the above arguments of the assessee and analyze the conclusions of the revenue.

36.1 Thus, Ld CIT(A) highlighted the blatant attitude of the assessee and for this he relied on the rejected advise of the CAs and the binding the judgment of Hon'ble Supreme Court in the assessee's own case. In effect, decision of the CIT(A) is in tube with the decisions of the Delhi Bench of the Tribunal (i) in the case of Shyam Behari v. Asstt. CIT [2011] 43 SOT 129/[2010] 8 taxmann.com 275 (Delhi) and (ii) Asstt. CIT v. Khanna & Annadhanam[2011] 48 SOT 120 (URO)/13 taxmann.com 94 (Delhi), which considered following assessee's arguments i.e., (i) there was a disclosure of the facts in the computation & balance sheet; (ii) the opinion of 3 tax experts had been taken; (iii) the issue was debatable & (iv) the assessee's appeal on the merits had been admitted by the High Court and rejected the same. Finally, the Tribunal held as follows: (i) section 271(1)(c) imposes "strict civil liability"; (ii) the fact that the legal opinion were not furnished during the assessment proceedings (but were furnished only during the CIT(A) penalty proceedings) indicates that the assessee realized the ineffectiveness of these opinions and still ventured into making the non-allowable claim; (ii) though there was disclosure in the computation and balance sheet, in order to minimize disclosure, the assessee took the "smart route" of directly crediting the receipt in the capital accounts of partners to evade tax; and (iv) The fact that a substantial question of law on the merits was admitted by High Court does not mean penalty is not leviable.

37. From the Explanation 1 above, it refers to a couple of independent groups of cases, which narrate the deemed cases of concealment. They are: (A) This group covers cases, there are again two sub groups of persons and they are: (i) the persons, who fail to offer an explanation or (ii) the persons, who have offered an explanation which is found to be out right false by the revenue authorities; or (B) This group refers to cases where the explanation offered by the person is not found false out right, but those cases other than such-false-explanation cases. These are identified by the following symptoms. They are: (i) such person does not able to substantiate the explanation offered; and (ii) such person not only fails to prove that such explanation is bona fide but disclosed all the facts relating to such explanation and material to the computation of his total income.

38. (v) Incorrect explanation of the assessee on the inapplicability of the provisions of section 176(3): In the light of the above scope, we proceed to examine the instant case and find the assessee's explanation, which revolves around the provisions of section 176(3) of the Act, are both false and unsubstantiated. The same deeply analysed by the Tribunal while dealing with the quantum appeal vide para 28 & 29 of the Tribunal's order. The said paragraphs relating to the non-applicability of section 176(3) of the Act to the facts of the present assessee is extracted as under:

'28. Decisions rendered in the context of cooperative bank did not apply to the cooperative society. In the course of arguments, the learned Counsel relied on various judgments given in the context of cooperative bank. Since the assessee is not a cooperative bank, those cases are not applicable to the facts of the case and hence no reliance can be placed on the judgments given in the context of business of banking/cooperative bank. Reliance was placed on the provisions of Section 176(3A) by the Ld. Counsel that the income arising out of the discontinued business should also be brought to tax. Provisions of Section 176(3)A are as under:—

"176(3A). Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance".

29. There is no doubt on provisions of section 176 are applicable to a discontinued business and Sub-section 3A provides for taxing the sums received after discontinuance as income of the year of the receipt. In our opinion reliance placed on the above provision is misplaced as the assessee has not discontinued the business. During the year the assessee is in the business and has offered income from interest on advances to the members as business income only. Therefore, the question of considering the discontinuation of business does not arise. What happened in the assessee's case is only cancellation of license to do the banking business, but the assessee is not prevented in doing any other business by the cooperative society. Only the activity of banking was prohibited. Even otherwise, the issue is not whether the income is to be brought to tax as business income or not. The issue is whether the incomes arising out of investment is eligible for deduction under section 80P(2)(a)(i) as of banking business. Therefore, we are of the opinion that provisions of section 176(3) A does not help the case of assessee.'

39. (vi) Incorrect explanation of the assessee -Assessee's Arguments on the disclosure of information in the Return: Further, we find the said explanation suffer from lack of credibility. How the assessee could go ahead and claim the deduction u/s 80P(2)(a) of the Act in respect of the ineligible and so called banking income? How can cooperative society earn banking income with the banking license? We find the assessee consistently taking law into their hand and the same is evident from the observations of the Supreme Court's judgment extracted above. With this kind of conduct of the assessee, in our opinion, no amount of disclosure of particulars in the return of income shall save the assessee from the award of penalty. We find what is disclosed in the return is only the claim of deduction and disrespected advise of the Auditors. What is the use of such disclosure of information? As such, there is information on the return why he made such unsustainable claims of deduction. When the law does not permit assessee to undertake banking activities, it has done so contumaciously. Now when the provisions of section 80P(2) do not permit claim of deduction in respect of such ineligible income, it has done so again contumaciously, which is not permitted by the Tribunal. Further, the assessee wants to apply the provisions of section 176(3) of the Act, when the same are not at all applicable to the facts of the case. It is completely objectionable and deplorable. It is surprising that the assessee is persistently violating the law of the land i.e., first the provisions of the Banking Regulation Act, 1949 and then the provisions of Income tax Act, 1961. Any way, we now focus on the provisions of Income tax Act, 1961, in general, and provisions of section 271(1)(c) of the Act, in particular.

40. Contents of the above paragraphs of this order amply suggest that the claim of deduction is not only unsustainable and such unsustainable claim of deduction is made with full knowledge of the assessee that the law is not on his side. None of the judgments relied upon by the assessee are comparable to the facts of this present case and therefore, they are distinguishable on facts. As such, finality on penalty proceedings are not only assessee-specific but also addition/disallowance-specific and are finalized after considering the facts of each case and such disallowance/additions. Therefore, the revenue fairly did not levy penalty in respect of the interest income from credit facility offered to the members. Therefore, the assessee's argumentative ground no. 2, 3, 4 and 5 of the appeal with its sub grounds are unsustainable in principle.

41. Further, on the experts' (Statutory Auditors) advise: It is reported fact that the management of the society knows that the income earned does not qualify the 'banking income' and so is the A.B. Mansinghka & Co., Auditors of the assessee. In a way, it is the case, where the assessee has not adopted the advise of the experts and proceeded to claim deduction u/s 80P(2) of the Act. Normally, the case is other way around and they issue certificates advising the claim of deduction and relevant cases are cited above. But in this case, Auditors advised that the impugned income is ineligible to be classified as banking income considering the judgment of the Supreme Court. But the assessee made a false claim of deduction and decided to provide false explanation in the penalty proceedings u/s 271(1)(c) of the Act.

42. Thus, it can be safely inferred that the assessee made a claim of deduction u/s 80P(2)(a)(i) in respect of the sums totaling to Rs 46,37,41,577/- knowing very well the impugned income is not eligible for such deduction. Assessee is fully aware of this fact and therefore the claim is made contumaciously and deliberately having no regard for the law. The said amounts „disallowed in computing the total income of the assessee as a result thereof shall, for the purposes of clause (c) of this sub section 271(1) of the Act, be deemed to represent the income in respect of which particulars have been concealed. Therefore, for all the reasons discussed above, the order of the CIT(A) does not call for any interference. Accordingly, ground nos. 1 to 5 of the appeal raised by the assessee are dismissed.

43. In the result, appeal of the assessee is dismissed.

SB

---

*In favour of revenue.

IT: Activity of extraction of granite boulders from hills and producing granite aggregate of different sizes by crushing and segregating through mechanical process amounts to 'manufacture' within meaning of section 2(29BA)

IT: Furnishing of SSI Certificate is not mandatory for purpose of claiming deduction under section 80-IB

■■■

[2013] 40 taxmann.com 302 (Cochin - Trib.)

IN THE ITAT COCHIN BENCH

Poabs Rock Products (P.) Ltd.

v.

Assistant Commissioner of Income-tax, Circle 1, Thiruvalla*

N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NOS. 86 TO 88 (COCH.) OF 2013
[ASSESSMENT YEARS 2008-09 AND 2009-10]

SEPTEMBER  5, 2013 

I. Section 2(29BA), read with section 80-IB, of the Income-tax Act, 1961 - Manufacture [Meaning of] - Assessment years 2008-09 and 2009-10 - Whether activity of extraction of granite boulders from hills and producing granite aggregate of different sizes by crushing and segregating through mechanical process amounts to 'manufacture' within meaning of section 2(29BA) and, therefore, an assessee engaged in said activity would be eligible for deduction under section 80-IB - Held, yes [Para 2] [In favour of assessee]

Words and Phrases : Word 'manufacture' as occurring in section 2(29BA) of the Income-tax Act, 1961

II. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [SSI undertakings] - Assessment years 2008-09 and 2009-10 - Whether furnishing of SSI Certificate is not mandatory for purpose of claiming deduction under section 80-IB - Held, yes [Para 22] [In favour of assessee]

FACTS

 

■		The assessee was engaged in the business of extraction of granite boulders from hills and producing granite aggregates of different sizes by crushing and segregating through mechanical process.
■		It claimed deduction under section 80-IB in both the years under consideration.
■		The Assessing Officer rejected the claim of deduction on the ground that the activities carried on by the assessee would not fall under the definition of 'Manufacture' given under section 2(29BA).
■		Another ground for rejection was that the assessee had failed to produce SSI certificate in support of its claim for deduction relating to the assessment year 2008-09.
■		The Commissioner (Appeals) upheld the order of Assessing Officer.
■		On second appeal:

HELD

 

■		The tax authorities have examined the meaning of the word manufacture in terms of newly inserted definition of the said word in section 2(29BA). The tax authorities have accepted the fact that the granite aggregates produced by the assessee have got different name and they are used for different purposes vis-à-vis the rock boulders. But they have held that the "character" of rock boulders and metals remain the same.
■		It appears that the tax authorities have understood the meaning of "character" as chemical composition or integral structure, since the chemical composition or integral structure of "rock boulders" and "metals" would remain the same.
■		However, the test of chemical composition or integral structure has to be applied under clause (b) of the definition given in section 2(29BA) of the Act. The activities of the assessee are being examined under clause (a) of section 2(29BA). The Commissioner (Appeals) has observed that, under clause (a), there shall be change of all the three aspects viz., name, character and use. The said observations of Commissioner (Appeals) are correct. However, his view that there is no change in the 'character' cannot be accepted. The expression 'character' should be read along with 'use'. [Para 18]
■		In the instant cases, granite boulders are extracted from hills and then they are converted into granite metals, sand and dust, after undergoing the various processes. These activities certainly result in emergence of a new and distinct commodity, having different name, character and use.
■		The original block does not remain the granite block, it becomes metals of different sizes or sand or dust. In the circumstances, there are manufacturing as well as production activities in the instant case in terms of section 80-IB. Accordingly, the orders of tax authorities on this issue is set aside. [Para 21]
■		The next issue is whether furnishing of SSI certificate is mandatory for the purpose of claiming deduction under section 80-IB.
■		In the instant case, the tax authorities have held that the production of SSI certificate is mandatory for granting deduction under section 80-IB, which is against the view expressed by the Delhi High Court in the case of Praveen Soni v. CIT [2011] 333 ITR 324/199 Taxman 26/10 taxmann.com 239.
■		It is not the case of the Assessing Officer that the assessee is hit by the various criteria fixed by the Central Government for determining an undertaking as Small Scale Industrial Undertaking under Industrial Development Regulation Act.
■		Hence, by respectfully following the above said decision of Delhi High Court, it is held that it is not necessary to produce SSI certificate for treating the assessees as Small Scale Industrial Undertaking in terms of section 80-IB of the Act. Therefore, the orders of tax authorities on this issue are set aside. [Para 22]
■		In the result, all the appeals filed by the assessee are allowed. [Para 23]

CASES REFERRED TO

 

CIT v. Gomatesh Granties [2000] 246 ITR 737/[2001] 118 Taxman 141 (Mad.) (para 3), CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC) (para 3), Lucky Mineral (P.) Ltd. v. CIT [2000] 245 ITR 830/[2001] 116 Taxman 1 (SC) (para 3), CIT v. M.R. Gopal [1965] 58 ITR 598 (Mad.) (para 5), CIT v. R.C. Construction [1996] 222 ITR 658 (Gau.) (para 5), Dy. Commissioner of Sales Tax (Law) v. Pio Food Packers [1980] 46 STC 63 (SC) (para 5), CIT v. Emptee Poly-Yarn (P.) Ltd. [2010] 188 Taxman 188/320 ITR 665 (SC) (para 5), Midas Polymer Compounds (P.) Ltd. v. Asstt. CIT [2011] 197 Taxman 481/9 taxmann.com 264/331 ITR 68 (Ker)(FB) (para 5), Union of India v. Kamlakshi Finance Corpn. AIR 1992 SC 711 (SC) (para 5), Arihant Tiles & Marbles (P.) Ltd. v. ITO [2007] 295 ITR 148/[2008] 166 Taxman 274 (Raj)(para 7), ITO v. Airhant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 (SC) (para 13), CIT v. Sesa Goa Ltd. [2004] 271 ITR 331/[2005] 142 Taxman 16 (SC) (para 13.1), D.J. Stone Crusher v. CIT [IT Appeal No. 6 & 7 of 2007, dated 16-12-2009] (para 14), Kores India Ltd. v. CCE 2004 (174) ELT 7 (SC) (para 17) and Praveen Soni v. CIT [2011] 333 ITR 324/199 Taxman 26/10 taxmann.com 239 (Delhi) (para 22).

Cherry P. Kurian for the Appellant. Smt. S. Vijayaprabha and M. Anilkumar for the Respondent.

ORDER

 

B.R. Baskaran, Accountant Member - The assessees cited above have filed these appeals challenging the orders passed by Ld CIT(A), Trivandrum and they relate to the assessment years mentioned against their name in the cause title. Since major issue urged in these appears are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.

2. The common issue that arises for consideration in both the cases is whether the activity of extraction of granite boulders from hills and producing granite aggregates of different sizes by crushing and segregating though mechanical process would amount to "manufacture or production" or not. Besides the above, another question urged is whether the assessee, M/s Poabs Rock Products (P) Ltd can be considered as a Small Scale Industrial Unit u/s 80IB or not.

3. The facts relating to the cases are stated in brief. Both the assessees are engaged in the business of extraction of granite boulders from hills and producing granite aggregates of different sizes by crushing them through mechanical process. M/s Poabs Rock Products (P) Ltd claimed deduction u/s 80IB of the Act in both the years under consideration. Deduction u/s 80IB(3)(ii) is allowed to a small scale industrial undertaking for certain number of years, if it begins to manufacture or produce articles or things or to operate its cold storage plant (not specified in sub-section (4) or sub-section (5)) at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 2002. The said claim was rejected by the AO in assessment year 2008-09 on the grounds that;

(a)		the activity carried on by the assessee would not fall under the definition of "Manufacture" as given u/s 2(29BA), which was inserted by the Finance Act 2009 w.e.f. 1.4.2009. and
(b)		the assessee has failed to produce SSI certificate valid for the FY 2007-08 relevant to the assessment year 2008-09.

For this purpose, the AO drew support from the following case law:—

(a)		CIT v. Gomatesh Granties [2000] 246 ITR 737/[2001] 118 Taxman 141 (Mad.)
(b)		CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC)

In assessment year 2009-10, the AO rejected the claim of deduction u/s 80IB only on the ground that the activities carried on by the assessee would not fall under the definition of "Manufacture" given u/s 2(29)(BA) of the Act. In this year, the AO drew support from the decision rendered by Hon'ble Supreme Court in the case of Lucky Mineral (P.) Ltd. v. CIT [2000] 245 ITR 830/[2001] 116 Taxman 1. However, in this year, the AO did not make any observation about the SSI certificate.

4. In the case of M/s Poabs Granite Products (P) Ltd, the assessee claimed additional depreciation u/s 32(1)(iia) of the Act in assessment year 2009-10. The additional depreciation is allowable in respect of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing. The AO rejected the claim of additional depreciation on the ground that the activity carried on by the assessee would not fall under the definition of "Manufacture" given u/s 2(29BA) of the Act.

5. Both the assessees filed appeals challenging the assessment orders passed in their respective hands. Before Ld CIT(A), the assessees placed reliance on the following case law:—

(a)		CIT v. M.R. Gopal [1965] 58 ITR 598 (Mad.)
(b)		CIT v. R.C. Construction [1996] 222 ITR 658 (Gau.)
(c)		Dy. Commissioner of Sales Tax (Law) v. Pio Food Packers [1980] 46 STC 63 (SC)
(d)		CIT v. Emptee Poly-Yarn (P.) Ltd. [2010] 188 Taxman 188/320 ITR 665 (SC)
(e)		Midas Polymer Compounds (P.) Ltd. v. Asstt. CIT [2011] 197 Taxman 481/9 taxmann.com 264/331 ITR 68 (Ker.)(FB)

It was submitted that the Tribunal has already decided that the activities carried on by these assessees are 'manufacture' in nature. By placing reliance on the decision of Hon'ble Supreme Court in the case of Union of India v. Kamlakshi Finance Corpn. AIR 1992 SC 711, the assessees contended before Ld CIT(A) that the principles of judicial discipline require that the orders of the higher authorities should be followed unreservedly by the subordinate authorities unless its operation has been suspended by a competent court. The Ld CIT(A) noticed that the Tribunal, vide its common order dated 8.4.2012, had accepted the contention of the assessee in the case of M/s Poabs Rock Products (P) Ltd in assessment years 2006-07 & 2007-08 in ITA Nos. 574 & 575/Coch/2010 that the activities carried on by the said assessee is Manufacturing activity eligible for deduction u/s 80IB of the Act. The Tribunal had also expressed the view that the definition of "Manufacture" inserted in sec. 2(29BA) by Finance Act, 2009 w.e.f. 1.4.2009 shall not apply to assessment years 2006-07 and 2007-08. Accordingly, the Ld CIT(A), by following the Tribunal's decision (referred supra) held that the activity carried on by M/s Poabs Rock Products (P) Ltd amount to "manufacture" for assessment year 2008-09. However, he upheld the rejection of deduction u/s 80IB on the ground that the assessee could not file valid SSI certificate and hence it cannot be regarded as a Small Scale Undertaking for the purposes of section 80IB of the Act, which was one of the conditions for allowing deduction u/s 80IB of the Act.

6. Both the assessees had filed appeals before Ld CIT(A) for the assessment year 2009-10. Since the definition of the word "manufacture" was introduced in sec. 2(29BA) w.e.f. 1.4.2009, the Ld CIT(A) examined the activities carried on both the assessees in terms of the definition of "manufacture" given in the above said section. The Ld CIT(A) held that the activities carried on by both the assessees are not covered within the definition of word "manufacture" as given in sec. 2(29BA) of the Act. The said section defined the word "manufacture" as under:-

'2(29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,--

(a)		resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b)		bringing into existence or a new and distinct object or article or thing with a different chemical composition or integral structure.'

For the sake of convenience, the relevant observations of Ld CIT(A) are extracted below:—

"As per part (a) of section 2(29BA), there shall be transformation of the original object or article or thing into a new and distinct object or article or thing having a different name, character and use. As per part (b) of the definition a new and distinct object or article or thing with a different chemical composition or integral structure should emerge. The chemical composition and the integral structure of the end product remains unaltered in the case of the appellant though there is change in the name and use of original product. But the character of end product remains the same. It is to be noted that as per part (a) of sec.2(29BA), there shall be change of all three aspects i.e. name, character and use. Further blasting of granite blocks which are found in a natural formation cannot be regarded as 'manufacture' as the granite blocks so produced from blasting have the name, character and use as the granite in natural formation. Further there is no change in chemical composition or integral structure. The crushing of granite does not cause any change in chemical composition or integral structure even though the end product may have a different name and use but its character, i.e., granite remains the same."

In the case of Poab Rock products (P) Ltd, the Ld CIT(A) also held that it cannot be regarded as a Small Scale Undertaking for the purposes of section 80IB of the Act in the absence of a valid SSI certificate for assessment year 2009-10, even though the AO had not cited that reason. Accordingly, the Ld CIT(A) upheld the rejection of claim of deduction u/s 80IB in the hands of M/s Poab Rock products (P) Ltd in both the years under consideration and also the claim of additional depreciation in the hands of M/s Poab Granite products (P) Ltd in assessment year 2009-10. Aggrieved, both the assessees have filed these three appeals challenging the orders passed by Ld CIT(A).

7. The Ld Counsel for the assessee submitted that the activities carried on by the assessee has been held to be "manufacture" by the Hon'ble Tribunal in the earlier years. Hence, the tax authorities are not justified in holding that the very same activity cannot be considered as "manufacturing activity", in terms of definition of the word "manufacture" inserted in sec. 2(29BA) of the Act. Referring to the definition given in that section, the Ld Counsel submitted that the meaning of the word "manufacture", already explained by the Courts have only been codified in the definition. Ld Counsel submitted that the assessee is manufacturing granite aggregates of different sizes, viz., 1-½", 1", ½", ¼" and also "sand" and dust. These aggregates have different name in common parlance viz., "metals". The sand manufactured by the assessee is equivalent to the quality of river sand and used for very same purposes as that of river sand. Further, each sized metal is used for different purposes and has got distinct and different use. He submitted that the tax authorities have accepted that the name and use of the products manufactured by the assessee are different from the granite boulders. However, they have held that the "character" of granite boulders and metals remain same, which is not correct. He submitted that the characteristics or distinguishing features of "granite boulders" cannot be compared with the features of "metals", even though the metals are derived from the granite boulders. He further submitted that the assessee companies are registered as 'manufacturing units' under the Factories Act. The Ld Counsel, besides placing reliance on the case law put before the tax authorities, also placed reliance on the decision rendered by the Hon'ble Rajasthan High Court in the case of Arihant Tiles & Marbles (P.) Ltd. v. ITO[2007] 295 ITR 148/[2008] 166 Taxman 274. He further submitted that the assessee obtained provisional SSI certificate in the year 1993 and later applied for permanent registration certificate. However, the assessee did not receive any permanent certificate so far and hence the provisional certificate issued to the assessee continues to be valid till date. He submitted that the provisional certificate was obtained as soon as the company started setting up of the factory. Accordingly he submitted that the tax authorities are not justified in holding that the assessee has failed to furnish SSI certificates for both the years under consideration. He further submitted that the assessee has started commercial production in the financial year 2000-2001, i.e., within the period specified in sec. 80IB(3)(ii) of the Act. He submitted that these facts are evident from the financial statements prepared by the assessee company at the end of every year. The Ld A.R also furnished copies of financial statements filed with the Registrar of Companies to substantiate his contention that the assessee company started commercial production only in the financial year 2000-2001. The A.R submitted that the assessee had filed the audit report in Form No.10CCB for both the years as prescribed in 80IB of the Act. The AO refused to recognize the provisional SSI certificate and also did not consider the Audit report. He submitted that the tax authorities are not correct in disregarding the above said documents and also in insisting upon a SSI certificate for the years under consideration, which is not required under the Act.

8. On the contrary, the Ld D.R submitted that the word "Manufacture" was not defined in the Act in earlier years, when the Tribunal rendered its decision in the assessee's own case for earlier years. Now the word "manufacture" has been defined in sec. 2(29BA) of the Act. The said section was inserted by Finance Act, 2009 w.e.f. 1.4.2009. The Ld CIT(A) has pointed out that the activities carried on by the assessee do not fall under the said definition and hence he has denied deduction u/s 80IB of the Act and also the additional depreciation u/s 32(1)(iia) of the Act. The Ld CIT(A) has also pointed out that all the case law relied upon by the assessee have been rendered prior to the insertion of the definition of the word "Manufacture" in the Act. In addition to the above, the assessee M/s Poabs Rock products (P) Ltd has failed to furnish the SSI certificate relevant for the two years under consideration and for that reason also, the Ld CIT(A) was justified in rejecting the claim of deduction u/s 80IB of the Act in both asst. years for that assessee.

9. We have heard the rival contentions and carefully perused the record. On going through the facts of the case, we are of the view that we need to address following two issues, viz.,

(a) Whether the activities carried on by the assessee can be regarded as "Manufacture or Production" in terms of sec. 80IB and sec. 32(1)(ii) of the Act.

(b) Whether the non-furnishing of SSI certificate for the years under consideration would disentitle the assessee to claim deduction u/s 80IB of the Act.

10. In the appeal relating to the assessment year 2008-09 in the case of "M/s Poab Rock Products (P) Ltd, we notice that the Ld CIT(A) has held, by following the decision rendered by the Tribunal in the assessee's own case in earlier years, that the activities carried on by the assessee can be regarded as "manufacture". We also notice that the said decision of the Ld CIT(A) has not been challenged by the revenue before us.

11. We notice that the Ld CIT(A) has held that the activities of the assessee do not fall within the meaning of definition of the word "manufacture" given in sec. 2(29BA) of the Act. At the cost of repetition, we extract below the said definition:—

"2(29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,—

(a)		resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b)		bringing into existence or a new and distinct object or article or thing with a different chemical composition or integral structure."

A careful reading of the above said definition would show that it is enough if the activities carried on by a person is covered either under clause (a) of section 2(29BA) or clause (b) of sec. 2(29BA) in order to be categorised as "manufacturing activity", since the word "or" is used between clause (a) and clause (b). Hence, it is not necessary that the activity of a person should fall under both clause (a) and clause (b).

12. Before proceeding to examine the applicability of sec. 2(29BA) to the activities carried on by the assessee, we feel is apposite to discuss certain case law, which we consider as relevant in this case. Before us, the Ld A.R placed reliance on the decision of Hon'ble Rajasthan High Court in the case ofArihant Tiles & Marbles (P.) Ltd. (supra). The assessee therein was engaged in activity of sawing of marble block into slabs and tiles and marketing them in indigenous as well as foreign markets. It claimed deduction u/s 80IA as an industrial undertaking which "manufactures or produces" articles or things. The High Court was asked to consider following questions:—

"(1)		Whether the expression "production" used under section80IA/80IB of the Income tax Act, 1961 in which both expressions "manufacture" and "production" have been used whether they have been used as synonyms with each other or the word "production" has a wider meaning than "manufacture" so as to include within its purview, an activity, which may not amount to manufacture but may still amount to production?
(2)		Whether if the question No.1 is to be decided in positive whether the cutting and polishing of marble stone into marble slabs and tiles which has been held by the Supreme Court not amounting to manufacture can still be considered production for the purpose of section 80IA/80IB?"

12.1 With regard to the first question, the Hon'ble Rajasthan High Court held that the expression "Production" has a wider connotation than the expression "manufacture". It was further held that all activities falling within the ambit of manufacture result in production but converse is not true. The relevant discussions are extracted below:—

'10. There is substance in the contention of learned counsel for the respondents that expression "production" has a wider connotation than the expression "manufacture" and, therefore, the question whether any activity falls within the ambit of s. 80-IA/80-IB, the examination from the point of view of only manufacturer is not the final test. The essential distinction between expressions "manufacture" and "production" had received attention of the judicial pronouncement from time to time.

11. The distinction between manufacture and production was noticed and explained by the Supreme Court in CIT v. N.C. Budharaja & Co. & Anr. Etc. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC). The apex Court clearly opined that all activities falling within the ambit of manufacture result in production but converse is not true.

12. The principle was reiterated in Chowgule & Co. (P) Ltd. Union of India & Ors. (1981) 47 STC 124 (SC).

13. In Aman Marble Industries (P) Ltd v. CCE (supra)(20030(157) ELT 393), the Court considering the entries under the Central Excise and Tariff Act held that activity of cutting of marble blocks into marble slabs does not amount to manufacture so as to bring it within the net of levy of excise duty. In coming to this conclusion, the Court relied on RSEB v. Associated Stone Industries & Ors. JT 2000 (6) SC 522 in which the apex Court observed that excavation of stones from a mine and thereafter cutting them and polishing them into slabs did not amount to manufacture of goods. Whether excavation of stone from mines amounts to production was not the issue before Rajasthan High Court or Supreme Court.'

12.2 With regard to the second question, the Hon'ble Rajasthan High Court considered the decisions rendered by the Hon'ble Supreme Court and other High Courts and held that the activity of cutting of granite/marble block into usable slabs or tiles is a manufacturing activity. The relevant discussions are extracted below:—.

'14. Karnataka High Court in CIT v. Mysore Minerals Ltd. (2001) 166 CTR (Kar) 142 : (2001) 250 ITR 725 (Kar) was considering whether the activity of cutting granite blocks into slabs and sizes and polishing them falls within the purview of s. 32A of IT Act, 1961 so as to allow the machinery used for such activity eligible for investment allowance and whether it also becomes eligible to deduction under s. 80-I which is available to 'industrial undertaking engaged in manufacturing or production of goods'. The Karnataka High Court opined as under:

"Sec. 32A refers to investment allowance on plant and machinery. Plant and machinery should be used in manufacture or process of any article or thing and it should be of an industrial undertaking. There are a number of conditions mentioned in the section. In order to find out whether a particular activity is a manufacturing activity or not it has to be observed that there should be an action or process of making an article by application of physical or mechanical labour and the product must be commercially a new or different article. Manufacturing results in alteration or change in the nature of the goods which are subjected to process. Granite blocks are converted into slabs and cut into sizes and thereafter polished. It is not the same commodity, i.e., the block. This matter was examined in the case of the assessee in CIT v. Mysore Minerals Ltd. (1994) 205 ITR 461 (Kar), and it was held that the assessee is an industrial undertaking entitled to investment allowance under s. 32A. It is pointed out that the special leave has been granted against the said judgment [see (1993) 201 ITR (St) 59].

Sec. 80-I also refers to profits and gains in respect of an industrial undertaking. In view of the decision given in the case of the assessee, we are of the view that the Tribunal is right in law in coming to the conclusion that the original assessment which granted the relief under ss. 32A and 80-I to the assessee was not erroneous and the inference of the CIT under s. 263 was not proper. The Tribunal is also right in law in holding that extracting granite from quarry and cutting it to various sizes and polishing should be considered as manufacture or production of any article or thing and the assessee's business activity must be considered as an industrial undertaking for the purpose of granting reliefs under ss. 32A and 80-I of the IT Act, 1961."

15. This judgment was under appeal before the Supreme Court in CIT v. Sesa Goa Ltd. (2004) 192 CTR (SC) 577 : (2004) 271 ITR 331 (SC). Referring to appeal arising from the above judgment of Karnataka High Court and by referring the principle enunciated in CIT v. Sesa Goa Ltd.case (supra), the appeals were dismissed. The Court said that extraction and processing of iron ore amount to "production" within the meaning of the word in s. 32A(2)(b)(iii) of the IT Act, 1961. On that premise the investment allowance was held deductible in terms of plant and machinery installed by the assessee for excavation and processing mineral ore under s. 32A. It also held that it is not necessary that the mined ore must be a commercially new product for the purpose of s. 32A. Other provisions of the Act such as s. 33(1)(b)(B) shows that mining of ore is stated to be production.

Thus the decision of Karnataka High Court affirmed by the Supreme Court deals with the same commodity and same expression in the same enactment with which we are concerned and clinches the issue in favour of the appellant.

16. We also find that even under the IT Rules, 1962 assessee under s. 44AB r/w r. 6G is required to furnish report of audit of his accounts and also required to furnish statement of particulars in Form No. 3CD provided under the rules which include furnishing information about the nature of business carried on by the assessee in Part B of the Annexure to be appended to the statement of particulars in which the 'marble and granite' has been classified under the manufacturing industry sector. Thus, for the purpose of income-tax, under the rules, marble and granite industry has been considered to be manufacturing industry.

Under the rules governing the compulsory audit in respect of various businesses also, marble and granite industry has been included in the sector of manufacturing industry. This goes to show that so far as the authorities under the income-tax entrusted with the task of its implementation are concerned and the framers of the rules have considered the cutting of marble and granite blocks into slabs and polishing them for bringing them to the stage of usability as an activity of industrial undertaking engaged in manufacture and production of articles or things. Rules framed under the Act are statutory and became part of statute. Thus under the scheme of IT Act and rules framed thereunder for the purpose of said Act, cutting and polishing of marble and granite blocks have been held to be an industrial activity of manufacture. As a block, it is not of any use and has been held to be a manufacturing industry for the purpose of IT Act.

17. It may be pertinent to notice that even as per its circular, the CBDT (vide Circular No. 729, dt. 1st Nov., 1995) [(1995) 129 CTR (St) 1] has considered granite as a mineral, and any process applied makes it valuable marketable commodity. Board has clarified that:

"The Board is, therefore, of the view that while granite can alone be considered as mineral, any process applied to granite would deprive the quality of rough mineral from the dimensional blocks of granite, which is a value added marketable commodity."

18. The decision of Karnataka High Court as affirmed by the Supreme Court is in consonance with the aforesaid view emerging from rules and expressed by the CBDT. The authority entrusted for smooth implementation of the enactment had issued directions to the authorities discharging functions under the Act. The same binds the authorities under the Act.

19. The Tribunal has relied on the decision of Supreme Court in Lucky Minmat (P) Ltd. v. CIT (supra) and which has also been pressed into service by learned counsel for the Revenue. This judgment affirmed the decision of Rajasthan High Court, wherein the High Court has held that mining of limestone and marble block and thereafter cutting and sizing the same before it is sold in the market was not a manufacturing activity by distinguishing the earlier judgment in CIT v. Best Chem & Limestone Industries (P) Ltd. (supra) in which the business of extracting limestone and its sale either as converted into 'lime rodi' or lime dust were held to be manufacturing activity. The only argument before the Supreme Court was that the High Court judgment in the case of Best Chem (supra) had wrongly been distinguished. That contention has been rejected by the Supreme Court.

20. It is apparent that the aforesaid judgment is founded on the ground that the commodity in Best Chem's case (supra) being different than what was in the case in hand, the judgment was rightly distinguished. The Supreme Court was not examining the issue about the fact whether the business of mining of limestone and marble blocks, thereafter cutting and sizing the same before it is sold in market is manufacturing or production, as the case may be. Apparently, the earlier decision of the Supreme Court in Chowgule & Co. (P) Ltd. v. Union of India & Ors. (supra) in which the activity of mining was held to result in production of goods, and the later judgment of Supreme Court in CIT v. Sesa Goa Ltd. (supra) with the equal strength of Judges constituting the Bench had taken different views by examining the issue directly and in the process of affirming the aforementioned judgment of Karnataka High Court in Mysore Mineral's case (supra), wherein, the activity of converting marble block, which is not usable as such, into slabs and polishing them and making it marketable commodity was held to be manufacturing activity……"

………Thus, legislative intent emanating from IT Act and rules framed there under and the judgment of the Karnataka High Court as affirmed by Supreme Court makes it clear that for the purpose of ss. 80-IA and 80-IB, process of cutting and sawing or sizing or polishing of marble blocks into slabs and tiles which results in making raw marble usable amounts to manufacture. Apart from that winning of marble block from mines itself amounts to production.

23. It will not be out of place to refer to a decision of Supreme Court in Kores India Ltd. v. CCE 2004 (174) ELT 7 (SC), wherein, the activity of cutting of jumbo rolls into typewriter/telex rolls was held to be manufacturing because the jumbo rolls as such could not have been used as ribbons in typewriter and vice versa and they are not interchangeable. The Court observed that: "The ribbon in jumbo rolls cannot be used in a typewriter and similarly a person who requires 30 pieces of spool ribbon would not be satisfied if he is offered jumbo rolls of equal length".

Apparently, the principle applied by the Supreme Court was that if without applying the process a thing in its raw form cannot be usable and it is made usable for particular purpose, it amounts to manufacture.

The Court approved the principle enunciated in Saraswati Sugar Mills v. Haryana State Board (1992) 1 SCC 418 that essence of manufacture is a change of one object to another for the purpose of making it marketable.

On this principle, the Court accepted the contention that by cutting jumbo rolls into smaller sizes, a different commodity has come into existence and the commodity which was already in existence serves no purpose and no commercial use. After the process, a new name and character has come into existence. The original commodity after processing does not possess original identity. Obviously, so far as physical characteristic of jumbo rolls and its shorter version in the form of typewriter and telex roll may have the same physical properties, nonetheless on the basis of their different use as a marketable commodity and after being cut, the same cannot be used for the purpose for which it could be used in original shape, the activity was held to be manufacture.

24. The principle aptly applies to present case. Here also, the original commodity namely marble block could not be used for building purposes as such until it is cut into different sizes to be used as building material. It is only by the process of cutting the marble block into slabs and tiles that it is made marketable. The marble block cannot be used for the same purpose as the marble slab or tile can be used and after the marble block has been cut into different sizes, the end product by putting it simultaneously cannot be used as a block. The principle in Kores India Ltd's case (supra) supports the contention of appellant…..

27. As a result, we hold that the decision of Supreme Court affirming the decision of Karnataka High Court in Mysore Minerals Ltd's case (supra), upholding cutting of granite/marble block into usable slabs or tiles is a manufacturing activity, governs the facts of present case, as directly arose and considered under the provisions of Income tax Act, with which we are concerned, hence, appeals deserve to be allowed.'

13. The revenue challenged the decision rendered by Hon'ble Rajasthan High Court in the above cited case by filing appeal before Hon'ble Supreme Court. The Hon'ble Apex Court considered the issue of "manufacture" vis-à-vis the activity of converting marble block, which is not usable as such, into slabs and polishing them and making it marketable commodity. The Hon'ble Apex Court held that those activities constitute manufacture or production activity. It is pertinent to note that the Hon'ble Supreme Court also considered the definition of the word "Manufacture" inserted in sec. 2(29BA) of the Act also in this case. The relevant observations made by Hon'ble Supreme Court in the said case as ITO v. Airhant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 are extracted below:—

'5. The question before us is: whether on facts and circumstances of the case(s) the activities undertaken by the respondent(s) herein would fall within the meaning of the words "manufacture or production" in s. 80-IA of the 1961 Act ?

6. To answer the above issue, it is necessary to reproduce the details of stepwise activities undertaken by the assessee(s) which read as follows:

"(i)		Marble blocks excavated/extracted by the mine owners being in raw uneven shapes have to be properly sorted out and marked;
(ii)		Such blocks are then processed on single blade/wire saw machines using advanced technology to square them by separating waster material;
(iii)		Squared up blocks are sawed for making slabs by using the gang saw machine or single/multi block cutter machine;
(iv)		The sawn slabs are further reinforced by way of filling cracks by epoxy resins and fibre netting;
(v)		The slabs are polished on polishing machine; the slabs are further edge cut into required dimensions/tiles as per market requirement in prefect angles by edge cutting machine and multi-disc cutter machines;
(vi)		Polished slabs and tiles are buffed by shiner."

In addition to the above activities, it may also be noted that the assessee(s) has been consistently regarded as a manufacturer/producer by various Government Departments and agencies. The above processes undertaken by the respondent(s) have been treated as manufacture under the Excise Act and allied tax laws.

7. At the outset, we may point out that in numerous judgments of this Court, it has been consistently held that the word "production" is wider in its scope as compared to the word "manufacture". Further, Parliament itself has taken note of the ground reality and has amended the provisions of the IT Act, 1961 by inserting s. 2(29BA) vide Finance Act, 2009, w.e.f. 1st April, 2009.

8. We quote herein below the relevant provisions of s. 2(29BA) as also the relevant provisions of s. 80-IA(2)(iii) of the IT Act, 1961 :

"2(29BA) 'manufacture' with its grammatical variations, means a change in a non-living physical object or article or thing,—

(a)		resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b)		bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;"

"80-IA(2)—(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India."

9. The authorities below rejected the contention of the assessee(s) that its activities of polishing slabs and making of tiles from marble blocks constituted "manufacture" or "production" under s. 80-IA of the IT Act. There was difference of opinion in this connection between the Members of the Tribunal. However, by the impugned judgment, the High Court has accepted the contention of the assessee(s) holding that in the present case, polished slabs and tiles stood manufactured/produced from the marble blocks and, consequently, each of the assessee was entitled to the benefit of deduction under s. 80-IA. Hence, these civil appeals have been filed by the Department.

10. Incidentally, it may be noted that some of the assessees before us are also job workers duly registered under the provisions of the Excise Act/Rules framed there under. It may also be clarified that in these cases, we are concerned with assessees who are basically factory owners and not mine owners. This distinction is of some relevance when we analyse the various judgments cited before us fairly by the learned counsel on behalf of the Department.

11. The main judgment on which the Department has placed reliance is the judgment of this Court in Lucky Minmat (P) Ltd. v. CIT (2000) 162 CTR (SC) 404 : (2001) 9 SCC 669. In that case, the following question came up for consideration before the Tribunal:

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that business activity of the assessee was in the nature of manufacturing or production so as to be entitled for relief under s. 80HH of the IT Act, 1961."

The assessee in that case had the business of mining of lime stones and marble blocks which thereafter were cut and sized before being sold in the market. It was held by this Court that the assessee was essentially in the business of mining of limestone. It was held that the activity of excavation will not constitute manufacture or production. It was further held that even the activity of cutting and sizing of marble blocks after excavation would not come within the ambit of expression 'manufacture' or 'production'. In the circumstances, this Court held that the assessee was not entitled to the benefit of s. 80HH of the IT Act. However, this Court distinguished the judgment of the Rajasthan High Court in the case of CIT v. Best Chem & Limestone Industries (P) Ltd. (1993) 113 CTR (Raj) 298 : (1994) 210 ITR 883 (Raj). In that case M/s Best Chemical was engaged in the business of extracting limestone and its sale thereafter after converting it into lime and lime dust or concrete which was held to be an activity of manufacture or production. The activity of conversion into lime and lime dust, according to this Court, in the case of Lucky Minmat (P) Ltd. (supra) certainly constituted a manufacturing process. It was clarified in the said case that mere mining of limestone and marble and cutting the same before it was sold will not constitute "manufacture" or "production" but conversion into lime and lime dust could constitute the activity of manufacturing or production. This distinction has not been taken into account by the Department while rejecting the claim of the assessee(s) for deduction under s. 80-IA of the IT Act, 1961.

12. There is one more judgment of which Shri Bhattacharya, learned Addl. Solicitor General, appearing on behalf of the Department, has placed reliance. That is the judgment of this Court in Rajasthan State Electricity Board v. Associated Industries & Anr. AIR 2000 SC 2382. In that case, the only question that arose for consideration was whether pumping out water from the mines came within the meaning of the word manufacture, production, processing or repair of goods so as to claim exemption from duty under notifications issued under s. 3(3) of the Rajasthan Electricity Duty Act, 1962. In that case, the first respondent was a registered public limited company, engaged in excavating stones from collieries and thereafter cutting and polishing them into slabs. The Rajasthan State Government levied excise duty under the provisions of the Act. A notification dt. 23rd March, 1962 was issued by the State under s. 3(3) of the Act granting exemption from tax on the energy consumed by a consumer in any industry in the manufacture, production, processing or repair of goods and by or in respect of any mine as defined in the Indian Mines Act, 1923. This notification was later on superseded on 2nd March, 1963 by which electricity duty came to be remitted in certain cases. One more notification was issued on 1st Nov., 1965 once again superseding earlier notifications. By cl. (c) of the said notification, the State of Rajasthan reduced the duty on the energy consumed in industries, other than those mentioned in cl. (a) of the notification which are in the manufacture, production, processing or repair of goods.

13. The basic controversy which arose for determination in the said case was whether the activity of pumping out water from the mines came within the meaning of the words "manufacture", "production", "processing or repair of goods". While disposing of the matter, this Court, vide paras 1 and 10, stated that the specific case of the company was that the electrical energy was consumed for pumping out water from mines to make mines ready for mining activity. This aspect is very important. It needs to be highlighted that the case of the company was that pumping out water from mines to make the mines ready for mining activity came within the ambit of the term "manufacture". This argument was rejected by this Court, after examining various judgments of this Court on the connotation of the word "manufacture". In our view, the judgment of this Court in Rajasthan State Electricity Board (supra) has no application to the facts of the present case. Even if one reads para 17 of the said judgment in the light of paras 1 and 10, it is very clear that the only activity which came up for consideration before this Court in the case of Rajasthan Electricity Board (supra) was the activity of pumping out water from a mine in order to make the mine functional. In the present case, we are not considered (sic-concerned) with such activity. Therefore, in our view the judgment of this Court in Rajasthan Electricity Board (supra) has no application to the facts of the present case.

14. In the case of Aman Marble Industries (P) Ltd. v. CCE 2003 (157) ELT 393 (SC), the question that arose for consideration was whether cutting of marble blocks into marble slabs amounted to manufacture for the purposes of Central Excise Act. At the outset, we may point out that in the present case, we are not only concerned with the word "manufacture", but we are also concerned with the connotation of the word "production" in s. 80-IA of the IT Act, 1961, which, as stated hereinabove, has a wider meaning as compared to the word "manufacture". Further, when one refers to the word "production", it means manufacture plus something in addition thereto. The word "production" was not under consideration before this Court in the case of Aman Marble Industries (P) Ltd. (supra). Be that as it may, in that case, it was held that "cutting" of marble blocks into slabs per se did not amount to "manufacture". This conclusion was based on the observations made by this Court in the case of Rajasthan State Electricity Board (supra). In our view, the judgment of this Court in Aman Marble Industries (P) Ltd. (supra) also has no application to the facts of the present case. One of the most important reasons for saying so is that in all such cases, particularly under the excise law, the Court has to go by the facts of each case. In each case one has to examine the nature of the activity undertaken by an assessee. Mere extraction of stones may not constitute manufacture. Similarly, after extraction, if marble blocks are cut into slabs per se will not amount to the activity of manufacture.

15. In the present case, we have extracted in detail the process undertaken by each of the respondents before us. In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated herein-above is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of "manufacture" or "production" under s. 80-IA of the IT Act. As stated herein-above, the judgment of this Court in Aman Marble Industries (P) Ltd. (supra) was not required to construe the word "production" in addition to the word "manufacture". One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of s. 80-IA. In this connection, our view is also fortified by the following judgments of this Court which have been fairly pointed out to us by learned counsel appearing for the Department.

16. In the case of CIT v. Sesa Goa Ltd. (2004) 192 CTR (SC) 577: (2004) 271 ITR 331 (SC), the meaning of the word "production" came up for consideration. The question which came before this Court was whether the Tribunal was justified in holding that the assessee was entitled to deduction under s. 32A of the IT Act, 1961, in respect of machinery used in mining activity ignoring the fact that the assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. The High Court in that case, while dismissing the appeal preferred by the Revenue, held that extraction and processing of iron ore did not amount to "manufacture". However, it came to the conclusion that extraction of iron ore and the various processes would involve "production" within the meaning of s. 32A(2)(b)(iii) of the IT Act, 1961 and consequently, the assessee was entitled to the benefit of investment allowance under s. 32A of the IT Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did produce a distinct new product. The view expressed by the High Court that the activity in question constituted "production" has been affirmed by this Court in Sesa Goa's case (supra) saying that the High Court's opinion was unimpeachable. It was held by this Court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture.

17. In our view, applying the tests laid down by this Court in Sesa Goa's case (supra) and applying it to the activities undertaken by the respondents herein (reproduced herein-above), it is clear that the said activities would come within the meaning of the word "production".

18. One more aspect needs to be highlighted. By the said judgment, this Court affirmed the decision of the Karnataka High Court in the case of CITv. Mysore Minerals Ltd. (2001) 166 CTR (Kar) 142 : (2001) 250 ITR 725 (Kar).

19. In the case of CIT v. N.C. Budharaja & Co. & Anr. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC), the question which arose for determination before this Court was whether construction of a dam to store water (reservoir) can be characterised as amounting to manufacturing or producing an article. It was held that the word "manufacture" and the word "production" have received extensive judicial attention both under the income-tax as well as under the central excise and the sales-tax laws. The test for determining whether "manufacture" can be said to have taken place is whether the commodity, which is subjected to a process can no longer be regarded as the original commodity but is recognised in trade as a new and distinct commodity. The word "production", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

20. Applying the above tests laid down by this Court in Budharaja's case (supra) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of s. 80-IA of the IT Act, 1961.'

13.1 It is pertinent to note that the Act has inserted the definition of the word "manufacture" in sec. 2(29BA) of the Act with effect from 1.4.2009. But the Act does not give any definition to the word "production". It was held by the Hon'ble Supreme Court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held by Hon'ble Supreme Court in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331/[2005] 142 Taxman 16 that while every manufacture can constitute production, every production did not amount to manufacture. In the said case, it was held that extraction of iron ore and the various processes would not constitute 'manufacture', but constitute "production". It is seen that it has been consistently held that the word "production" is wider in its scope as compared to the word "manufacture". It was held by Hon'ble Supreme Court in the case of Arihant Tiles & Marbles (P.) Ltd. (supra) that the word "production", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

14. The question whether the activity of crushing the boulders into stone concrete would amount to manufacture or not came to the consideration of Hon'ble Himachal Pradesh High Court in the case of D.J. Stone Crusher v. CIT [IT Appeal Nos. 6 & 7 of 2007, dated 16-12-2009]. The relevant discussions made by Hon'ble Himachal Pradesh High Court and the decision taken by it are extracted below:—

'4. According to Shri Vishal Mohan, the boulders are collected from a mining site. Thereafter, they are segregated to obtain stones of requisites sizes. These boulders are then transported by tractors/trollies and fed into the dug of the crusher and thereafter they are crushed in the crushing machine which is electrically operated. The crushed material is then placed on a vibrating screen which divides the crushed material into different sizes and this material is then carried to the storage area with the help of four conveyor belts which are also electrically operated.

5. The basic question which arises is whether the process of converting boulders into stone concrete (grit) is a manufacturing activity within the meaning of ss. 80-IA and 80-IB of the IT Act, 1961.

6. In Black's Law Dictionary (5th Edn.), the word "manufacture" has been defined as, "the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine".

7. In Sterling Foods v. State of Karnataka & Anr. 1986 (3) SCC 469, the question for determination before the apex Court was whether shrimps, prawns and lobsters subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease to be the same commodity or become a different commodity. The Apex Court held as follows :

"6. It is clear on an application of this test that processed or frozen shrimps, prawns and lobsters are commercially regarded the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinct commodity. They are in common parlance known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. The dealer and the consumer regard both as shrimps, prawns and lobsters. The only difference is that processed shrimps, prawns and lobsters are ready for the table while raw shrimps, prawns and lobsters are not, but still both are, in commercial parlance, shrimps, prawns and lobsters. It is undoubtedly true that processed shrimps, prawns and lobsters are the result of subjecting raw shrimps, prawns and lobsters to a certain degree of processing but even so they continue to possess their original character and identity as shrimps, prawns and lobsters, notwithstanding the removal of heads and tails, peeling, deveining and cleaning which are necessary for making them fit for the table. Equally it makes no difference in character or identity when shrimps, prawns and lobsters are frozen for the purpose of preservation and transfer to other places including far-off countries in the world. There can therefore be no doubt that processed or frozen shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character and identity as the original shrimps, prawns and lobsters."

8. This judgment was followed by the apex Court in CIT v. Relish Foods (1999) 152 CTR (SC) 500: (1999) 237 ITR 59 (SC) wherein the same definition was applied to the provisions of the IT Act.

9. The question whether stone crushing activity is a manufacturing process was considered by a Division Bench of this Court in Civil Writ Petn. No. 605 of 1998 decided on 26th March, 1999 titled Panth Stone Crusher v. State of Himachal Pradesh & Ors. wherein this Court held as follows :

"We have carefully considered the submissions of the learned counsel appearing on either side. So far as the case on hand is concerned, stone boulders or blocks initially extracted from mines by excavation are subject to the process of crushing mechanically or by manual labour and by such process the resultant commodity or goods, commonly known as 'Bajri' or 'Gitti' are obtained and sold in market. There could be no serious dispute or controversy over the factual position that the stone blocks or boulders excavated from mines from the earth have different user and purpose and either cannot be an effective substitute in the matter of their own area or purpose of use than 'Bajri' or 'Gitti'. Not only the manufactured product 'Bajri' or 'Gitti' is a well known commercial product by itself and has a distinct and different purpose and use substantially and radically different from the blocks of stone/big boulders but in commercial parlance, both engaged in the trade as well as consumers who purchase are well aware of such different and distinct uses of those commodities by their well recognized and commercial names also. Merely from the fact that 'Bajri' or 'Gitti' is produced out of the stone blocks/big boulders and such produce retain the basic metallic attributes or properties of stone, it cannot be stated that the resultant product of 'Bajri' or 'Gitti' would be one and the same as the block of stones/big boulders unearthened or excavated from earth/mines. When bigger stones and boulders are cut and shaped into specified shapes and sizes in crushers or manufactured into ballast, metal or 'Gitti' or 'Bajri', in our view, there certainly takes place the required transformation in stone boulders and in substance a different commercial article fit for construction of roads, houses, bridges and dams are produced."

10. A Division Bench of the Madras High Court in CIT v. Sacs Eagles Chicory (2000) 164 CTR (Mad) 455 : (2000) 241 ITR 319 (Mad) dealt with the issue as to what is 'manufacture'. In the case before the Madras High Court, chicory roots were being roasted and then changed it into powder form. The question was whether this amounted to manufacture within the meaning of IT Act. The Madras High Court held as follows :

"The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different insofar as its identity is concerned, as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple slices retains the same identity as pineapple. Chicory powder and chicory root have the common identity of being chicory. The change in the form to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity."

11. It would be pertinent to mention here that this decision of the Madras High Court was upheld by the apex Court in Sacs Eagles Chicory v. CIT(2002) 175 CTR (SC) 201 : (2002) 255 ITR 178 (SC).

12. In Indian Hotels Co. Ltd. & Ors. v. ITO & Ors. (2000) 162 CTR (SC) 310 : (2000) 245 ITR 538 (SC), the apex Court again dealt with the question as to what is the meaning to be given to the word 'manufacture'. The apex Court held that the processing of raw food items such as pulses, cereals, vegetables, meat, etc. into edible items in the kitchen cannot be said to be process of manufacture.

13. In CIT v. Gem India Mfg. Co. (2002) 172 CTR (SC) 615 : (2001) 249 ITR 307 (SC), the question before the apex Court was whether the process of cutting, polishing raw diamond amounts to manufacture and produces new articles or things. The apex Court held as follows :

"The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things.

There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached."

14. A three Judge Bench of the apex Court in Aspinwall & Co. Ltd. v. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC), considered the question whether the process of manufacturing coffee beans from raw berries amounts to manufacture. The apex Court after making reference to the Encyclopedia Britannica held that coffee is a beverage made from roasted seeds (beans) of the coffee plant and found that the process of coffee into roasted coffee went through nine processes. Firstly the coffee was dried in the sunlight. Then the outer husk of the coffee been was removed, if necessary, by mechanical operation. The coffee seeds were then extracted and polishing was done. Thereafter, gradation was done where the good coffee was separated by mechanical as well as manual grading. The Court held that net product is absolutely different and separate from the input. The apex Court held as follows :

"Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product.

The submission of the learned counsel for the Revenue that the assessee was doing only the processing work and was not involved in the manufacture and producing of a new article cannot be accepted. The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which result in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity."

15. Shri Vishal Mohan, learned counsel for the assessee has placed reliance on the judgment of the apex Court in Lucky Minmat (P) Ltd. v. CIT(2000) 162 CTR (SC) 404 : (2000) 245 ITR 830 (SC) wherein the apex Court has held as follows :

"The conversion into lime and lime dust or concrete by stone crushers could legitimately be considered to be a manufacturing process while the mere mining of limestone and marble and cutting the same before it was sold in the market could not be so considered."

16. According to Shri Vinay Kuthiala, learned counsel for the Revenue, this observation is only obiter dicta and is not the ratio of the decision and the question whether an activity amounts to manufacture or not is to be decided in the facts of each case.

17. As far as conversion of boulders into grit is concerned, a Division Bench of this Court in the case Panth Stone Crusher (supra) has already held that this process amounts to manufacture though in the context of the Sales-tax Act. However, there is no definition of 'manufacture' in the Sales-tax Act and the Division Bench decided this matter under general law which would be applicable to the present case also.

18. It would also be pertinent to mention here that in Lucky Minmat case (supra), the apex Court has clearly held that conversion of concrete by stone crushers could legitimately be considered to be a manufacturing process. The observation of the Supreme Court cannot be termed to be 'obiter dicta' since the Supreme Court has held that the process of concrete by stone crushers is a manufacturing process. Therefore, there is no merit in the contention of the Revenue. Accordingly, all the questions are answered in favour of the assessee and against the Revenue.'

Thus it is seen that the Hon'ble Himachal Pradesh High Court has held that the stone crushing activity resulting in conversion of stone boulders into grit (stone concretes) amount to manufacture.

15. The activities carried on by both the assessees herein have been narrated as under by the assessee before the tax authorities in the case of Poabs Rock Products (P) Ltd.

(a)		Holes are dug in rock deposits using Mechanical devices and the said holes are filled with explosives for carrying blasting.
(b)		Rock boulders so obtained are sized using Rock breakers for making the boulders into uniform sizes.
(c)		The boulders are fed into the Primary Rock Crushers and thereafter to the secondary rock crushers.
(d)		The crushed aggregates are sieved using a mechanical screen to segregate the aggregates into various sizes.
(e)		The aggregates so segregated are transferred to overhead hoppers for delivery.

In the case of Poabs Granite Product (P) Ltd, the activities are explained in a detailed manner as under:-

1.		Digging holes using jack hammers and air compressors and blasting for producing boulders.
2.		Breaking of boulders using mechanical rock breakers to produce rubbles.
3.		Loading the rubbles to the tipper lorries using excavator loader.
4.		Feeding the rubbles from the tipper lorries to the primary crushers for producing soiling.
5.		The soiling produced at the primary crushers are fed to the different secondary crushers through conveyor belts to produce granite aggregate of different sizes viz., 1½", 1", ½", ¼", sand and dust.
6.		The above products are fed into the vibrating screens through conveyor belts for segregation and the segregated different granite aggregates are collected in different bunkers.
7.		The products stored at the bunkers are loaded to the trucks for sending to customers.

It is also stated that the assessee is producing sand also out of granite boulders and the quality of sand produced by them through mechanical process is equal to the quality of natural sand. It was further submitted that all the activities have been carried by using various types of machines in various stages.

16. Thus, it is seen that the rock boulders obtained by blasting activity are not sold as such, but they are subjected to various mechanical process in order to convert into different sizes of metals and also sand. Besides the rock dust is also separately collected and sold. The Hon'ble Karnataka High Court, in the case of Sesa Goa Ltd. (supra), while dismissing the appeal preferred by the Revenue, has held that extraction and processing of iron ore did not amount to "manufacture". However, it came to the conclusion that extraction of iron ore and the various processes would involve "production" within the meaning of s. 32A(2)(b)(iii) of the IT Act, 1961 and consequently, the assessee was entitled to the benefit of investment allowance under s. 32A of the IT Act. The said view was also approved by the Hon'ble Supreme Court. In the case of Arihant Tiles & Marbles (P) Ltd., case (supra) the Hon'ble Apex Court has held that the activity of cutting marble blocks into slabs and converting them into polished slabs and tiles would come in the category of "manufacture" or "production" under sec. 80IA of the Act. Thus, it is seen that the Hon'ble Supreme Court has held that the activities carried on byArihant Tiles & Marbles (P.) Ltd. case (supra) would fall under both the category, viz., "manufacture" or "production". In the instant case also, the assessees are engaged not only in extracting boulders, but also converting them into granite aggregates, commonly called "metals", sand, dust.

17. At this stage, we would like to refer to the decision rendered by Hon'ble Supreme Court in the case of Kores India Ltd. v. CCE 2004 (174) ELT 7 (SC), which was referred to by Hon'ble Delhi High Court in the case of Arihant Tiles & Marbles (P.) Ltd case (supra). The Hon'ble Supreme Court in the case of Kores India Ltd. (supra) has held that the activity of cutting of jumbo rolls into type writer/telex rolls was manufacturing activity on the reasoning that the jumbo rolls as such could not have been used as ribbons in typewriter and vice versa and they are not interchangeable. It is to be noted that the "typewriter ribbon" had different name, character and use in the common parlance. In the instant case also the metals and sand are obtained from rock boulders, but they have different name, character and use in the common parlance.

18. We have already noticed that the tax authorities have examined the meaning of the word "manufacture" in terms of newly inserted definition of the said word in sec. 2(29BA) of the Act. The tax authorities have accepted the fact that the granite aggregates produced by the assessees herein have got different name and they are used for different purposes vis-à-vis the rock boulders. But they have held that the "character" of rock boulders and metals remain the same. It appears that the tax authorities have understood the meaning of "character" as chemical composition or integral structure, since the chemical composition or integral structure of "rock boulders" and "metals" would remain the same. However, the test of chemical composition or integral structure has to be applied under clause (b) of the definition given in sec. 2(29BA) of the Act. We are examining the activities of the assessees herein under clause (a) of sec. 2(29BA). The Ld CIT(A) has observed that, under clause (a), there shall be change of all the three aspects viz., name, character and use. We agree with the said observations of Ld CIT(A). However, we are unable to agree with his view that there is no change in the "character". In our view, the expression 'character' should be read along with 'use'. We shall elaborate this point further.

19. In the case of Kores India Ltd. (supra) the ribbon in the jumbo rolls and the typewriter ribbons had same chemical composition and integral structure, but both of them had different name, character and use. It was held by Hon'ble Apex Court that, since the ribbon in jumbo rolls cannot be used as typewriter ribbons, it cannot be said that the character of ribbons remain the same in both types. Accordingly, the Hon'ble Supreme Court held that by cutting jumbo rolls into smaller sizes, a different commodity has come into existence and the commodity which was already in existence serves no purpose and no commercial use. The Apex Court further held that, after the process, a new name and character has come into existence. Similarly, in the instant case also, the boulders cannot be used for the purposes for which the metals could be used. We were told that each sized metal has got distinct use and they cannot be substituted for one another.

20. We may quote some more examples. The readymade garments are manufactured by using cloth materials. Even after conversion, the cloth remains as cloth in the garments. In that situation, it cannot be said that there is no change in "character", though there is change in the name and use. Similar is the position, when stainless steel sheets are converted into utensils. Accordingly, in our view, the expression 'character' has to be understood as "commercially different product having distinctive features".

21. In the instant cases also, granite boulders are extracted from hills and then they are converted granite metals, sand and dust, after undergoing the process indicated above. These activities certainly results in emergence of a new and distinct commodity, having different name, character and use. The original block does not remain the granite block, it becomes metals of different sizes or sand or dust. In the circumstances, in our view, there are manufacturing as well as production activities in the instant cases in terms of s. 80-IB of the IT Act, 1961. Accordingly, we set aside the orders of tax authorities on this issue.

22. The next issue is whether furnishing of SSI certificate is mandatory for the purpose of claiming deduction u/s 80IB of the Act. The expression "Small Scale Industrial Undertaking" is defined under sec. 80IB(14)(g) of the Act as under:—

'Small scale industrial undertaking" means an industrial undertaking which is, as on the last day of the previous year, regarded as a small scale undertaking under section 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951).'

We notice that an identical issue was considered by Hon'ble Delhi High Court in the case of Praveen Soni v. CIT [2011] 333 ITR 324/199 Taxman 26/10 taxmann.com 239, wherein it was held by the High Court, after considering sec. 11B of the Industries (Development and Regulation) Act, 1951, that the registration under Industrial Development Regulation Act is not a condition for treating an assessee as small scale undertaking. For the sake of convenience, we extract below the Head notes of the said case as reported in ITR.

"Deduction under s. 80-IB—Small-scale industrial undertaking—Absence of registration under the provisions of IDR Act, 1951—As per cl. (g) of sub-s. (14) of s. 80-IB, small-scale industrial undertaking means an industrial undertaking which is regarded as "small-scale industrial undertaking under s. 11B of the IDR Act, 1951"—As per s. 11B, it is for the Central Government to lay down the conditions which are required to be fulfilled as regards small-scale industries—In the notification dt. 10th Dec., 1997, issued by the Central Government in exercise of such powers, the conditions mentioned for being regarded as small-scale industries are the ownership of plant and machinery and value thereof—Registration of such an undertaking under the said Act is not a condition precedent for treating the same as small-scale industrial undertaking—That registration is prescribed for altogether different purpose viz., to avail of the benefit under that Act—As far as deduction under s. 80-IB is concerned, the only aspect which is relevant and is to be considered is as to whether the conditions stipulated in the said notification for regarding an industrial undertaking as a small-scale industrial undertaking are fulfilled or not—In the instant case, admittedly assessee fulfils the eligibility conditions prescribed under the notification and is to be regarded as small-scale industrial undertaking—Therefore, assessee was entitled to deduction under s. 80-IB as a small-scale industrial undertaking even though it is not so registered under the provisions of the IDR Act."

In the instant case, we notice that the tax authorities have held that the production of SSI certificate is mandatory for granting deduction u/s 80IB of the Act, which is against the view expressed by the Hon'ble Delhi High Court in the above cited case. It is not the case of the AO that these assessees are hit by the various criteria fixed by the Central Government for determining an undertaking as Small scale industrial undertaking under Industrial Development Regulation Act. Hence, by respectfully following the above said decision of Hon'ble Delhi High Court, we hold that it is not necessary to produce SSI certificate for treating these assessees as small scale industrial undertaking in terms of sec.80IB of the Act. Accordingly, we set aside the orders of tax authorities on this issue.

23. In the result, all the appeals filed by the assessees are allowed.

SUNIL

---

*In favour of assessee.

Employees' PF/ ESI Contribution covered by S. 43B

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

It is an admitted fact that the entire amount was deposited by the respondent-assessee at least on or before the due date of filing of the returns under Section 139 of the I.T. Act and being a concurrent finding of fact by the respective authorities and in the light of the judgments rendered by this Court in the case of Commissioner of Income Tax vs. M/s State Bank of Bikaner & Jaipur (D.B. Income Tax Appeal No.177/2011) so also Commissioner of Income Tax vs. Jaipur Vidyut Viaran Nigam Ltd. (D.B. Income Tax Appeal No.189/2011), of even date wherein it has been held that if the amount has been deposited on or before the due date of filing the return under Section 139 and admittedly it was deposited on or before the due date then the amount cannot be disallowed under Section 43B of the I.T. Act or under Section 36(1)(va) of the Act. In fact in the above matters one of the party is same as in the present appeals, therefore, the issue is no more res-integra in the light of judgments of this Court referred to supra and, in our view, no substantial question of law arises out of the impugned orders of the ITAT, which may require attention of this Court.

HIGH COURT OF RAJASTHAN AT JAIPUR

O R D E R

(1) D.B. INCOME TAX APPEAL NO.278/2011

(2) D.B. INCOME TAX APPEAL NO.103/2011

(3) D.B. INCOME TAX APPEAL NO.280/2011

(4) D.B. INCOME TAX APPEAL NO.281/2011

(5) D.B. INCOME TAX APPEAL NO.301/2011

Commissioner of Income Tax, Jaipur-II, Jaipur

Vs.

Jaipur Vidyut Vitran Nigam Ltd.

DATE OF ORDER : 06th January 2014

HON'BLE MR. JUSTICE AJAY RASTOGI

HON'BLE MR. JUSTICE J.K. RANKA

BY THE COURT: (Per Hon'ble Ranka J.)

These Income Tax Appeals under Section 260A of the Income Tax Act (for short I.T. Act) are directed against the orders dated 30/09/2008, 20/08/2010, 30/09/2008, 30/09/2008 & 30/09/2008 of Income Tax Appellate Tribunal, Jaipur Bench, Jaipur (for short ITAT) arising out of ITA No.825/JP/2008 for Assessment Year 2005-06, ITA No.333/JP/2010 Assessment Year 2006-07, ITA No.826/JP/2008 Assessment Year 2003-04, ITA No.76/JP/2008 Assessment Year 2001-02 and ITA No. 827/JP/2008 Assessment Year 2004-05 respectively.

2. Since the controversy involved is identical, these Income Tax Appeals are being decided by this common order.

3. The brief facts as reveal from the record are that a claim was made by the respondent-assessee about payment of GPF, CPF and ESI and the said amount was claimed under Section 36(1)(va) read with Section 43B of the I.T. Act. It is the claim of the revenue that the said amount though paid by the assessee, but was not paid within the due date as given under the relevant Act of GPF, CPF and ESI and, therefore, the said amount could not be allowed either under Section 36(1)(va) and even under Section 43B of the I.T. Act as it was not paid on or before the due date of the respective Acts.

4. It is the claim of the respondent-assessee that though the amount could not be paid on or before the due date under the respective Act, but the same was deposited on or before the due date of furnishing of the Income Tax returns under Section 139 of the I.T. Act and, therefore, in view of Section 43B read with Section 36(1)(va) of the I.T. Act the entire amount was allowable.

5. Counsel for the revenue submitted that the amount had to be deposited on or before the due date of the respective GPF Act, CPF Act and ESI Act and since the same was not paid on or before the due date of the respective Acts, therefore, it was not even allowable under the provisions of Section 36(1)(va) of the I.T. Act nor could be allowed under Section 43B of the I.T. Act.

6. We have considered the arguments advanced by the learned counsel for the revenue and have also gone through the impugned orders. In our view no substantial question of law arise out of the orders of the ITAT as it is an admitted fact that the entire amount was deposited by the respondent-assessee at least on or before the due date of filing of the returns under Section 139 of the I.T. Act and being a concurrent finding of fact by the respective authorities and in the light of the judgments rendered by this Court in the case of Commissioner of Income Tax vs. M/s State Bank of Bikaner & Jaipur (D.B. Income Tax Appeal No.177/2011) so also Commissioner of Income Tax vs. Jaipur Vidyut Viaran Nigam Ltd. (D.B. Income Tax Appeal No.189/2011), of even date wherein it has been held that if the amount has been deposited on or before the due date of filing the return under Section 139 and admittedly it was deposited on or before the due date then the amount cannot be disallowed under Section 43B of the I.T. Act or under Section 36(1)(va) of the Act. In fact in the above matters one of the party is same as in the present appeals, therefore, the issue is no more res-integra in the light of judgments of this Court referred to supra and, in our view, no substantial question of law arises out of the impugned orders of the ITAT, which may require attention of this Court.

7. We find no merit in these appeals and the same are hereby dismissed in limine.

One Person Company – Important Provisions under Companies Act, 2013

Posted In Company Law | Articles, Featured | 5 Comments »

CS Akhilesh Kumar Jha

One Person Company is new concept under the Companies Act, 2013. Previously, there was no such type of concept. One Person Company means a company which has only one person as a member. That type of Company Called "One Person Company" (Section 2(62)). It means it is a gift of Companies Act, 2013 that any person, may incorporate company, who is competent to contract. Previously, under the Companies Act, 1956, such type of company could not be incorporated.

The status of the One Person Company shall be "Private Company". Wherever the name of the company shall be mentioned, it should be noted that the word "One Person Company" must be written in the "()" below the name of the Company.  The Memorandum of Association of One Person Company shall also indicate the name of other Person who shall be a nominee of Member. Therefore, In this regard a written consent shall be taken from such Nominee member. Such provisions have been mentioned in the Law due to only observing that, in case of original member shall be incapable due to any reason at any time or due to his death. The nominated Person shall become Member of the Company after the incident.

Further, it shall be duty of the Company to file such consent letter with Registrar of Companies at the time of formation of Company.

Nominated Person has right to withdraw his name. The Method for withdrawing shall be prescribed. The Member has also right to change the nominated person. The Nominated person may be changed, when the Member give notice. The method of notice shall be prescribed.

It shall also be a duty of the Member of the One Person Company to intimate to the company for any change in the name of Nominated Person. The Name of Nominated Person shall be mentioned in the Memorandum of Association of the Company. Thereafter, it shall be a duty of the Company to intimate to Registrar of Companies.

It should be noted that in case any change in the Name of the Nominated Person. It shall not be constructed that it is alteration in the Memorandum of Association of the Company (Section 3).

 Important Provisions under the Companies Act, 2013

1-   Cash Flow Statement is not included in the Definition of "Financial Statement". It means Cash Flow statement is not mandatory for One Person Company .(Section 2 (40))

2-   Annual Return shall be signed by the Company Secretary or where there is no company secretary, by the directors of the Company. (Section 92)

3-    It is not compulsory to call Annual General Meeting. (Section 96)

4-   It is not mandatory to call General Meeting in case of One Person Company, so any transaction which shall be moved in the General Meeting as per Section 114 of the Act, The One Person Company may communicate that resolution to members. Thereafter, As per Section 118 of the Act, that matter shall be entered in the Minutes Book which is maintained under law and signed and dated by the Member. Such date of Signing shall be deemed the date of Meeting. This date shall be referred all purpose under this Act. (Section 122)

5-   Simultaneously, in the Board of One Person Company only one director, The Company may communicate resolution for any truncation or purpose. Thereafter as per section 118 of the Act, such resolution shall be recorded in the Minutes Book under the Law and signed and dated. Such date of Signing shall be deemed the date of Meeting. This date shall be referred all purpose under this Act. (Section 122)

6-   Financial Statement, including consolidated financial statement, if any, shall be approved by one director and submitted to the Auditor for his report thereon. (Section 134)

7-   The Board Report must be enclosed with the Financial Statement and it also signed by the One Director.  The Board Report must be contained explanation and comments on every reservation, qualification and adverse remark of Auditor. (Section 134)

8-    The Auditor Report also shall be attached with the Financial Statement (Section 134)

9-   One Person Company shall file its Financial Statement along with necessary documents which is duly adopted by the Member within 180 days from the date of ending of financial year/ closure of financial year.

10-   An individual who is member shall be deemed as first director until the director or directors are duly appointed by the members according to the Provisions of the Act. (Section 152)

11-  One Person Company must conducted Board Meeting, the one meeting must be held in each half of a calendar year and gap between two meetings should not be less than 90 days. The section 174 is not applicable for Once Person Company. (Section 173)

12-  It is duty of the company to note down the contract in the next board meeting immediately holding after the entering into contract, where the sole member is a member and a director of the company and those contracts which is ordinary course of business shall not be included here. (Section 193)

Power of CIT to assume jurisdiction u/s 263 in respect of assessments made u/s 153A?

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CA Sarbjit Garg

Debate as to whether CIT has power to assume jurisdiction u/s 263 of the Act in respect of assessments made u/s 153A after obtaining mandatory approval u/s 153D.

(The author strongly feels that powers of CIT u/s 263 do not extend to assessments made u/s 153A after obtaining mandatory approval u/s 153D and invites comments from readers)

 The relevant provisions of Section 263 of the Income Tax Act, 1961 are reproduced hereunder:

"263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

 [Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a)  an order passed [on or before or after the 1st day of June, 1988] by the Assessing Officer shall include—

(i)  an order of assessment made by the Assistant Commissioner or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the [Joint] Commissioner under section 144A;

(ii)  an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

(b)   "record" [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the Commissioner;"

          Scope of section 263 and explanation thereto: From a plain reading of the section 263 and explanation thereto, it is clear that in addition to assessment made by AO as per  explanation  (a) (i) only the assessment order made by the  Assistant Commissioner or Deputy Commissioner or Income-tax Officer on the basis of directions issued by the Joint Commissioner u/s 144A and as per the explanation (a) (ii) only  the order made by  the Joint Commissioner in exercise of the power or in performance of the functions of Assessing Officer conferred on or assigned to him under the orders or directions issued by  the Board or by the Chief Commissioner or the Commissioner authorized by the Board in this  behalf u/s 120 are  covered  under this section.

           A combined reading of these provisions read with explanation will indicate that this provision covers assessments made by AO u/s 143(3). In these cases, there is application of mind only by one person. Therefore in all these cases power of review been vested with the Commissioner. The assessments in search cases are made under special provisions as provided u/s 153A read with Section 153D. This means that as per the provisions of section 263 (1), only those cases are covered where the assessment has been made either by the Assessing Officer himself or on the basis of the directions issued by the Joint Commissioner u/s 144A or the Joint Commissioner in exercise of the power or in performance of the functions of Assessing Officer. If the intention of the legislature had been to cover the assessments made u/s 153A r.w.s. 153D, one more clause would have been added to explanation to section 263 providing for this.

The assessments u/s 153A can be made only after obtaining prior approval of the next higher authority i.e. Joint Commissioner / Addl. Commissioner u/s 153D of the I.T. Act, 1961. This sub-section was inserted by the Finance Act, 2007 w.e.f. 01/06/2007 and no corresponding amendment was made in explanation to section 263, to cover these assessments also.

Meaning of the word Approval as mentioned in Section 153D:

The word approval has not been defined in the Act. However, it has been defined in Black's Law Dictionary -VIth Edition as the act of confirming, ratifying, assenting, sanctioning or consenting to some act or thing done by another. Hence approval implies knowledge and exercise of discretion after knowledge.

Hon'ble ITAT Pune, Bench "B" in case of Akil Gulamali Somji v. Income Tax Officer Ward 4[5], Pune, has observed that the provisions laid down u/s. 153D of the Act are different as here the prior approval of Joint Commissioner is not required merely for direction for payment of the due amount of tax but overall approval of the assessment framed by the I.T.O. Therefore, assessment made without obtaining prior approval as required under section 153 D was declared null and void in this case.

In case of assessments in cases other than cases of search and seizure, there is no provision for review in the Act other than as provided for under section 263 and explanation thereto. Therefore, all these are covered u/s 263. In case of assessments u/s 153A provision for prior approval under section 153D has been made. Approval can only be made after thorough review. Therefore, these are not covered u/s 263. Had the attention of the legislature  been  to cover the assessment u/s 153A read with section 153D under section 263, suitable amendment would have been made in explanation to  section 263 (1) also. Clearly meaning thereby, that the assessment u/s 153A read with section 153D can not be revised u/s 263.

Procedure for assessment in Search and Seizure cases:

Procedure for assessment in Search & Seizure cases is provided in the Manual of Office Procedure Vol.II (Tech.) published by DIRECTORATE OF INCOME TAX (ORGANISATION & MANAGEMENT SERVICES) CENTRAL BOARD OF DIRECT TAXES in  February 2003. The relevant guidelines as provided In Chapter-3 related to  Assessment Procedure (Search and Seizure) are reproduced hereunder:

"4. Appraisal report, panchanama and annexures : Along with the seized material the investigation wing forwards to the Assessing Officer an appraisal report, copies of warrants, and the panchanama and its annexures. These should be handed over to the A.O. within two and a half months from the date of initiation of the search. The appraisal report comprises the investigation wing's findings on the search and may include a note on the modus operandi of tax evasion adopted by the searched parties and their associates, tentative computation of undisclosed income in the hands of various assessees, overview of seized materials and suggestions for further enquiries. This report is prepared essentially for the guidance of the AO; as such, its findings are not binding on him. Wherever there is a major deviation between the income estimated in the appraisal report and the income proposed to be assessed, however, the matter should be discussed between the assessment wing and the investigation wing and the minutes of this meeting should be recorded. The AO should leave a detailed note in the ordersheet of the MR in this regard. It must be noted that the appraisal report is open to scrutiny by audit along with the relevant assessment records in all search cases".

A review of the provisions of Section 153A, Section 153D and procedure for assessment makes it clear that the assessment order u/s 153A is already subject approval by the Addl. Commissioner u/s 153D and discussed with the investigation wing in case of major deviation between the income estimated in the appraisal report and the income proposed to be assessed. If the orders already subject to review by two authorities, as explained above have to be reviewed again u/s 263, there would not be finality in the assessment proceedings. This will be against the observation of Hon'ble Bombay High Court in CIT vs Gabrial India Ltd (1993) 203 ITR (BOM), wherein the Hon'ble High Court held that such an action is against the well accepted policy of law that there must be point of finality in all legal proceedings and that stale issues should not be reactivated beyond a particular stage.

The power exercised by JCIT u/s 144A is not same as u/s 153D of the Act

That the provisions of section 144A and 153D are reproduced hereunder:

 [Power of [Joint Commissioner] to issue directions in certain cases.

144A.  A  [Joint Commissioner] may, on his own motion or on a reference being made to him by the  [Assessing] Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the  [Assessing] Officer to enable him to complete the assessment and such directions shall be binding on the  [Assessing] Officer :

Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.

Explanation.—For the purposes of this  [section] no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee.

 [Prior approval necessary for assessment in cases of search or requisition.

153D. No order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in clause (b) of  [sub-section (1) of]section 153A or the assessment year referred to in clause (b) of sub-section (1) of section 153B, except with the prior approval of the Joint Commissioner.]

A review of the aforesaid provisions indicates that the powers of JCIT/Addl.CIT u/s 153D are much wider compared to the compared to powers u/s 144A of the Act. Under the provisions of Section 144A, the JCIT may, on his own motion or on a reference being made to him by the [Assessing] Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the [Assessing] Officer to enable him to complete the assessment and such directions shall be binding on the [Assessing] Officer. Whereas heading of Section 153D indicates that it is applicable only in cases of search or requisition and provides that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in clause (b) of  [sub-section (1) of]section 153A or the assessment year referred to in clause (b) of sub-section (1) of section 153B, except with the prior approval of the Joint Commissioner.]

Thus the provisions of Section 144A are applicable in all cases other than search and requisition whereas provisions of Section 153D are applicable only in case of search and requisition. The provisions of Section 144A empower to JCIT to issue binding directions to AO for his guidance to enable him to complete the assessment only in certain circumstances, whereas the provisions of Section 153D require the AO to seek prior approval of JCIT before passing any order of assessment or reassessment.

No assessment can be made u/s 153A or u/s 153B by AO until and unless, the entire record of assessment and the issues arising during assessment are reviewed by JCIT/Addl. CIT and proposed assessment order is approved by him. Hence approval u/s 153D from JCIT/ Addl. CIT,  tantamount to review by the next higher authority. Orders already reviewed can not be reviewed again.

 There is no such provision for assessment under section 143(3) of the Income Tax Act, 1961, which is taken care of u/s 263 of the Income Tax Act, 1961.

Further even in cases where the AO obtained prior approval of JCIT u/s 144A in support of any view taken by him during the course of assessment proceedings, the Hon'ble Allahabad High Court in the following cases has held that CIT would not be justified in interfering in the approval accorded by the Addl.CIT for framing assessment order.

CIT vs. Dr. Ashok Kumar in Appeal No. 192 of 2000

CIT vs. Dr. Ashok Kumar in Appeal No. 163 of 2008

CIT vs. Dr. Ashok Kumar in Appeal No. 413 of 2012

CIT vs. Dr. Ashok Kumar in Appeal No. 414 of 2012

In all the aforesaid cases the Hon'ble Court at para 5.2 of the order observed as under:

 " In the last it is also relevant fact that the AO was fully alive about the facts of the case and that is why he got necessary approval of Addl. Commissioner before completing the assessment orders for all the assessment years and once that is not disputed by the Revenue than the CIT would not be justified in interfering in the approval accorded by the Addl.CIT for framing assessment order and thus there was no case for setting aside the assessment orders for the assessment years in question. On the basis of facts and circumstances of the case I am of the opinion that the impunged order is liable to be quashed accordingly."

Conclusion: In view of the foregoing, it is clear that powers of the CIT do not extend to assessments made u/d 153A after obtaining approval u/s 153 D. However, since there is no conclusive case law on the subject, readers are requested to kindly share their views with relevant case law, if possible.

(By CA Sarbjit Garg, (M) 9814331650 email: gargsarbjit@yahoo.com)

Illegal Lifts in Building – An Analysis

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LIFTS  INSTALLATIONS  IN  SOCIETIES:

01.   Self-Sensitising, towards requirement of Lift-Elevator.

a)      Till about 20 years ago, most residential buildings in Mumbai, were upto Ground plus 3 or 4 storied buildings, wherein LIFT (Elevator) was not installed, since at that time it was not considered necessary and people preferred to climb stairs, irrespective of all odds.  Consequent to the Life-Style changes, including physical and mental apathy, currently the Four storey building residents have started to feel the need for having a Lift-Elevator in their buildings.

b)      Now with the advent of newer building technologies, High-Rise buildings are constructed, which, presently, go even beyond 50 storey's (Floors), which in turn made it, an lawfully essential requirement (service), to have an Lift-Elevator in such High-Rise buildings.  This in turn, obviously also meant higher maintenance costs for the Lifts (AMC & Spares), besides being liable for the consistently increasing Electricity charges and additionally also for the present Service Tax @ 12.36%, on such Lift Maintenance Costs & Society Service Charges.

c)       Several Lift Accidents /Incidents, involving casualty to human life, has already been recorded by the News Papers, more specifically in Mumbai and Pune.  Ignorant and Innocent Flat-Owners, read such published news, and impulsively forget to cross-check their own buildings Lift, apathically forgetting that their families stay in such buildings and are using the ill-maintained and risky Lifts.

d)      IF the Lift-Elevator is maintained properly with periodic replacement of spares and accessories,  .AND.  IF the Lift is used in a sensible manner,  THEN the cost of maintaining the Lift is not exorbitant, ALSO more so when compared to the invaluable single life, that we and our families have,  .AND. further more so, when compared to the broken bones and invalid lives we shall be forced to live, due to the falling Lifts.

INSTALLING  NEW  LIFT  IN  NON-LIFT  BUILDINGS:

02.  Non-Lift buildings, can install Lift-Elevator, in their buildings, subject to compliance of various legal parameters.  FEW basic requirements are as follows:

a)    New Lifts are allowed to be installed ONLY on those legal-buildings, which have duly approved and sanctioned plans.

b)    New Lift installation permissions are granted ONLY to those legal-buildings, who have duly been granted "Occupancy Certificate" (means "OC").

c)     Due Prior NOC is required from the Fire Dept.

d)    Buildings Structural Stability Report, by a duly registered Structural Engineer.

e)     Latest Drawings, from an registered Architect, proposing Lift-Installation location, in conjuction with the sanctioned buildings plans.

f)      Prior permission to erect new Lift and consequent Lift License is to be obtained from the "Inspector of Lifts"

PRIVATE  PURPOSE  LIFT-ELEVATOR:

03.   It is perfectly legal to have a separate "Private Lift-Elevator", installed for specific Private usage (including residential), subject to compliance of various legal parameters.

a)          The law provides for installation of Private Lifts, for Hospitals, Clinics, Commercial Offices, that may be lawfully operating from a Residential Building.  Private Lift, also can be installed, for specific floors and/or specific residences, subject to the sanctioned building plans.

b)          The Society and its members, would have no legal-say, to refuse or object, to such installations of separate "Private Lift-Elevator".  However all necessary compliances under the Development Control Rules, Lift Act, MMC Act and the MRTP Act, would have to be complied.

BASIC LEGAL SAFETY CRITERIA FOR LIFT-ELEVATOR:

04.    The Lift-Owner (Society) should ensure the following:

a)         Lift Maintenance (AMC) vendors, should be mandatorily licensed and appropriately experienced.

b)         Lift should be fitted with an "Over-Load device", which should mandatorily function when more weight (passengers) are inside the lift. This means that the Lift should not start, "TILL" the Lift load is within the weight-bearing capacity.  The mandatory and specificatory requirements of the "Lift Load", should be printed /engraved on a metal plate, and permanently rivetted (affixed) inside the Lift-Cabin Walls.

c)          Fire Extinguisher, inside the Lift is mandatory

d)         Alarm Button/Switch, inside the Lift is mandatory, with shrill hooters on every floor, and compusorily in the Security Personnels Cabin /Desk.

e)          Multiple Emergency Lights inside the Lift cabin, connected to alternate power-system (batteries, solar, wind …. )

f)           Overhead-Exhaust system  .OR.  Side-Exhaust system, is mandatory.  The Exhaust (Fan) system, could be fitted with auto on-off system.

g)         Permanently affixing a laminated photocopy of the "Lift Licence", which should be mandatorily displayed,  inside the Lift-Cabin Walls.

h)        The entire Lift-System, should be duly insured, for all parameters (i.e. Fire, Accidents, Incidents, Damages ….).

i)           Various other parameters, as prescribed under the various applicable Laws.

MH GOVT. APATHY ON LIFT ACT:

05.   The prosecution component of the Lift Act, remains static and ineffective and rarely implementable, for over 70 years, which in turn means that the Lift-Owners (Societies), can continue their apathy towards the lives of the Lift-Users (Society members).

a)        The Lift Act provides negligible prosecution modalities, for unlicensed Lifts and ill-maintained Lifts, and unlicensed Lift AMC Vendors,  which indirectly portrays the gross apathy, towards the affected & hapless Citizens, more so when the media has documented several incidents of falling Lifts, leading to Human Life casualties.

b)        INSPITE of collecting License Fees, Inspection Fees, the Lift Act, is not sensitised for the value of Human Life, and also for the foreseen incidents and accidents, due to the illegal /unlicensed Lifts and ill-maintained Lifts and the unlicensed Lift AMC Vendors

c)         The Competent Authorities, apprehensively are interested in conducting limited & routine checks, obviously with the intention of collecting "Inspection Fees", more so in the light of the fact, that prosecution is rarely initiated against the Lift-Owners, for failure to comply with the Lift Inspection Report.

d)        Anticipatively, the MH Govt., would wake-up in future and sensitise itself to its people .AND.  make appropriate stringent amendments to the Lift Act,   BUT only AFTER scores of major casualities, to human lives, have been documented.

PUNISHMENT FOR ILL-MAINTAINED LIFT:

06.  The Legal Punishment system has provisions for:

a)      Non-Maintenance of Lift, is a fine'able offence, under the Lift Act.  Such Fine, if levied & paid, is recoverable from the personal pocket of the Society's Mg.Committee (more specifically, the Secretary)

b)      Accidents or Incidents, arising out of non-maintenance of Lifts, to Life & Property, is a Criminal Offence, which would lead upto imprisonment, of buildings care-takers (means the Mg.Committee).

c)       Non-Maintenance of Lift, is a within the parameters of deliberate "Negligence & Deficiency", under the Consumer Protection Laws, leading to levy of heavy to heavy damages and compensations to the aggrieved complainant. This again is obviously recoverable from the personal pocket of the Society's Mg.Committee (more specifically the Secretary).

d)      Members of the Society's Mg.Committee, can be collectively prosecuted with Fine and/or Imprisonment under the Indian Penal Code, for endangering human life, due to Negligence in maintaining the Lift.

LIFT  USAGE  TIMINGS:

07.   Lift-Elevator, is a deemed essential service, having safety implications on Life & Property.

a)     ALL the building-residents, are entitled to use the Lift, on a 24 X 7 X 365 basis

b)     Lift-Elevator, usage timings CANNOT be restricted, by the Society, irrespective of the decision of the majority residents (members) of the Building.  This would also mean criminally restraining and restricting the Lift-User, when in light of Health Emergencies, Work Emergencies, Fire and other Safety issues.

c)      Deliberately Stopping or Restricting the for usage of Lift, can be prosecutable under the Criminal Acts and the Consumer Protection Act.

d)     The Coop. Society's Bye-Laws, have a illegal & nuisance clause of authorising the Society Mg.Committee, vide a General Body resolution, to restrict the usage timings of the Buildings Lift.  This is without lawful jurisdiction. The Society and its Secretary can be lawfully prosecuted, depending on the inclination of the Flat-Owner, residing on the higher floors.

LIFT  USAGE  CHARGES:

08.  The Lift-Owner (Society) is liable to collect charges for Lift-Usage.

a)       The building residents (Society members), are liable, by legal default, to pay equalised Service Charges, for "usage" of the Lift,  irrespective of usage or non-usage of the Lift.

b)       The building residents (Society members), are liable, by legal default, to pay equalised share, for "replacement" of the Lift, Spares and other accessories, irrespective of usage or non-usage of the Lift.

c)        Charging varying "Lift Charges", floor-wise to the buildings residents, is illegal and discrimination.

d)       Life Usage charges, CANNOT be recovered from various vendors (Milk'wala, Vegetable'wala, Courier'wala, Pizza'wala, Postman, Newspaper'wala and so on ….)

WHO CAN USE THE LIFT-ELEVATOR:

09.   Each and Every, person residing /visiting the building, is lawfully entitled to use the Lift, without any restrictions, whatsoever.

a)     It is no excuse, in legal terms, to restrict (stop) anybody from using the Lift, irrespective of who-so-ever it may be.  A Owner-Member, a L&L Tenant, Servants, miscellaneous Service Vendors (like (Milk'man, Courier'boy, Postman, and so on ….), ALL are entitled to use the Lift, without reference to any rules & regulations, framed or formulated  or decided by the Society.

b)     The flat-owner (member) has an inherent right, by legal default, to use the Lift, on a 24 X 7 X 365 basis, without any reference to any Society outstanding defaulter dues.  This lawfully means, that a defaulter member CANNOT be restrained or restricted from using the Lift Services.

c)      Consequent to some Judgements of the Hon. Consumer Courts,  "Pet Dogs" are by legal default, entitled to usage the buildings Lift-Elevator, that too without any extra charges.

d)     Usage if Lift, is not dependent on user charges.

FAILURE TO MAINTAIN LIFT-ELEVATOR MEANS:

10.   Under the Law, the Lift has to be compulsorily maintained.

a)          The Building-Owner (or Care-Taker, eg. Mg.Committee of the Society), can be prosecuted, with Fine under the Lift Act, for non-maintenance of the Lift.  The Fine, though negligble,  shall be imposed on and payable by the Society, which subsequently is to be duly recovered from the personal pocket of the Society Secretary, due to the parameters u/s 73(1AB) of the MCS Act.

b)          ADDITIONALLY,  The Builder Owner or Secretary, becomes liable for prosecution, leading to payment of compensation /damages, under the Consumer Protection Act.

c)           ALONGWITH above, duly applicable Criminal prosecution can be filed, under multiple sections of the Indian Penal Code, in the local Magistrates Court, leading to Fine and/or Imprisonment, for various periods.

d)          The Building "OC" maybe revoked by the BMC authorities, leading to consequent various expenditure, which in turn means all consequent losses caused to the building (Society), can be lawfully and successfully recovered from the personal pockets of the Society's Mg.Committee, due to the varioius legal parametes of the Maharashtra Coop. Societies Act & Rules, therein.

e)           It is no-excuse and is immaterial, under the law, to say that the Society General Body, has not approved funds for Lift AMC, or for Lift spares, parts and accessories.

f)            It is also no-excuse and is immaterial, under the law,  to say that the Society does not have funds to Maintain the buildings Lift.

g)          Society CANNOT claim Insurance, in the event of non-usability or damages to the Lift, due to any reason, whatsoever.

h)         Lower re-sale value of Flats, in ill-maintained building Lifts.

i)            Flat owner-member may also file a private case in the respective MRTP Courts, against the Inspector of Lifts, and the area Municipal Commissioner and the Society, praying for compliance directions or imposing Fine on the Society, for failure to Maintain or Replace the Lift (as applicable).

BASIC CHECK-LIST for LIFT MAINTENANCE:

11.  Anybody (Owner or Non-Owner), can initiate suo-motto action.

a)       Write a requisition notice to the "Inspector of Lifts", every first week of January and of July of every year, directing him to depute his officer to cause "visit and inspection" of the buildings Lift.

b)      Preserve the Inspection-Fee receipt, alongwith the "Inspection Report", for future references and statistics.

c)        Lift AMC vendor, should be directed to comply with the deficiences of the "Inspection Report"

d)      "Compliance Report",  MUST be taken "ONLY" from the licensed Lift AMC vendor. Consequently, photocopy of this "Compliance Report", MUST be submitted to the "Inspector of Lifts", under due acknoledgement.

e)        Lift AMC vendor, should be directed to clean and fumigate the Lift-Well and the Lift-Motor room, and also lubricate all moving parts and accessories of the Lift system, practically every month end.  This is besides conducting all routine check-ups, as mandated under the Act.

f)        Lift AMC vendor. should record ALL his Maintenance activities in a Lift Maintenance Log-Book.  Such Log-Book entries should be read and approved in every monthly Mg.Committee meetings.  Summary of such Lift Maintenance Log-Book, should be reflected in the Annual Mg.Coommittee Working Report, which should be duly ratified in the General Body Meetings of the Society. General Members are entitled to copies of the "Lift Maintenance Log-Book".

g)       Lift-Motor room, should NOT be kept key-locked.  It is a violation of the Fire Act & Rules

h)      Buildings Terrace, should NOT be kept key-locked, since it is classified as "common open space".   It is a violation of the Fire Act & Rules.

i)         NOTHING should be stored in the Lift-Motor-Room, to the exception of essentials & accessories, required for Lift maintenance.

j)         Multiple Fire-Extinguishers and Sand-Buckets should be installed, OUTSIDE the Lift-Motor-Room .AND.  inside the Lift-Motor-Room.

k)      Simply replace entire Electrical wiring, of the entire Lift System, upto the main-line, atleast ONCE in every Five years, which means substantial savings in Electricity and enhancing life-span and safety of the Lift syetem.  This means:  PAY MORE = FEEL BETTER.

l)         Intall Lifts, preferably with Automatic closing doors, instead of manual closing doors.  Automatic closing doors, are perfect, from safety point of view.

m)    Not cleaning the Lift-Well and Lift-Motor Room and the Lift-cabin, would qualify as a prosecutable "nuisance" under the BMC laws, and as well as the Consumer laws.

COMPLAINTS  TO  LIFT-INSPECTOR:

12.  For safety of all concerned

a)    A private individual Flat-Owner (say a Society member), may make a written complaint to the Inspector of Lifts (PWD), making a detailed complaint on the various deficiencies in the buildings lift, which could be a cause of risk to Life and Property, of the residents of the building.

b)    The Inspector of Lifts, is mandatorily bound by Law, to cause due Inpection of the buildings Lift-Elevator system, consequent to which he MUST issue directions to the building owner (say Society), for rectification of the various deficicenes.

c)     IF the Inspector of Lifts, fails to cause inspection, on a due complaint, then the Inspector of Lifts, may be prosecuted under  "The Maharashtra Government Servants Regulation of Transfer and Prevention of Delay in discharge of Official duties Act, 2005″

d)    Subject to some parameters, Criminal Prosecution can also be filed against the Inspector of Lifts, for failure to enforce the various parameters of the Lift Act.

e)     Subject to some parameters, the Fire Dept., make revoke the buildings "OC", for non-compliance of the various parameters of the Lift Act & Rules, therein.

f)      Revocation of the buildings "OC" would also mean that Water-Charges will be levied at double the normal rates.  AND no permission can be granted by the BMC, for any future changes, including installation of Mobile Tower Attenna, Hoardings, any "change of user" and so on ….

g)    The inspection of a Lift and submission of Inspection Report, in lieu of "Inspection Fees", is classified as a "Administrative Function".  Hence, the Lift-Inspector, can be liable, for Criminal prosecution, for failure to conduct proper inspection of the Lifts,  .AND. additionally also liable under the Consumer Laws, for deficiency & failure to conduct proper inspection of Lifts

PROJECTIVE  REASONS  FOR  LIFT  ACCIDENTS:

13.  The Lift being a Electro-Mechanical unit, needs technical expertise.

a)     Contrary to unusual perceptions that the buildings Lift, will work life-long, the Lift of a Building hardly has a tentative life-span of around 10 odd years. This is contrary, vis-a-vis the MH Govt., directives to replace the Lift, every 20th year.

b)     Lift Accidents, tend to happen, chiefly because of lack of appropriate maintenance and failure to timely replace necessary Lift parts & Spares.  This is typically due to the penny-pinching attitude of the Society members.

c)      Over-loading the Lift, with passengers and carrying construction material, during internal renovation and repairs, by the Society residents.

d)     Deliberately /Apathically refusing to install Safety devices.

e)      Arrogantly and Aggressively, yanking open the Lift Doors, during Lift-in-Motion.

POSSIBLE SAFETY SPECIFICATION OF THE LIFT:

14.  Though not classified  or mandatory,  think to:

a)           Avoid installing Metal collapsible-shutters, .OR. full Metal-sandwich doors, on Lifts.  INSTEAD use Fire-Resistant See-Thru Fiber-Glass doors, with extroverted 90 degree positioned air vents.

b)           Install bi-yearly replaceable, Fire-Extinguishers inside the Lift Cabin

c)            Install IR-CCTV camera inside the Lift Cabin, with specific stand-alone monitor with the Security personnel, to check on user-Safety and further which would also serve to check nuisance-users.

d)           Install two-way Intercom system embedded on the panel board of the Lift Cabin.

e)            Install Alarm-switch with Shrill-Hooters, on each individual floors and inside the Security personnels Cabin.

f)             Install "Power Back-up Generator", to be activated automatically, in case of Main Power failure.

g)           Replace entire Lift system, with the latest Lift-System, atleast every 15th year, by using the Society's "Sinking Fund and Repair Fund", with prior-approval of the Society's General Body, AND without any reference to the Cooperative Registrar.  Loans from Financial Instutitions (like Coop. Bank etc….) can be availed for installing New Lifts, by a Society, under certain parameters.

h)          Install a Power-Isolator system, specifically for the entire Lift-system, to avoid tripping of the Main-line, and consequently activating the "Power Back-up Generator".

i)             Avoid Spilling of Oil, Water, Mercury and any other inflammable liquids on the floor of Lift's Cabin. Look-out for nefarious people (nuisance users), who deliberately urinate, defecate and spit Paan'juice inside the Lift cabin.

WHAT TO DO,  "IF" THE LIFT FALLS DOWN:

15.  Since the Govt. Authorities .OR.  the Lift Inspector will not be around to help you, DO take some Prudent action, by :

a)    Immediately Switch off the Power-Supply to the Lift System.

b)    Try to Ply Open the Lift-Elevator doors

c)     Pull out the Passengers and lay them flat on the ground. Do not give them Water

d)    Firstly, Call for an Ambulance

e)     Secondly, Call the Fire Brigade

f)      Thirdly, Call the Police Control room number on  "100″, and seek emergency help, about the incident.

g)    Fourthly, and subsequently IF you are a prudent citizen, THEN lodge a FIR with the local Police Station, about the incident (criminal accident), in the larger interest of the Public (means your family members and other co-residents)

h)    Subsequent to the FIR, IF the police dept., does not inveestigate and file Charge-Sheet, THEN file private Criminal complaint at the local Magistrates court, against all concerned and negligent persons, which includes the Society Secretary, the Lift AMC vendor and others.

i)       In private buildings, and in normal circumstances, the Govt., does not provide any help, relief or compensation, for Human life casualities, and as usual, victims have to fend for themselves.

INTROSPECT:  IF you do not take suo-motto care of your Lifts, THEN you are in Moral-Abetment, in the Lift-Falling incident (criminal accident). Next time, you /family may be inside the falling Lift.

Special Thanks to Social Activist Shri Afzal Mohammed, for filing "Public Interest Litigation" (PIL) before the Hon. High Court, in Mumbai, on "Lift Safety Issues", in the larger interest and safety of the Public.

————————————————–

AUTHOR:  Hemant Agarwal

Email:  ha21@rediffmail.com

Date:  24^th February, 2014

Reg. withdrawal of exemption for services for Export which are subject to Minimum Export Price or Export Duty

Posted In Service Tax | Notifications | No Comments »

Notification No.  05/2014-Service Tax, Dated- 24^th  February, 2014.

G.S.R.  107 (E).– In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 6/2013-Service Tax, dated the 18^th April, 2013 published in the Gazette of India, Extraordinary Part-II, Section 3, sub-section(i), vide number G.S.R. 254 (E), dated 18^th April, 2013, namely:-

In the said notification, in paragraph 3, in condition (a), in the second proviso, serial number (xix) and the entries relating thereto shall be deleted.

 [F.No. 605/10/2013-DBK]

(Sanjay Kumar)

Under Secretary to the Government of India

Note: The principal notification No. 6/2013-Service Tax, dated the 18^th April, 2013 was published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 254(E), dated the 18^th April, 2013 and was last amended by notification no. 17/2013 –Service Tax, dated the 26^th December, 2013 vide number G.S.R. 792 (E), dated the 26^th December, 2013

ICAI to Release 2014 Guidance Note on Audit of Banks

Posted In CA CS ICWA | News | No Comments »

COMING SOON
NEW PUBLICATION FROM THE AUDITING & ASSURANCE STANDARDS BOARD
2014 GUIDANCE NOTE ON AUDIT OF BANKS

The Auditing and Assurance Standards Board of ICAI will soon bring out the 2014 edition of the Guidance Note on Audit of Banks. The 2014 edition has been thoroughly revised and revamped to reflect inter alia the changes in the regulatory requirements of RBI, impact of CBS on banks' internal control environment and the financial reporting processes. The auditor's procedures have also been rewritten at many places to bring it in sync with the risk based approach in the currently applicable Standards on Auditing and also to address queries frequently posed especially by the bank branch auditors. To make the Guidance Note more handy and useful, repetitive guidance has been identified and removed as also discussion on basic level concepts has been shifted to the accompanying CD, thereby reducing its volume. In addition, the CD will also contain text of important RBI circulars, illustrative checklists, appendices, etc.

Please keep a watch on www.icai.org for information on date of release of the Guidance Note.

Source- ICAI

Calcutta HC Ruling on Section 93 of I-T Act,1961–Rising of Phoenix

Posted In Income Tax | Articles | No Comments »

CA Anuja Garg

Introduction

International transactions have always been on the anvil of the tax department. The retrospective amendments in the Income-tax Act, 1961 ("the Act") and introduction of GAAR despite existing specific anti-avoidance provisions, are evident of this fact.

The decision of the Calcutta High Court in the case of Maersk Line UK Ltd, which reiterates the fact that business transactions having commercial substance and bona fide business purpose are permissible as long as there is no misuse of the provisions, assumes importance since the same is the first (and probably the last) judicial pronouncement in respect of the dormant section 93 of the Actand more so, since the said section, being a specific anti-avoidance provision could lose its sheen once GAAR takes the reign.

Background

Section 93 of the Act corresponds to section 44D of the erstwhile Income-tax Act, 1922which was one of the earliest anti-avoidance legislations in India.

The said section was reintroduced in the 1961 Act with some cosmetic changes and presently reads as under:

"93. Avoidance of income-tax by transactions resulting in transfer of income to non-residents.

(1) Where there is a transfer of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, any income becomes payable to a non-resident, the following provisions shall apply—

(a)         where any person has, by means of any such transfer, either alone or in conjunction with associated operations, acquired any rights by virtue of which he has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a non-resident person which, if it were income of the first-mentioned person, would be chargeable to income-tax, that income shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section, be deemed to be income of the first-mentioned person for all the purposes of this Act;

(b)         where, whether before or after any such transfer, any such first-mentioned person receives or is entitled to receive any capital sum the payment whereof is in any way connected with the transfer or any associated operations, then any income which, by virtue or in consequence of the transfer, either alone or in conjunction with associated operations, has become the income of a non-resident shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section, be deemed to be the income of the first-mentioned person for all the purposes of this Act.

Explanation.—The provisions of this sub-section shall apply also in relation to transfers of assets and associated operations carried out before the commencement of this Act.

(2) Where any person has been charged to income-tax on any income deemed to be his under the provisions of this section and that income is subsequently received by him, whether as income or in any other form, it shall not again be deemed to form part of his income for the purposes of this Act.

(3) The provisions of this section shall not apply if the first-mentioned person in sub-section (1) shows to the satisfaction of the Assessing Officer that—

(a)   neither the transfer nor any associated operation had for its purpose or for one of its purposes the avoidance of liability to taxation; or

(b)   the transfer and all associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.

Explanation.—For the purposes of this section,—

(a)      references to assets representing any assets, income or accumulations of income include references to shares in or obligation of any company to which, or obligation of any other person to whom, those assets, that income or those accumulations are or have been transferred;

(b)      any body corporate incorporated outside India shall be treated as if it were a non-resident;

(c)       a person shall be deemed to have power to enjoy the income of a non-resident if—

(i)        the income is in fact so dealt with by any person as to be calculated at some point of time and, whether in the form of income or not, to enure for the benefit of the first-mentioned person in sub-section (1), or

(ii)      the receipt or accrual of the income operates to increase the value to such first-mentioned person of any assets held by him or for his benefit, or

(iii)    such first-mentioned person receives or is entitled to receive at any time any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and assets which represent that income, or

(iv)     such first-mentioned person has power by means of the exercise of any power of appointment or power of revocation or otherwise to obtain for himself, whether with or without the consent of any other person, the beneficial enjoyment of the income, or

(v)       such first-mentioned person is able, in any manner whatsoever and whether directly or indirectly, to control the application of the income;

(d)      in determining whether a person has power to enjoy income, regard shall be had to the substantial result and effect of the transfer and any associated operations, and all benefits which may at any time accrue to such person as a result of the transfer and any associated operations shall be taken into account irrespective of the nature or form of the benefits."

Section 93 of the Act, therefore, applies in a situation wherein,either alone or in conjunction with associated operations –

-          pursuant to transfer of assets, consequently any income becomes payable to a non-resident, before or after such transfer, or

-          where any such first mentioned person receives or is entitled to receive any capital sum, the payment whereof is in any way connected with the transfer or any associated operations, then any income which by virtue or in consequence of the transfer, has become the income of a non-resident, whether it would or it would not have beenchargeable to income-tax apart from the provisions of the said section.

In other words, the section aims at protecting the interest of the Revenue in cases wherein payment of tax is sought to be evaded by transferring assets to non-residents while continuing to enjoy the income by resorting to dubious methods.

The section is applicable subject to fulfillment of the following conditions –

• there is a transfer of assets;
• by reason of that transfer, income traceable to the said assets becomespayable to a person who is a non-resident or resident but not ordinarily resident;
• the resident, by means of the transfer alone or in conjunction with associated operations, acquires right toenjoy such income;
• the income from the said assets, if it was the income of the resident, would bechargeable to income-tax.

The only exception to the applicability of section 93 is that if, to the satisfaction of the Assessing Officer, it is demonstrated that the transfer and all associated operations were bona fide commercial transactions not designed for the purposes of avoiding liability to taxation.

Recent decision of the Calcutta High Court in the case of DIT v. Maersk Line UK Limited: ITA No. 89/2013

The assessee, Maersk Line UK Limited, a company incorporated in the United Kingdom, is the partner of P&O Nedlloyed ("Nedlloyed"), a partnership firm established in the United Kingdom. Nedlloyed has two partners, the assessee and Nedlloyed BV ("the Dutch company") a company incorporated under the laws of Netherlands.Nedlloyed carries on business of operation of ships all over the world including in India. The global profit and loss of the partnership is shared by its two partners, the assessee and the Dutch company in the ratio of 56:44 respectively.

P&O Nedlloyed India Private Limited ("NIPL"), a company incorporated inIndia under the Companies Act, 1956, and a wholly owned subsidiary of the assessee, is the authorized shipping agent of the partnership firm Nedlloyed in India and represents the partnership firm Nedlloyed in all transactions in India.

The assessee sold 10,71,420 equity shares of its wholly ownedsubsidiary, NIPL to Maersk India Private Limited for consideration ofRs.5,20,28,155/-.This sale was admittedly part of the overall reorganizationof the business of the assessee. The long term capital gain on sale of shares at a consideration of Rs.5,20,28,155/- worked out to Rs.2,58,76,351/-The assessee filed its income-tax return for the assessment year 2006-07 on 29th November, 2006, declaring totalincome of Rs.2,58,76,351/- on account of long term capital gain. In the return, the assessee also claimed credit for tax deductionat source (TDS).

During the previous year 2005-06, corresponding to assessment year 2006-07, NIPLdeclared dividendamounting to Rs.14,99,98,800/- to its non-resident shareholders, i.e. the assessee. Admittedly, NIPL India had earned profits and had cashsurplus and/or cash reserves for distribution of dividends, andaccordingly a resolution was adopted by the Board of Directors for distribution of dividend. While arriving at the revised net worth of NIPL, the valuers had made certain adjustments to the net worth of the equity shares up to 31st March, 2006 including,inter alia, deduction of Rs.17,10,36,000/- declared as dividend and paid to its shareholders from its net worth.

By the order of assessment dated 10th November, 2008 the Assessing Officer assessed the income of the assessee at Rs.17,12,57,331/- for the assessment year in question, inter alia, upon increasing the value of the shares sold by the assessee after disallowingthe deduction claimed on account of distribution of dividend and also credit claimed for deduction of TDS from Nedlloyed.

The assessing officer contended that Nedlloyed group had intentionally resorted to payment of dividend to avoid payment of tax on long term capital gains on sale of shares.

The fact that distribution of dividend by NIPL prior to its sale by the assessee, even after the payment of dividend distribution taxes, had resulted in tax advantage of Rs.94 lakhs was not disputed.The fundamental question that arose was whether the declaration of dividend byNIPL, just before sale of its shares to Maersk India, could betreated as a colourable device and part of impermissible taxavoidance scheme.

The High Court, dismissed the Revenue's appeal on the following grounds –

• There was no legal bar to the distribution of dividends, which was done in accordance with the provisions of the Companies Act, 1956. The Revenue has not been able to demonstrate any illegality in the distribution of dividend, in view of admitted cash reserves and surplus for such distribution.
• On acceptance of dividend distribution tax, the legality of distribution of dividend could not be questioned. Further, if there was no legal infirmity in distribution of dividend, the mere fact that such distribution of dividend ended up in saving taxes on sale of shares would not invalidate the distribution of dividend.
• That the share valuation was done in due compliance of RBI guidelines and did not suffer from any infirmity, was demonstrated by concurrent finding of facts.

Judicial Precedents in respect of section 44D of the erstwhile 1922 Act

Kadar Mohideen v CIT: 38 ITR 647 (Madras HC)

The decision of the Madras High Court, in the case of Kadar Mohideen, was the first precedent on section 44D of the erstwhile 1922 Act, wherein the assessee, a resident in India, was carrying on business of manufacture of ball threads in Ceylon and was assessed to income-tax on the income from the said business. In the books of the business there were credits in the names of his wife, minor sons and his nephew. A private company was formed in Ceylon and the business was transferred to it. The company in turn allotted shares to the assessee, his wife, minor sons and nephew. Subsequently, the assessee filed his return of income by including the dividend income from the company in respect of the shares standing in the names of his wife and his minor sons. In the assessment year 1947-48, which related to the year of account in which the company was formed, the Income-tax Officer held that the entire profits of the company should be included in the assessment under section 44D of the Income-tax Act, as the assessee had failed to prove that the transfer of assets to the foreign company was not made with a view to avoid a liability to taxation. In view of the fact, that the majority of the shares in the company were owned by the assessee, the other shares being in the name of his near relations, the officer held that the assessee had the power to enjoy the income of the company. He, therefore, included the entire profits of the company in the assessable income of the assessee.

The High Court held that the entire income of the company (not only the dividend declared by the company) could be assessed in hands of the assessee only if the assets transferred by him to the company constituted the entire share capital of the company and the assessee had the power to enjoy the income from the transferred assets. In this case, the consideration for shares allotted to the wife of the assessee represented her own money deposited with the business and if two persons transferred their respective assets to a non-resident company, which together constituted the share capital of the company, each of them had to be taxed in respect of the assets transferred by him, one person could not be taxed in respect of the entire income of the company nor could both of them be treated as a single assessee. In such a case each person has to be taxed in respect of the dividends received by him from the company. In view of the fact that the entire assets which were transferred to the limited company did not belong to the assessee, it follows that the assessee would be entitled only to the dividends from that foreign company, and not the entire profits. The assessee had disclosed the income from the dividends received by his wife and minor sons in his return and thus, it could not, therefore, be said that the transfer of assets was made for the purpose of avoiding income-tax.

CIT v. Mohammed Ibrahim Sahib: 45 ITR 166 (Madras High Court)

The legal principle of section 44D of the erstwhile 1922 Act was further explained in the case of Mohammed Ibrahim Sahibby the Madras High Court. In this case, the assessee was carrying on a business at Colombo for more than twenty years. He decided to leave Ceylon and settle down in India. All the assets of the business including goodwill were transferred to a private limited company, of which he became a major shareholder, the other shareholders being his sons.

It was contended by the Department that the transaction came within the purview of section 44D.

The assessee, however, affirmed that the transfer was made with a view to preserve the business to the family and not for the purpose of avoidance of tax.

The High Court held that in every case where there is a transfer of an income producing asset to a non-resident company, there will be avoidance of tax and the assessee who transfers such assets would certainly know or be presumed to know that the effect of the transfer would be that the tax liability would be avoided. The real question to be decided in a case like this is whether the actual avoidance of tax was the result of a design on the part of the assessee and not merely an incident or effect of the transaction entered into for other reasons.

In the present case, the transfer of the assessee's assets to the non-resident company was not with the object of avoiding Indian income-tax but with a view to facilitate the continuance of the business which he was carrying on.

The High Court observed that the mere fact that the transfer results in the avoidance of the tax liability could not mean that there was an intention to avoid such liability. The word "purpose" signifies an intention or design to achieve a particular result, namely, the avoidance of liability to taxation. Where the purpose is shown to be other than the avoidance of liability to taxation, the exemption given by the section would apply.

Contrary view of the Supreme Court in the case of Chidambaram Chettiar (through legal heirs) v. CIT: 60 ITR 28.

The facts in the case of Chidambaram Chettiarare similar. In this case, a Hindu undivided family carried on an extensive money lending business in British India, Burma and elsewhere. There was a partition in the family, and the members constituted themselves into a firm to carry on the business. Subsequently the firm started a money-lending business in Kuala Lumpur with capital transferred from its business in Burma. A company was incorporated in Pudukottai, a native State, with the purpose of taking over the Kuala Lumpur business. Subsequently the assets of the business of the firm in Kuala Lumpur were transferred to the company in consideration of shares of the company issued to the partners of the firm. Five years later, the company distributed bonus shares out of its profits.

The Revenue sought to assess the partners of the firm separately in respect of the profits of the company incorporated in Pudukottai derived from the business in Kuala Lumpur under section 44D.

It was contended by the taxpayer to begin with that since the transfer of assets to the non-resident company was made by the partnership firm in India, the partners of the firm could not be brought under the purview of the provision.

The contention was negatived by the Court relying on the decision of House of Lords in the case of Congreve &Anr. v. IRC: 16 ITR Supp. 107, wherein it was argued that for an income to fall under the purview of the above provision, it must have been such income as would have been taxable in India in the year of transfer. In the said year it was foreign income not remitted to India and as such was not taxable in India. The Court disregarded this contention on the ground that the taxability should be adjudged in the year of assessment of income only and not in the year of transfer, because what is relevant is the enjoyment of a foreign income by a resident in the year of assessment and not the transfer of assets by the transferor.

The apex Court held –

"…the sub-section is not concerned with the transferor but only with the result brought about by means of the transfer of the assets in conjunction with associated operations. The sub-section was designedly couched in the widest phraseology to prevent evasion of tax in the manner prescribed thereunder. If it was not so, a person can transfer his assets to another in a year they have not yielded any income at all, reserving indirectly the right to enjoy the income therefrom in future or he may transfer his assets when they are not yielding any income, but which may, under a scheme of future development, yield enormous profits. On the other hand, a bona fide transferor is amply protected by sub-s. (3) of s. 44D of the Act."

The Court also held that since the partners of the firm along with their close relatives owned all the shares of the company, it has to be construed that they had the power to enjoy the income of the company arising from the transferred assets.

Conclusion

The deeming provision regarding power of enjoyment of income has been phrased in the widest possible way and its application has to be analyzed in the facts of each case. The provision will not be applicable if the main purpose of the transfer of assets was commercial expediency, incidentally resulting in savings of tax.

Post assessment year 2016-17, tax-avoidance,however, would be examined on the touchstone of GAAR. The list of illustrations given by the Shome Committee on the applicability of GAAR clarifies that GAAR would not be invokes in cases wherein tax benefit is linked to declaration or non-declaration of dividend since declaring dividend is a strategic policy decision which cannot be questioned. The ratio decidendi in the case of Maersk Line UK is in line with the rationale drawn by the Shome Committee. It would be, in such circumstances, interesting to note as to whether, post-implementation of GAAR, the factual matrix underlined in section 93 would become redundant and resume silence the way it hadsince the inception of Income-tax Act, 1961 or whether the same would still retain its place in a modified form.

(Author is working as Senior Executive – Corporate Tax with Wipro Limited at Bangalore)

IT : Where assessee had offered actual amount received on sale of property for taxation, revenue authorities were not justified in passing penalty order under section 271(1)(c) by adopting higher sale consideration under section 50C on basis of stamp duty valuation of said property

■■■

[2014] 42 taxmann.com 26 (Calcutta)

HIGH COURT OF CALCUTTA

Commissioner of Income-tax, Kol-IV

v.

Madan Teatres Ltd.*

GIRISH CHANDRA GUPTA AND TARUN KUMAR DAS, JJ.

GA NO. 684 OF 2013 
ITAT NO. 62 OF 2013

MAY  14, 2013 

Section 271(1)(c), read with section 50C, of the Income-tax Act, 1961 - Penalty - For concealment of income [Disallowance of claim, effect of] - Assessee sold a property for a sum of Rs. 2.51 crore - For purpose of stamp duty, value was estimated at a sum of Rs. 5.19 crore and on that basis stamp duty was realized - Thereupon, Assessing Officer having adopted sale price at Rs. 5.19 crore and passed a penalty order under section 271(1)(c) - Tribunal set aside said penalty order - On appeal, it was noted that actual amount received on sale was offered for taxation and it was only on basis of deemed consideration proceedings under section 271(1)(c) were started - Even otherwise, revenue failed to produce any iota of evidence that assessee actually received one paise more than amount shown to have been received by him - Whether in aforesaid circumstances, Tribunal was justified in setting aside penalty order - Held, yes [Para 4] [In favour of assessee]

Md. Nizumuddin for the Appellant. Alok Kumar Pal for the Respondent.

ORDER

 

1. The Court : The assessee sold the property at a sum of Rs.2,51,50,000/-For the purpose of stamp duty, however, the value was estimated at a sum of Rs.5,19,77,000/- and on that basis the stamp duty was realized. During the assessment, it was found that the assessee had disclosed the sale price at a sum of Rs.2,51,50,000/-. The Assessing Officer fixed the sale price at a sum of Rs.5,19,77,000/- and started proceedings under Section 271(1)(C). Penalty for a sum of Rs.30,09,989/-was imposed.

2. The assessee preferred an appeal. The Appellate Authority allowed the appeal and set aside the order imposing penalty indicated above for the following amongst other reasons:

"However, the capital gain was a loss irrespective of the value of sale consideration of either Rs.2,51,50,000/- taken by appellant in return of income or Rs.5,19,77,000/- taken by Assessing Officer in the assessment order and therefore there was no tax effect and appellant did not litigate further before the Assessing Officer. Appellant has referred to the decision of Hon'ble Supreme Court in the case of Dharmendra Textiles Processors, 306 ITR 277 where it was held that mens rea is not an essential element for imposing penalty u/s.271(1)(c) of the I.T. Act. It has been further clarified by the Hon'ble Supreme Court in the case of CIT Ahmedabad v. Reliance Petroproducts Pvt. Ltd. arising out of Civil Appeal No.2463 of 2010 in the decision dated 17.03.2010 that a mere making of claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding income of the assessee. The Hon'ble Supreme Court had opined that if no fault can be found with the particulars submitted by the assessee in its Return of income then penalty u/s.271(1)(c) cannot be imposed. In the present case, as far as the amount of consideration of sale for the purpose of computation of capital gain u/s.48 is concerned, even if the valuation of property as per the stamp valuation authority is more than the actual sale consideration, the provisions of section 50C(2) allow the appellant to choose the actual sale consideration if the appellant is convinced about the fair market value of such property being the same as consideration actually received by the appellant. Assessing Officer invoked the provisions of section 50C(1) and deemed the sale consideration at Rs.5,19,77,000/- as per the valuation of stamp valuation authorities and appellant chose not to contest the same u/s. 50C(2) of the I.T. Act as it would not have made any difference in the tax liability of the appellant because the capital gain still remained a loss. However, the belief of appellant at the time of filing of return of income that the valuation of property by stamp valuation authorities could not be the fair market value of the property is a bona fide belief though not pursued further in view of the provisions of section 50C(2) of the I.T. Act. After considering all facts and circumstances in the present case, I find that the appellant cannot be said to have filed inaccurate particulars of income or to have concealed any income and therefore I cancel the penalty of Rs.30,09,989/- imposed by the Assessing Officer u/s.271(1)(c) of the I.T. Act."

3. The Revenue preferred an appeal. The learned Tribunal dismissed the appeal holding, inter alia, as follows:

"Thus obviously, it is only on account of deeming provisions of section 50C, the AO has made the addition by adopting the sale consideration of Rs.5,19,77,000/-, being the value adopted for the purpose of stamp valuation. The revenue has also not shown as to how the assessee could be held to have actually received this amount which is in excess of the amount of Rs.2,51,50,000/-. It has also not been shown as to whether any corresponding addition has been made in the hands of the buyer. In any case, the issue is also now squarely covered by the decision of the Coordinate Bench of this Tribunal in the case of Renu Hingorani (supra). In the circumstances, respectfully following the decision of the Coordinate Bench of this Tribunal in the case of Renu Hingorani (supra) as also on account of the fact that the revenue has not been able to dislodge the findings of the Ld. CIT(A) that the bona fides of the assessee are genuine, the findings of the ld. CIT(A) stand confirmed. In the circumstances, the appeal of the revenue is dismissed."

4. Mr. Niaumuddin, learned Advocate appearing for the Revenue, contended that the assessee had a choice to dispute the valuation on the basis of the deemed value, but the assessee did not take that opportunity. The assessee had a choice or he could have litigated. The fact remains that the actual amount received was offered for taxation. It is only on the basis of the deemed consideration that the proceedings under Section 271(C) started. The revenue has failed to produce any iota of evidence that the assessee actually received one paise more than the amount shown to have been received by him.

5. We are, as such, of the opinion that there is no scope to admit the appeal since the same does raise any question of law, substantial or otherwise.

6. The appeal is, therefore, rejected.

SUNIL

---

*In favour of assessee.

--

T-I : Where assessee, a builder, purchased cement from one party by account payee cheques at rates which were reasonable as compared to rates paid to other parties, assessee's claim for deduction in respect of said expenses was to be allowed under section 37(1)

IT- II : Where assessee in support of payment of labour charges, brought on record documentary evidence such as election card, driving licence, ration card etc. of recipients, transactions in question being genuine in nature, assessee's claim for deduction of labour charged was to be allowed

■■■

[2014] 42 taxmann.com 80 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax -IV

v.

Sonar Construction (P.) Ltd.*

V.M. SAHAI AND N.V. ANJARIA, JJ.

TAX APPEAL NO. 904 OF 2011†

AUGUST  24, 2012 

I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Burden of proof] - Assessment year 2003-04 - Assessee was engaged in building and construction activities - It purchased cement from one 'N' - Assessing Officer rejected assessee's claim in respect of said purchases - Commissioner (Appeals) noted that purchase of cement from 'N' was by account payee cheque and that party was a small contractor, who had closed his business and, on account of this reason, assessee could not produce said party inspite of best efforts - It was also noted that purchase of cement was at reasonable rate as compared to rates paid to other parties - He thus deleted disallowance made by Assessing Officer - Tribunal confirmed order of Commissioner (Appeals) - Whether on facts, no substantial question of law arose from Tribunal's order - Held, yes [In favour of assessee]

II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Burden of proof] - Assessment year 2003-04 - Assessee made payment towards labour charges - Assessing Officer rejected assessee's claim in respect of said payment taking a view that identity of person concerned was not proved - Commissioner (Appeals) was of view that there were sufficient documentary evidence in nature of election card, driving licence, ration card, confirmation of ledger account, etc., by which genuineness of transaction was proved - He thus allowed assessee's claim - Tribunal confirmed order of Assessing Officer - Whether findings recorded by authorities below being which were in no way perverse, no interference in said findings was called for - Held, yes [In favour of assessee]

Varun K. Patel for the Appellant.

JUDGMENT

 

N.V. Anjaria, J. - The present Appeal by the Revenue under section 260-A of the Income-tax Act, 1961 is directed against the common order dated 21-01-2011 of the Income-tax Appellate Tribunal, Ahmedabad(C) in ITA Nos. 1838 & 1839 of 2009 insofar as the said common order relates to ITA No. 1838 of 2009.

1.1 The appellant has raised the following questions proposing it to be a substantial question of law :

"(A) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of Rs. 7,20,000/- made by Assessing Officer on account of purchases from Nirav Traders?

(B) Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 6,80,030/- made by Assessing Officer on account of labour payment?"

2. We heard Mr. Varun K. Patel for the Appellant.

3. The Assessing Officer made two disallowances while assessing the income of the respondent-assessee for the Assessment Year 2003-2004. The first was of Rs. 7,20,000/- in respect of purchases made from one Nirav Traders. The second disallowance for Rs. 6,80,030/- was on the count of labour charges paid. According to the Assessing Officer, the genuineness of the transaction with Nirav Traders was not proved. As regards the amount paid towards labour charges, it was observed by the Assessing Officer that the identity of the person concerned was not proved.

3.1 In the appeal of the assessee, the Commissioner of Income-tax (Appeals) held that the purchase of cement from Nirav Traders was by account payee cheque and that the party was a small contractor, who had closed his business. The assessee, therefore, could not produce the party in spite of best efforts. It was also noted by the CIT(A) that the purchase of cement was at reasonable rate compared to the rates paid to other parties. He, however, confirmed disallowance of 10% to the extent of Rs. 72,000/-, and thereby partly allowed the ground of the assessee. With regard to the labour payment disallowed by the Assessing Officer the CIT(A) was of the view that there were sufficient documentary evidence in the nature of election card, driving licence, ration card, confirmation of ledger account etc. by which the genuineness of the transaction was proved . The disallowance came to be deleted by him.

3.2 The Tribunal dismissed the appeal of the Revenue and confirmed findings of the appellate Commissioner holding that the Commissioner had properly considered the material before it on both the issues.

4. With regard to the disallowance on account of purchase from Nirav Traders, the Tribunal observed as under :

"The learned CIT(A) found that rates of the\cement purchases from "NT" is almost the same as compared to be purchase rates of other traders. The purchase bills were produced and all the payments have been made through account payee cheques. No evidence is brought on record that the purchase price paid to the above returned to the assessee. The learned CIT(A) was therefore justified in deleting the substantial addition\on the above issue."

5. Similarly in respect of the second addition, the Tribunal arrived at following findings of its own :

"The assessee could file only copy of the account, the AO accordingly disallowed the above payment. It was submitted before the learned CIT(A) that copy of the account alongwith confirmation of the parties and complete details of the payment and tax deducted from payments made to them have been filed. Copy of the bank account showing the details of the payments through banking channel was filed to show genuineness of the payments being made. It was further submitted that copy of election card, bills for purchases of bricks, site report of delivery of bricks, vouchers, ledger account etc. were filed to prove identity of the above person along with their addresses, phone numbers etc. and the payments were made through demand draft and regarding identity of Jugdish Sathwara, complete details were filed and payments were made by cheques from Global Trust Bank on which TDS was also deducted. The learned CIT(A) on examining the above details found that the assessee made genuine transactions with these three parties and all the payments were made through banking channel. Thus, the assessee proved genuineness of the payment, which have been supported by the details."

6. The confirming findings recorded by the Tribunal were based upon the facts and material relevant to the issue before it. They were findings of facts and in the realm of appreciation. When the findings are factual in nature and properly arrived at, and when they are in no way perverse, no interference is called for in the present appeal. No substantial question of law arises for consideration.

7. Accordingly, the appeal is dismissed.

SUNIL

---

*In favour of assessee.

†Arising out of order of Tribunal in ITA Nos. 1838 and 1839 (Ahd.) of 2009, dated 21-1-2011

IT : Interest on refund is allowable on all kinds of tax payment; it is not confined only to tax paid on demand

■■■

[2014] 42 taxmann.com 83 (Kerala)

HIGH COURT OF KERALA

Assistant Commissioner of Income-tax, Circle (1), Calicut

v.

Kerala Transport Co.*

DR. MANJULA CHELLUR, CJ.
AND A.M. SHAFFIQUE, J.

W.A. NO. 817 OF 2010

OCTOBER  8, 2013 

Section 244A, read with section 156, of the Income-tax Act, 1961 - Refunds - Interest on [Excess tax paid] - Assessment year 1990-91 - Whether 'any amount becomes due to assessee' as mentioned in section 244A(1) clearly takes in all forms of refunds, either self assessed tax or tax paid as per notice under section 156; and it cannot be argued that liability to pay interest is only in respect of tax paid after a demand is made under section 156 - Held, yes [Para 4] [In favour of assessee]

Words & Phrases : 'Any amount becomes due to assessee' as occurring in section 244A of the Income-tax Act, 1961

Jose Joseph for the Appellant. S. Arun Raj for the Respondent.

JUDGMENT

 

A.M. Shaffique, J. - This appeal is filed by the revenue against the judgment of the learned Single Judge allowing the writ petition to the extent of modifying Ext.P4 order declining interest on refund of self-assessed tax and directing the Assessing Officer to grant eligible interest on refund of excess self-assessed tax paid from the date of first regular assessment and adjustment till date of refund at the rate provided under Clause (b) of Section 244A (1) of the Income Tax Act. (hereinafter referred as the Act.

2. The facts involved in the above writ petition would disclose that with reference to assessment year 1990-91 the Assessee paid tax after making a self-assessment. The assessment was completed under Section 144 of the Act on 23.03.1993 as per Ext.P1. While making self assessment the assessee had paid a sum of Rs.13,94,620/-. An additional amount of Rs.4,34,349/- was raised based on Ext.P1 assessment order. The same was collected on 16.08.1993. After a series of appeals preferred by the petitioner the assessment was revised to give effect to the order dated 30.01.2002 of the ITAT thus setting off the loss determined for the earlier year. An order was passed by the Assistant Commissioner of Income Tax under Section 154 of the Act fixing the revised total income at Rs.39,56,950/- and tax at Rs.10,10,521/-. Since the petitioner had paid excess tax, the 1st respondent again passed an order dated 18.12.2002 determining the excess tax paid by the petitioner amounting to Rs.9,40,669/- and classifying excess tax paid under two categories. Rs.5,06,320/- paid as self-assessed tax under Section 140A and Rs.4,34,349/- as tax paid vide notice under Section 156 of the Act. The 1st respondent also allowed interest under Section 244A on the excess tax of Rs.4,34,349/- paid on 16.08.1993 and held that no interest under Section 244A is payable by the department on tax paid by way of self-assessed tax and there is no provision for the same. Ext.P3 is the said order. Aggrieved by Ext.P3 the petitioner preferred a revision and the 2nd respondent rejected the same as per Ext.P4 order. The petitioner had filed the writ petition seeking a declaration that he is entitled to get interest under Section 244A (1) of the Act on the balance refund amount of Rs.5,06,320/- and for a direction to the respondents to pay the interest on the said amount.

3. The learned Single Judge found that it is clear from Section 244A(1)(b) and the explanation that the department cannot dispute that the assessee is entitled to interest on refund of all payments of tax in excess of actual tax found due. It is found that if any self-assessed tax paid and adjusted against the demand, was later found to be refunded, then the assessee will be entitled to get interest under Section 244A (1) (b) of the Act on such excess tax adjusted against demand. Accordingly, the writ petition was allowed as stated above.

4. The learned counsel for the appellants based on the Explanation to section 244A would contend that as far as self-assessment is concerned, there cannot be any refund under the normal circumstances. Such a procedure is not taken care of under Section 244A (1) (b) of the Act is concerned. Section 244A (1) (b) and Explanation reads as under:

'244A. Interest refunds.— (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely:—

(a)**

**

**

(b) in any other case, such interest shall be calculated at the rate of one half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.

Explanation:— For the purposes of this clause, "date of payment of tax or penalty" means the date on and from which the amount of tax or penalty specified in the notice of demand issued under Section 156 is paid in excess of such demand.'

The argument is that going by the Explanation to Section 244A (1)(b) the liability to pay interest is only in respect of the tax paid after a demand is made under section 156 of the Act. We do not think that such a differentiation can be made to the aforesaid provision and Explanation does not give a different meaning at all. Any amount due to the assessee under the Act mentioned in section 244(1) clearly takes in all forms of refund, either self assessed tax or tax paid as per notice under Section 156 of the Act. As far as the explanation is concerned it only indicates the date on which the interest is liable to paid. That being the position, we do not think that there is any illegality or perversity in the judgment of the learned Single Judge.

Accordingly, this appeal is dismissed.

SB

---

*In favour of assessee.

--

IT: Order passed by Commissioner under section 119(2)(b) is an administrative order against which appeal before Tribunal under section 253 will not be maintainable

■■■

[2014] 42 taxmann.com 85 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax -II

v.

Rasida Ibrahimbhai Vohra*

M.R. SHAH AND R.P. DHOLARIA, JJ.

SPECIAL CIVIL APPLICATION NOS. 17461 TO 17464 OF 2013

DECEMBER  18, 2013 

Section 253, read with section 119, of the Income-tax Act, 1961 - Appellate Tribunal - Appeals to [CBDT's Administrative order] - Whether order passed by Commissioner under section 119(2)(b) is an administrative order against which appeal before Tribunal under section 253 would not be maintainable - Held, yes [Para 6][In favour of assessee]

FACTS

 

■		The assessees approached the Commissioner for regularization of their return in terms of section 119(2)(b).
■		The Commissioner rejected said application.
■		However, the Tribunal had directed the Commissioner to consider the case of the assessee afresh, after giving proper opportunity of being heard to them.
■		On application:

HELD

 

■

Consistently the Tribunal has held that the order passed by the Commissioner under section 119(2)(b) is an administrative and non appealable order. Even otherwise, considering section 253 an appeal against the order passed by the Commissioner under section 119(2)(b) is not provided/maintainable. As such order passed by the Commissioner under section 119(2)(b) is an administrative order against which appeal before Tribunal under section 253 would not be maintainable. Under the circumstances, the Tribunal has materially erred in entertaining the appeals against the order passed by the Commissioner under section 119(2)(b) and has materially erred in passing the impugned order directing the Commissioner to consider the case of the respondent-assessee afresh, including the issue of condonation of delay, virtually quashing and setting aside the orders passed by the Commissioner under section 119(2)(b) and remanding the matter to the Commissioner. [Para 6.1]

CASE REVIEW

 

CIT v. Patel Maheshbhai Dahyabhai [2013] 36 taxmann.com 307 (Guj.) (para 6.4) distinguished.

Mauna M. Bhatt for the Petitioner.

JUDGMENT

 

M.R Shah, J. - As common question of law and facts arise in this group of petitions, they are disposed of by this common judgment and order.

2. In all these petitions under Articles 226 & 227 of the Constitution of India, the petitioner- Commissioner of Income Tax-II, Vadodara has challenged the impugned common judgment and order passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as the "ITAT") dated 31.5.2013 passed in ITA No.188/AHD/2012 to 191/AHD/2012, by which, the learned ITAT has directed the Commissioner of Income Tax to consider the case of the respondents herein-respective assessee afresh including the issue of condonation of delay, after giving proper opportunity of being heard to them.

3. The facts leading to the present Special Civil Applications in nutshell are as under:

3.1 That with respect to the each assessee the Commissioner of Income Tax passed separate orders dated 3.11.2008 and 22.11.2009 respectively passed under Section 119(2)(b) of the Income Tax Act, 1961 (hereinafter referred to as the "I.T. Act"), by which, the application submitted by the respective assessee for regularization of their return in terms of Section 119(2)(b) of the I.T. Act, came to be rejected.

3.2 Feeling aggrieved and dissatisfied with the separate orders passed by the Commissioner of Income Tax passed under Section 119(2) (b) of the I.T. Act, the respective assessee preferred appeals before the learned ITAT and the learned ITAT by impugned judgment and order and relying upon the order passed by the Division Bench of this Court in Special Civil Application No.8003 of 2013 has directed the Commissioner of Income Tax to consider the case of the assessee afresh, including the issue of condonation of delay, after giving proper opportunity of being heard to them.

3.3 Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned ITAT, the department/revenue has preferred present Special Civil Applications under Articles 226 & 227 of the Constitution of India.

4. Ms. Mauna Bhatt, learned advocate on behalf of the petitioner-revenue has vehemently submitted that the learned Tribunal has materially erred in passing impugned order and directing the Commissioner to consider the case of the assessee afresh. It is submitted that the learned Tribunal has materially erred in relying upon/considering/applying the order passed by the Division Bench of this Court in Special Civil Application No.8003 of 2013.

4.1 It is further submitted by Ms. Mauna Bhatt, learned advocate for the petitioner -revenue that as such against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act appeal before the learned ITAT is not maintainable as the orders passed by the Commissioner is an administrative and non appealable order. It is submitted that as such consistently the learned ITAT has held that order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is an administrative order and therefore, non appealable. It is submitted that despite the above, in the present cases the learned Tribunal has entertained the appeals which otherwise were not maintainable and has passed impugned orders. It is submitted that therefore, common judgment and order passed by the learned Tribunal is wholly without jurisdiction.

4.2 It is further submitted by Ms. Mauna Bhatt, learned advocate for the petitioner-revenue that even the learned Tribunal has materially erred in passing the impugned order relying upon the order passed by this Court passed in Special Civil Application No.8003 of 2013. It is submitted that as such in the aforesaid decision, the Division Bench did not agree with the similar order passed by the Tribunal passed in rectification application. However, the Division Bench in exercise of powers under Article 226 of the Constitution of India did not interfere with the order passed by the Tribunal in the peculiar facts and circumstances of the case narrated in the said order. It is submitted that in the said decision the Division Bench has not stated that in each and every appeal against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act, the Tribunal can entertain the appeal and pass the order on merits. It is submitted that the powers which are exercised by this Court under Articles 226 of the Constitution of India cannot be permitted to be exercised by the learned Tribunal while exercising the appellate jurisdiction. It is submitted that once the appeal is not maintainable against the order passed by the Commissioner under Section 119(2)(b) of the I.T. Act, thereafter it is not open for the Tribunal to pass any order on merits.

5. Though, served nobody appears on behalf of the respondents.

6. Heard Ms. Mauna Bhatt, learned advocate for petitioner-revenue. At the outset, it is required to be noted that what was challenged before the learned ITAT was the order passed by Commissioner passed under Section 119(2)(b) of the Act. It is submitted that consistently the Appellate Tribunal has held that the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is an administrative and non appealable order. Even otherwise, considering Section 253 of the I.T. Act an appeal against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is not provided/maintainable. As such order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is an administrative order against which appeal before the learned Appellate Tribunal under Section 253 of the Act would not be maintainable. At the cost of repetition, it is observed that consistently learned Appellate Tribunal has held that the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is an administrative and non appealable order. Under the circumstances, the learned Appellate Tribunal has materially erred in entertaining the appeals against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act and has materially erred in passing the impugned order directing the Commissioner to consider the case of the respondents-assessee afresh, including the issue of condonation of delay, virtually quashing and setting aside the orders passed by the Commissioner of Income Tax passed under Section 119(2)(b) of the Act and remanding the matter to the Commissioner.

6.1 It appears that by passing impugned order, the learned Appellate Tribunal has relied upon and/or considered/followed the order passed by the Division Bench of this Court in Special Civil Application No.8003 of 2013. We have considered and perused the order passed by the Division Bench of this Court in Special Civil Application No.8003 of 2013 and considering the same, we are of the considered opinion that learned Appellate Tribunal has materially erred in passing the impugned common judgment and order relying upon the order passed by the Division Bench of this Court passed in Special Civil Application No.8003 of 2013. In the case before the Division Bench, the learned Appellate Tribunal initially dismissed the appeal which was preferred against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act holding that the said order is an administrative and non appealable order. Despite the above, in a rectification application, learned Tribunal issued similar direction and/or passed similar order to the impugned orders and too that as such the Division Bench did not agree with the order passed by the Tribunal passed in rectification application and as such, has observed that the Tribunal order on rectification application suffered from serious legal defect. In para 7 the Division Bench has observed as under:

7. We have no hesitation in holding that the Tribunal's order on rectification application suffered from serious legal defect. If in the original order, the Tribunal was of the opinion that the order passed by the petitioner was not appellable, in exercise of rectification powers the Tribunal simply could not have given directions to the Commissioner to pass fresh order on the respondent's application. In essence, the Tribunal nullified the original order of the Commissioner and directed him to pass a fresh order after hearing the respondent. The Tribunal could have done this if the appeal was maintainable. When the Tribunal was of the opinion that the appeal was not maintainable, there was no question of giving such a direction, particularly in the order on application for rectification, the Tribunal did not come to any different conclusion. In other words, without holding that the appeal was maintainable, the order under challenge could not have been interfered with.

However, in the peculiar facts and circumstances of that case, the Division Bench did not thought it fit to interfere with the order passed by the learned Tribunal. Thus, it can be said that in exercise of powers under Article 226 of the Constitution of India the Division Bench thought it fit not to interfere with the order passed by the learned Tribunal, though the Division Bench observed that the order passed by the Tribunal suffered from serious legal defect. The order passed by the Division Bench in Special Civil Application No. 8003 of 2013 cannot be said to be a precedent and as such no law has been laid down by the Division Bench in the aforesaid decision. By aforesaid decision in Special Civil Application No.8003 of 2013 the Division Bench has not passed an order and/or held that though the appeal before the Appellate Tribunal against the order passed by the Commissioner passed under Section 119(2)(b) of the I.T. Act is maintainable and the Appellate Tribunal in exercise of appellate jurisdiction can entertain the appeal and pass the order on merits. Under the circumstances, as such the learned Tribunal has materially erred in solely relying upon the decision of the Division Bench of this Court in Special Civil Application No.8003 of 2013, which was passed by the Division Bench in exercise of powers under Article 226 of the Constitution of India and in the peculiar facts and circumstances of that case. As such the learned Tribunal has not correctly appreciated the decision of the Division Bench of this Court in Special Civil Application No.8003 of 2013 and as such has not considered the fact that as such appeal was not maintainable at all. Under the circumstances, the learned Appellate Tribunal has materially erred in passing the impugned common judgment and order relying upon and/or considering the order passed by this Court in Special Civil Application No.8003 of 2013.

7. In view of the above and for the reasons stated above all the petitions succeeds and the impugned common judgment and order passed by the learned ITAT dated 31.5.2013 passed in ITA No.188/AHD/2012 to 191/AHD/2012 is hereby quashed and set aside. Rule is made absolute to the aforesaid extent in each of the petitions. No costs.

POOJA

---

*In favour of assessee.

--
Regards,

Pawan Singla , LLB

M. No. 9825829075

IRFC Tax Free Bonds Tranche II – Key Features & Tax Benefits

Posted In Income Tax | Articles | No Comments »

CA Sandeep Kanoi

IRFC is a dedicated financing arm of the Ministry of  Railways.  Its  sole objective is to raise money from the market to part finance the plan outlay of Indian Railways.  The money so made available is used for acquisition of rolling stock assets and for  meeting other  developmental needs of the Indian Railways.

The borrowing programme of IRFC is guided by the requirements projected by Ministry of Railways.  The company has successfully met the targeted borrowings year after year, through issue of both taxable and tax-free Bonds, term loans from banks/financial institutions and through off shore borrowings.  IRFC also makes use of innovative financial instruments to diversify the debt portfolio and to minimize the cost.  Its contribution to infrastructure build-up in Railways is very significant. Till 31^st March, 2012, Rolling Stock assets – Locomotives, Coaches and Wagons – valued at Rs. 82,447 crore have been added to the asset base of the Indian Railways with funding assistance from IRFC. IRFC's funding has support technology infusion   in the Railways and has enabled Ministry of Railways to purchase new generation Locomotives from General Motors (USA) alongwith transfer of technology and new generation Coaches from Germany for use in high speed/Shatabdi trains.

IRFC is issuing Tranche II of Tax Free Bonds from 28 Feb 2014 to 07 Mar 2014. Key Features of the issue are as follows :-

• Indian Railway Finance Corporation Ltd is fully owned by the Government of India and is a dedicated financing arm of the Ministry of  Railways.
• Issue Size: proposes to raise Rs. 1,50,000 lakhs with an option to retain oversubscription upto Rs.  1,41,687.85 lakhs aggregating to Rs.  2,91,687.85 lakhs.
• Credit Ratings: AAA by ICRA and CARE, AAA/Stable by CRISIL
• Interest on these Bonds is Tax-Free, no TDS is applicable, Wealth Tax is not levied (Detailed Note is given Below)
• Basis of Allotment : On first come first serve basis

Issue Structure: Issue of Tax free Secured Redeemable Non-convertible bonds

Options / Series of Bonds	Series 1	Series 2
Tenor	10 years	15 years
Coupon Rate % p.a. (Category I, II and III)	8.19	8.63
Total Coupon Rate % p.a. (Category IV)	8.44	8.88
Frequency of Interest payment	Annual	Annual
Face Value / Issue Price per Bond	Rs 1,000
Minimum Application	Rs 5,000 (in multiples of Rs 1,000 thereafter)
Issuance	Demat and Physical form
Interest on application % p.a.	As per coupon rate applicable to investor category
Interest on refund % p.a.	5.0
Proposed to be listed on	BSE and NSE

STATEMENT OF TAX BENEFITS

Under the current tax laws, the following possible tax benefits, inter alia, will be available to the Bond Holder. This is not a complete analysis or listing of all potential tax consequences of the subscription, ownership and disposal of the Bond, under the current tax laws presently in force in India. The benefits are given as per the prevailing tax laws and may vary from time to time in accordance with amendments to the law or enactments thereto. The Bond Holder is advised to consider in his own case the tax implications in respect of subscription to the Bond after consulting his tax advisor as alternate views are possible. Interpretation of provisions where under the contents of this statement of tax benefit is formulated may be considered differently by income tax authority, government, tribunals or court. We are not liable to the Bond Holder in any manner for placing reliance upon the contents of this statement of tax benefits.

A. INCOME TAX

1. Interest from Bond do not form part of Total Income.

(a) In exercise of power conferred by item (h) of sub clause (iv) of clause (15) of Section 10 of the Income Tax Act, 1961, the Central Government vide notification no 61/2013/ F.No.178/37/2013-(ITA.I) dated 8th August 2013 authorizes Indian Railway Finance Corporation Ltd. to issue during the Financial year 2013-14, tax free, secured, redeemable, non-convertible bonds of ` 1,000 each for the aggregate amount not exceeding ` 10,00,000 lakhs subject to the other following conditions that –

(i) It shall be mandatory for the subscribers of such bonds to furnish their permanent account number to the issuer.

(ii) The holder of such bonds must register his or her name and holding with the issuer.

(iii) The tenure of the bonds shall be ten, fifteen or twenty years.

(iv) There shall be a ceiling on the coupon rates based on the reference Government security (G-sec) rate;

(v) The reference G-sec rate would be the average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India (FIMMDA) on a daily basis (working day) prevailing for two weeks ending on the Friday immediately preceding the filing of the final prospectus with the Exchange or Registrar of Companies (ROC) in case of public issue and the issue opening date in case of private placement.

(vi) The ceiling coupon rate for AAA rated issuers shall be the reference G-sec rate less 55 basis points in case of Retail Individual Investor and reference G-sec less 80 basis points in case of other investor segments, like Qualified Institutional Buyers(QIB's), Corporates and High Net worth Individuals.

(vii) In case the rating of the issuer entity is AA+, the ceiling rate shall be 10 basis points above the ceiling rate for AAA rated entities as given in the clause (vii).

(viii) In case the rating of the issuer entity is AA or AA-, the ceiling rate shall be 20 basis points above the ceiling rate for AAA rated entities as given in the clause (vii).

(ix) These ceiling rates shall apply for annual payment of interest and in case the schedule of interest payments is altered to semi-annual, the interest rates shall be reduced by 15 basis points;

(x) The higher rate of interest, applicable to retail investors, shall not be available in case the bonds are transferred by Retail investors to non retail investors.

(xi) At least 70% of aggregate amount of bonds shall be raised through public issue. 40% of such public shall be earmarked for retail investors.

(b) Total issue expenses shall not exceed 0.65% of the issue size in case of public issue and in case of private placement, it shall not exceed 0.25% of the issue size.

The issue expense would include all expenses relating to the issue like brokerage, advertisement, printing, registration etc.

(c) Section 10(15)(iv)(h) to be read with Section 14A(1) provides that in computing the total income of a previous year of any person, interest payable by any public sector company in respect of such bonds or debentures and subject to such conditions, including the condition that the holder of such bonds or debentures registers his name and the holding with that company, as the Central Government may, by notification in the Official Gazette, specify in this behalf shall not be included;

Further, as per Section 14 A(1), no deduction shall be allowed in respect of expenditure incurred by the assesse in relation to said interest, being exempt under the Income Tax Act, 1961.

Section 2(36A) of the IT Act defines Public Sector Company as any corporation established by or under any state Central, State, Provincial Act or a Government company as defined section 617 of the Companies Act, 1956.

(d) Accordingly, pursuant to the aforesaid notification, interest from bond will be exempt from income tax.

(e) Since the interest Income on these bonds is exempt, no Tax Deduction at Source is required. However,

interest on application money would be liable for TDS as well as tax as per present tax laws.

2. CAPITAL GAIN

(a) Under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer.

Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition. The capital gains will be computed by deducting expenditure incurred in connection with such transfer and cost of acquisition/indexed cost of acquisition of the bonds from the sale consideration.

However as per third proviso to section 48 of Income tax act, 1961, benefits of indexation of cost of acquisition under second proviso of section 48 of Income tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds. Thus, long term capital gain tax can be considered 10% on listed bonds without indexation.

Securities Transaction Tax ("STT") is a tax being levied on all transactions in specified securities done on the stock exchanges at rates prescribed by the Central Government from time to time. STT is not applicable on transactions in the Bonds.

In case of an individual or HUF, being a resident, where the total income as reduced by the long term capital gains is below the maximum amount not chargeable to tax i.e. `2,00,000 in case of all individuals, ` 250,000 in case of resident senior citizens and ` 500,000 in case of resident super senior citizens, the long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of ten per cent in accordance with and the proviso to sub-section (1) of section 112 of the I.T. Act read with CBDT Circular 721 dated September 13, 1995.

A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge for corporate only) is payable by all categories of tax payers.

(b) Short-term capital gains on the transfer of listed bonds, where bonds are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provision of the I.T. Act.

The provisions related to minimum amount not chargeable to tax, surcharge and education cess described at Para 2 (a) above would also apply to such short-term capital gains.

(c) Under Section 54 EC of the I .T. Act and subject to the conditions and to the extent specified therein, long term capital gains arising to the bondholders on transfer of their bonds in the company shall not be  chargeable to tax to the extent such capital gains are invested in certain notified bonds within six months from the date of transfer. If only part of the capital gain is so invested, the exemption shall be proportionately reduced. However, if the said notified bonds are transferred or converted into money within a period of three years from their date of acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the bonds are transferred or converted into money. Where the benefit of Section 54 EC of the I.T. Act has been availed of on investments in the notified bonds, a deduction from the income with reference to such cost shall not be allowed under Section 80 C of the I.T. Act. The investment made in the notified bonds by an assessee in any financial year cannot exceed ` 50 lacs.

(d) As per the provisions of section 54F of the Income Tax Act, 1961 and subject to conditions specified therein, any long-term capital gains (not being residential house) arising to Bond Holder who is an individual or Hindu Undivided Family, are exempt from capital gains tax if the entire net sales considerations is utilized, within a period of one year before, or two years after the date of transfer, in purchase of a new residential house, or for construction of residential house within three years from the date of transfer. If part of such net sales consideration is invested within the prescribed period in a residential house, then such gains would be chargeable to tax on a proportionate basis.

Provided that the said Bond Holder should not own more than one residential house at the time of such transfer. If the residential house in which the investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains tax exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred. Similarly, if the Bond Holder purchases within a period of two years or constructs within a period of three years after the date of transfer of capital asset, another residential house (other than the new residential house referred above), then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired or constructed.

(e) The income by way of short term capital gains or long term capital gains (not covered under Section 10(38) of the IT Act) realized by FIIs on sale of security in the Company would be taxed at the following rates as per Section 115AD of the I.T. Act.

• Short term capital gains- 30% (plus applicable surcharge and education cess).

• Long term capital gains – 10% without cost indexation (plus applicable surcharge and education cess)

As per section 90(2) of the IT Act, the provision of the IT Act would not prevail over the provision of the tax treaty applicable to the non-resident to the extent such tax treaty provisions are more beneficial to the non resident. Thus, a non resident can opt to be governed by the beneficial provisions of an applicable tax treaty.

(f) Under section 195 of the Income Tax Act, Income Tax shall be deducted from sum payable to non residents on the long term capital gain and short term capital gain arising on sale and purchase of bonds at the rate specified in the Finance Act of the relevant year or the rate or rates of the income tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, as the case may be.

However under section 196D, No deduction of tax shall be made from income arising by way of capital gain to Foreign Institutional Investors.

3. BONDS HELD AS STOCK IN TRADE

In case the Bonds are held as stock in trade, the income on transfer of bonds would be taxed as business income or loss in accordance with and subject to the provisions of the I.T. Act.

4. TAXATION ON GIFT

As per section 56(2) (vii) of the I.T. Act, in case where individual or Hindu undivided Family receives bond from any person on or after 1st October, 2009

A. without any consideration, aggregate fair market value of which exceeds fifty thousand rupees, then the whole of the aggregate fair market value of such bonds/debentures or;

B. for a consideration which is less than the aggregate fair market value of the Bond by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration;

shall be taxable as the income of the recipient.

Provided further that this clause shall not apply to any sum of money or any property received—

a) from any relative; or

b) on the occasion of the marriage of the individual; or

c) under a will or by way of inheritance; or

d) in contemplation of death of the payer or donor, as the case may be; or

e) from any local authority as defined in the Explanation to clause (20) of section 10; or

f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or g) from any trust or institution registered under section 12AA.

B. WEALTH TAX

Wealth-tax is not levied on investment in bond under section 2(ea) of the Wealth-tax Act, 1957.

C. PROPOSALS MADE IN DIRECT TAXES CODE

The Hon'ble Finance Minister has presented the Direct Tax Code Bill, 2010 ("DTC Bill") on August 30, 2010. The DTC Bill is likely to be presented before the Indian Parliament thereafter. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.

(Please Note the above is For the purpose of information only, invest only after referring to the final prospectus which is available on the website of IRFC)

LAW vs Case Law On 'Flats'

Posted In Income Tax | Articles | No Comments »

V. Swaminathan B.Sc., B.L., FCA

PROLOGUE

As is, by and large, known, the Constitution of India, the nation's basic charter, is the supreme law of the land. And all other laws are subordinate to the Constitution; and as such, must be read and interpreted in the light of the constitutional provisions.

The authority to legislate by the Union and States   is as conferred by Article 246 of the Constitution. Of the three independent lists as provided in the Seventh Schedule to the Constitution, List- II comprises the entries over which the State legislatures have the exclusive powers to legislate.

Anyone concerned is expected, rather needs, to be aware, the Constitution itself has, over the recent years, been subjected to drastic amendments; and many are purported to have been made so as to remain in tune mainly with growingly changing socio-economic environments. Even so, in a manner of plain speaking, quite a few of the amendments do not, in public opinion, seem to have been done objectively and with a public-centric approach; instead, happen to have been thrust upon the people, – thereby rendering the age-old and time-recognised-honoured human rights, one being the very basic right namely, – the "right to property", a laughing stock. Conceptually, though, that is really a bundle of rights, principally comprise the so called 'ownership'; with all other appended and accompanying rights/interests.

One of the amendments so effected and sticking as a sore thumb /-point is the 44^th Amendment(s) of 1978; resulting in drastically decolouring or dubbing what earlier was regarded a 'fundamental' right, into a 'constitutional – or 'statutory- right. As commented critically by a Researcher in her published Article,- "the amendment bestowed upon the Indian socialist state a licence to indulge in what Fredric Bastiat termed legal plunder. This is one of the classic examples when the law has been perverted in order to make plunder look just and sacred to many consciences." Whatsoever that means in real life terms to a property holder, in one's perspective, there could conceivably be no denying that, even so, for understanding and/or construing any provision of an enactment, in proper light, – such as, of state, MOFA herein – none can rightly afford to bypass or side-step the connected overriding provisions and vital implications of the other primary central/state statutes, besides any other, the three time tested ones, – the T P Act, Contract Act, Registration Act.

INTRODUCTION

The case law for study herein is the SC judgment reported @ SC on Car Parking. (Nahalchand's case). The legislation of relevance is the special law of Maharashtra embodied in two enactments, called the Maharashtra Ownership Flats Act, 1963 and the Maharashtra Apartment Ownership Act, 1970. They, in terms, respectively govern the property in the form of 'units' of a building, commonly known as 'Flats' and 'Apartments'. For brevity, in the ensuing discussion, they are referred to as MOFA and MAOA.

In the instant case, to support the mutually contradicting stance, both parties have chosen to respectively put up pleas claiming how the relevant provisions of MOFA have to be construed; and differently interpreted.

To briefly recap at the outset, so as to serve as a backdrop:

A plethora of rules /principles of interpretation have been evolved and enunciated by courts in decided cases over the years to serve as aids for the purpose of construing any statutory provision. That is to ascertain the intention of the law makers, so as to make it effective and accomplish the objective of any enactment. As   there are several of them, court has to, for its purpose of adjudication, select the most appropriate one or more of them not only for a proper understanding of, but also for construing any provision, depending on the type of issue (s), to the end of adjudicating having regard/in accordance with the relevant provisions of the applicable governing enactment. That is easier said than done / doable. In that endeavour, no need to underline, it is the duty and responsibility of counsels for both sides to be of every assistance to courts.

This write-up is intended, and may be, read as a supplement to the earlier write-up published @ Nahalchand's Case (I).

The viewpoints stressed therein, in a nut shell:

The only point of dispute for court to decide and settle was whether the promoter was entitled to be granted the prayer for 'injunction' against the OPs.  Going by an understanding of the arguments advanced, and the reasoning and findings given, the court has to be simply taken to have said "NO". That is, on the ground that the promoter has no such lawful right to retain, for a separate sale, the disputed property, being the 'stilt car parking slots', forming part and parcel of the Common Areas and Facilities" (CAF).  That being so, the court's further observation (Para 40 of the judgment – which reads :  "It is, thus, clear that the PROMOTER HAS NO RIGHT TO SELL `stilt parking spaces' as these are neither `flat' nor appurtenant or attachment to a `flat'. (FONT supplied) might have to be regarded merely as an observation in the nature of "obiter dictum"; as distinct from "precedent"

Further that, with due respect to the wisdom of the judiciary, but in no manner offending it, the only way to reconcile the said observation might be to take it to mean that a promoter selling units of a building as 'flats', hence governed by MOFA, has "no right to sell separately" any such portion of the building complex, which is necessarily part and parcel of CAF. This is a straight forward and common sense point, readily inferable; hence requiring no long drawn process of reasoning, more so, any interpretation of the law in its legal sense.

Anyone proceeding on a different premise / understanding of the SC case, whether or not based on any legal /expert advice or otherwise,  will be doing so at his own peril; by reason of the prospect of his having to face a lifelong (or even beyond) 'infantile' / 'imbecile' litigation.

2. To reinforce, though at the cost of repeating:

The instant case is one of civil law dispute between the two parties; and only them, none else. The final ruling given is having regard only to the particular facts of the case; and based on the interpretation of the given provisions of the MOFA as canvassed. If rightly viewed, from a legal perspective, in essence, what has been held is that all areas and facilities in a building complex of the kind herein, – meant, by the very nature, for common enjoyment, that is, other than/distinct from the areas of the flats in exclusive possession and enjoyment of the respective takers, in their own individual rights,- do not but constitute part and parcel of the "common areas and facilities", within the meaning of MOFA.

To proceed on that premise, if at all, the only other aspect which requires a separate study,- that is independent of / sans the instant case, – is this: What the "limited" area, as envisaged by the law connotes; and, whether promoter has a lawful right to sell to a flat taker, who has paid a price, inclusive or otherwise, the facility of parking his car / vehicle, stilt or open, so that the latter has a right to occupy and enjoy such area, as 'limited', to the exclusion of the rest of the flats takers, in the same manner as he has in respect of the exclusive area of his flat.

An Analysis of SC Judgment

3.1. The factual matrix as per narration in the SC Judgment is reproduced below:

< The facts:

2. Few important questions of law arise in this group of appeals. It will be convenient to formulate the questions after we set out the material facts and the contentions of the parties. The narration of brief facts from S.C. Suit No. 1767 of 2004 will suffice for consideration of these appeals. Nahalchand Laloochand Private Limited is a Private Limited Company. As a promoter, it developed few properties in Anand Nagar, Dahisar (East), Mumbai and entered into agreements for sale of flats with flat purchasers. The flat purchasers are members of Panchali Co-operative Housing Society Ltd. (for short, `the Society'). The promoter filed a suit before the Bombay City Civil Court, Bombay for permanent injunction restraining the Society (defendant) from encroaching upon, trespassing and/or in any manner disturbing, obstructing, interfering with its possession in respect of 25 parking spaces in the stilt portion of the building. The promoter set up the case in the plaint that under the agreements for sale it has sold flats in its building and each flat purchaser has right in respect of the flat sold to him and to no other portion. It was averred in the plaint that each flat purchaser has executed a declaration/undertaking in its favour to the effect that stilt parking spaces/open parking spaces shown in the plan exclusively belong to the promoter and that the declarant has no objection to the sale of such spaces by it. The defendant (Society) traversed the claim and set up the plea that the promoter has no right to sell or dispose of spaces in the stilt portion and that the undertakings given by the flat purchasers are not binding being contrary to law and based on such undertakings, the promoter has not acquired any right to sell stilt parking spaces. >

3.2. For ready reference and appreciation, certain portions of the operative part of the Judgment, as selected for the present purpose (UPPERCASE/ITALICS supplied), are set out below; while specific comments are inset, other detailed comments are being separately furnished later:

A) The summary of findings of the High Court as given in the SC judgment (with BIG FONT supplied):

While dismissing the appeal, THE HIGH COURT RECORDED THE FOLLOWING FINDINGS:

The carpet area of any of the 56 flats/tenements in Panchali building is not less than 35 sq. mtrs.

The parking space enclosed or unenclosed, covered or open cannot be a `building'.

IT IS COMPULSORY REQUIREMENT TO PROVIDE FOR PARKING SPACES UNDER DCR.

IT IS OBLIGATORY ON THE PART OF THE PROMOTER TO FOLLOW THE DCR. THE AGREEMENT SIGNED UNDER MOFA BETWEEN THE DEVELOPER AND THE FLAT PURCHASER MUST BE IN CONFORMITY WITH THE MODEL FORM OF AGREEMENT (FORM V) PRESCRIBED BY THE STATE GOVERNMENT.

THE MODEL AGREEMENT DOES NOT CONTEMPLATE THE FLAT PURCHASERS TO SEPARATELY PURCHASE THE STILT PARKING SPACES.

The rights arising from the agreement signed under the MOFA between the promoter and the flat purchasers cannot be diluted by any contract or an undertaking to the contrary. The undertakings contrary to DCR will not be binding either on the flat purchasers or the Society.

The stilt parking space is a common parking area available and THE DEVELOPER IS OBLIGED TO PROVIDE THE SAME UNDER THE DCR WHEN THE CARPET AREA OF THE FLAT IS 350 SQ. METERS IT IS NOT AN ADDITIONAL PREMISES/AREA THAT HE IS AUTHORIZED TO SELL EITHER TO FLAT PURCHASER OR ANY OUTSIDER. IT IS PART AND PARCEL OF THE SOCIETY BUILDING AND IT CANNOT BE SEPARATE PREMISES AVAILABLE FOR SALE. As soon as the Corporation issues the occupation certificate and the Society is registered, the building as well as the stilt parking spaces, open spaces and all common amenities become the property of the Society.

The stilt parking spaces cannot be put on sale by the developer as he ceases to have any title on the same as soon as the occupation certificate is issued by the Corporation and it becomes the property of the society on its registration.

THE STILT PARKING SPACES CANNOT BE TERMED AS `OPEN/COVERED GARAGES' AND CLAUSE 2 OF THE MODEL AGREEMENT-FORM V PROVIDES FOR SALE OF COVERED/OPEN GARAGE IN ADDITION TO THE FLAT/SHOP.

IT IS IMMATERIAL IF THE PURCHASE AGREEMENT DOES NOT INCLUDE STILT CAR PARKING SPACES IN THE COMMON AREA OF AMENITIES. The stilt car parking spaces is part of the common amenities and IT CANNOT BE TREATED TO BE A SEPARATE PREMISES/ GARAGE WHICH COULD BE SOLD BY THE DEVELOPER TO ANY OF THE MEMBERS OF THE SOCIETY OR AN OUTSIDER.

Under MOFA, the developer's right is restricted to the extent of disposal of flats, shops and/or garages, which means that any premises which is included in the Flat Space Index (FSI) can be sold by the developer/promoter. The stilt parking space is not included in the FSI nor is it assessable for the Corporation taxes.

B)  OBSERVATIONS, FINDINGS, AND OPINION OF SC:

12. In view of the contentions outlined above, the questions that arise for consideration are:

(i) WHETHER STAND ALONE `GARAGE' OR IN OTHER WORDS `GARAGE' AS AN INDEPENDENT UNIT BY ITSELF IS A `FLAT' WITHIN THE MEANING OF SECTION 2(A-1) OF MOFA; (ii) WHETHER STILT PARKING SPACE/OPEN PARKING SPACE OF A BUILDING REGULATED BY MOFA IS A `GARAGE'; (III) IF THE ANSWER TO AFORESAID QUESTIONS IS IN THE NEGATIVE, WHETHER STILT PARKING SPACE/OPEN PARKING SPACE IN SUCH BUILDING IS PART OF `COMMON AREAS AND FACILITIES' AND (IV) WHAT ARE THE RIGHTS OF THE PROMOTER VIS-`-VIS SOCIETY (OF FLAT PURCHASERS) IN RESPECT OF OPEN PARKING SPACE/S / STILT PARKING SPACE/S.

 13. All these questions have to be considered in the light of statutory provisions. At this stage we notice some of the provisions of MOFA. As regards other statutory provisions, we shall refer to them wherever necessary.

Thus seen, the main focus has been on the provisions of MOFA. However, the proposition thrown up, as may be noted from the analytical study attempted herein, for an incisive consideration, is this: – The two enactments, for the reasons brought out, are prima facie not self -contained / -sufficient codes; and therefore, must be read together, as mutually interlinked /complementary; not on a standalone basis. 

 14. THE DEFINITION OF `FLAT' IN SECTION 2(a-1) IS MOST VITAL AND DURING COURSE OF ARGUMENTS IT HAS BEEN RIGHTLY SAID THAT MEANING OF THE WORD `FLAT' IS THE ACTUAL FULCRUM OF MOFA. SECTION 2(A-1) READS THUS:

…….

In the same vein the other arguments of either parties, it might be noted, have been set out, and considered mainly having regard to the statutory definitions of the other words/expressions used in the statute namely, 'common areas', 'garage', …

As may be readily inferred, simply following upon the lines of arguments of both sides, the court appears to have confined itself, in considering the point of and settling the private dispute, with the main focus, as urged, merely on interpretation of the statutory definitions of the words / expressions under reference.

18. Section 10 casts duty upon the promoter to take steps for formation of co-operative society or company, as the case may be. The said provision reads as follows:

S.10. (1) As soon as a minimum number of persons required to form a Co-operative society or a company have taken flats, the promoter shall within the prescribed period submit an application to the Registrar for registration of the organization of persons who take the flats as a co-operative society or, as the case may be, as a company; and the promoter shall join, in respect of the flats which have not been taken, in such application for membership of a co-operative society or as the case may be, of a company. Nothing in this section shall affect the right of the promoter to dispose of the remaining flats in accordance with the provisions of this Act.

Provided that,….

 Provided further that,

19. There is also obligation cast upon promoter to execute the documents of title and CONVEY TO THE CO-OPERATIVE SOCIETY OR THE COMPANY OR AN ASSOCIATION OF FLAT PURCHASERS/APARTMENT OWNERS, RIGHT, TITLE AND INTEREST IN THE LAND AND BUILDING BY VIRTUE OF SECTION 11 which reads thus:

S.11.  (1) A promoter shall take all necessary steps to complete his title and convey to the organization of persons, WHO TAKE FLATS, WHICH IS REGISTERED EITHER AS A CO-OPERATIVE SOCIETY OR AS A COMPANY AS AFORESAID, OR TO AN ASSOCIATION OF FLAT TAKERS OR APARTMENT OWNERS HIS RIGHT, TITLE AND INTEREST IN THE LAND AND BUILDING, AND EXECUTE ALL RELEVANT DOCUMENTS THEREFOR IN ACCORDANCE WITH THE AGREEMENT EXECUTED UNDER SECTION 4 and if no period for the execution of the conveyance is agreed upon, he shall execute the conveyance within the prescribed period and also deliver all documents of title relating to the property which may be in his possession or power.

The specially marked words "IN ACCORDANCE WITH THE AGREEMENT EXECUTED UNDER SECTION 4" are so crucial, as requiring to be given the due importance; ought not to be glossed over. That is, one would urge, necessary, for a proper understanding and appreciation of the purport and import of Section 11. And, if so done, it is bound to be realised that, the final conveyance to the registered society (or company or association) as envisaged, would be of the entire property (land and building) in the complex; but that should/could only be, subject to, not only the exclusive rights to the 'flat', so also the proportionate right / interest in the common areas and facilities (though undivided, but not excluding but including the right to such part of them as demarked "limited", and passed on, "as appurtenant thereto", to individual flat taker(s), as per the terms spelt out in the "agreement to sell" respectively entered into.

Also needs to be specially noted that, Section 11, in terms, covers / applies to 'apartments' as well, albeit 'apartments' are, generally speaking, governed by the separate enactment i.e. MAOA. Further that, in the MAOA itself there is no provision to cover the mandate of "final conveyance"; for which, therefore, one has to necessarily turn to and take into consideration what is provided in, besides MOFA, the rules framed there under (Rules 8 and 9). Similar such clinching clues are to be found in both the enactments, elsewhere as well. Most significant of all is, – clause 25 of FORM V, prescribed for MOFA, which reads: "This Agreement shall always be subject to the provisions of the Maharashtra Apartment Ownership Act, and the rules…"

20. Section 16 of MOFA provides that the provisions contained therein are IN ADDITION TO THE PROVISIONS OF THE T. P. ACT and shall take effect notwithstanding anything to the contrary contained in the contract.

By necessary implication, (a) for a proper understanding / construing the implication of the provisions of MOFA, the elated provisions of the TP Act ought to be kept in view, and given due weight age; and (b) though not so spelt out,- so also, besides any other, of the related / connected provisions of the Contract Act, Registration Act.

 Re: question nos. (i) and (ii):

(A) WHAT IS `FLAT'?

> 21. FOR PROPER CONSIDERATION OF QUESTIONS (I) AND (II) AS AFORE-REFERRED, IT IS OF CONSIDERABLE IMPORTANCE TO ASCERTAIN THE IMPORT AND MEANING OF THE TERM `FLAT' DEFINED IN SECTION 2(A-1) ….

(B) WHETHER STILT PARKING SPACE IS A GARAGE?

………

 30. THE NEXT QUESTION IS, WHETHER STILT PARKING SPACE IN A BUILDING REGULATED BY MOFA IS A `GARAGE'. THE TERM `GARAGE' HAS NOT BEEN DEFINED IN MOFA AND, THEREFORE, WE NEED TO FIRST FIND OUT WHAT IS THE EXTENT AND SCOPE OF THAT TERM IN SECTION 2(A-1). THE GENERAL TERM `GARAGE' IS APPROPRIATED IN ENGLISH FROM THE FRENCH LANGUAGE AND MEANS

 34. The relevant portion of condition No. 2, Form v appended to 1964 rules reads as under:

THE FLAT PURCHASER HEREBY AGREES TO PURCHASE FROM THE PROMOTER AND THE PROMOTER HEREBY AGREES TO SELL to the Flat Purchaser one flat No. ………. of the Type ………. of carpet area admeasuring ………. sq. meters (which is inclusive of the area of balconies) on ………. floor as shown in the Floor plan thereof hereto annexed and marked Annexure D/Shop No. ………. /covered/open Garage No. ………. in the ………. Building (hereinafter referred to as the Flat;) FOR THE PRICE OF RS. ………. INCLUDING RS. ………. BEING THE PROPORTIONATE PRICE OF THE COMMON AREAS AND FACILITIES APPURTENANT TO THE PREMISES, THE NATURE EXTENT AND DESCRIPTION OF THE COMMON/LIMITED COMMON AREAS AND FACILITIES/LIMITED COMMON AREAS AND FACILITIES WHICH ARE MORE PARTICULARLY DESCRIBED IN THE SECOND SCHEDULE hereunder written. The Flat Purchasers hereby agrees to pay to that Promoter balance amount of purchase price of Rs. ………. (Rupees ………. ……………) having been paid to the Promoter on or before the execution of his agreement in the following manner;

 35. WE DO NOT PERCEIVE ANY FORCE IN THE ARGUMENT THAT OPEN PARKING SPACE TANTAMOUNTS TO A `GARAGE' WITHIN THE MEANING OF SECTION 2(a-1) READ WITH CONDITION NO. 2,  FORM V, OF 1964 RULES. CAN A PERSON BUYING A FLAT FOR RESIDENCE OR ONE OF THE USES MENTIONED IN SECTION 2(a-1) REALLY THINK THAT OPEN TO THE SKY OR OPEN SPACE FOR PARKING MOTOR VEHICLES IS A GARAGE? WE DO NOT THINK SO….

In perceiving as aforesaid, Paragraph 11 of FORM V, the second of two sentences therein, which reads, -"He SHALL USE THE GARAGE OR PARKING SPACE only for propose of for keeping or parking the Flat purchaser's own vehicle"-has apparently been lost sight of; that mentions "parking space", in addition to "garage".

 37. THE HIGH COURT HAS HELD THAT THE STILT CAR PARKING SPACES ARE PART OF THE COMMON AMENITIES. IS THE HIGH COURT RIGHT IN ITS VIEW? MOFA DOES NOT DEFINE NOR does IT EXPLAIN `COMMON AREAS AND FACILITIES' THOUGH THE SAID PHRASE IS USED AT VARIOUS PLACES IN THAT ACT. Mr. Pravin K. Samdani, LEARNED SENIOR COUNSEL FOR MAHARASHTRA CHAMBER OF HOUSING INDUSTRY SUBMITTED THAT FOLLOWING COULD BE TERMED AS PART OF THE `COMMON AREAS':

………

The aforesaid list as suggested by the learned senior counsel, in our opinion, is not exhaustive. IT MAY NOT BE OUT OF PLACE TO REFER TO SECTION 3(f) OF MAOA WHICH DEFINES `COMMON AREAS AND FACILITIES' AS FOLLOWS:

3. "Definitions – In this Act, unless the context otherwise requires,-"*

*(IN THE JUDGMENT THE opening WORDS, IN INVERTED   COMMAS, ALBEIT CRUCIAL requiring to be focussed on, NOT FOUND)

………

(f) Common areas and facilities UNLESS OTHERWISE PROVIDED IN THE DECLARATION OR LAWFUL AMENDMENTS, thereto means–

(1) THE LAND ON WHICH THE BUILDING IS LOCATED;

 (2) …

(3) the basements, cellars, yards, gardens, PARKING AREAS and storage spaces;

(4) to (7)….. 

(8) all other parts of the property necessary or convenient to its existence, maintenance and safety, or normally in common use;

……….

IT IS TRUE THAT INTERPRETATION CLAUSE OR LEGISLATIVE DEFINITION IN A PARTICULAR STATUTE IS MEANT FOR THE PURPOSES OF THAT STATUTE ONLY AND SUCH LEGISLATIVE DEFINITION SHOULD NOT CONTROL OTHER STATUTES. BUT THE PARTS OF THE PROPERTY STATED IN CLAUSES (2), (3) AND (6) OF SECTION 3(f) AS PART OF `COMMON AREAS AND FACILITIES' FOR THE PURPOSES OF MAOA ARE WHAT IS GENERALLY UNDERSTOOD BY THE EXPRESSION `COMMON AREAS AND FACILITIES'. THIS IS FORTIFIED BY THE FACT THAT THE AREAS WHICH ACCORDING TO THE LEARNED SENIOR COUNSEL COULD BE TERMED AS `COMMON AREAS' IN A BUILDING REGULATED BY MOFA ARE SUBSTANTIALLY INCLUDED IN AFORE NOTICED CLAUSES OF SECTION 3(f) OF MAOA. LOOKING TO THE SCHEME AND OBJECT OF MOFA, AND THERE BEING NO INDICATION TO THE CONTRARY, WE FIND NO JUSTIFIABLE REASON TO EXCLUDE PARKING AREAS (OPEN TO THE SKY OR STILTED PORTION) FROM THE PURVIEW OF `COMMON AREAS AND FACILITIES' UNDER MOFA.

 38. IT WAS ARGUED THAT UNDER MOFA IT IS FOR THE PROMOTER TO PRESCRIBE AND DEFINE AT THE OUTSET THE `COMMON AREAS' AND UNLESS IT IS SO DONE BY THE PROMOTER, THE PARKING AREA CANNOT BE TERMED AS PART OF `COMMON AREAS'. WE ARE QUITE UNABLE TO ACCEPT THIS SUBMISSION…..

IF A PROMOTER DOES NOT FULLY DISCLOSE THE COMMON AREAS AND FACILITIES HE DOES SO AT HIS OWN PERIL. STILT PARKING SPACES WOULD NOT CEASE TO BE PART OF COMMON AREAS AND FACILITIES MERELY BECAUSE THE PROMOTER HAS NOT DESCRIBED THE SAME AS SUCH IN THE ADVERTISEMENT AND AGREEMENT WITH THE FLAT PURCHASER. ALTHOUGH THERE IS SOME MERIT IN THE CONTENTION OF THE APPELLANT THAT HIGH COURT ERRED IN PLACING RELIANCE ON THE TWO ASPECTS–NAMELY, THAT THE AREA OF STILT PARKING SPACE IS NOT INCLUDED IN THE FSI AND SUCH AREA IS NOT ASSESSABLE TO THE CORPORATION TAXES – IN REACHING THE CONCLUSION THAT STILT PARKING SPACE IS PART OF `COMMON AREAS' BUT IN OUR VIEW EVEN IF THESE TWO ASPECTS ARE EXCLUDED, IN WHAT WE HAVE DISCUSSED ABOVE STILT PARKING SPACE/OPEN PARKING SPACE OF A BUILDING REGULATED BY MOFA IS NOTHING BUT A PART OF `COMMON AREAS' …

 39. WE HAVE NOW COME TO THE LAST QUESTION NAMELY– WHAT ARE THE RIGHTS OF A PROMOTER VIS-`-VIS SOCIETY (OF FLAT PURCHASERS) IN RESPECT OF STILT PARKING SPACE/S. IT WAS ARGUED THAT THE RIGHT OF THE PROMOTER TO DISPOSE OF THE STILT PARKING SPACE IS A MATTER FALLING WITHIN THE DOMAIN OF THE PROMOTER'S CONTRACTUAL, LEGAL AND FUNDAMENTAL RIGHT AND SUCH RIGHT IS NOT AFFECTED. THIS ARGUMENT IS FOUNDED ON THE PREMISE, FIRSTLY, THAT STILT PARKING SPACE IS A `FLAT' BY ITSELF WITHIN THE MEANING OF SECTION 2(A-1) AND IN THE ALTERNATIVE THAT IT IS NOT PART OF `COMMON AREAS'. BUT WE HAVE ALREADY HELD THAT `STILT PARKING SPACE' IS NOT COVERED BY THE TERM `GARAGE' MUCH LESS A `FLAT' AND THAT IT IS PART OF `COMMON AREAS'. AS A NECESSARY COROLLARY TO THE ANSWERS GIVEN BY US TO QUESTION NOS. (i) TO (iii), IT MUST BE HELD THAT STILT PARKING SPACE/S BEING PART OF `COMMON AREAS' OF THE BUILDING DEVELOPED BY THE PROMOTER, THE ONLY RIGHT THAT THE PROMOTER HAS, IS TO CHARGE THE COST THEREOF IN PROPORTION TO THE CARPET AREA OF THE FLAT FROM EACH FLAT PURCHASER. SUCH STILT PARKING SPACE BEING NEITHER `FLAT' UNDER SECTION 2 (a-1) NOR `GARAGE' WITHIN THE MEANING OF THAT PROVISION IS NOT SELLABLE AT ALL.

 40. MOFA WAS ENACTED BY THE MAHARASHTRA LEGISLATURE AS IT WAS FOUND THAT BUILDERS/DEVELOPERS/PROMOTERS WERE INDULGING IN MALPRACTICES IN THE SALE AND TRANSFER OF FLATS AND THE FLAT PURCHASERS WERE BEING EXPLOITED. The effect of MOFA may be summarized as follows. First, every promoter who constructs or intends to construct block or building of flats in the area to which MOFA applies has to strictly adhere to the provisions contained therein, i.e., inter alia, he has to make full and true disclosure of the nature of his title to the land on which the flats are constructed and also make disclosure in respect of the extent of the carpet area of the flat and the nature, extent and description of the common areas and facilities when the flats are advertised for sale. Secondly, the particulars which are set out in Section 4(1A) (a) (i) to (x) have to be incorporated in the agreement with the flat purchaser. Thirdly, the promoter has to apply to the Registrar for registration of the organization (co-operative society or company or condominium) as soon as minimum number of persons required to form such organization have taken flats. As regards unsold flats, the promoter has to join such organization although his right to dispose of unsold flats remains unaffected. FOURTHLY, AND MORE IMPORTANTLY, THE PROMOTER HAS TO TAKE ALL NECESSARY STEPS TO COMPLETE HIS TITLE AND CONVEY TO THE ORGANIZATION HIS RIGHT, TITLE AND INTEREST IN THE LAND AND BUILDING AND EXECUTE ALL RELEVANT DOCUMENTS ACCORDINGLY. IT WAS ARGUED BY Mr. Tanmaya Mehta, LEARNED COUNSEL FOR THE PROMOTER THAT IN VIEW OF THE PROVISIONS OF MOFA, SECTION 6 OF T.P. ACT AND ARTICLE 300A OF THE CONSTITUTION, THE RIGHT OF THE PROMOTER TO TRANSFER PARKING SPACES IS NOT AT ALL RESTRICTED. Relying upon the decisions of this Court in ICICI Bank Ltd. v. SIDCO Leathers Ltd. & Ors (SC) -Appeal (civil) 2332 of 2006 – Dated 28.04.206 ,  Karnataka State Financial Corporation v. N. Narasimahaiah & Ors. (SC) – Appeal (civil) 610-612 of 2004 – Dated- 13.03.208 and Bhikhubhai Vithlabhai Patel &amp; Ors., v. State of Gujarat & Anr., he submitted that the provisions contained in MOFA must be construed strictly and there is no provision either express or by necessary implication in MOFA restricting the sale of stilt or open parking spaces. Mr. Sunil Gupta ALSO ARGUED THAT PROMOTER CONTINUES TO HAVE CONTRACTUAL, LEGAL AND FUNDAMENTAL RIGHT TO DISPOSE OF THE STILT/OPEN PARKING SPACE IN THE MANNER IN WHICH HE PROPOSES AND HIS CONSUMERS ACCEPT. We think this argument does not bear detailed examination. Suffice it to say that if the argument of learned senior counsel and counsel for promoter is accepted, the mischief with which MOFA is obviously intended to deal with would remain unabated and flat purchasers would continue to be exploited indirectly by the promoters. IN OUR OPINION, MOFA DOES RESTRICT THE RIGHTS OF THE PROMOTER in the block or building constructed for flats or to be constructed for flats to which that Act applies. The promoter has no right to sell any portion of such building which is not `flat' within the meaning of Section 2(a-1) and the entire land and building has to be conveyed to the organisation; the only right remains with the promoter is to sell unsold flats. It is, thus, clear that the promoter has no right to sell `stilt parking spaces' as these are neither `flat' nor appurtenant or attachment to a `flat'.

The case law cited, on a quick reading, does not appear to be of any direct relevance or of real help to support the arguments. Be that as it may, as is seen, the court itself has not considered necessary, hence not considered the case law cited.

Concerning the view the court has taken, as borne out in the last sentence of paragraph 40. , that reads, -  " It is, thus, clear that the promoter has no right to sell `stilt parking spaces' as these are neither `flat' nor appurtenant or attachment to a flat",-  read, – besides other detailed comments herein later,-  the inset comments under earlier paragraphs 19 and 20 of the judgment.

 41. In view of the above, it is not at all necessary to deal with the factual submissions advanced by Mr. Tanmaya Mehta. Having regard to the answer to question No. (iv), the finding of the High Court that undertakings are neither binding on the flat purchasers nor the society also warrants no interference.

NOTE: To make it clear, while reproduced above are only some portions on a selective basis, it is recommended, being necessary, to mindfully read the whole of the Judgment for an independent study and understanding.

4. OWN INDEPENDENT OBSERVATIONS AND  VIEWPOINTS:

A) Facts as narrated are not seen to cover or provide any clue on the following:

(a) Whether as per approved plan, 'stilt parking' and 'open parking' had been demarcated?

(b) Whether in the agreement (s) for sale with flat takers those were disclosed, so also the price there for, either as part of lump sum or separately, and charged for and collected from the flats takers?

(c) Whether there were sale deeds executed and registered? If so, how the provision for car parking, both stilt and open, and consideration there for were disclosed?

(d) Whether the 25 stilt car parking slots retained by the promoter were the surplus remaining; that is, excluding those covered (as queried) in (b) and (c) above?

(e) Whether the promoter had any unsold flats left with it, after the CHS was formed and registered?

(f) Whether the formal conveyance as mandated by Section 11 of the MOFA has been duly effected? If answer is 'yes', did the promoter have any unsold flats even then?

Note: Had the aforesaid and any other further relevant facts been gone into, in details, and brought on record, that could have been of immense assistance for firstly the lower courts, to adjudicate the point of dispute in proper light and better perspective.

B) Interpretation of MOFA

The commentary and cited case law in the popular text book published by Law Book House (2003 Edn.) on MOFA, etc., are of guidance. At pgs. xli, xlii, the case law summed up under the topic head, – GARAGE USED FOR OTHER THAN PARKING CAR, provide useful information. None of those old court cases have been cited in the instant case or even referred; hence the judicial view taken in the past, especially on the import or significance of the concepts such as, 'common areas' and garage' seems to have been over sighted.

Similarly, no notice is seen to have been taken of some of the other useful information available. Particularly, those are on the history and historical developments of the state legislation on 'flats'. One believes that, those could have thrown more light, so as to assist the court in adjudicating the dispute in the instant case in all its ramifications. To be precise, as one sees, had it been so stressed, the court would possibly have been persuaded to veer round to the view that after all, the two enactments, MOFA and MAOA, though prima facie  are separate , not really so but would have be necessarily read together, not in isolation, for certain practical purposes. For example, in the instant case, for a proper constriction and understanding of the true import of the terms such as 'limited' common areas- of which special definition is found in MAOA, but not in MOFA.

To dilate:

 At page 10 of the book -

i)            In the very nomenclature of the enactment, the word 'ownership' is used.

The first limb of the preamble to the MOFA (1963) reads:

 WHEREAS, it has been brought to the notice of the State Government that, consequent on the acute shortage of housing in the several areas of the State… sundry abuses,  malpractices, and difficulties relating to the promotion of the construction of, and the sale and management and transfer OF FLATS TAKEN ON OWNERSHIP BASIS exist and or increasing.

The third limb reads:

AND WHEREAS, it is now expedient after considering the recommendations and suggestions made … to make provision during the period of such shortage of housing for the regulation …., OF FLATS ON OWNERSHIP BASIS….

ii)      At page 15 of the book, read the commentary on case law on – Whether Flat can be attached and sold in execution of a decree?

It is to be noted that, earlier, there was a controversy on the point of issue, and in the absence of a clear cut provision in MOFA, the dispute had to be resolved by adverting to the provisions of the State Co-op. Societies Act, and settled through a long drawn process of reasoning. Incidentally, even after the 1986 retroactive amendment of the definition of "Flat" (section 2 (a)), to include 'an apartment', no specific provision has been made enabling the flat holder to mortgage and obtain home loan. In other words, for obtaining home loan, a flat holder has to necessarily rely on the specific provision in the other enactment namely, MAOA. No need to add that, such is the position that has come to be/ is being accepted and followed all along for the granting of home loans by lending institutions also to 'flat holders', not only to 'apartment purchasers'. Incidentally, that such is the position has been recognised also for tax purposes. The reference is to, among others, the allowance of tax incentives in respect of home loan, also to 'flat holder'. That is very much intended may be seen from the several provisions of the I T Act; for example, see the comprehensive language of section 269 UA, intended to cover both types of units, i.e. flats, besides apartments.

At page 151 of the book, the expert commentary, in the same vein, reads:

Prior to 1970 it was felt that on account of shortage of lands in urban areas the majority of…could not think in terms of owning houses on individual basis. True, there was an ever-growing tendency to construct multi-storeyed flats, apartments, and the like on ownership basis but persons purchasing…. did not have a marketable title thereto and could not obtain any loan by mortgaging such flats, felt necessary to legislate…. The above Act was therefore passed to provide for the ownership of an individual apartment in a building and to make such apartment heritable and transferable property, and to provide for matters connected with the said purposes.

To be noted: The above narrated legislative history goes to explain that, the basic objective was to vest purchasers of both flats and apartments with 'ownership rights', alike.

ON THE CONCEPT OF, – "COMMON AREAS AND FACILITIES"

As specially defined in MOFA, the term "common areas and facilities", of course, means and includes, – the land on which the building stands, and all other wedded but common areas or facilities; which again is an expression specially defined, as to mean and include certain items specified. However, should one have to go by a strict and narrow view, as has been done in the instant case, then that would inevitably lead to a strikingly piquant /bizarre situation. In that, all those other facilities known to be provided by promoter's as agreed with flat takers but not found a mention, e.g. swimming pool, club house, and the like, or those compulsorily required to be provided as per the mandates of local regulations e.g. so called, – 'Rain Water Harvesting', Sewerage Treatment Plant' and the like, though physically located outside of the flat, would be left uncovered by the concept of "common areas and facilities" as defined. Albeit, those also are, taken into account for pricing, and required to be available to the flat takers, for common use and enjoyment,- for the purposes for which they are intended or required.

Ø Another aspect that has not been argued, hence left unconsidered by court (s) is this:

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):

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 enactment, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law.

With that in focus, if one were to test the interpretation (as urged, -and accepted by court) of the word 'garage', the only inference possible is that for a proper construction, what ought to be borne in mind are these: Any such concept as 'garage' keeps on changing over the years. Going by natural presumption, the word 'garage' has been used in the 1963 enactment, as that was the type  of facility for car parking known at that point in time and in vogue. But it is only in course of time later, over the years, the new ideas of having for car parking, -stilts, underground parking, even the lately known high / multi level car parking, have come in vogue. In view thereof, if the above rule of construction were to be followed, then, in today's context, even though the same term 'garage' has continued to be used, it must be given a new meaning, as to accommodate or yield to take within its ambit also the new kinds of later innovations; that is, besides stilt, also the others as afore said. Further, the words "appurtenant to flat" have no small significance but must be given the meaning as intended and warranted; that has not been done in the instant case.

In fact, as said earlier herein, the court itself has observed to the effect that the meaning as assigned in MOAO to the concepts dealt with cannot be simply ignored. Another reason, as canvassed, even if to take a common sense view, both the Acts must be read together, for the purpose of construing the meaning of 'limited common area'. If so done, one submits, that demarcated stilt car parking area(s) will automatically come within the scope of the said term; hence, to be covered/included in FORM V. That is, same as in the deed of conveyance to apartment purchaser under MAOA.

No need to add and pinpoint that, to hold otherwise, that would have the patently unintended or unwarranted consequence. That is, result in denying / depriving flat takers the unquestionable fundamental rights to transfer, inherit, mortgage, so on; that would fly in the face of the very objective of the MOFA, also of the allied enactment, MAOA.

For similar reasoning, even if 'flat' were to be taken requiring to be construed so strictly as argued and accepted, as to exclude 'stilt car parking', there seems to be nothing in MOFA in support. On the contrary, for reasoning advanced herein, the stilt car parking slots, it can be forcefully argued, must be given the same meaning as under MAOA and regarded as "limited common area" also under MOFA. If so done, what must inevitably follow is that flat taker, same way as apartment taker, has a lawful right for an exclusive occupation and enjoyment of the assigned slot(s) out of the common areas exclusively for his parking. Following through such reasoning, the view that promoter has no right to sell, or if done for a price that will be illegal,- as heard to being opined even by experts in legal circles, -is bound to fall like a pack of cards. This is no different from, but supported by the same logic, or reasoning behind that flat taker is regarded to have an inherent right to mortgage and obtain home loan, so on ; also that, any such term in MOFA, not specifically  covered in the definition section, ought to, for all practical purposes, be widely construed. To be so done, keeping in focus the most fundamental rule of all; namely the rule of 'purposive interpretation', — which if simply understood, merely means that it must be such an interpretation as to serve or sub serve  eventually the purpose  or the object of accomplishing the legislative intent behind.

For the above purpose, to take a narrow view, – that is MOFA and MAOA are two entirely independent enactments,- would make a non sense of , and offend, the very wisdom or objective of the legislation or legislative intent behind. It is observed that, certain observations in the instant case itself,- read closely  paragraph 37 (the concluding lines therein) of the judgment, – the SC, as may be inferred, is inclined / leaning towards such a line of reasoning as canvassed above; but, regrettably though, has stopped short of pursuing it any further.

"Question of law"

In the first place, in one's perception, a fundamental point (poser) that arises for an analytical study is this: Does the matter necessarily involve a 'question of law', so as to require a long drawn process of reasoning, -as is seen to have been resorted to, – for arriving at a convincingly judicious answer? To put it differently, is it not preferable to adopt a different line of reasoning, but which in comparison entails no complicity, if that would lead to same conclusion as of now. That is, for the court to decide, the promoter's contested action in retaining the stilt car parking slots, with intent to sell separately, is unlawful, not being in accordance with the governing law; hence, its prayer for an order of injunction against the OPs cannot be granted but should be rejected.

To be precise, had the OPs put up their case on such different grounds and advanced arguments accordingly, as suggested herein, the court's decision would still have been the same and in their favour. For that matter, possibly, the dispute would not have had to be taken up to court.

To add:

A) According to the scheme of the provisions as embodied in MOFA, sale of a flat is required to be made for a price as agreed with flat taker. As clearly spelt out in Section 4, the written 'agreement for sale' there under should be in the prescribed form. The form so prescribed is FORM V (inserted by G.N. of 10-4-1987, w.e.f. 13-4-1987).

B) Section 4 (1A) lays down what all are the particulars which the prescribed 'agreement' for sale taken "on ownership basis" should inter alia include. As specified in clause (a) therein, the particulars the agreement should contain, among others, are, -

……..

(iv) the price of the flat including the proportionate price of the common areas and facilities which should be shown separately, to be paid by the purchaser of flat; .."

 (v) the precise nature of the organisation to be constituted of the persons who have taken flats or are to take the flats;

(vi) the nature, extent and description of the common areas and facilities;

(vii) the nature, extent and description of LIMITED , COMMON AREAS AND FACILITIES, IF ANY;

(viii) percentage of undivided interest in the limited common areas and facilities if any, APPERTAINING TO THE FLAT AGREED TO BE SOLD;

(b) (This enumerates copies of documents requiring to be attached to the agreement for sale in FORM V)….

The foregoing are mandatory provisions; hence, are required to be mindfully read, and harmoniously and strictly construed. If so done, so far as one could see, the promoter will be within his lawful right only if it /he effects sale of any facility, – to be precise any special type of car parking, such as stilt car parking as in the instant case, – in terms / pursuance of the same document – i.e. the agreement for sale (FORM V) entered into for effecting the sale of 'flat' as such. To put it differently, if promoter does not do so or does it any differently, as in contemplation in the instant case, it / he will be exposing self to legal action, of every conceivable sort in general, more so on the ground of having committed an 'offence' as envisaged in inter alia, section 13 and 14 of MOFA itself. So prefer to leave it as is, following the same wisdom implied in the SC's related cryptic observations in a related context of the Judgment.

Be that as it may, now, looking into the successive  judgments of HC and SC, it is obvious that both courts  have proceeded on same lines; that is, inferably, toeing the lines with, and /or  conceding / to following upon the lines of arguments as advanced by both sides – on the premise that there are "questions of law" requiring adjudication. And, for that purpose, as urged, that an interpretation of certain words/expressions used in MOFA has to be embarked on/ gone through.

C) At this juncture the under mentioned aspects, as commonly understood, and put in a language for a layperson to easily make out, are essentially required to be borne in mind:

According to well settled and largely followed principles / rules, as elicited in a plethora of case law:

Not all questions are to be regarded as 'questions of law', particularly as requiring a judicial interpretation.  But only any question on which the position in law is not clear, or not clear enough to decide single-mindedly and firmly affirm, and hold that there is only one view possible which could be intelligently and judiciously (in its profound sense) held out. And more so, without having to go through a long drawn argumentative process and reasoning. In short, an appeal ought not to be entertained unless the court is satisfied that, legally but strictly speaking, there is no scope for holding a contrary view or a better one at that to please the eyes of law.

In the instant case, counsels are seen to have gone on, so to say, to convince the court on the merits or otherwise of own independent arguments. In doing so, they are seen to have harped on mainly the statutory definitions of the words, – 'flat', 'common areas and facilities', 'garage', so on.

In doing so, however, it is noted that, court's attention has not been drawn to, besides others, -hence not considered by the court(s) –the following intricate facets:

(a)        The opening words of section 2 of the MOFA, which reads, -

"Definitions. – In this Act, UNLESS THE CONTEXT OTHERWISE REQUIRES, – "

(b)     The principle of interpretation that has been receiving more and more attention of courts, in recent times, graphically described as, "UPDATING CONSTRUCTION".

The said principles, in a manner of urging, may have to be construed to be an extension of the other rules of interpretation enunciated by courts in decided cases, commonly to aid ascertainment of so called "Contextual Meaning".

Those and the other appropriate rules of interpretation could have been summoned for assisting/useful guidance, in the exercise of interpretation gone through; which, however, has not been done in the course of arguments by both the sides.

As is imagined, perhaps, had the foregoing been argued and relied upon, the court would have been convinced that the correct position in law is readily decipherable, even without having to go through the long drawn process of reasoning as urged by the parties.

In the Judgment, the main observations refer to the mandatory provisions of section 10 and section 11 of MOFA. Those provisions, if closely read and incisively understood, are sure to have been noted to be clarificatory and self-sufficient enough for concluding that the promoter's action in retaining some stilt parking slots, with intent to sell separately, that is outside of and after execution and registration of the "agreements to sell" is in any case, a misguided action / misadventure, and clearly in contravention of the scheme of the provisions of sections 11 and 12 of MOFA. To be precise, the point sought to be made is. even as per a plain and straight forward reading of only sections 11 and 12, on a standalone basis, the point of dispute would have come to be settled no differently than now. That is, without having had to go through the painful long drawn process of "interpretation" resorted to, of the words/ expressions namely, 'flat", "garage" and "common areas and facilities" and "limited" "common areas and facilities".

On the aspect of principles of interpretation to be borne in mind, what are categorised as External Aids are of the utmost importance. 'Legislative History and Background' is one of them, to be taken as of significant relevance herein.

As lucidly summed up in text books:

The legislative history of a statute could be traced and considered to understanding its scope. Held permissible for ascertaining the evil sought to be remedied.

Further, to sustain the presumption of constitutionality, consideration may be had even to matters of common knowledge, the history of the times and every conceivable state of facts existing at the time of legislation. Therefore, due importance must be given to the legislative history, context and background.

It is permissible to look into the Statement of Objects and Reasons of the Bill for the purpose of appreciating the background and the antecedent factual matrix leading to the legislation. Also, for finding out the intention of the legislature and to interpret and determine the true scope of the provision, provided of course, there be ambiguity in a genuine sense.

The words and expressions  defined in one statute as judicially interpreted do afford a guide to the construction  of same words or expressions used in another , should both statutes are  pari materia legislations or it is specifically provided in one statute  to give the same meaning to the words as defined in another statute.

Had these been kept in focus, as would have been ideally expected, and brought up in the course of the proceedings, as one sees it, there could have been no justification for the dispute to have been settled in better light?

SC in re. PODAR CEMENT

This write-up herein might not be complete without drawing attention to the earlier one attempted in this series, and posted @LAW and ('vs'?) CASE LAW On "FLATS" – A Critical Study – TaxGuru. That represents a case study of the SC judgment delivered in re CIT vs Podar Cement Ltd. (reported on this website @ Owner vs  Beneficial Owner- of Flats  ; also in 226 ITR 625). In which, the concept of "PRECEDENT", having regard to the factual matrix of that case, has been specially brought out in detail, which is of a direct relevance herein as well.

Some of the other aspects covered / viewpoints shared in that article, with particular reference to the same property holder's rights in flats as in the instant case, would be of common relevance.

That is a case in which, as distinct from the instant case, the predominant issue concerned a dispute between the Revenue and taxpayer, Nonetheless, what needs to be pinpointed/noted is that, the apex court, in dealing with the connected aspect, of the rights of a holder of flats in a building complex, has followed a diagonally opposite line of reasoning, as distinct from the instant case. For a useful hint, in that case,- the ruling is to the effect that the most essential criterion of all, underlying the concept of "ownership", so as to satisfy the acid test of "ownership", the pre-requisites,- to quote from the judgment – are mainly these:

"(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;

(c) power to alienate inter vivos, or to charge as security;

(d) power to leave the res by will.

The Judgment further reads: "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)"

For getting a full grip of the ratio of the said court decision, so as to appreciate why the ruling in that case is not reconcilable but prima facie contradicts the ruling in the instant case, it is strongly suggested, may be read, in full.

EPILOGUE

For underlining and driving home effectively certain related humane aspects, it may be, not out of context but, appropriate to share the outstanding wisdom of a legal luminary, – a great thinker and humanist of our times, all rolled into one,- behind the following quotes:

LAWYERS, PRESS, JUDICIARY

Lawyers

• In a vast democracy like India, many citizens are bound to be undimensional.  But no lawyer has any excuse for being undimensional.  By his learning and equipment and by his professional competence he is better qualified than the rest of the citizenry to take an active part in the making of laws and their formulation of public policies. He would be failing his country if he did not do his duty. The lawyer has to act as a catalyst. The responsibilities which today lie on the shoulders of the lawyers are far greater than at any time in world history.
• We produce lawyers who seem lost without case law to support their propositions.  The average lawyer, who finds himself without a precedent to cite, is like a tycoon without balance sheet, jazzman without a trumpet, a gossip without a club.
• A lawyer with a well furnished mind alone can be truly a counsellor at law; he alone can, not merely look up precedents, but guide his client along the path of wisdom, even of generosities which may appear irrelevancies to the preoccupied client. In the hands of such a lawyer, the law represents the application of reason to noble and purposeful ends.

• Man has been defined as a rational animal. But you cannot live in India without being constantly reminded that this definition was given to man by man himself in a characteristic moment of self-adulation.

• In the last..decades, we have taken plenty of wrong turns at the crossroads , misused time, taken gold for dross and dross for gold; however, would like to reaffirm my unquenchable confidence in the long-term future of India.

To faithfully follow upon and continue to live with the same spirit and pessimistic outlook, in the context herein, one may wish to simply add, -may be, it is, frankly speaking, not but too late in the day to even realise the gravity of the obtaining scenario; but that is not to say, by any yardstick used for measuring time, it may not be late for everyone concerned to wake up to the realities all around only to think of and striving own best for bringing about a change / improvement for a better tomorrow (!).

• The New York State Legislature passed a major Piece of consumer legislation in 1977 to ensure that laws affecting common people would be "plain- language laws". Attempt to likewise cure our laws of their incredible fuzziness is more than overdue, by decades.

• There can be no excellence in the law without excellence in lawyers.

JUDICIARY

Quoting Pathak J, from a landmark SC Judgment, observed:

……The responsibility fixed on the court is serious one. And there is no need to warn that this power …can have grave consequences if the content of its potential is not truly appreciated and realized by those who wield it. Whenever a Court breaks new ground, the development and recognition of new rights is often accompanied by the birth of problems surfacing also for the first time…..

Source: 'Memorial' lecture delivered on the subject of SC's judgment in "the Judges' case"

PRESS

The Press must make a sharp distinction between a story, the publication of which is dictated by public interests, and a story which is entirely sleazy ad sensational. Not only has the right but also duty to expose the truth fully.

(TO add: In any event, the Press has a basic duty not to give undue publicity or unduly project and propagate anything, the nuisances of which even a law expert may have no competence to be reasonably sure on or explain satisfactorily if questioned, – as to what is "the truth", or attendant misconception)

• Unfortunately, the 1980s has been a degraded decade- even progressions like the legal, accountancy and medical professions, have become commercialized. The same evil has afflicted journalism. Professions have sunk to the lower level of business. We are living in times when professional or business ethics sounds like an oxymoron, a contradiction like a hot ice –cube or a tiny giant.  Today the main idea of most newspapers, journals or magazines is to maximise readership, regardless of the higher values which ought to animate journalism.
• In a lighter vein, a reading of above leaves one, even though not normally used to or has a fancy to exaggerate or eulogize, with an unpredictable urge to visualize or admire the tax gatherers' exemplary forethought in giving no different status to the two, – professionals and businessmen. Reference is to the long-range vision and wisdom in framing and bringing to taxation even as long back as in 1922, income of both under the same head, – old section 10 (1) (new section 28) of  IT Act.

 The above are quotes from the memorable published articles and speeches, of legal legend, Palkhivala, a widely acclaimed scholar par excellence, with the backing of his erudite knowledge, also lifelong exposure and practical experience in the field of law practice.

 (Source: WE, THE PEOPLE and We, the Nation; the two books are worthwhile to be read not once but times over as one will do of the Bible, the Bhagavad Geeta, or the like)

These are being shared in the fervent hope that may serve, as intended, the purpose of inciting, inducing, or provoking the others to appreciate, and try and imbibe the righteous spirit and public-centric approach.

Tail Piece:

To end with an optimistic note:-

No doubt, as things stand as of now, there appears to be no scope for hoping, in the foreseeable future, any positive or sincere move forward from the men in governance, either in the states or at the centre, towards a change in the overall scenario, for the better.

In the interim, the only hope on hopes that could provide some solace is that, the Judiciary, noted and commended of late for its proactivism, may not waver in its endeavours but think of and come to the rescue, by providing some relief/bring succour to the thus far victimised buying community – purchasers /owners of flats or apartments. What is immediately called for is the realisation by the judiciary of the need for construing the extant state enactments (governing the construction and sale of multi-storeyed buildings / 'units' thereof), not only of Maharashtra but of every other State, in such a manner as to, not to resort to a technical or hyper technical approach, with the sole aim of bringing home justice to the investing public. As said herein before, that could be attempted and accomplished, to begin with, by construing the enactment (s) cohesively; that is, as legislation for saving and protecting the lawful rights of the investing people spoken of herein. May be, desirably do so, suo motu; say, by treating the matter as one deserving to be taken on as a PIL. Alternatively, do so on the very next occasion the court is called upon to opine in the matter.  

Disclaimer: The foregoing brief analysis is intended to convey own thoughts and viewpoints, based on an independent study of the covered limited aspects. Welcome to share, should anyone, especially a competent law expert in field practice, entertain any doubt or has a better view to offer after an independent study, so as to serve the objective of common good.

CLB bans audio or video recording of bench proceedings by parties

Posted In Company Law | Notifications | No Comments »

Company Law Board (Amendment) Regulations, 2014 – Insertion Of Regulation 51

Order  [File no.10/36/2001-CLB], Dated 20-2-2014

In exercise of the powers conferred by sub-section (4B) and sub-section (6) of section 10(E) of the Companies Act 1956 (1 of 1956), the Company Law Board hereby makes the following Regulations further to amend the Company Law Board Regulations, 1991, namely:—

1. In CHAPTER IV of the Company Law Board Regulations, 1991, (hereinafter referred to as the said regulations), after Regulation 50, the following Regulation shall be inserted namely:—

"51. Restriction on Audio or Video Recording by the parties:—

There shall be no audio or video recording of the Bench proceedings by the parties."

2. This order shall come into force with immediate effect.

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