IT : Where assessee-firm received a sum of Rs. 4.35 lakhs in cash from its sister concern and repaid a sum of Rs. one lakh in cash to sister concern, transfer of cash by one firm to another would operate as a reasonable cause and, therefore, levy of penalty under sections 271D and 271E upon assessee was not justified
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[2014] 41 taxmann.com 235 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'A'
K.K. Enterprises
v.
Joint Commissioner of Income-tax, Range-25(2)*
SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY GARG, JUDICIAL MEMBER
AND SANJAY GARG, JUDICIAL MEMBER
IT APPEAL NOS. 4699 & 4700 (MUM.) OF 2012
[ASSESSMENT YEAR 2001-02]
[ASSESSMENT YEAR 2001-02]
OCTOBER 18, 2013
Section 269SS, read with sections 269T, 271D, 271E and 273B, of the Income-tax Act, 1961 - Loan or deposits - Mode of accepting [Penalty] - Assessment year 2001-02 - Assessee, a partnership firm, was doing business as a builder and developer - During year, it received a sum of Rs. 4.35 lakhs in cash from its sister concern - It repaid a sum of Rs. one lakh in cash to sister concern - Both firms were in same business having their offices located in same premises with a common partner - Assessing Officer held that there was clear violation of provisions of sections 269SS and 269T by assessee - He, therefore, levied penalties under sections 271D and 271E upon assessee - Whether in terms of definition of 'loan or deposit' defined in section 269T, repayment of Rs. one lakh in cash by assessee to sister concern would not hit by section 269T and, therefore, penalty levied under section 271E was liable to be deleted - Held, yes - Whether since cash had been accepted by assessee-firm from another firm constituted by family members, transfer of cash by one firm to another would operate as a reasonable cause - Held, yes - Whether, therefore, penalty levied under section 271D was saved by section 273B and was liable to be deleted - Held, yes [Paras 3.3, 3.4 and 4] [In favour of assessee]
Words and Phrases : 'Loan and deposit' occurring in sections 269SS and 269T of the Income-tax Act, 1961
FACTS
| ■ | The assessee, a partnership firm, was doing business as a builder and developer. During the year, it received a sum of Rs. 4.35 lakhs in cash from its sister concern. It out of the sum received repaid a sum of Rs. one lakh in cash to sister concern. | |
| ■ | The Assessing Officer held that there was a clear violation of provisions of sections 269SS and 269T by the assessee. He, therefore, levied the penalties under sections 271D and 271E upon the assessee. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the penalty order. | |
| ■ | On second appeal : |
HELD
| ■ | Where a person is found to have acted in violation, he is bound to show reasonable cause, failing which the penalty is imposable. A reasonable cause is always a matter of fact. [Para 3.2] | |
| ■ | While a loan or deposit stands defined to mean 'loan or deposit of money' in section 269SS, i.e., providing for a conditionality on its acceptance from its very inception, the said words were defined in section 269T to mean 'any loan or deposit of money which is repayable after a notice or repayable after a period.' The enhancement in the scope of section 269T, so as to include loan or deposit of any nature, i.e., in case of a person other than a company, is only by the Finance Act, 2002,w.e.f. 1-6-2002. Clearly the cash received by the assessee from its sister concern cannot be said to be repayable after a notice or after a period, i.e., in terms of the definition obtaining at the time of its acceptance or repayment. Its repayment would, thus, stand to be ousted and, thus, not hit by section 269T. No penalty under section 271E, on an ostensible default thereof, would thus hold. Therefore, the penalty levied under section 271E upon the assessee was liable to be deleted. [Para 3.3] | |
| ■ | As regards the sum of Rs. 4.35 lakhs received by the assessee in cash on different dates during the relevant year, the same would definitely qualify as a loan or deposit within the meaning of the term under section 269SS inasmuch as the same stands widely defined as loan or deposit of money. The sum received by the assessee is admittedly payable to the payer and, as such, is only a loan or deposit of money falling within the purview of section 269SS. However, the assessee is entitled to relief under section 273B. Both the concerns are sister concerns in the same business having their offices located in the same premises with a common partner. A firm under normal circumstances only acts through the agency of its partners, who may bank for the cash required in one firm on that available with another. In saying so, the Bench does not in any manner suggest that where cash entries are duly recorded in the books of account of both the recipient and the payer, i.e., represent genuine transactions of cash paid and received, the same would by itself constitute a reasonable cause, excluding penalty under section 271D/271E. This is as this is precisely what stands barred by sections 269SS and 269T, which, therefore, are to be regarded as substantive provisions, prescribing acceptance and repayment of loan or deposit of money otherwise than by accounted payee cheque or accounted payee bank draft where the threshold limit is exceeded, as in the instant case. But only that in the given circumstances of instant case, where cash has been accepted by the assessee-firm from another firm constituted by the family members, being in fact run though the agency of among others a common partner, the transfer of cash by one firm to another would operate as a reasonable cause, saving penalty. True the assessee has not been able to show of being prevented by any reasonable reason in not accepting the same through account payee cheque or bank draft, rather there has been no contention to that effect. Equally the constitution of the payer concern, which is only another person under the Act, would not be of much import. However, it is the totality of the circumstances that have to be taken into account. The transactions between firms are, in fact, only done between individuals. In the perception of the partner, inasmuch as the things are to be viewed from the stand point of the businessman, he may only be transferring the money from one pocket to another. [Para 3.4] | |
| ■ | In view of the foregoing, the assessee has been able to exclude its case on the ground of reasonable cause, so that the penalty under section 271D is saved by section 273B. Therefore, the penalty levied under section 271D upon the assessee was liable to be deleted. [Para 4] |
CASE REVIEW
CIT v. Natvarlal Purshottamdas Parekh [2008] 303 ITR 5 (Guj.) (para 3.4); CIT v. Sunil Kumar Goel [2009] 315 ITR 163/183 Taxman 53 (Punj. & Har.) (para 3.4); CIT v. Maheshwari Nirman Udyog [2008] 302 ITR 201/170 Taxman 502 (Raj.) (para 3.4) and CIT v. Lakshmi Trust Co. [2008] 303 ITR 99 (Mad.) (para 3.4) followed.
CASES REFERRED TO
Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (para 3.1), Asstt. Director of Inspection v. Kum. A.B. Shanthi [2002] 255 ITR 258/122 Taxman 574 (SC) (para 3.2), CIT v. Standard Brands Ltd. [2006] 285 ITR 295/155 Taxman 383 (Delhi) (para 3.2), CIT v. Natvarlal Purshottamdas Parekh [2008] 303 ITR 5 (Guj.) (para 3.4), CIT v. Sunil Kumar Goel [2009] 315 ITR 163/183 Taxman 53 (Punj. & Har.) (para 3.4), CIT v. Maheshwari Nirman Udyog [2008] 302 ITR 201/170 Taxman 502 (Raj.) (para 3.4) and CIT v. Lakshmi Trust Co. [2008] 303 ITR 99 (Mad.) (para 3.4).
Jitendra Shah for the Appellant. S.K. Madhuk for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is a set of two Appeals by the Assessee agitating the separate Orders by the Commissioner of Income Tax (Appeals)-35, Mumbai ('CIT(A)' for short) of even date, i.e., 28.05.2012, dismissing the assessee's appeal contesting the levy of penalty u/ss. 271D and 271E of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2001-02.
2. The appeals raising common issues, were posted for hearing and, accordingly, heard together, and are being decided by a common, consolidated order. The brief facts of the case are that the assessee, a partnership firm, being a builder and developer, was found during the course of the assessment proceedings by the Assessing Officer (A.O.) to have received a sum of Rs.4.35 lacs from one, M/s. Sahakar Developers, in cash during the relevant year, so that there had been a clear violation of section 269SS of the Act. The assessee was, accordingly, show caused in the matter, whereat it was explained that the sum received was in fact not a 'loan or deposit', but amounts received toward a land deal, the payer-firm, which is only a group concern, being also in the same line of business. However, as no details in respect of the said deal nor evidence/s to substantiate the said claim, stood furnished, the same was found not acceptable. No other explanation having been furnished, so that the assessee was clearly unable to show any reasonable cause for to the impugned default, penalty u/s.271D was levied, and also confirmed by the first appellate authority for the same reason. The assessee had similarly also paid Rs. 1 lac in cash to the said payer, i.e., M/s. Sahakar Developers, so that there was also a contravention of section 269T of the Act. Penalty u/s. 271E, i.e., toward the default of the said provision, stood attracted, and was accordingly levied, and confirmed for the same reason; both the penalties being in terms of the relevant sections, i.e., the amounts having been received and repaid in cash, i.e., other than by way of account-payee cheque or account-payee bank draft, the prescribed modes, and thus in default of the provisions.
3. We have heard the parties, and perused the material on record.
3.1 The default of the relevant sections, being ss. 269SS and 269T of the Act, is apparent. The question before us, however, is the maintainability in law of the corresponding penalty u/ss.271D and 271E of the Act respectively under the facts and circumstances of the case. The assessee's case before us as well as before the authorities below was in terms of the sums having been received from a sister concern, having a common partner in Shri Kamlesh Gangar, with both the concerns having in fact offices at the same place at Borivali, Mumbai and, two, of having acted bona fide, with no ulterior motive, with the transactions being recorded in the regular books of accounts of both the parties, and which would, therefore, constitute a reasonable cause u/s.273B of the Act, saving penalty. With reference to the decision by the apex court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC), it is claimed that there was no deliberate defiance of law or guilt of conduct contumacious or conscious disregard of its obligation, so as to attract the levy of penalty. Further, qua the repayment of loan or deposit, the extended definition of the loan or deposit u/s.269T is only by Finance Act, 2003 w.r.e.f 01.06.2002, so that the same would not apply for the current year; the impugned repayment of Rs. 1 lac having been made on 14.07.2000 (PB pg.14) and, thus, outside the ambit of the extended definition as provided and applicable from 01.06.2002. The Revenue's case, on the other hand, is that none of the foregoing contentions constitute a reasonable cause in terms of section 273B of the Act, and which in any case has to be proved as a fact by the asseesse.
3.2 The provision of sections 269SS and 269T, as well as sections 271D and 271E, prescribing penalty respectively for default of the former sections, have been held as constitutionally valid by the apex court in the case of Asstt. Director of Inspection v. Kum. A.B. Shanthi [2002] 255 ITR 258/122 Taxman 574. To say, therefore, that the breach of the said provisions is a mere technical or venial breach, so that no penalty on that account would be exigible, as explained by the apex court in Hindustan Steel Ltd. (supra), would not obtain. The said decision, no doubt forming part of the jurisprudence on penal provisions, particularly in the context of fiscal legislation, we may clarify, could only be applied with reference to the factual circumstances and the conduct of the assesse, and not merely with reference to a prescription of law. As explained inKum. A.B. Shanthi (supra), where there was a genuine and bona fide transaction and the tax payer could not get a loan or deposit by account-payee cheque or account-payee demand draft for some reason, the authority vested with the power to impose the penalty has the discretionary power not to levy the penalty. This would then sum up or define the parameters under which the applicability or otherwise of the decision in the case of Hindustan Steel Ltd. (supra) would need to be considered qua the penalties under reference. In other words, the transaction being genuine or bona fide, though representing an essential condition for saving penalty would itself not be sufficient. Rather, non-genuine transaction was held as outside the scope of the penal provisions inasmuch as the same is liable to be considered as the income of the assessee u/s. 68 of the Act; the two provisions operating in different fields. Reference in this regard may be made to the decision in the case of CIT v.Standard Brands Ltd. [2006] 285 ITR 295/155 Taxman 383 (Delhi), besides several by the tribunal.
Continuing further, true, the provisions of ss. 269SS and 269T were enacted by the Legislature toward providing a check on the tax payers giving false explanation for their unaccounted money, or making false entries in accounts, explaining the cash found during searches, etc. with reference thereto, as noted by the apex court in Kum. A. B. Shanthi (supra). However, that would not, even as explained by the apex court therein, constrict the scope of the provisions, cast in clear and unambiguous language, to such cases of search, etc. only. As such, where a person is found to have acted in violation, he is bound to show reasonable cause, failing which the penalty is imposable. A reasonable cause is always a matter of fact. In the several cases cited by the assessee, penalty has been deleted on the basis of finding/s of a reasonable cause with the assessee-appellant toward the impugned transaction.
3.3 We next examine the facts and circumstances of the case. To begin with, however, we may clarify that while a loan or deposit stands defined to mean 'loan or deposit of money' in section 269SS, i.e., providing for a conditionality on its acceptance, and from its very inception (i.e., 11.07.1981), the said words were defined in sec. 269T to mean any loan or deposit of money which is repayable after a notice or repayable after a period. The enhancement in the scope of s. 269T, so as to include loan or deposit of any nature, i.e., in case of a person other than a company, is only by Finance Act, 2003 w.e.f. 01.06.2002. Clearly, the cash received by the assessee from its sister concern cannot be said to be repayable after a notice or after a period, i.e., in terms of the definition obtaining at the time of its acceptance (16.06.2000) or repayment (14.07.2000). Its repayment would, thus, stand to be ousted and, thus, not hit by section 269T. No penalty u/s.271E of the Act, on an ostensible default thereof, would, thus, hold.
3.4 As regards the sum of Rs. 4.35 lacs received by the assessee in cash on different dates during the relevant year, the same would definitely qualify as a loan or deposit within the meaning of the term u/s.269SS of the Act inasmuch as the same stands widely defined as loan or deposit of money. The sum received by the assessee is admittedly payable to the payer, as reflected per the accounts of both the parties (PB pgs.4, 14) and, as such, is only a loan or deposit of money falling within the purview of section 269SS. The assessee has clearly been unable to substantiate its claim of the said sum as having been received in relation to a transaction/s in land or having its genesis in business transaction/s with the said party. In fact, Rs. 1 lac out of the sum received stands repaid in cash and, again, without reference to, or any underlying business transaction being otherwise exhibited. In fact, the assessee itself states of the account with the said party to be in the nature of a current account, contradicting its said explanation.
So however, in our view, the assessee is entitled to relief u/s.273B. Both the concerns are sister concerns, in the same business; rather, having their office located in the same premises, with a common partner. A firm under normal circumstances only acts through the agency of its partners, who may bank for the cash required in one firm on that available with another. We may though clarify that we, in saying so, do not in any manner suggest that where cash entries are duly recorded in the books of accounts of both the recipient and the payer, i.e., represent genuine transactions of cash paid and received, the same would by itself constitute a reasonable cause, excluding penalty u/s.271D / 271E of the Act. This is as this is precisely what stands barred by sections 269SS and 269T, which, therefore, are to be regarded as substantive provisions, proscribing acceptance and repayment of loan or deposit of money otherwise than by account-payee cheque or account-payee bank draft where the threshold limit is exceeded, as in the instant case. But only that in the given circumstances of this case, where cash has been accepted by the assessee-firm from another constituted by the family members, being in fact run through the agency of, among others, a common partner, the transfer of cash by one from to another would operate as a reasonable cause, saving penalty. True, the assessee has not been able to show of being prevented by any reasonable reason in not accepting the same through account-payee cheque or bank draft; rather, there has been no contention to that effect. Equally, the constitution of the payer concern, which is only another person under the Act, would not be of much import. However, it is the totality of the circumstances that have to be taken into account. The transactions between firms are, in fact, only done between individuals. In the perception of the partner, inasmuch as the things are to be viewed from the stand-point of the businessman, he may only be transferring the money from one pocket to another. In so deciding, we have been guided by the decisions by the hon'ble courts, where the term 'reasonable cause' has been explained as liable to be liberally construed where the bona fides are not in doubt, and indeed penalty held as not exigible under similar circumstances, as in CIT v. Natvarlal Purshottamdas Parekh [2008] 303 ITR 5 (Guj)). As explained in CIT v. Sunil Kumar Goel [2009] 315 ITR 163/183 Taxman 53 (Punj. & Har.), where the transactions are between two sister concerns, both within the family, and the fund transfers were for the purposes of business, with the transactions accounted for in the books, the requirement of reasonable cause is to be considered as satisfied in such circumstances. On the same footing is the decision in the case of CIT v.Maheshwari Nirman Udyog [2008] 302 ITR 201/170 Taxman 502 (Raj.) and CIT v. Lakshmi Trust Co. [2008] 303 ITR 99 (Mad).
4. In view of the foregoing, considering the totality of the facts and circumstances of the case, including the number and volume of transactions, in our view the assessee has been able to exclude its case on the ground of reasonable cause, so that the penalty in the instant case is saved by section 273B of the Act, as well as on the ground of applicability of the un-amended provision of s. 269T of the Act. We decide accordingly.
5. In the result, both the appeals by the assessee are allowed.
S.K.J*In favour of assessee.
IT : In order to claim exemption under section 11, assessee can file audit report in Form No. 10B even at a later stage either before Assessing Officer or before appellate authority by showing a sufficient cause
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[2014] 41 taxmann.com 184 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax - IV
v.
Xavier Kelavani Mandal (P.) Ltd.*
V. M. SAHAI AND N. V. ANJARIA, JJ.
TAX APPEAL NO. 1362 OF 2011†
SEPTEMBER 5, 2012
Section 11, read with section 12A, of the Income-tax Act, 1961 and rule 17B of the Income-Tax Rules, 1962 - Charitable or religious trust - Exemption of income from property held under [Filing of audit report] - Assessment year 2006-07 - Assessee filed its return declaring certain income - On verification, Assessing Officer noticed that assessee had not furnished audit report in Form No. 10B, which was compulsory requirement for eligibility of exemption under section 11 as stated in section 12A(b), read with rule 17B - He thus denied exemption to assessee - Commissioner (Appeals) having permitted assessee to file audit report, accepted same and, accordingly, assessee's claim for exemption was allowed - Tribunal upheld order of Commissioner (Appeals) - Whether it is permissible for assessee to produce audit report at a later stage either before Assessing Officer or before appellate authority by showing a sufficient cause - Held, yes - Whether, therefore, Tribunal was justified in allowing assessee's claim - Held, yes [In favour of assessee]
CASE REVIEW
CIT v. Gujarat Oil & Allied Industries Ltd. [1993] 201 ITR 325 (Guj.) and CIT v. Shahzadanand Charity Trust [1997] 228 ITR 292/[1998] 96 Taxman 494 (Punj. & Har.) (para 5) followed.
CASES REFERRED TO
CIT v. Gujarat Oil & Allied Industries Ltd. [1993] 201 ITR 325 (Guj.) (para 4) and CIT v. Shahzadanand Charity Trust [1997] 228 ITR 292/[1998] 96 Taxman 494 (Punj. & Har.) (para 4).
Ms. Paurami B. Sheth for the Appellant.
JUDGMENT
N.V. Anjaria, J. - The present appeal under section 260A of the Income-tax Act, 1961 preferred by the Revenue is directed against the order dated 17.06.2011 of the Income Tax Appellate Tribunal, Ahmedabad Bench 'C' in ITA No. 2050/Ahd/2009 for the assessment year 2006-07.
1.1 The following question is proposed by the appellant as a substantial question of law.
"Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to accept the audit report from the assessee which was not filed during the course of assessment proceeding and to grant exemption u/s.11 of the Act?"
2. We heard learned advocate Ms. Paurami Sheth for the appellant.
3. The issue in narrow compass and is about the Commissioner of Income-tax (Appeals) directing acceptance of audit report from the assessee and granting exemption under section 11 of the Income-tax Act, 1961 (hereinafter referred to as `the Act' for sake of brevity).
3.1 The assessee filed its return of income for the Assessment Year 2006-07. On verification, the Assessing Officer noticed that the assessee had not furnished audit report in Form No.10B, which was compulsory requirement for eligibility of exemption under section 11A of the Act as stated in section 12A(b) read with Rule 17B of the Income Tax Rules, 1962. Assessee was issued show cause notice as to why exemption claimed by it under section 11 should be disallowed. The Assessing Officer passed order denying the exemption. He taxed gross receipts without granting deduction of expenditure.
3.2 In the appeal preferred by the assessee, the Commissioner of Income-tax (Appeals) permitted the assessee to file the audit report and directed to accept the same by his order dated 16.04.2009 and the exemption under section 11 of the Act allowed. The Department filed appeal which came to be dismissed by the impugned order bringing the Department before this Court by way of present appeal.
4. The question whether it is permissible to the assessee to produce the audit report at the appellate stage, has already been answered by this court in CIT v. Gujarat Oil & Allied Industries Ltd. [1993] 201 ITR 325 (Guj.), wherein it is held that the provision regarding furnishing of audit report along with the return has to be treated as a procedural provision. It is directory in nature and its substantial compliance would suffice. In that case, the assessee had not produced the audit report along with the return of income, but produced before completion of the assessment. The Punjab and Haryana High Court in CIT v. Shahzadanand Charity Trust [1997] 228 ITR 292/[1998] 96 Taxman 494 has reiterated the same principle holding that the benefit of exemption should not be denied merely on account of delay in furnishing the same, and it is permissible for the assessee to produce the audit report at a later stage either before the Income Tax Officer or before the appellate authority by showing a sufficient cause. This decision of Punjab & Haryana High Court has been relied on by the Tribunal.
5. In the above view, the Tribunal is eminently justified both in law and on facts in observing and holding as under:—
"In this case, it is not in dispute that the audit report in prescribed form was obtained prior to filing of the return on 20/12/2006; therefore, there was no reason for the assessee to keep the audit report with it in order to loose the exemption. The assessee in the earlier as well as in the subsequent assessment years filed the audit report and got the exemption. The conduct of the assessee in earlier year and subsequent years would prove that due to the facts stated above there was delay in filing the audit report and the contention of the assessee was supported by the affidavit of Mohmad Iqbal Vohra (PB-4). The learned CIT(A) on proper appreciation of the facts and material on record in the light of the decisions of the Hon'ble Punjab & Haryana High Court and the Hon'ble Calcutta High Court rightly directed the AO to accept the audit report of the assessee and grant exemption u/s. 11 of the IT Act."
6. For the above reasons, the appeal of the Revenue is devoid of merit, raising no question of law much less any substantial question of law.
7. Accordingly the appeal is dismissed.
■■*In favour of assessee.
†Arising out of order of Tribunal in ITA No. 2050 (Ahd.) of 2009, dated 17-6-2011.
IT : Notice issued under section 148 after obtaining approval of Commissioner would be of no consequence as said approval is contrary to provisions of section 151
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[2014] 41 taxmann.com 151 (Bombay)
HIGH COURT OF BOMBAY
DSJ Communication Ltd.
v.
Deputy Commissioner of Income-tax, Circle -2(1)*
S.J. VAZIFDAR AND M.S. SANKLECHA, JJ.
WRIT PETITION NO. 722 OF 2011
SEPTEMBER 13, 2012
Section 151, read with section 148, of the Income-tax Act, 1961 - Income escaping assessment - Sanction for issue of notice [Approval of concerned authority] - Whether where revenue authorities failed to prove that impugned notice under section 148 had been issued after obtaining approval of Additional Commissioner or Joint Commissioner as required under section 151(2), reassessment proceedings initiated in pursuance of said notice deserved to be quashed - Held, yes - Whether in this regard, plea taken by revenue that impugned notice had been issued with approval of Commissioner would be of no consequence as, in any event, said approval would be contrary to provisions of section 151 - Held, yes [In favour of assessee]
CASES REFERRED TO
Ghanshyam K. Khabrani v. Asstt. CIT [2012] 346 ITR 443/20 taxman.com 716/210 Taxman 75 (Bom.) (Mag.) (para 10).
Salil Kapoor and Satendra Kumar Pandey for the Petitioner. Vimal Gupta for the Respondent.
JUDGMENT
1. The petitioner has sought inter-alia a writ of certiorari to quash a notice under section 148 of the Income Tax Act, 1961 dated 28.1.2004 issued by respondent No.1 and an order dated 4.3.2011. Respondent No.2 is the Commissioner of Income Tax.
2. On 28.11.1997, the petitioner filed its return of income, which was accepted under section 143(1). The impugned notice dated 28.1.2004 was issued within a period of four years. By a letter dated 16.3.2004, the petitioner requested for the reasons in respect of the impugned notice. On 14.3.2005, the assessment order was passed under section 143(3) read with section 147 by making certain additions and disallowances. The same was done without respondent No.1 having furnished the reasons.
3. For the purpose of this petition, it is not necessary to consider the merits of the assessment order dated 14.3.2005. Nor is it necessary to consider the submission that the assessment order was passed without establishing that any income had escaped assessment. This is for the reason that the writ petition is liable to be allowed on one ground itself, in view of the judgment of a Division Bench of this Court, which we will refer to shortly.
4. By an order dated 17.11.2009, the Commissioner of Income Tax (Appeals) dismissed the petitioner's appeal. The petitioner had contended that the reasons for issuance of the impugned notice had not been furnished. It was held that the same had been furnished during the re-assessment proceedings.
5. The petitioner had filed an appeal before the Income Tax Appellate Tribunal inter-alia on the ground that the reasons had not been furnished by the Assessing Officer before completing the assessment. It was further contended before the Tribunal that in spite of a specific request by a letter dated 16.3.2004, respondent No.1 had not furnished the reasons recorded for issuing the impugned notice. The Tribunal by an order dated 30.9.2010 set aside the order of the AO in view of the absence of the respondents having communicated the reasons for the impugned notice. The Tribunal remanded the matter to the AO with a direction to communicate the reasons for re-opening the assessment and thereafter to pass a fresh order after considering the petitioner's objections thereto, if any. The appeal before the Tribunal was accordingly disposed of.
6. Subsequently, under cover of a letter dated 10.2.2011, the reasons were furnished to the petitioner. For the purpose of this petition, it is sufficient to note that the reasons were furnished by respondent No.1 - Deputy Commissioner of Income Tax. Below the signature of respondent No.1, an Additional Commissioner of Income Tax, Range-2 (1), Mumbai has signed the following endorsement :—
"Put up for approval for issue of notice u/s. 148 of the Income-tax Act, 1961"
7. Mr. Kapoor relied upon section 151, which as under :—
"151. Sanction for issue of notice.—(1) In a case where an assessment under sub-section (3) of Section 143 or Section 147 has been made for the relevant assessment year, no notice shall be issued under Section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice:
Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice.
(2) In a case other than a case falling under sub-section (1), no notice shall be issued under Section 148 by an Assessing Officer, who is below the rank of Joint Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.
Explanation. — For the removal of doubts, it is hereby declared that the Joint Commissioner, the Commissioner or the Chief Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under Section 148, need not issue such notice himself."
Mr. Kapoor submitted firstly that the approval as required by section 151 had not been obtained. Secondly, he submitted that in any event, even according to the respondents, the approval of the CIT-2 was obtained. In other words, admittedly, the approval of the Joint Commissioner was not taken. The impugned order is therefore, according to him, liable to be set aside.
8. The endorsement at the foot of the reasons merely directed that the matter be "Put up for approval" for issue of a notice under section 148. There is nothing on record that indicates that the same was actually put up for approval. Nor is there anything to indicate that the approval was in fact granted.
9. Mr. Gupta, the learned counsel appearing on behalf of the respondents submits that it must be presumed from the said endorsement that the approval had been granted. He was however, unable to produce the approval despite our having granted him an opportunity of doing so. The affidavit in reply does not annexe the approval. Despite a further opportunity in Court, the approval was not produced.
Mr. Gupta relied upon paragraph 4 of the petitioner's objections contained in the petitioner's letter dated 3.3.2011, which reads as under :—
"4. The sanction given by the Addl.CIT is also not proper as the reasons recorded merely contains the signature of the Addl.CIT but not his comments. If the Addl.CIT has given any separate comments, kindly furnish us a copy of the same for our rebuttal. In absence of any separate comments, the sanction or approval is not proper and therefore, the reopening against lacks jurisdiction".
The word used in paragraph 4 is "comments" and not "approval". It is difficult to read the paragraph as an admission on the petitioner's part that the Additional Commissioner had in fact granted his approval. In any event, if he had in fact granted approval, it was for the respondents to produce the same. The respondents cannot merely rely upon their interpretation of a submission by the petitioner in this regard. At the cost of repetition, the respondents have failed to produce the approval of the Additional Commissioner or the Joint Commissioner either in the affidavit in reply or even otherwise, although they were granted an opportunity of doing so. Whether the approval was granted or not is an objective fact which can be established only by producing the approval. It is not the respondents' case that the approval was in fact granted, but is misplaced.
10. Indeed the respondents' case is to the contrary. In paragraphs 4(iii) and 8 of the affidavit in reply, it is expressly stated that the impugned notice was issued "with the approval of CIT-2, Mumbai." There is not a whisper about the Additional Commissioner or the Joint Commissioner having granted the approval. The alleged approval therefore, in any event, is contrary to the provisions of section 151, as held in the judgment of a Division Bench of this Court, to which one of us (M.S. Sanklecha, J.) was a party, dated 12.3.2012 in Ghanshyam K. Khabrani v. Asstt. CIT [2012] 346 ITR 443/20 taxman.com 716/210 Taxman 75 (Bom.) (Mag.). The Division Bench held as under:—
'6 The second ground upon which the reopening is sought to be challenged is that the mandatory requirement of Section 151(2) has not been fulfilled. Section 151 requires a sanction to be taken for the issuance of a notice under Section 148 in certain cases. In the present case, an assessment had not been made under Section 143(3) or Section 147 for A.Y. 200405. Hence, under sub section 2 of Section 151,no notice can be issued under Section 148 by an Assessing officer who is below the rank of Joint Commissioner after the expiry of 4 years from the end of the relevant Assessment Year unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. The expression "Joint Commissioner" is defined in Section 2(28C) to mean a person appointed to be a Joint Commissioner of Income Tax or an Additional Commissioner of Income Tax under Section 117(1). In the present case, the record before the Court indicate that the Assessing Officer submitted a proposal on 28 March 2011 to the CIT(I) Thane through the Additional Commissioner of Income Tax Range (I) Thane. On 28 March 2011, the Additional CIT forwarded the proposal to the CIT and after recording a gist of the communication of the Assessing Officer stated that:
"As requested by the A.O. Necessary approval for issue of notice u/s 148 may kindly be granted in the case, if approved."
On this a communication was issued on 29 March 2011 from the office of the CIT (1) conveying approval to the proposal submitted by the Assessing officer. There is merit in the contention raised on behalf of the Assessee that the requirement of Section 151(2) could have only been fulfilled by the satisfaction of the Joint Commissioner that this is a fit case for the issuance of a notice under Section 148. Section 151(2) mandates that the satisfaction has to be of the Joint Commissioner. That expression has a distinct meaning by virtue of the definition in Section 2(28C). The Commissioner of Income Tax is not a Joint Commissioner within the meaning of Section 2(28C). In the present case, the Additional Commissioner of Income Tax forwarded the proposal submitted by the Assessing Officer to the Commissioner of Income Tax. The approval which has been granted is not by the Additional Commissioner of Income Tax but by the Commissioner of Income Tax. There is no statutory provision here under which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner. In a similar situation the Delhi High Court in CIT v. SPL'S Siddhartha Ltd. [2012] 17 taxmann.com 138 held that powers which are conferred upon a particular authority have to be exercised by that authority and the satisfaction which the statute mandates of a distinct authority cannot be substituted by the satisfaction of another. We are in respectful agreement with the judgment of the Delhi High Court.
7. In view of the finding which we have recorded on submission (i) and (iv), it is not necessary for the Court to consider submission (iii) which has been urged on behalf of the Assessee. Once the Court has come to the conclusion that there was no compliance of the mandatory requirements of Section 147 and 151(2), the notice reopening the assessment cannot be sustained in low.'
11. In view of the above conclusion, we did not permit Mr. Kapoor to advance any other arguments. It is therefore, also not necessary to consider the other prayers.
12. In the circumstances, Rule is made absolute in terms or prayer (a).
There shall be no order as to cost.
2014-TIOL-69-ITAT-DEL
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'H' NEW DELHI
BENCH 'H' NEW DELHI
ITA No.3358/Del/2012
Assessment Year: 2009-10
Assessment Year: 2009-10
ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE-17(1), NEW DELHI
CIRCLE-17(1), NEW DELHI
Vs
M/s VERVE ENGINEERING PVT LTD
C-148, MAYAPURI INDUSTRIAL AREA, DELHI - 110064
PAN NO: AACCV7364H
C-148, MAYAPURI INDUSTRIAL AREA, DELHI - 110064
PAN NO: AACCV7364H
CO No.378/Del/2012
Assessment Year: 2009-10
Assessment Year: 2009-10
M/s VERVE ENGINEERING PVT LTD
C/O SHRI KAPIL GOEL, ADVOCATE
F-26/124, SECTOR-7, ROHINI
NEAR DEEPALI CHOWK, DELHI - 110085
C/O SHRI KAPIL GOEL, ADVOCATE
F-26/124, SECTOR-7, ROHINI
NEAR DEEPALI CHOWK, DELHI - 110085
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-17(1), NEW DELHI
CIRCLE-17(1), NEW DELHI
G D Agrawal, VP And Chandra Mohan Garg, JM
Date of Decision: November 22, 2013
Appellant Rep by: Shri Sameer Sharma, Sr. DR.
Respondent Rep by: Shri Kapil Goel, Adv.
Respondent Rep by: Shri Kapil Goel, Adv.
Income tax – Section 36(1)(iii) – Whether when the assessee does not utilise the borrowed funds for business purpose and spends the same to purchase equity shares as investments, interest paid on such loans is not allowable as per provisions of Sec36(1)(iii).
The assessee borrowed the sum of Rs. 22.50 crores from 'U' as loan which was utilized for purchasing the equity shares of DNL as investments. AO applied provisions of section 36(1)(iii) observing that the borrowed money was not utilized for the purpose of business. The CIT (A) confirmed the findings of AO but set off the interest received from 'C' on advance given against the interest paid.
Revenue contended that the money borrowed from 'U' was not for the purpose of business and, therefore, the entire disallowance of interest was to be sustained. There is no provision under the Income-tax Act for setting off the interest received against the interest paid on the money which was not borrowed for the purpose of business.
Assessee contended that the money borrowed from 'U' and the interest received from 'C' was inextricably connected. To acquire shares in DNL, assessee company took loan from 'U'. Earlier the shares were to be purchased through 'C' to whom advance was given by major shareholder of the assessee. However, the shares were later on purchased by assessee only. The amount advanced to 'C' was transferred to 'U' to fund the investment. Thus, there was direct nexus of interest received with interest paid.
After hearing both the parties, the ITAT held that,
++ section 36 provides the deductions which are to be allowed while computing the income under the head 'profit and gains of business'. Under Section 36(1)(iii), deduction is allowable for interest paid in respect of money borrowed for the purpose of business or profession. The assessee paid interest to 'U'. The sum of Rs.22.50 crores was borrowed from 'U' and, on the same day, the amount was invested for purchase of shares of DNL. The shares of DNL were kept by the assessee as investment and not as stock-in-trade. Therefore, the money was borrowed by the assessee from UFPL not for the purpose of business but for the purpose of investment in the shares of another company and disallowance is confirmed;
++ CIT(A) allowed the set off on the ground that had the funds not been given to 'C', the same should have been available for making the investment for the purchase of shares and there would be lesser borrowing of funds with lesser interest burden. Thus, CIT(A) allowed the relief on the basis of consequence of certain presumptive events. That income is to be computed on the basis of facts as they existed and not on the basis of some hypothesis that had the assessee not advanced to 'C', it would have been required to borrow less money. The assessee may have interest income on its capital or on its non-interest bearing funds received from somebody else but the said interest cannot be set off against the interest payment on the basis of some hypothesis or presumption. Therefore, the finding of CIT(A) is reversed;
++ even when the assessee has not carried on the business, the certain expenses which were required to be incurred for maintaining the corporate status of the assessee is allowable deduction. Moreover, the assessee carried on the business during the accountingyear relevant to the assessment year under consideration, whatever small scale may be of the business. Moreover, AO himself applied Section 36(1)(iii) while considering the allowability of the interest paid to 'U'. The disallowance of the expenses was not justified.
The assessee borrowed the sum of Rs. 22.50 crores from 'U' as loan which was utilized for purchasing the equity shares of DNL as investments. AO applied provisions of section 36(1)(iii) observing that the borrowed money was not utilized for the purpose of business. The CIT (A) confirmed the findings of AO but set off the interest received from 'C' on advance given against the interest paid.
Revenue contended that the money borrowed from 'U' was not for the purpose of business and, therefore, the entire disallowance of interest was to be sustained. There is no provision under the Income-tax Act for setting off the interest received against the interest paid on the money which was not borrowed for the purpose of business.
Assessee contended that the money borrowed from 'U' and the interest received from 'C' was inextricably connected. To acquire shares in DNL, assessee company took loan from 'U'. Earlier the shares were to be purchased through 'C' to whom advance was given by major shareholder of the assessee. However, the shares were later on purchased by assessee only. The amount advanced to 'C' was transferred to 'U' to fund the investment. Thus, there was direct nexus of interest received with interest paid.
After hearing both the parties, the ITAT held that,
++ section 36 provides the deductions which are to be allowed while computing the income under the head 'profit and gains of business'. Under Section 36(1)(iii), deduction is allowable for interest paid in respect of money borrowed for the purpose of business or profession. The assessee paid interest to 'U'. The sum of Rs.22.50 crores was borrowed from 'U' and, on the same day, the amount was invested for purchase of shares of DNL. The shares of DNL were kept by the assessee as investment and not as stock-in-trade. Therefore, the money was borrowed by the assessee from UFPL not for the purpose of business but for the purpose of investment in the shares of another company and disallowance is confirmed;
++ CIT(A) allowed the set off on the ground that had the funds not been given to 'C', the same should have been available for making the investment for the purchase of shares and there would be lesser borrowing of funds with lesser interest burden. Thus, CIT(A) allowed the relief on the basis of consequence of certain presumptive events. That income is to be computed on the basis of facts as they existed and not on the basis of some hypothesis that had the assessee not advanced to 'C', it would have been required to borrow less money. The assessee may have interest income on its capital or on its non-interest bearing funds received from somebody else but the said interest cannot be set off against the interest payment on the basis of some hypothesis or presumption. Therefore, the finding of CIT(A) is reversed;
++ even when the assessee has not carried on the business, the certain expenses which were required to be incurred for maintaining the corporate status of the assessee is allowable deduction. Moreover, the assessee carried on the business during the accountingyear relevant to the assessment year under consideration, whatever small scale may be of the business. Moreover, AO himself applied Section 36(1)(iii) while considering the allowability of the interest paid to 'U'. The disallowance of the expenses was not justified.
Revenue's appeal partly allowed
ORDER
Per: G D Agrawal:
The appeal by the Revenue is directed against the order of learned CIT(A)-XIX, New Delhi dated 9th April, 2012 for the AY 2009-10.
2. The Revenue has raised the following grounds of appeal:-
"1. Ld.CIT(A) erred in law and on the facts in holding that the interest income of Rs.1,13,50,138/- cannot be considered as income from other sources and directing the AO to set off the interest income with the interest paid.2. Ld. CIT(A) erred in law and on the facts of the case in allowing the expenses of Rs.61,191/- without appreciating that the assessee did not carry out any business activity during the year.3. The appellant craves for reserving the right to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the bearing of appeal."
3. In the cross-objection, the assessee has raised the following grounds:-
"1. That on the facts and in the circumstances of case and in law, the ld.CIT-A erred in giving a finding at Para 7/Page 6 that "The AO has clearly established that the funds borrowed were invested in the shares of M/s Den Networks Limited" which as per ld. CIT-A is "long term non trade/capital investment".2. That on the facts and in the circumstances of case and in law, the ld.CIT-A erred in not holding that full interest of Rs.194,03,219 is allowable u/s 36(1)(iii) without being restricted to Rs.113,50,138.That the cross objector craves the leave to add, amend, modify, delete any of the ground(s) of cross objection before or at the time of hearing."
4. At the time of hearing before us, it is stated by the learned DR that during the accounting year relevant to the assessment year under consideration, the assessee borrowed the sum of Rs.22.50 crores from M/s Unicon Fincap Pvt. Ltd. (hereinafter referred to as 'UFPL') as loan. The above amount was utilized on the same day for purchasing the equity shares of M/s Den Networks Ltd. (hereinafter referred to as 'DNL'). That admittedly, the shares were purchased as an investment and not as stock-in-trade. Since the borrowed money was not utilized for the purpose of business, the Assessing Officer, rightly applying the provisions of Section 36(1)(iii) of the Income-tax Act, 1961, disallowed the interest paid to UFPL amounting to Rs.1,94,03,219/-. That learned CIT(A) also upheld the finding of the Assessing Officer and held that the interest expenditure is not allowable. However, thereafter, the Assessing Officer set off the interest received by the assessee amounting to Rs.1,13,50,138/- from City Guide Yellow Pages Pvt. Ltd. against the interest paid to UFPL and sustained the disallowance. From the facts of the assessee's case, it is evident that the money borrowed from UFPL was not for the purpose of business and, therefore, the entire disallowance of interest was to be sustained. There is no provision under the Income-tax Act for setting off the interest received against the interest paid on the money which was not borrowed for the purpose of business. He, therefore, requested that the order of learned CIT(A) should be reversed and that of the Assessing Officer may be restored. With regard to disallowance of interest amounting to Rs.61,191/-, he relied upon the order of the Assessing Officer.
5. The learned counsel for the assessee, on the other hand, so far as Revenue's appeal is concerned, relied upon the order of learned CIT(A) and he stated that the money borrowed from UFPL and the interest received from City Guide Yellow Pages Pvt. Ltd. are inextricably connected. In support of this argument, he filed a note on the entire transactions and we reproduce the same below for ready reference:-
"Note on Transaction1. Mr. Sameer Manchanda wanted to acquire shares of Den Networks Ltd. from RRB Financial who invested into the shares of den networks ltd in 2007. These shares were required to be acquired through a company Verv Engineering Pvt. Ltd. whose 90% shares were held with Sameer.2. To acquire these shares at a total agreed value of Rs.22.50 Cr., the company took a loan from Unicon Fincap. Mr. Sameer Manchanda stood guarantor to this loan and also part funded the loan through city guide yellow pages pvt. ltd.3. Verve Engineering received a loan of Rs.22.50 cr on 17/09/2008 from Unicon.4. Verve Engineering paid the consideration of Rs.22.50 Cr on 17/09/2008 to RRB Investments.5. City Guide received a Loan from Sameer Manchanda for Rs.13 Cr. (5 cr on 12/09/2008 and 8 cr on 15/09/2008).6. {{As a part of preface these shares were first planned to be acquired though City guide and city guide received a sum of Rs.9.50 Cr. From Unicon on 10/09/2008, as loan to execute the transaction. But later it was decided to acquire these shares through Verv and transaction was routed to Verv.}}.7. City Guide paid an amount of Rs.22.50 Cr on 16/09/2008 to Unicon:a. Rs.9.50 Cr paid back, received from Unicon on 10/09/2008.b. Rs.13 Cr. Paid to Unicon, received from Sameer on 12/09/2008.8. In nut shell City Guide forwarded a loan of Rs.13 Cr. to Unicon, to part fund the loan of Rs.22.50 Cr. by Unicon to Verv.9. Unicon charged interest on Rs.22.50 Cr. from Verv - Rs.1.94 Cr.10. Unicon paid interest on Rs.13 Cr. to City Guide - Rs.1.13 Cr.11. City Guide paid interest on Rs.13 Cr to Verv - Rs.1.13 Cr.12. Verve Engineering paid back Rs.22.50 Cr. loan to Unicon.a. 27/10/08 - 0.75 cr directly by Sameer - recd. Loan from Sameer on same date.b. 05/01/09 - 2.00 Cr. Rtgs from HSBC - recd. Loan from Sameer on same date.c. 09/03/09 - 6.75 Cr. Rtgs from HSBC - recd. Loan from Sameer on same date.d. 13/03/09 - 5 Cr. Rtgs frm HSBC - recd. Loan from Sameer on same date.e. 16/03/09 - 5 Cr. Rtgs. From HSBC - recd. Loan from Sameer on same date.f. 18/03/09 - 3 Cr. Rtgs from HSBC - recd. Loan from Sameer on same date.13. Unicon Paid back 13 Cr. to City Guidea. 12/03/09 - 5 Cr. Rtgs Syndicate Bankb. 16/03/09 - 5 Cr Rtgs Syndicate Bankc. 17/03/09 - 3 Cr. Rtgs Syndicate Bank14. City Guide paid back 13 Cr. to Sameera. 12/03/09 - 5 Cr. Rtgs Syndicate Bankb. 16/03/09 - 5 Cr Rtgs Syndicate Bankc. 17/03/09 - 3 Cr. Rtgs Syndicate Bank"
6. The learned counsel further submitted that the disallowance sustained by the learned CIT(A) out of interest paid is not justified. The same should be allowed in view of the cross-objection furnished by the assessee.
7. We have carefully considered the submissions of both the sides and perused the material placed before us. Section 36(1)(iii) of the Income-tax Act, 1961 reads as under:-
"3636. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-(i) ….(ii) ….(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]Explanation.-Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;"
8. From the above, it is evident that Section 36 provides the deductions which are to be allowed while computing the income under the head 'profit and gains of business'. Under Section 36(1)(iii), deduction is allowable for interest paid in respect of money borrowed for the purpose of business or profession. In the appeal before us, the assessee paid interest of Rs.1,94,03,219/- to UFPL. The sum of Rs.22.50 crores was borrowed from UFPL on 17.09.2008 and, on the same day, the amount was invested for purchase of shares of DNL. It is an admitted position that the shares of DNL were kept by the assessee as investment and not as stock-in-trade. Therefore, the money was borrowed by the assessee from UFPL not for the purpose of business but for the purpose of investment in the shares of another company. On the above facts, in our opinion, as per Section 36(1)(iii), the assessee is not entitled to the deduction of interest paid on the money borrowed from UFPL. The learned CIT(A) has also recorded the similar finding at page No.6 paragraph No.7 of his order, the relevant portion of which reads as under:-
"The AO has clearly established that the funds borrowed were invested in the shares of M/s Den Networks Ltd. The investment in the shares of M/s Den Networks Ltd., is in the form of long term non-trade investment/capital investment. In such a case, the interest expenditure is not allowable. I am in agreement with the contentions of the AO and the action of the AO is upheld."
9. After considering the arguments of both the sides and the facts of the case, we entirely agree with the above finding of the learned CIT(A).
10. Now, the next question arises whether the interest paid to UFPL is to be set off against the interest of Rs.1,13,50,138/- received by the assessee from City Guide Yellow Pages Pvt. Ltd. That Sameer Manchanda paid from his bank account Rs.13 crores to City Guide Yellow Pages Pvt. Ltd. However, later on, the loan account was transferred to the assessee company by passing journal entries. The assessee has not paid any interest to Sameer Manchanda but received the interest of Rs.1,13,50,138/- from City Guide Yellow Pages Pvt. Ltd. However, on the above facts, in our opinion, there is no case for set off of the interest paid to UFPL with the interest received from City Guide Yellow Pages Pvt. Ltd. The CIT(A) has allowed the set off with the following finding:-
"The other contention of the AR is that the interest receipt should be reduced from the interest expenditure incurred for disallowance if any on the ground that, had the funds not given to M/s City Guide Yellow Pages Pvt. Ltd., the same would have been available for making the investment and also there would be lesser borrowal of funds for making investment with lesser interest burden. The contentions of the AR are tenable. The AO is hereby directed to allow set off of interest received against the interest paid and disallowed."
11. The CIT(A) allowed the set off on the ground that had the funds not been given to City Guide Yellow Pages Pvt. Ltd., the same should have been available for making the investment for the purchase of shares and there would be lesser borrowing of funds with lesser interest burden. Thus, the CIT(A) allowed the relief on the basis of consequence of certain presumptive events. That income is to be computed on the basis of facts as they existed and not on the basis of some hypothesis that had the assessee not advanced to City Guide Yellow Pages Pvt. Ltd., it would have been required to borrow less money. The fact remains that the assessee has borrowed the money from UFPL which was evidently not borrowed for the purpose of business. The interest paid on such borrowing cannot be allowed as a deduction under Section 36(1)(iii). The assessee may have interest income on its capital or on its non-interest bearing funds received from somebody else but the said interest cannot be set off against the interest payment on the basis of some hypothesis or presumption. We, therefore, reverse the finding of the learned CIT(A) in this regard and restore that of the Assessing Officer.
12. The only ground that remains in the Revenue's appeal is with regard to disallowance of expenses of Rs.61,191/- which were disallowed by the Assessing Officer and allowed by the learned CIT(A).
13. After considering the arguments of both the sides and the facts of the case, we are of the opinion that the learned CIT(A) was fully justified in deleting the disallowance of the expenses amounting to Rs.61,191/- on the ground that these were the expenses of general nature. It is a settled law now that even when the assessee has not carried on the business, the certain expenses which were required to be incurred for maintaining the corporate status of the assessee is allowable deduction. Moreover, on the facts of the assessee's case, we are of the opinion that the assessee carried on the business during the accounting year relevant to the assessment year under consideration, whatever small scale may be of the business. Moreover, the Assessing Officer himself applied Section 36(1)(iii) while considering the allowability of the interest paid to UFPL. Section 36(1)(iii) is applicable while computing the business income. The Assessing Officer cannot take the double stand once while considering the allowability of interest and another while considering the allowability of the office and administrative expenses. In view of the above, we are of the opinion that the disallowance of the expenses amounting to Rs.61,191/- was not justified. Accordingly, ground No.2 of the Revenue's appeal is rejected.
14. In the cross-objection, the assessee has challenged the disallowance sustained by the CIT(A) out of the interest payment. However, while considering the Revenue's appeal, we have held that the entire interest paid by the assessee to UFPL is disallowable. Therefore, the assessee's cross-objection has no merit. The same is rejected.
15. In the result, the appeal of the Revenue is partly allowed while the cross-objection of the assessee is dismissed.
(Decision pronounced in the open Court on 22.11.2013)
2014-TIOL-103-HC-MUM-IT
IN THE HIGH COURT OF BOMBAY
Income Tax Appeal No. 248 of 2012
THE COMMISSIONER OF INCOME TAX-13, MUMBAI
Vs
M/s PUJA PRINTS
Mohit S Shah, CJ And M S Sanklecha, J
Dated : January 15, 2014
Appellant Rep. by : Mr. Charanjeet Chanderpal
Respondent Rep. by : Mr. Subhash Shetty
Respondent Rep. by : Mr. Subhash Shetty
Income Tax - Sections 55A, 55A(b)(ii), 131, 133(6), 142(2), 260A - registered valuer - Fair Market Value - Departmental Valuation Officer (DVO) - Whether reference made by AO to the valuation officer per se is bad in law - Whether a reference could be made to DVO only when the value adopted by the assessee is less then the fair market value - Whether a circular issued by CBDT is binding on assessee as well - Whether in case the power to refer any dispute with regard to the valuation of the property is already available, there is no need to specifically empower AO to do so in circumstances specified u/s 55A - Whether in case a specific provision under which the reference can be made to DVO is available, there is no occasion for the AO to invoke the general powers of enquiry - Whether the ownership of the property is required to be examined for determining the date of acquisition for the purpose of indexation, particularly when this issue was not raised either before the AO or the CIT(A).
The assessee concern in its return of income had claimed long term capital gains of Rs.11.20 lakhs in respect of sale of its land and building in Mumbai for a consideration of Rs.2 Crores. Assessee claimed a deduction on account of brokerage of Rs.5 lakhs and the costs of indexation was claimed at Rs.1.78 Crores, on the basis of the value of the property being Rs.35.99 lakhs as on 1 April 1981. This valuation of Rs.35.99 lakhs as a fair market value as on 1 April 1981 of the property was on the basis of a valuation report. During assessment, AO was of the view that the value of property at Rs.35.99 lakhs as adopted by the assessee was high considering the fact that it was purchased at a consideration of Rs.1.45 lakhs only 15 months earlier. Therefore, AO referred the issue of valuation to the Departmental Valuation Officer who valued the property at Rs.6.68 lakhs as on 1 April 1981 and the indexed cost at Rs.33.20 lakhs. Consequently, AO by his Assessment Order enhanced the capital gain of the appellant from Rs.11.20 lakhs to Rs.1.61 Crores. On appeal, CIT(A) dismissed the appeal of assessee.
On further appeal, Tribunal held that in view of Section 55A(a), it was not permissable for AO to make a reference to the DVO for the purpose of valuation, as the value of the property declared by the Assessee was not less than its fair market value. The Tribunal also held that the date from which the assessee became owner of the property needs to be examined vis a vis the various partnership deeds entered into by the partners of assessee firm. In order to determine the issue of the date of first acquisition of the property by the firm, the issue was restored to the AO. The impugned order clarifies that in case the AO concludes that the assessee is holding the property w.e.f. 1 April 1981 then AO to accept the valuation as given by the assessee and work out its capital gain.
Before HC, the Revenue's counsel had submitted that the order of Tribunal failed to appreciate the fact that the Finance Act 2012 had amended Section 55A(a) by substituting the words "is less then its fair market value" by the words "is at variance with its fair market value". Though this amendment was admittedly bought into force only in 2012, yet being clarificatory it would even apply to the case of the appellant for the AY 2006-07. Alternatively in terms of Section 55A (b)(ii), AO was justified in making the reference to the DVO for redetermining the cost of acquisition of the property. In support, reliance was placed upon the CBDT circular No.96 dated 25 November 1972; and in any event, an AO was entitled to call for a report from the DVO to determine the fair market value of a property in exercise of its power u/s 131, 133(6) and 142(2) while completing the assessment. This power was dehors Section 55A. In support reliance was placed upon the decision of the Guwahati High Court in ITO v/s. Smt. Gita Rani Banik 251 ITR 712 wherein the Guwahati High Court follows its earlier decision in Smt. Amiya Bala Paul v/s. CIT 240 ITR 378.
On the other hand, the assessee's counsel had submitted that the order of Tribunal cannot be faulted with as it merely records and follows the decision of jurisdictional HC in the CIT-14 v/s. Daulal Mohta HUF in Income Tax Appeal No.1031 of 2008 rendered on 22 September 2008 on an identical issue. In the face of Section 55A, it is not permissable to refer the issue of valuation to the DVO in terms of Sections 133, 133(6) and 142(2). Moreover, the decision of the Guwahati HC in Smt. Amiya Bala Paul, had been reversed by the SC in Smt. Amiya Bala Paul v/s. CIT (2003-TIOL-05-SC-IT). Consequently, decision cited by the revenue was no longer good law. Section 55A(b)(ii) would have no application when Section 55A(a) covers the field. The Circular No.96 dated 25 November 1972 relied upon by the revenue was neither binding upon assessee nor on the Tribunal. In any view, it was contrary to the plain meaning of Section 55A. Thus, it was submitted that the appeal be dismissed as no substantial question of law arises.
Held that,
++ we find that the impugned order dated 18 February, 2011 allowing the assessee's appeal holding that no reference to the DVO can be made u/s 55A, only follows the decision of this Court in the matter of Daulal Mohta HUF. The revenue has not been able to point out how the aforesaid decision is inapplicable to the present facts nor has the revenue pointed out that the decision in Daulal Mohta HUF has not been accepted by the revenue. On the aforesaid ground alone, this appeal need not be entertained. However, as submissions were made on merits, we have independently examined the same. We find that Section 55A(a) very clearly at the relevant time provided that a reference could be made to the Departmental Valuation Officer only when the value adopted by the assessee was less then the fair market value. In the present case, it is an undisputed position that the value adopted by assessee of the property at Rs.35.99 lakhs was much more than the fair market value of Rs.6.68 lakhs even as determined by the DVO. In fact, the Assessing Officer referred the issue of valuation to the Departmental Valuation Officer only because in his view the valuation of the property as on 1981 as made by the assessee was higher then the fair market value. In the aforesaid circumstances, the invocation of Section 55A(a) is not justified;
++ the contention of the revenue that in view of the amendment to Section 55A(a) of the Act in 2012 by which the words "is less then the fair market value" is substituted by the words "is at variance with its fair market value" is clarifactory and should be given retrospective effect. This submission is in face of the fact that the 2012 amendment was made effective only from 1 July 2012. The Parliament has not given retrospective effect to the amendment. Therefore, the law to be applied in the present case is Section 55A(a) as existing during the period relevant to the Assessment Year 2006-07. At the relevant time, very clearly reference could be made to DVO only if the value declared by the assessee is in the opinion of Assessing Officer less than its fair market value;
++ the contention of the revenue that the reference to the DVO by the Assessing Officer is sustainable in view of Section 55A(a) (ii) is not acceptable. This is for the reason that Section 55A(b)of the Act very clearly states that it would apply in any other case i.e. a case not covered by Section 55A(a). In this case, it is an undisputable position that the issue is covered by Section 55A(a) of the Act. Therefore, resort cannot be had to the residuary clause provided in Section 55A(b)(ii). In view of the above, the CBDT Circular dated 25 November 1972 can have no application in the face of the clear position in law. This is so as the understanding of the statutory provisions by the revenue as found in Circular issued by the CBDT is not binding upon the assessee and it is open to an assessee to contend to the contrary;
++ the contention of the revenue that the AO is entitled to refer the issue of valuation of the property to the Departmental Valuation Officer in exercise of its power under Sections 131, 133(6) and 142(2) is entirely based upon the decision of the Guwahati High Court in Smt. Amiya Bala Paul. However, SC in Smt. Amiya Bala Paul has reversed the decision of the Guwahati High Court and held that if the power to refer any dispute with regard to the valuation of the property was already available under Sections 131(1), 136(6) and 142(2), there was no need to specifically empower the Assessing Officer to do so in circumstances specified u/s 55A. It further held that when a specific provision under which the reference can be made to the Departmental Valuation Officer is available, there is no occasion for the AO to invoke the general powers of enquiry. In view of the above and particularly in view of clear provisions of law as existing during the period relevant to AY 2006-07, we are of the view that questions (a) and (b) do not raise any substantial question of law.
Revenue's appeal dismissed
Case followed:
Smt. Amiya Bala Paul v/s. CIT (2003-TIOL-05-SC-IT)
JUDGEMENT
This appeal under Section 260A of the Income Tax Act 1961 (the Act) challenges the order dated 18 February 2011 passed by the Income Tax Appellate Tribunal (the Tribunal). This appeal relates to Assessment Year 2006-07.
2. The following questions of law have been formulated by the revenue for consideration by this Court: -
(a) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in holding that the reference made by the AO to the valuation officer per se is bad in law? Further, whether the ITAT was justified in observing that the reference to the DVO u/s. 55A of the IT Act 1961 is to be made when the value of the property disclosed by the assesee is less than the fair value and not vice versa thereby ignoring the provisions of section 55A(b)(ii) of the Act 1961 and paragraph 26 to 28 of circular No.96 dated 25.11.1972 of the CBDT?(b) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in directing the AO to accept the valuation given by the respondent as the Fair Market Value on the basis of the registered valuer's report and workout capital gain?(c) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in holding that the ownership of the property is required to be examined visavis the various partnership deeds entered into by the firm and to that limited extent restoring the issue to the file of the AO for determining the date of acquisition by the firm for the purpose of indexation, particularly when this issue was not raised either before the AO or the CIT(A) and hence did not arise from the order of the CIT(A)?
3. Briefly, the facts leading to this appeal are:
(a) In its return of income, the appellant had claimed long term capital gains of Rs.11.20 lakhs in respect of sale of its land and building (property) at village Marol, Andheri (East), Mumbai for a consideration of Rs.2 Crores. The respondent-assessee claimed a deduction on account of brokerage of Rs.5 lakhs and the costs of indexation was claimed at Rs.1.78 Crores, on the basis of the value of the property being Rs.35.99 lakhs as on 1 April 1981. This valuation of Rs.35.99 lakhs as a fair market value as on 1 April 1981 of the property was on the basis of a valuation report;(b) The Assessing Officer was of the view that the value of property at Rs.35.99 lakhs as adopted by the respondent-assessee was high considering the fact that it was purchased at a consideration of Rs.1.45 lakhs only 15 months earlier. Therefore, the Assessing Officer referred the issue of valuation to the Departmental Valuation Officer who valued the property at Rs.6.68 lakhs as on 1 April 1981 and the indexed cost at Rs.33.20 lakhs. Consequently, the Assessing Officer by his Assessment Order enhanced the capital gain of the appellant from Rs.11.20 lakhs to Rs.1.61 Crores;(c) Being aggrieved, the respondent-assessee filed an appeal before the Commissioner of Income Tax (Appeal). By an order dated 29 October 2009, the Commissioner of Income Tax (Appeal) dismissed the appeal of the respondent-assesssee;(d) Being aggrieved, the respondent-assesee preferred a Second Appeal before the Tribunal. The Tribunal by the impugned order held that in view of Section 55A(a) of the Act, it was not permissable for the Assessing Officer to make a reference to the Departmental Valuation Officer for the purpose of valuation, as the value of the property declared by the Assessee is not less than its fair market value.The Tribunal by the impugned order also held that the date from which the respondent-assessee became owner of the property needs to be examined visavis the various partnership deeds entered into by the partners of respondent-assessee firm. For the above purpose i.e. to determine the issue of the date of first acquisition of the property by the firm, the issue was restored to the Assessing Officer. The impugned order clarifies that in case the Assessing Officer concludes that the respondent-assessee is holding the property w.e.f. 1 April 1981 then the Assessing Officer to accept the valuation as given by the respondent-assessee and work out its capital gain;(e) Being aggrieved, the revenue is in appeal from the impugned order dated 18 February 2011.
4. Mr. Charanjeet Chanderpal, learned Counsel appearing for the appellant submits that :-
(a) The impugned order of the Tribunal failed to appreciate the fact that the Finance Act 2012 has amended Section 55A(a) of the Act by substituting the words "is less then its fair market value" by the words "is at variance with its fair market value". Though this amendment was admittedly bought into force only in 2012, yet being clarificatory it would even apply to the case of the appellant for the Assessment Year 2006-07;(b) Alternatively in terms of Section 55A (b)(ii) of the Act, the Assessing Officer was justified in making the reference to the Departmental Valuation Officer for redetermining the cost of acquisition of the property. In support, reliance was placed upon the CBDT circular No.96 dated 25 November 1972; and(c) In any event, an Assessing Officer is entitled to call for a report from the Departmental Valuation Officer to determine the fair market value of a property in exercise of its power under Sections 131, 133(6) and 142(2) of the Act while completing the assessment. This power is dehors Section 55A of the Act. In support reliance was placed upon the decision of the Guwahati High Court inIncome Tax Officer v/s. Smt. Gita Rani Banik 251 ITR 712 wherein the Guwahati High Court follows its earlier decision in Smt. Amiya Bala Paul v/s. Commissioner of Income Tax 240 ITR 378.
5. As against the above, Mr. Hiro, learned Counsel appearing for the respondent-assessee in support of the impugned order submits as under:-
(a) The impugned order of the Tribunal cannot be faulted with as it merely records and follows the decision of jurisdictional High Court in the Commissioner of Income Tax-14 v/s. Daulal Mohta HUF in Income Tax Appeal No.1031 of 2008 rendered on 22 September 2008 on an identical issue;(b) In the face of Section 55A of the Act, it is not permissable to refer the issue of valuation to the Departmental Valuation Officer in terms of Sections 133, 133(6) and 142(2) of the Act. Moreover, the decision of the Guwahati High Court in Smt. Amiya Bala Paul (supra), has been reversed by the Apex Court in Smt. Amiya Bala Paul v/s. CIT 262 ITR 407 = (2003-TIOL-05-SC-IT). Consequently, decision cited by the revenue is no longer good law;(c) Section 55A(b)(ii) of the Act would have no application when Section 55A(a) of the Act covers the field. The Circular No.96 dated 25 November 1972 relied upon by the revenue is neither binding upon assessee nor on the Tribunal. In any view, it is contrary to the plain meaning of Section 55A of the Act.
In view of the above, it was submitted that the appeal be dismissed as no substantial question of law arises.
Regarding Questions (a) and (b):-
6. We have considered the rival submissions. We find that the impugned order dated 18 February, 2011 allowing the respondent-assessee's appeal holding that no reference to the Departmental Valuation Officer can be made under Section 55A of the Act, only follows the decision of this Court in the matter of Daulal Mohta HUF (supra). The revenue has not been able to point out how the aforesaid decision is inapplicable to the present facts nor has the revenue pointed out that the decision in Daulal Mohta HUF (supra) has not been accepted by the revenue. On the aforesaid ground alone, this appeal need not be entertained. However, as submissions were made on merits, we have independently examined the same.
7. We find that Section 55A(a) of the Act very clearly at the relevant time provided that a reference could be made to the Departmental Valuation Officer only when the value adopted by the assessee was less then the fair market value. In the present case, it is an undisputed position that the value adopted by the respondent-assessee of the property at Rs.35.99 lakhs was much more than the fair market value of Rs.6.68 lakhs even as determined by the Departmental Valuation Officer. In fact, the Assessing Officer referred the issue of valuation to the Departmental Valuation Officer only because in his view the valuation of the property as on 1981 as made by the respondent-assessee was higher then the fair market value. In the aforesaid circumstances, the invocation of Section 55A(a) of the Act is not justified.
8. The contention of the revenue that in view of the amendment to Section 55A(a) of the Act in 2012 by which the words "is less then the fair market value" is substituted by the words "is at variance with its fair market value" is clarifactory and should be given retrospective effect. This submission is in face of the fact that the 2012 amendment was made effective only from 1 July 2012. The Parliament has not given retrospective effect to the amendment. Therefore, the law to be applied in the present case is Section 55A(a) of the Act as existing during the period relevant to the Assessment Year 2006-07. At the relevant time, very clearly reference could be made to Departmental Valuation Officer only if the value declared by the assessee is in the opinion of Assessing Officer less than its fair market value.
9. The contention of the revenue that the reference to the Departmental Valuation Officer by the Assessing Officer is sustainable in view of Section 55A(a) (ii) of the Act is not acceptable. This is for the reason that Section 55A(b)of the Act very clearly states that it would apply in any other case i.e. a case not covered by Section 55A(a) of the Act. In this case, it is an undisputable position that the issue is covered by Section 55A(a) of the Act. Therefore, resort cannot be had to the residuary clause provided in Section 55A(b)(ii) of the Act. In view of the above, the CBDT Circular dated 25 November 1972 can have no application in the face of the clear position in law. This is so as the understanding of the statutory provisions by the revenue as found in Circular issued by the CBDT is not binding upon the assessee and it is open to an assessee to contend to the contrary.
10. The contention of the revenue that the Assessing Officer is entitled to refer the issue of valuation of the property to the Departmental Valuation Officer in exercise of its power under Sections 131, 133(6) and 142(2) of the Act is entirely based upon the decision of the Guwahati High Court in Smt. Amiya Bala Paul (supra). However, the Apex Court in Smt. Amiya Bala Paul (supra) has reversed the decision of the Guwahati High Court and held that if the power to refer any dispute with regard to the valuation of the property was already available under Sections 131(1), 136(6) and 142(2) of the Act, there was no need to specifically empower the Assessing Officer to do so in circumstances specified under Section 55A of the Act. It further held that when a specific provision under which the reference can be made to the Departmental Valuation Officer is available, there is no occasion for the Assessing Officer to invoke the general powers of enquiry.
In view of the above and particularly in view of clear provisions of law as existing during the period relevant to Assessment Year 2006-07, we are of the view that questions (a) and (b) do not raise any substantial question of law.
Regarding Question (c):-
11. The Tribunal by its impugned order has merely remanded the issue to the Assessing Officer to determine the date on which the respondent-assessee acquired the property for the purpose of working out the cost of acquisition. No specific submissions in regard to this issue was made by the revenue during the oral submissions. In any event, an order of remand in these facts does not give rise to any substantial question of law.
12. Accordingly, we see no reason to entertain questions (a), (b) and (c) as formulated by the revenue as they do not raise any substantial questions of law. Accordingly, appeal is dismissed with no order as to costs.
CIT v/s DEUTSCHE POST BANK HOME FINANCE LTD. (2014) 98 DTR(DEL)`144 , IT APPEAL NO.312 OF 2012
CIT v/s SIEMENS PUBLIC COMMUNICATION NETWORK LTD(2014) 98 DTR(KAR) 151 ,IT APPEAL NOs 59,488& 489 of 2007
Issue- whether subvention payment received from parent company is revenue receipt or capital receipt ?
IT: Deduction under section 80HHC is to be reduced to extent it had already been allowed under section 80-IB
■■■
[2014] 41 taxmann.com 75 (Punjab & Haryana)
HIGH COURT OF PUNJAB AND HARYANA
Broadway Overseas Ltd.
v.
Commissioner of Income-tax, Jalandhar -1*
RAJIVE BHALLA AND DR.BHARAT BHUSHAN PARSOON, JJ.
IT APPEAL NOS. 234 OF 2009 & 277 (O&M)†
NOVEMBER 22, 2013
Section 80HHC, read with sections 80-IA and 80-IB, of the Income-tax Act, 1961 - Deductions - Exporters [Computation of deduction] - Assessment years 2001-02 and 2003-04 - Whether if an assessee has claimed deduction of profit or gains under section 80-IB, deduction to that extent is not to be allowed under section 80HHC - Held, yes - Assessee, a manufacturer and exporter of fence fittings, had claimed deduction under section 80HHC as well as section 80-IB - Said claim was allowed accordingly - Commissioner noticed that while allowing deduction under section 80HHC, deduction under section 80-IB was not deducted as per section 80-IB(13) read with section 80-IA(9) - He invoked section 263 and directed Assessing Officer to recompute total income of assessee keeping in view provisions of section 80-IA, read with section 80-IB - Whether Assessing officer was rightly directed to recompute deduction - Held, yes [Para 22][In favour of revenue]
FACTS
| ■ | The assessee, had claimed deduction under sections 80HHC and 80-IB. | |
| ■ | Said claim was allowed accordingly by the assessing authority. | |
| ■ | However, the Commissioner noted that deduction under section 80HHC was allowed without reducing therefrom deduction under section 80-IB as per section 80-IB(13) and 80-IA(9) and invoking the provisions of section 263 he directed the Assessing Officer to recompute the total income of the assessee keeping in view the provisions of section 80-IB(13) read with section 80-IA(9). | |
| ■ | On appeal, the Tribunal affirmed the order passed by the Commissioner. | |
| ■ | On further appeal: |
HELD
| ■ | The Assessing Officer framing the assessment under section 143(3) vide order dated 27-3-2006 had allowed assessee's claim for deduction under section 80HHC as also under section 80-IB without application of provisions of section 80-IB(13) read with section 80-IA(9). [Para 10] | |
| ■ | A perusal of the order of the Assessing Officer reveals that wittingly, or unwittingly, consciously or unconsciously, this order does not refer to the provisions of section 80-IB(13) and section 80-IA(9). It is strange that when the Assessing Officer had insight into the provisions of section 80-IB(13) and section 80-IA(9) as is reflected in notice, why no reference was made in the order, it is intriguing. It remains a fact that intentionally or unintentionally, no effect was given to the provisions of section 80-IB(13) and section 80-IA(9). Because of omission of these provisions, order was rendered erroneous and undoubtedly was prejudicial to the interest of the revenue as well. [Para 11] | |
| ■ | From a con-joint reading of show-cause notice and order, it transpires that the Assessing Officer knew it well that the only course available for allowing deductions, was on consideration of provisions of section 80-IB(13) and section 80-IA(9) along with section 80HHC and 80-IB, but leaving that course, the Assessing Officer simply allowed deductions under section 80-IB as also under section 80HHC without even making reference to the provisions of section 80-IB(13) and section 80-IA(9). Clearly enough, the view taken by the Assessing Officer is unsustainable in law. [Para 12] | |
| ■ | Claim of the assessee that reasons for invoking provisions of section 263 and justification provided for such invocation in the order of Tribunal are different, also has no merit. When the reasons given for invocation of provisions of section 263 in the context of show-cause notice of 20-3-2008 are read in relation to detailed discussion made in the impugned order, it transpires that there is no dichotomy inter se. [Para 13] | |
| ■ | It may be recapitulated that Commissioner vide order dated 28-3-2008, has remitted the case to the Assessing Officer for recomputing the total income of the assessee keeping in view the provisions of section 80-IB(13) read with section 80-IA(9) in correlation with sections 80HHC and 80-IB. Merely because in order of Tribunal while referring to section 80-IA(9) due to typographical error, it has been mentioned as section 80-IA(9A), the order does not become bad in law. [Para 15] | |
| ■ | Sequelly, reversing the order of the Tribunal, order of the Commissioner was restored holding that deduction under section 80HHC was to be reduced to the extent it had already been allowed under section 80-IB. [Para 21] | |
| ■ | Summing up the entire controversy, in conclusion, it is held that when provisions of section 80-IB(13) are read in conjunction with section 80-IA(9), it becomes clear that deduction under section 80HHC is to be computed on the eligible business profits only after reducing therefrom the portion of profit on which deduction has already been availed by the assessee under this section i.e. 80-IB. In other words, if an assessee has claimed deduction of profit or gains under section 80-IB, deduction to that extent is not to be allowed under section 80HHC. [Para 22] | |
| ■ | Therefore, the Assessing officer had been rightly directed to recompute the total income of the assessee keeping in view the provision of section 80-IB(13) and section 80-IA(9) [Para 23] |
CASE REVIEW
Jt. CIT v. Madideep Engg. & Pkg. India. (P.) Ltd. [2007] 292 ITR 1/163 Taxman 337 (SC) (para 13) and CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490/[1981] 7 Taxman 56 (Punj. & Har.)(para 16) distinguished.
Axin Exim International v. CIT [IT Appeal No. 469 of 2010, dated 18-4-2011] CIT v. Davinder Exports [IT Appeal No. 371 of 2007, dated 21-4-2011] and Friends Castings (P.) Ltd. v. CIT [2012] 20 taxmann.com 708 (Punj. & Har.) (para 17) followed.
CASES REFERRED TO
Malabar Industrial Co Ltd. v. CIT [2000] 243 ITR 83 /109 Taxman 66 (SC) (para 5), Jt. CIT v. Madideep Engg. & Pkg. India. (P.) Ltd. [2007] 292 ITR 1/163 Taxman 337 (SC) (para 13), CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490/[1981] 7 Taxman 56 (Punj. & Har.)(para 16), Axin Exim International v. CIT[IT Appeal No.469 of 2010, dated 21.4.2011] (para 17), CIT v. Davinder Exports [IT Appeal No. 371 of 2007, dated 20-9-2010] (para 17), Friends Castings (P.) Ltd. v. CIT [2012] 20 taxmann.com 708 (Punj. & Har.) (para 17), CIT v. Abhishek Industries Ltd. [2013] 213 Taxman 176/31 taxmann.com 77 (Punj. & Har.) (para 18), CIT v.Honda Siel Power Products Ltd [2011] 333 ITR 547/[2012] 194 Taxman 175 (Delhi) (para 18), Asstt. CIT v. Rogini Garments [2007] 108 ITD 49 (Chennai) (SB) (para 18) and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 18).
S.K. Mukhi for the Appellant. Vivek Sethi for the Respondent.
JUDGMENT
Dr. Bharat Bhushan Parsoon, J. - These two appeals arise out of a joint order dated 30.10.2008 (Annexure A-1) passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as, the Tribunal) in ITA Nos.327 and 328 (Asr)/2008 pertaining to the assessment years 2001-02 and 2003-04.
2. Both the appeals have been taken up together as question of law involved therein is the same. For convenience and clarity, facts of appeal No.234 of 2009 are being referred to.
3. The appellant-assessee is engaged in the manufacture and export of fence fittings. Assessment for the assessment year 2001-02 was finalised under Section 143(3) of the Income Tax Act, 1961 (for short, the Act) by the Assessing Officer (for short, the AO) on 27.3.2006. The assessee had claimed deduction under Sections 80HHC and 80IB of the Act. The deduction under Section 80HHC of the Act was allowed at Rs.1,48,94,112/- without reducing therefrom the deduction allowed under Section 80IB at Rs.47,35,855/-.
The Commissioner of Income Tax, Jalandhar-1, Jalandhar (for short, the CIT) invoking the provisions of Section 263 of the Act issued notices dated 20.3.2008 and 25.3.2008 (Annexure A-5). Vide order dated 28.3.2008 (Annexure A-2), disagreeing with the stand taken in reply dated 27.3.2008 (Annexure A-4) by the assessee, the CIT directed the AO to recompute the total income of the assessee keeping in view the provisions of Section 80IB(13) read with Section 80IA(9) of the Act.
Aggrieved with this order, the assessee had approached the Tribunal where orders of the CIT were affirmed and appeals of the assessee, consequently, were dismissed.
4. In the present appeal, following substantial questions of law had been put forth for answer by the appellant/assessee:
| '(i) | "That the ITAT was not justified on facts & in law in confirming the action of C.I.T. u/s 263 in holding the findings of the AO as erroneous in so far it is prejudicial to the interests of revenue and thereby setting aside the assessment in holding that the claim of deduction u/s 80HHC and its allowability by the AO without reducing there from the deduction u/s 80IB is bad in law, which is against the established principle of law pertaining to powers of CIT for Revision u/s 263, wherein it has been held that in case the AO has adopted one possible view, the order of the AO cannot be held to be erroneous as confirmed by Hon'ble Supreme Court of India in the case of Malabar Industrial Co Ltd. v.CIT [2000] 243 ITR 83." | |
| (ii) | "That the ITAT was not justified on facts & in law in confirming the action of C.I.T. u/s 263 in holding the findings of the AO as erroneous in so far it is prejudicial to the interests of revenue and thereby revising the assessment in holding that the claim of deduction u/s 80HHC and its allowability by the AO without reducing there from the deduction u/s 80IB is bad in law, without appreciating the established principles of law as so laid down by Hon'ble Supreme Court of India in the case of Jt. CITv. Madideep Eng. & Pkg. India. (P.) Ltd. [2007] 292 ITR 1 (SC), wherein it was held that "Deductions under various sections i.e., 80HH and 80I are independent." | |
| (iii) | "Whether on the facts and in the circumstances of the case the ITAT was justified in concurring with the action of the C.I.T. u/s 263 thereby wrongfully revising the assessment and directing the A.O. to recompute the total income of the assessee by keeping in view the provisions of Sections 80IB(13) r/w Section 80IA(9) as interpreted by the Special Bench of the ITAT in the case of Rogini Garments (supra) which is bad in law." | |
| (iv) | Whether the ITAT was justified in concurring with the orders of CIT in holding that the order of AO was erroneous by holding that the decision in the case of Scm Creations v. Asstt.CIT [2008] 10 DTR 247 (Mad.) as reported in part 176 pertains to deduction regarding 80HH and 80I which did not contain any provisions similar to Section 80IA(9A) which is factually incorrect as first of all there is no such provision like 80IA(9A) and even if ITAT meant 80IA(9) even then ITAT is not justified because the decision of the Hon'ble Madras High Court in SCM Creations (supra) was relating to deduction u/s 80IA and 80HHC and not regarding 80HH and 80I as so held by the ITAT. Thus meaning thereby Hon'ble Madras High Court has dealt with the provisions of Section 80IA which does include 80IA(9), so that the holdings of the ITAT while confirming the orders u/s 263 by the CIT is erroneous and needs interference by this Hon'ble Court. | |
| (v) | That the ITAT has erred in sustaining the order of CIT u/s 263 on altogether different ground which is unwarranted under any provisions of the Income Tax Act, 1961 | |
| (vi) | That the orders of the Tribunal & CIT are legally unsustainable & bad in law and perverse.' |
5. Assailing powers of the Commissioner of Income Tax (Appeals) of revision under Section 263 of the Income Tax Act, 1961, seeking support fromMalabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC), it is claimed by the appellant-assessee that if order of the AO had incidentally resulted in loss to the revenue, it could not be said to be erroneous particularly when the Assessing Officer had adopted one of many possible views. It is claimed that merely because the Commissioner of Income Tax (Appeals) took recourse to another possible view, he could not have invoked Section 263 of the Act, as in addition to being prejudicial to the interests of the revenue, order of the Assessing Officer co-jointly was required to be adjudged erroneous as well. To buttress his argument, counsel for the appellant has referred to following extract from Malabar Industrial Co. Ltd. (supra):
'The phrase "prejudicial to the interest of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the Revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. ...'
6. It is further urged by learned counsel for the appellant-assessee that the Assessing Officer was not oblivious of the provisions of Section 80IB(13) and Section 80IA(9) of the Act as in notice dated 2.11.2005 (Annexure A-7), the Assessing Officer had made reference to these provisions. Para 3 of the notice repeatedly referred to by the assessee is reproduced as below:
"Further it is seen that deduction u/s 80IB and 80HHC have not been computed considering the provisions of sub section (13) of Section (9) of Section 80IA. Show cause why the amount of profits and gains claimed and allowed u/s 80IB be not allowed u/s 80 HHC."
7. Per contra, claim of the revenue is that the assessee was allowed deduction under Section 80HHC of the Act to the tune of Rs.1,48,94,112/-without reducing therefrom deduction of Rs.47,35,885/- allowed to it under Section 80IB of the Act. The CIT had come to the prima facie conclusion that the order of the AO was erroneous as also was prejudicial to the interest of the revenue. Thus, twin conditions i.e. erroneous nature of the order as also it being prejudicial to the interest of the revenue, had been satisfied by the CIT. Thus, proceedings of CIT under Section 263 of the Act were valid and the Tribunal had rightly upheld the same.
8. We have heard counsel for the parties, while going through the paper books.
9. To adjudicate the matter in controversy, not only provisions of Section 80HHC and 80IB are to be gone into but even provisions of Section 80IB(13) and of Section 80IA(9) are also to be appraised.
10. The AO framing the assessment under Section 143(3) of the Act vide order dated 27.3.2006 had allowed assessee's claim for deduction under Section 80HHC as also under Section 80IB without application of provisions of Section 80IB(13) read with Section 80IA(9) of the Act.
11. A perusal of the order of the Assessing Officer reveals that wittingly or unwittingly, consciously or unconsciously, this order does not refer to the provisions of Section 80IB(13) and Section 80IA(9) of the Act. It is strange that when the Assessing Officer had insight into the provisions of Section 80IB(13) and Section 80IA(9) as is reflected in notice (Annexure A-7), why no reference was made in the order (Annexure A-3), it is intriguing. It remains a fact that intentionally or unintentionally, no effect was given to the provisions of Section 80IB(13) and Section 80IA(9) of the Act. Because of omission of these provisions, order Annexure A-3 was rendered erroneous and undoubtedly was prejudicial to the interest of the revenue as well.
12. From a co-joint reading of show cause notice and order Annexure A-3, it transpires that the Assessing Officer knew it well that the only course available for allowing deductions, was on consideration of provisions of Section 80IB(13) and Section 80IA(9) of the Act along with Section 80HHC and 80IB, but leaving that course, the Assessing Officer simply allowed deductions under Section 80IB as also under Section 80HHC without even making reference to the provisions of Section 80IB(13) and Section 80IA(9) of the Act. Clearly enough, the view taken by the Assessing Officer is unsustainable in law.
13. Learned counsel for the appellant-assessee referring to Jt. CIT v. Madideep Engg. & Pkg. India. (P.) Ltd. [2007] 292 ITR 1/163 Taxman 337 (SC)has claimed that both the provisions are independent and do not impinge upon domain and sweep of each other. When confronted with this issue by the revenue side, the appellant has conceded that in this authority provisions of Sections 80HHC and 80IB of the Act, muchless in correlation with Section 80IB(13) and Section 80IA(9) of the Act, were not in issue. Sequelly, the assessee has not been able to convince as to how Madideep Engg. & Pkg. India (P.) Ltd. (supra) comes to its rescue. Claim of the assessee that reasons for invoking provisions of Section 263 of the Act and justification provided for such invocation in the order of Income Tax Appellate Tribunal are different, also has no merit. When the reasons given for invocation of provisions of Section 263 in the context of show cause notice of 20.3.2008 (Annexure P5) are read in relation to detailed discussion made in the impugned order Annexure A-1, it transpires that there is no dichotomy inter-se. Relevant portion of show cause notice Annexure A-5 is reproduced as below:
"3. Examination of record further reveals that during the period relevant to the assessment year under consideration the assessee was allowed deduction u/s 80HHC amounting to Rs.1,48,94,112/- without reducing from profit of the business the deduction u/s 80IB allowed to the extent of Rs.47,35,885/-. The law requires that for computation of deduction u/s 80HHC, deduction allowed u/s 80IB is to be deducted from the profits and gains of business as required by the provisions of Section 80IA(9) of the I.Tax Act, 1961. ..."
14. Now reference to order Annexure A-I of ITAT would be of avail, relevant portion whereof, is appended as below:
"9. In Section 80-IA of the Act, deduction is allowable in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. equal to 100% of profits and gains derived from such business for 10 consecutive assessment years. Sub-section (9) provides for computation of procedure which clearly provides that deduction to the extent of such profits and gains shall not be allowed under other provisions of Chapter VIA on which the assessee has claimed and allowed deduction u/s 80IA. There does not exist any ambiguity in the mandate of the statute in the context of section 80IA(9). The prescription of section makes it very clear that where any amount of profits and gains is claimed and allowed u/s 80IA for any assessment year deduction to that extent of such profits and gains shall not be allowed under any other provisions of Chapter VIA."
15. It may be recapitulated that CIT vide order dated 28.3.2008 (Annexure A-2), has remitted the case to the Assessing Officer for recomputing the total income of the assessee keeping in view the provisions of Section 80IB(13) read with Section 80IA(9) in correlation with Sections 80HHC and 80IB. Reference to Rogni Garments of Special Bench of ITAT was merely illustrative. Merely because in order of ITAT while referring to Section 80IA(9) due to typographical error, it has been mentioned as Section 80IA(9A), the order does not become bad in law.
16. Sequelly, authority cited by the appellant reported as CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490/[1981] 7 Taxman 56 (Punj. & Har.) does not support the case of the appellant as in the said authority, the Tribunal had upheld the action of the CIT on an altogether different ground than the ground taken by CIT while acting under Section 263 of the Act, unlike the position available in the present case, wherein there is no such dichotomy regarding the reasons cited by CIT while invoking Section 263, with the reasons given by the Tribunal while supporting the action of CIT.
17. At this stage, reference may be made to orders dated 18.4.2011 passed in Axin Exim International v. CIT [IT Appeal No.469 of 2010, dated 21.4.2011] passed in CIT v. Davinder Exports [IT Appeal No. 371 of 2007, dated 20.9.2010] passed in Friends Castings (P) Ltd. v. CIT [2012] 20 taxmann.com 708 (Punj. & Har.), wherein there is consistent view of this High Court. Relevant portion of the judgment dated 20.9.2010 in Friends Castings (P) Ltd.'s case (supra) reads as under:
"8. Learned counsel for the assessee was unable to point out that the approach of the authorities below was contrary to any statutory provision except to urge that the view taken by the Tribunal is erroneous as under Section 80-IA(9) which are also applicable in view of Section 80-IB(13), the only restriction is that deduction should not exceed the total profits and gains, and the restriction that deduction claimed and allowed underSection 80-IA or 80-IB could not be allowed under any other provision should be read in the light of condition of deduction not exceeding total profits and gains.
9. We are unable to accept the submission.
10. The restriction under Section 80-IA(9) is not only that the total deduction should not exceed profits and gains, there is a further restriction that deduction allowed under Section 80-IA or 80-IB will be a bar to claim deduction under any other provision of the Chapter."
18. More recently, this aspect has been dealt with at length in CIT v. Abhishek Industries Ltd. [2013] 213 Taxman 176/31 taxmann.com 77 (Punj. & Har.). In this judgment, authority cited as CIT v. Honda Siel Power Products Ltd. [2011] 333 ITR 547/[2010] 194 Taxman 175 (Delhi), cited by the assessee has also been referred to Discussing Asstt. CIT v. Rogini Garments [2007] 108 ITD 49 (Chennai) (SB), Honda Siel Power Products Ltd(supra) as also CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC), Coordinate Bench of this Court had come to a firm finding that if an assessee has claimed deduction of profit or gains under Section 80IB, deduction under Section 80HHC is to be granted after reduction to the extent already allowed under Section 80IB.
19. Quoting Rogini Garment's case(supra), para 42 from the said judgment was reproduced which is also being appended here below:
"42 Section 80HHC is part of Chapter VI-A. Hon'ble jurisdictional High Court in the case of CIT v. Sharon Vancers(P.) Ltd. [T.C. (A) No. 62 of 2004 dt. 26.02.207], has made it clear that it is not correct to say that Section 80HHC of the Act is a self contained provision. The deduction cannot be allowed ignoring the restrictive clause contained in Section 80-IA(9). The restrictive clause in Section 80-IA makes it abundantly clear that wherever deduction under any other section of Chapter VI-A(C) is claimed, the computation will be subject to the restrictions laid down in Section 80-IA (9). It precludes 'pro tanto', all the deductions of such profits and gains claimed under Chapter VI-A(C). Section 80HHC is part of Chapter VI-A(C). It is not a self-contained provision. There is absolutely no ambiguity on this aspect. We are therefore of the opinion that relief under Section 80-IA should be deducted from the profits and gains of the business before computing relief under Section 80HHC of the Act."
20. Referring to various other authorities thereafter and taking note of facts of that particular case where disagreeing with CIT, the Tribunal had upheld order of the AO, allowing deductions under Sections 80IB as also 80 HHC of the Act, Coordinate Bench of this Court has held as under:
"13. We are, further, of the firm view that nothing should be left at the whims and fancies of the AO while making assessment of income tax on the questions purely of law. Otherwise, it will bring ridicule to the system of assessment and end up with dangerous results. If for example one AO takes a particular view point, out of the two possible views while interpreting the provisions and the AO of another area takes the other possible view, that would lead to anomalous situations. The Tribunal has held in this case that the AO adopted one of the two possible views and therefore, there was nothing wrong. What restrained the Tribunal to discuss and determine the scope of plain meaning of the provisions of Section 80IA(9)? The decision of ITAT was always subject to challenge either by the department or the assessee before the higher forums."
21. Sequelly, reversing order of the Tribunal, order of CIT was restored holding that deduction under Section 80HHC was to be reduced to the extent it had already been allowed under Section 80IB of the Act.
22. Summing up the entire controversy, in conclusion, it is held that when provisions of Section 80IB(13) are read in conjunction with Section 80IA(9) of the Act, it becomes clear that deduction under Section 80HHC of the Act is to be computed on the eligible business profits only after reducing therefrom the portion of profit on which deduction has already been availed by the assessee under this Section i.e. 80IB. In other words, if an assessee has claimed deduction of profit or gains under Section 80IB, deduction to that extent is not to be allowed under Section 80HHC.
23. From the discussion as made earlier, all the questions posed by the appellant are decided in favour of the revenue and against the assessee. Sequelly, in terms of orders of CIT (Annexure A-2), affirmed by ITAT (Annexure A-1), the Assessing Officer has been rightly directed to recompute the total income of the assessee keeping in view provisions of Section 80IB(13) read with Section 80IA(9) of the Act.
24. Dismissed accordingly.
IT: Amended provision of section 80-IB(10)(d) having been made effective from 1-4-2005, is not applicable to assessee's housing project approved in year 2003
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[2013] 40 taxmann.com 541 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-I
v.
Shreenathji Construction*
MS. SONIA GOKANI AND M.R. SHAH, JJ.
TAX APPEAL NO. 510 OF 2013
JUNE 27, 2013
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [Housing projects] - Whether in view of order passed in case of Manan corpn. v. Asstt. CIT [2013] 214 Taxman 373/29 taxmann.com 15 (Guj.), Tribunal was right in holding that amended provision of section 80-IB(10)(d) having been made effective from 1-4-2005, was not applicable to assessee's housing project approved in year 2003 and, therefore, said project having more than 2000 sq. ft. commercial construction was eligible for deduction - Held, yes [Para 3] [In favour of assessee]
CASE REVIEW
Manan Corpn. v. Asstt. CIT [2013] 214 Taxman 373/29 taxmann.com 15 (Guj.) (para 3) followed.
CASES REFERRED TO
CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/17 taxmann.com 156 (Guj.) (para 2) and Manan Corpn. v. Asstt. CIT [2013] 214 Taxman 373/29 taxmann.com 15 (Guj.) (para 3).
K.M. Parikh for the Appellant.
ORDER
M.R. Shah, J. - Revenue has preferred the present Appeal with proposed following substantial questions of law :—
'(A) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in upholding the decision of the CIT (A) and thereby, deleting the disallowance u/s. 80IB (10) without appreciating that the legal relationship between the assessee firm and the end users of the unit was that of "work contract" ?
(B) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing deduction u/s. 80-IB (10) r.w.s 80-IB (1) of the assessee on profit derived from sale of unutilized FSI not being the element of profits derived from the business activity of development and construction of the housing project relating to the sale of tenements ?"
(C) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amended provision is not applicable to the assessee's project as the project was approved in 2003 without appreciating that the amended provision is applicable with effect from A.Y 2005-06, irrespective of date on which the approval was granted by local authority and that the housing project having more than 2000 sq. ft commercial construction will be outside the purview of deduction u/s. 80-IB (10) of the Act ?'
2. So far as Question {A} is concerned, it is not disputed by Shri K.M Parikh, learned advocate for the Revenue that the said question is squarely answered against the Revenue by the Division Bench of this Court in case of CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/17 taxmann.com 156 (Guj.). It is not in dispute that the said decision is confirmed by the Hon'ble Supreme Court. In view of the above, the present Tax Appeal is dismissed qua Question No. (A).
3. So far as Question no. {C} is concerned, the same is also answered against the Revenue by the decision of Division Bench of this Court in case ofManan Corpn. v. Asstt. CIT [2013] 214 Taxman 373/29 taxmann.com 15 (Guj.). Nothing has been pointed out whether the said decision is carried further by the Revenue or not. In view of the above, the present Tax Appeal is dismissed qua Question No. (C).
4. So far as Question no. {B} is concerned, it is reported that with respect to the said question, other Tax Appeals are admitted, being Tax Appeal No. 1306 of 2011 and connected appeals; inclusive of Tax Appeal No. 173 of 2012. In view of the above, present Tax Appeal is admitted qua Question No. (B) only.
5. To be heard with Tax Appeal No. 1306 of 2011 and connected appeals; inclusive of Tax Appeal No. 173 of 2012.
SUNILSC dismisses SLP – Disallowance of reimbursement of expenses to agents U/s. 40(a)(ia)
Supreme Court (SC) dismisses Special Leave Petition (SLP) in the case of CIT Vs. Gujarat Narmada Valley Fertilizers Company Ltd. filed against decision of Gujarat High Court which upheld the order of Income Tax Appellate Tribunal holding that disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is not justified on reimbursement of expenses to C & F and consignment agents.
SUPREME COURT OF INDIA
COMMISSIONER OF INCOME TAX
vs.
GUJARAT NARMADA VALLEY FERTILIZERS CO LTD
Date of Pronouncement – 17th January, 2014
ANIL R. DAVE & JAGDISH SINGH KHEHAR,
JJ. TA No.315/2013 (CC 175/2014)
Counsel appeared
R.P. Bhatt, D.L. Chidananda, Purnima Bhat, Anil Katiyar, Advs. for the Petitioner
ORDER
Delay condoned. The Special Leave Petition is dismissed.
IT: Insurance money received on loss of production is not eligible for deduction under section 80-IA
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[2013] 40 taxmann.com 399 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
Gangothri Textiles Ltd.*
MRS. CHITRA VENKATARAMAN AND K. RAVICHANDRABAABU, JJ.
TAX CASE (APPEAL) NO. 2596 OF 2006†
OCTOBER 30, 2012
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profit and gains from infrastructure undertaking [Computation of deduction] - Assessment year 1998-99 - Assessee suffered fire accident on 11-3-1996 - It subsequently made claim before insurance company and admittedly, same was compensated - Assessee claimed that insurance money was paid to it for loss of production due to accident and, therefore, same would be considered for grant of relief under section 80-IA - Whether given fact that fire accident had taken place as early as 11-3-1996 and there being no nexus between claim before insurance company and subsequent loss arising out of industrial activity, compensation could be considered for purpose of granting relief under section 80-IA - Held, no [Para 4] [In favour of revenue]
N.V. Balaji for the Appellant. R. Venkatanarayanan for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The Revenue is on appeal as against the order of the Income Tax Appellate Tribunal relating to assessment year 1998-99 by raising the following question of law:—
"Whether the insurance money received on loss of production is entitled for deduction under Section 80IA?"
2. It is seen from the facts herein that the assessee is stated to have suffered fire accident on 11.3.1996, which is relevant for the assessment year 1996-97. The assessee subsequently made claim before the insurance company and admittedly, the same was compensated. The assessee claimed loss on production due to the fire accident that took place on 11.3.1996. The Assessing Officer rejected the claim of the assessee by pointing out that the claim with the insurance company and the subsequent loss of the profit in the subsequent year was not at all connected. The Income Tax Officer held that mere commercial connection between the industrial undertaking would not be sufficient for grant of relief under Section 80IA of the Income Tax Act. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal by holding that on perusal of the Surveyor's report, it was clear that the insurance money was paid to the assessee for the loss on production. In the circumstances, the Officer was directed to include the compensation as profit derived from the undertaking and compute the same for deduction under Section 80IA of the Act. Aggrieved by the same, the Revenue went on appeal before the Income Tax Appellate Tribunal. Before the Tribunal, evidently, the assessee was not represented either in person or through counsel. The Tribunal allowed the assessee's claim based on the decision of the Delhi Bench of the Tribunal rendered in the case of Rollatainers Ltd. v. Dy. CIT [2000] 111 Taxman 221 (Mag.), wherein it was held that the insurance claim received for goods damaged in transit had direct nexus with the industrial undertaking and hence, it was an allowable deduction under Section 80-IA of the Act. Aggrieved by the same, the Revenue is on appeal before this Court.
3. We agree with the submission of the learned Standing counsel for the Revenue that in the absence of any nexus shown between the compensation received and the business activities of the industrial undertaking, the compensation could not be held as derived from the undertaking for the purpose of inclusion under Section 80-IA of the Act.
4. As already seen in the preceding paragraph, the accident took place on 11.3.1996, which is relevant for the assessment year 1996-97. The assessment year in question relating to 1998-99. It is evident from the reading of the order of the authorities below that there were no materials produced by the assessee to substantiate the nature of the fire accident that had taken place to link it to the commercial activity to earn profit. Given the fact that the accident had taken place as early as 11.3.1996 and there being no material to link this accident and the nature of damage caused in the industrial activity and to the productivity of the company, rightly, the Assessing Officer held that there being no nexus between the claim before the insurance company and the subsequent loss arising out of the industrial activity, there could be no question including the compensation for the purpose of granting relief under Section 80-IA of the Act.
5. As far as the order of the Commissioner of Income Tax (Appeals) is concerned, the same was passed based on the Surveyor's report. There is absolutely no deliberation as to the compensation received having any connection whatsoever to the industrial activity of the assessee on its income earning aspect.
6. As far as the Tribunal's order is concerned, reliance placed on the decision of the Delhi Bench of the Tribunal rendered in the case of Rollatainers Ltd. (supra) is totally misplaced, since, as is evident from the order of the Tribunal, the case dealt with by the Delhi Bench related to the compensation received on the goods damaged while in transit. As far as the present case is concerned, even though we directed the assessee to produce the details regarding the fire accident and the policy, the assessee could not produce the same before this Court to substantiate its contention, and there being no material to substantiate the contention of the assessee linking the loss to the fire accident, we do not find any justifiable ground to accept the order of the Tribunal which is not based on factual findings. In the circumstances, we have no hesitation in accepting the plea of the Revenue, thereby, set aside the order of the Tribunal.
7. In the result, the above Tax Case (Appeal) is allowed. No costs.
VARSHA*In favour of revenue.
†Arising out of order of ITAT, in IT Appeal No. 208/Mad./2002 dated 17-5-2006.
IT: Where after completion of assessment, consequent upon inquiry assessee surrendered amount of certain loan as bogus loan and interest on said loan, concealment of income was established making a case for levy of penalty under section 271(1)(c)
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[2013] 40 taxmann.com 344 (Gujarat)
HIGH COURT OF GUJARAT
Bharatkumar G. Rajani
v.
Deputy Commissioner of Income-tax*
M.R. SHAH AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 180 OF 2013†
JULY 15, 2013
Section 271(1)(c), read with section 68, of the Income-tax Act, 1961 - Penalty - Concealment of Income [Surrender of income, effect of] - Assessment year 2001-02 - After assessment of assessee had been completed, Investigation Wing detected money laundering racket, in which assessee was also found involved - In response to notice under section 148 assessee filed return of income declaring bogus loan of Rs. 10 lakh and interest thereon as additional income - Assessing Officer completed reassessment and also levied penalty under section 271(1)(c) on assessee - Whether on facts, concealment of income came to be established and penalty under section 271(1)(c) was rightly levied upon assessee - Held, yes [Para 3] [In favour of revenue]
R.K. Patel for the Appellant.
ORDER
M.R. Shah, J. - Present appeal has been preferred by the appellant-assessee challenging the impugned judgment and order dated 01.06.2012 passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot (hereinafter referred to as "ITAT") in ITA No.123/Rjt/2011 with respect to the assessment year 2001-02 by which the ITAT has allowed the said appeal preferred by the Revenue by quashing and setting the order dated 28.01.2011 passed by the CIT(A) and consequently confirming/restoring the order passed by the Assessing Officer of penalty of Rs.5 lakh levied under section 271(1) (c) of the Income Tax Act, 1961 (hereinafter referred to as "IT Act").
2. That the assessee a trader in tea on wholesale and retail basis filed his return of income on 12.10.2001 declaring the total income at Rs.7,14,050/-. That the said return was finalized and assessment order was passed under section 143(3) of the IT Act assessing the total income at Rs.10,14,850/-. It appears that after the original assessment was completed, the department carried out searches and post-search inquiries in the case of one Saha Group. That during the inquiries it was revealed that the assessee had additionally taken a loan of Rs.5 lakh from Shri Babulal D. Visrolia and a further loan of Rs.5 lakh from Shri Vinod L. Patodia. During the course of inquiry held by the department the assessee surrendered the aforesaid loans aggregating to Rs.10 lakh as bogus loans. Based upon the information received by the AO from the Investigation Wing of the Income Tax Department, notice under section 147/148 was issued pursuant to which the assessee filed a return of income in which he surrendered the said loan of Rs.10 lakh apart from withdrawing the claim of interest on the said loan. Assessment was completed under section 143(3)/148 on 07.02.2006 accepting the income as returned by the assessee in response to notice issued by the AO under section 148 of the IT Act. While completing reassessment proceedings, the AO also initiated proceedings for levy of penalty. After hearing the assessee, the AO imposed the penalty of Rs.5 lakh being minimum leviable.
Feeling aggrieved and dissatisfied with the order passed by the AO levying the penalty of Rs.5 lakh, the assessee preferred appeal before the CIT(A) and the CIT(A) by order dated 28.01.2011 allowed the said appeal and passed an order deleting the penalty of Rs.5 lakh levied by the AO under section 271(1)(c) of the IT Act.
Feeling aggrieved and dissatisfied with the order passed by the CIT(A) dated 28.01.2011 in deleting the penalty levied by the AO under section 271(1)(c) of the IT Act, the Revenue preferred appeal before the ITAT and by impugned judgment and order the ITAT has allowed the said appeal and has quashed and set aside the order passed by the CIT(A) and has restored the order passed by the AO levying penalty under section 271(1)(c) of the IT Act.
Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the ITAT, the assessee has preferred the present Tax Appeal.
3. We have heard Shri R.K. Patel, learned counsel appearing on behalf of the assessee at length.
At the outset it is required to be noted that in the original return the assessee had shown the return income of Rs.7,14,500/-only. After the Investigation Wing detected the money laundering racket at Mumbai, wherein the assessee was also found to have been involved, only thereafter the assessee filed revised return of income declaring bogus loan of Rs.10 lakh and interest thereon as additional income Thus, it was established that the assessee has considered income of Rs.10,88,972/-. It is also required to be noted at this stage that even after the original assessment was completed and during the course of investigation by communication dated 23.11.2004 the assessee wrote a letter to the Deputy Director of Investigation, Mumbai offering additional income of Rs.5 lakh shown as loan from Babulal D. Visrolia and Vinod L. Patodia. However, even at that time also, he offered the additional income of Rs.5 lakh and thereafter, when the reassessment proceedings were initiated the assessee admitted to have introduced bogus loan of Rs.5 lakh from Babulal D. Visrolia and Rs.5 lakh from Vinod L. Patodia [in all Rs.10 lacs] and shown the additional income of Rs.10 lakh and amount of Rs.88,972/-thereon in response to the notice under section 148 of the IT Act. Considering the facts and circumstances, the concealment of income of Rs.10,88,972/- came to be established and consequently when in a penalty proceedings under section 271(1)(c) of the IT Act, the minimum penalty of Rs.5 lakh has been levied by the AO, which has been confirmed by the ITAT, we see no reason to interfere with the impugned judgment and order passed by the ITAT. No error and/or illegality has been committed by the ITAT in restoring the order passed by the AO levying the penalty under section 271(1)(c) of the IT Act. Hence, present appeal deserves to be dismissed. No question of law much less substantial question of law arises in the present appeal.
4. In view of the above, present tax appeal deserves to be dismissed and is, accordingly, dismissed.
VARSHA †Arising out of order of ITAT dated 28-1-2011 in IT Appeal No. 123 (Rjt.) of 2011.
Regards,
Pawan Singla , LLB
M. No. 9825829075 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
| ■ | ork 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 †Arising out of order of ITAT, dated 26-10-2012 in IT Appeal No. 1138/Ahd./2010.
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Chapter XII- Meeting of Board and its Powers
Ø Four board meetings are to be held in a year and the time gap between two meetings shall not be more than 120 days. No requirement to hold the meeting every quarter as provided under the Companies Act, 1956.
Ø Participation of directors at Board Meetings has been permitted through video-conferencing.
Ø At least seven days notice is required to be given for a Board meeting. However, a provision for shorter notice is there.
Ø Every listed company and such other company as may be prescribed to have an audit committee.
Ø The Audit committee shall consist of a minimum of three directors with independent directors forming a majority and majority of members of Audit committee including the Chairperson shall have financial knowledge.
Ø A vigil mechanism in the prescribed manner to be established by every listed company or such class or classes of companies, as may be prescribed.
Ø Besides the Audit Committee, the constitution of Nomination and Remuneration Committee has also been made mandatory in the case of listed companies and such other class or description of companies as may be prescribed.
Ø The Nomination and Remuneration Committee shall consist of at least three non-executive director(s) with at least one half shall be independent director. The Chairperson of the company (whether executive of non executive) may be appointed as member of nomination and remuneration committee but cannot chair nomination and remuneration Committee.
Ø Where the combined membership of the shareholders, debenture holders and other security holders is more than 1000 at any time during the financial year, the company shall constitute a Stakeholders' Relationship Committee. The Chairperson of the Committee shall be a non-executive director.
Ø Certain new matters that are required to be transacted by the board of directors at their meeting only.
Ø Certain powers which earlier can be exercised by the Board with the approval of general meeting by way of ordinary resolution under section 293 of the Companies Act 1956, shall now to be passed by special resolution.
Ø The limit of political contribution has been increased from 5% to 7.5% of the average net profits of the company during the three immediately preceding financial years.
Ø Like Public limited company, in case of a private limited company, an interested director cannot vote or take part in the discussion relating to any matter in which he is interested, whereas under the Companies Act, 1956, director of a private limited company can do so.
Ø The Companies Act, 1956 requirement of seeking permission of the central government for giving loan to director has been dispensed with.
Ø Companies are prohibited from making investment through more than 2 layers of investment companies subject to certain exemptions in case of foreign acquisitions and requirement of multi layered structure as per any law.
Ø The provisions related to inter-corporate loans and investments (section 372A of Companies Act, 1956) have been extended to include loans and investments to any person.
Ø Minimum rate of interest on inter corporate loans have to be prevailing rate of interest on dated government securities.
Ø No approval of the central government required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary. Under the Companies Act, 1956 approval is required under section 297.
Ø A company shall not enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire assets for the consideration other than cash from the company & vice versa without the approval of company in general meeting.
Ø Apart from the existing transactions, certain new related party transactions are also provided for which approval of board will be required.
Ø No approval of the central government required for entering into any related party transactions. Under the Companies Act, 1956 approval is required under section 297.
Ø One Person Company shall enter into a contract with the sole member of the company who is also its director, only in writing or else ensure that the terms of the contract are contained in a memorandum or are recorded in the minutes of the first Board meeting held after entering into the contract. The company shall inform the Registrar about every such contract.
Ø Directors and Key Managerial Personnel are now prohibited to enter into any forward dealings in company's securities. Under the Companies Act, 1956 there is no such provision.
Ø Specific provisions are introduced prohibiting insider trading of securities. Under the Companies Act, 1956 there is no such provision.
Ø The definition of price sensitive information has also been included.
CHAPTER XII
MEETINGS OF BOARD AND ITS POWERS
| 173. | Meetings of Board, | 285 | Board to meet at least once in every three calendar months. |
| | | 286 | Notice of meetings. |
| 174. | Quorum for meetings of Board. | 287 | Quorum for meetings. |
| | | 288 | Procedure where meeting adjourned for want of quorum. |
| 175. | Passing of resolution by circulation. | 289 | Passing of resolutions by circulation. |
| 176 | Defects in appointment of directors not to invalidate actions taken. | 290 | Validity of acts of directors. |
| 177. | Audit committee. | 292A | Audit Committee, |
| 178. | Nomination and Remuneration Committee and stakeholders relationship committee | Sch. XIII | Schedule |
| 179, | Powers of Board. | 291 | General powers of the Board. |
| | | 292 | Certain powers to be exercised by Board only at meeting. |
| 180. | Restrictions on powers of Board. | 293 | Restrictions on powers of Board. |
| 181. | Company to contribute to bona fide and charitable funds, etc. | 293 | Restrictions on powers of Board. |
| 182. | Prohibitions and restrictions regarding political contributions, | 293A | Prohibitions and restrictions regarding political contributions. |
| 183. | Power of Board and other persons to make contributions to national defense fund, etc. | 293B | Power of Board and other persons to make contributions to National Defence Fund, etc. |
| 184. | Disclosure of interest by Directors | 299 | Disclosure of interests by Directors. |
| | | 300 | Interested director not to participate or vote in Boards proceedings. |
| 185. | Loan to Directors, etc. | 295 | Loans to Directors, etc. |
| | | 296 | Application of section 295 to book debts in certain cases. |
| 186. | Loan and investment by Company. | 372A | Inter-corporate loans and investments. |
| 187. | Investments of Company to be held in its own name, | 49 | Investments of Company to be held in its Own name. |
| 188. | Related Party Transactions | 314 | Director, etc, not to hold office or place of profit. |
| | | 297 | Boards sanction to be required for certain contracts in which particular Directors are interested. |
| 189. | Register of contracts or arrangements in which Directors are interested. | 301 | Register of Contracts, Companies and Firms in which directors are interested. |
| 190. | Contract of employment with managing or Whole-Time Directors. | 302 | Disclosure to members of director's interest in contract appointing manager, MD. |
| 191. | Payment to Director for loss of office, etc., in connection with transfer of undertaking, property or shares | 320 | Payment to director for loss of office, etc., in connection with transfer of shares. |
| 318 | Compensation for loss of office not permissible except to Managing or WTD or to directors who are managers. | ||
| | Payment to director, etc., 11w loss of office, etc, in connection with transfer of undertaking or property. | ||
| 192 | Restriction on non-cash transactions involving Directors | | No provision exists |
| 193 | Contract by One Person Company | | No provision exists |
| 194 | Prohibition on forward dealings in securities of company by a key Managerial Personnel | | No provision exists |
| 195 | Prohibition on Insider Trading of securities | | No provision exists |
CHAPTER XII - MEETINGS OF BOARD AND ITS POWERS
Comments - Sections 285-290 of the Companies Act, 1956 regarding meeting of board, notices, quorum etc has been re-organised in Sections 173-176 with many changes. BM through video conferencing has been allowed. 7 days notice of BM can also be sent by Email. However, provision for shorter notice is also there. Interested director can neither participate in board meeting nor in general meeting. Listed companies and prescribed class of companies have to establish a vigil mechanism & have to form a "Audit committee" & "Nomination and Remuneration Committee". Every company having more than 1000 security holders have to form a "Stakeholders Relationship Committee". Inter-corporate loans and investments, and investments through more than two layer investment subsidiaries are restricted. Limits of contributions by a company to political parties or for political activities have been increased to 7.5%. Forward trading in the shares of companies, its holding, subsidiary and associate companies by the directors is prohibited.
Section 173: Meetings of Board (Similar to Section 285,286)
| Comment - This Section provides that a minimum of four board meetings are to be held in a year and the time gap between two meetings shall not be more than 120 days. There is no requirement to hold the meeting every quarter as provided under the Companies Act, 1956. Atleast 7 days notice of Board meeting shall be given to every director at his address registered with the company by post or by electronic means failing which officers shall be liable for penalty. However, a provision for shorter notice is there. Shorter notice in private limited companies may not be practically possible as these companies do not have independent director. Participation of directors at Board Meetings has been permitted through video-conferencing. In case of One Person Company, Small Company and Dormant Company, atleast 1 meeting of the Board of Directors must be held in each half of a calendar year and the gap between the 2 meetings shall be atleast 90 days. |
| TABLES | ||
| Number of BMs in a calendar year: | First BM | Within 30 days from the date of incorporation. |
| Minimum BMs | Atleast 4 BMs such that time gap between two BMs not more than 120 days. | |
| Maximum BMs | No Restriction. | |
| Length of Notice | 7 days Notice | However, for urgent necessity, provision of shorter notice is there |
| Agenda is not required | The Act does not prescribe the content of the notice | |
| Form of Notice | No form of notice has been specified by the Act | |
| To whom notice to be given? | Every director at his address registered with the company | |
| How to send notice? | By hand delivery or by post or by electronic means. | |
| Mode of Participation | Either in person or through audio visual means capable of recording the proceedings of such meetings along with date and time. | |
| When notice not required? | When Articles fixes date, time and place of all future BMs | |
| When Resolution fixing date, time and place of all future BMs has been passed and a copy of resolution has been sent to every director. | ||
| Consequences of omission to send notice to a director | Meeting Void. [Parmeshwari Prasad Gupta V Union of India (1974) 44 Comp Cas 1]. | |
Ø First Board Meeting, Interval between Board Meetings & Relaxation by the Central Government [Sec 173 (1)]:
v First Board Meeting - Every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation
v Interval between Board Meetings - After the first meeting, the company shall hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board.
v Relaxation by the Central Government - The Central Government may, by notification, direct that the provisions of this subsection shall not apply in relation to any class or description of companies or shall apply subject to such exceptions, modifications or conditions as may be specified in the notification.
| Four Board Meetings Held – Whether Contravention of Section 173? Example: Does the company comply with the provisions of section 173(1) in the following cases? a. A company held its 1st, 2nd, 3rd and 4th Board meetings on 1st January, 30th June, 1st July and 31st December respectively. b. A company held its 1st, 2nd, 3rd and 4th Board meetings on 1st March, 30th May, 15th September and 31st December respectively. Answer a. The company has held four board meetings in a year. However, as the gap between 1st & 2nd meeting as well as 3rd & 4th meeting exceeds 120 days, the company has not complied with the provisions of Section 173(1). Answer b. The company has held four board meetings in a year. Also the gap between all meetings does not exceed 120 days; the company has complied with the provisions of Section 173(1). |
Ø Participation of Directors in Meeting through video conferencing also[Sec 173(2)]: The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time. The Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio visual means.
| Whether Participation by Video Conferencing in Board Meeting is Valid? Example: A private ltd co. has 12 directors out of which 7 directors stay abroad. Out of the remaining 5 directors, four directors are in New York presently. The company wants to hold a board meeting in which the 7 directors residing abroad and 5 directors went on a visit to New York will participate through video conferencing. Can the company hold a valid Board Meeting in which those directors will participate by means of video conferencing? Answer: Sec. 173(2) allows the participation of directors in Board Meeting through video conferencing or other audio visual means also. However, it should be capable of recording and recognising the participation of the directors and recording and storing the proceedings of such meetings along with date and time. Hence, the company can hold a valid board meeting. |
Ø Length of Notice, Shorter Notice [Sec 173(3)]:
v Length of Notice - A meeting of the Board shall be called by giving not less than seven days' notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means.
v Shorter Notice - A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting. In case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.
| Whether Notice by Email is Valid? Example: A company wants to hold its Board Meeting on 15th September. The company wants to send the notice by email on 13th September. Examine Its Validity. Answer: Sec 173(3) allows the delivery of notice by electronic means. In case of urgent business, a notice shorter to 7 days is allowed provided atleast one independent director is either present at the meeting or ratify the transaction afterwards in the manner prescribed. |
| Date, Place & Time of Board Meeting – No Restriction Example: A company wants to hold its Board Meeting abroad on Sunday at 11 PM at night. Examine the validity. Answer: Unlike an AGM, the date, place & time of the board meeting has been left with the discretion of the directors and there is no restriction under the companies act, 2013 regarding the date, time and place of board meeting. Hence the Board Meeting is valid provided a proper notice for such Board meeting is given to all the directors at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means |
| Form or Content of Notice – Not Specified Example: In the above example, is it necessary that notice shall specify the nature of business to be transacted? Answer: No form or content has been prescribed by the act. Agenda is not required to be sent along with the notice unless the act requires specific notice to be moved for a resolution at a Board Meeting. |
| Notice by way of Telephonic Call due to urgent necessity - Invalid Example: A company called a meeting by a telephone call due to very urgent necessity. The meeting is attended by all directors and five items were transacted. None of the directors objected to the absence of notice. Examine validity. Answer: As per sec 173(3), A meeting of the Board shall be called by giving not less than seven days' notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. As the notice has not been given in writing, such notice is not valid. Hence the meeting cannot be said to be properly called and will be invalid. |
| Notice to a foreign director present in India by courier at his hotel - Invalid Example: A company sent a notice of meeting to a foreign director (present in india) by courier at his hotel. Examine validity. Answer: As per sec 173(3), A meeting of the Board shall be called by giving not less than seven days' notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. As the notice has not been given at his address registered with the company, such notice shall be invalid. |
| Notice is required to an Interested Director(s), Foreign Director(s), Alternate Director(s) as well as Original Director. Example: A company has 5 directors, A, B, C, D & E. A is a foreign director. X has been appointed as alternate director to B. C is an interested director for the purpose of proposed resolution. The Company does not want to send notice to A (as he is a foreign director and not likely to attend), B (on the grounds that he is out of state) & C (as he cannot vote in the meeting). Examine validity. Answer: As per sec 173(3), A meeting of the Board shall be called by giving not less than seven days' notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. Hence the company is required to send notice to A, B & C also. |
| Resolution Fixing Board Meeting can be treated as Notice. Example: A company passed a resolution to hold a board meeting on 1st day of every month at 11:00 AM at its registered office. Examine validity. Answer: Sec 173(3) do not prescribe the form or mood of notice. A copy of resolution passed will be sufficient and can be treated as notice provided the resolution is served on every director. Merely passing of resolution is not sufficient. [A.L.A.R. Arunachalam Chettiar Firm V Kaleeswarar Mills Ltd AIR (1957) Mad 309] |
| Article Of Association Specifying The Date, Place And Time Of Board Meeting – No Separate Notice Required. Example: The AOA of the company fixes the date, time and place of Board meeting. Can this be treated as notice? Answer: A provision in the article is equivalent to the notice in writing. Hence no further notice is required. |
| No Further Notice Required for Adjourned Board Meeting. Example: A company adjourned its board meeting and do not want to give further notice. Examine validity Answer: Adjourned Board Meeting is a continuation of the original meeting. Hence no further notice is required except in the following cases: 1) Where the articles of the company provides for fresh notice for adjourned meeting. [Pramod Kr. Mittal V Southern Steel Ltd (1980) 50 Comp Cas 555] 2) Where a board meeting is adjourned for an indefinite time |
| Right to Receive Notice Cannot Be Waived. Example: Mr. Rohit, a director states that he will not be able to attend the board meetings for the next 1 month. Company does not want to send notice to Mr. Rohit. Examine Validity. Answer: Notice is to be sent to each director even if he waives his right to receive notice [Re, Portuguese Consolidated Copper Mines Ltd. (1889) 42 Ch D 160 (CA)] |
| Omission to give notice will make Meeting Invalid Example: A Ltd. failed to send notice to a director. Examine Validity. Answer: The provisions of Sec. 173(3) are mandatory and failure to send notice to even a single director will make the meeting and the resolution passed at the meeting null and void [Kuldip Singh Dhillon V Paragon Utility Finaciers Pvt Ltd. (1988) 60 Comp Cas 77]. Even an accidental omission to give notice to a director would make the meeting invalid. [Parmeshwari Prasad Gupta V Union of India (1974) 44 Comp Cas 1] |
Ø Penalty [Sec 173(4)]: Every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of twenty-five thousand rupees.
Ø Relaxation for OPC, Small Co. & Dormant Co. [Sec 173(5)]: A One Person Company, small company and dormant company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days.
| Two Board Meetings Of OPC Held – Whether Contravention of Section 173? Example: Does the OPC comply with the provisions of section 173 in the following cases? a. A company held its 1st & 2nd Board meetings on 31st May and 16th August respectively. b. A company held its 1st & 2nd Board meetings on 11th April and 11th September respectively. Answer a. The OPC has held two board meetings in each half of a calendar year. However, as the gap between the two meetings does not exceed 90 days, the OPC has not complied with the provisions of Section 173. Answer b. The OPC has held two board meetings in each half of a calendar year. However, as the gap between the two meetings exceeds 90 days, the OPC has complied with the provisions of Section 173. |
Ø Exemption for OPC [Sec 173(5)]: Nothing contained in this sub-section and in section 174 shall apply to One Person Company in which there is only one director on its Board of Directors.
Section174: Quorum for meetings of Board (Similar to Section 287,288)
| Comment - This Section provides that the quorum for a meeting of the BOD of a company shall be 1/3 of its total strength or 2 directors, whichever is higher, and the directors participating by video conferencing or other audio visual means shall be counted for quorum. Where the number of interested directors exceeds, or is equal to, 2/3 of the total strength of the Board, the number of directors who are not interested and present at the meeting, being not less than 2, shall be the quorum. Now where due to removal / resignation etc. the number of Directors is reduced below the quorum, then the continuing Directors may act for the purpose of increasing the number of Directors to that required for the quorum, or for summoning a general meeting. The provisions that the frequency of the Board meeting shall not be deemed to be contravened merely by the reason that the meeting of the Board had been called in compliance with the Section could not be held for the want of quorum, has been dispensed with. |
| TABLES | ||
| Quorum | In case no. of interested director is ≥ 2/3 of total strength, quorum shall be | Remaining directors not less than 2 |
| In other case, Quorum shall be higher of | a) 1/3 of total strength or | |
| b) 2 directors | ||
| Quorum as per articles | Articles cannot reduce the quorum. However, it can increase. [Re, Sir Hormusji A. Wadia AIR (1921) Bom 372; (1921) 23 BOM LR 1104] | |
| Quorum required throughout meeting | Quorum is required at the time of transacting each and every business | |
| If strength of BOD falls below quorum, Continuing directors may act | If Strength of Board reduced below Quorum, Continuing Directors may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose. | |
| Consequences when quorum not present | The Board Meeting is void [Firestone Tyres & Rubber Company V Synthetic & Chemicals Ltd. (1971) 41 Comp Cas 377 Bom, (1971) 41 ITR 377 Bom] | |
Ø Quorum for Board Meeting [Sec 174(1)]: The quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum under this sub-section.
| Whether Participation by Video Conferencing Counted For Quorum? Example: A private ltd co. has 12 directors out of which 7 directors stay abroad. Out of the remaining 5 directors, 2 directors are in New York & 2 Director are in New Delhi at present. The company wants to hold a board meeting in which the 7 directors residing abroad and 4 directors in New York & New Delhi will participate through video conferencing. Can the participation by video conferencing be counted for the purpose of quorum? Answer: Sec. 174(1) states that the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum. Hence, such participation will be counted for the purpose of Quorum. |
| Position of Alternate Directors while computing Quorum and whether quorum has to be present throughout the meeting. Example: The board meeting of a company started at 01:00 PM where 7 directors were present, out of which 2 directors were alternate director. The total no. of directors was 10. The Board transacted 10 items. At 02:00 PM, after the completion of 4 items in the agenda, 4 directors left the meeting. Examine the validity of transaction. Answer: In the given case, quorum will be 1/3 of 10 directors i.e. 3.33 taken as 4 directors. Alternate directors shall also be included while computing quorum. Since 7 directors were present upto the completion of 4 items in the agenda, the Board meeting has been has been validly held. However, quorum has to be present at the time of transacting each and every business. As after transacting 4 items, 4 directors left, because of which the no. of directors present has fallen below the quorum, the remaining 6 items of the agenda cannot be validly discussed and voted upon. Therefore, resolutions passed in respect of 6 items are void and have no legal effect. |
Ø If Strength of Board reduced below Quorum, Continuing Directors may act [Sec 174(2)]: The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose.
| How can number of directors be increased if fallen below quorum? Example: The no. of directors of a Private Ltd. Co. has been reduced to 1. How can the co. appoint director to increase the no. of strength to that fixed for quorum? Answer: Sec. 174(2) empowers the continuing director(s) to act for the purpose of increasing no. of directors to that fixed for the quorum or for summoning a general meeting, if the no. has been reduced below the quorum. In such a case, the continuing director may appoint an additional director or may summon a general meeting for the purpose of appointment of director. |
Ø Quorum in case of Interested Directors [Sec 174(3)]: Where at any time the number of interested directors exceeds or is equal to two thirds of the total strength of the Board, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time. "Interested director" means a director within the meaning of sub-section (2) of section 184.
| Whether Quorum Is Present? Example (a) In a meeting, out of 11 directors only 7 directors were present of which only two directors were not interested in one of the transaction. How should the meeting deal with the matter? (b) Suppose, in the above example, 10 directors were present of which only two directors were not interested in one of the transaction. How should the meeting deal with the matter? Answer: In the given case, the required quorum comes to 4 directors (1/3 of total strength or 2; whichever is higher) but only 2 directors who are not interested in the transaction are present. 2/3 of the total strength comes to 8. (a) Since the no. of interested director is only 5, section 174 is not attracted. Thus the remaining 2 directors who are not interested do not constitute a quorum and hence the Board meeting cannot be validly convened. (b) Since the no. of interested director is 8, section 174 is attracted. Thus the remaining 2 directors who are not interested will constitute a quorum and hence the Board meeting shall be valid. |
Ø Adjournment of meeting due to want of Quorum [Sec 174(4)]: Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place. Any fraction of a number shall be rounded off as one; & "Total strength" shall not include directors whose places are vacant.
| No quorum was present in adjourned meeting - Consequences? Example: At an adjourned Board meeting, quorum was not present. Meeting was held. Examine validity? Answer: Sec 174(4) is silent on such situation. In the absence of any specific statutory provision to validate such meeting, such meeting remains invalid. |
| Even if Board Meeting Not Held For Quorum, Sec. 174 Violated. Example: A meeting of board could not take place on 29/09/2030 for want of quorum and hence adjourned. As a result the company did not hold any board meeting for that quarter. Has the company violated the provisions of sec. 174? Answer: Sec 288 of the Companies Act, 1956 states that Sec. 285 shall not be deemed to be contravened if the board meeting could not be held for want of quorum. There is no corresponding provision in the Companies Act, 2013. Hence, the company has violated Sec. 174 . |
Section175: Passing of Resolution by Circulation (Similar to Section 289)
| Comment - Now resolution by circulation shall be approved, if it is consented by majority of Directors instead of earlier requirement of consent of all Directors present in India or by majority of them. Also, now all resolution passed by circulation shall have to be mandatorily noted in the next board meeting and should be made part of the minutes. Now where any resolution has been put to vote by circulation and not less than 1/3 of the total number of Directors requires that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at Board meeting and not by circulation. Now, the notice shall be sent in draft to all Directors or members of committee at their addresses registered with the Company in India by post or courier, or through electronic means. |
| TABLE | |
| Conditions | 1) Resolution circulated in draft together with necessary papers |
| 2) Circulation to all the directors or members of committee at their address registered with the co. | |
| 3) Delivery by hand or by post or by courier, or by prescribed electronic means. | |
| Approval by whom? | Approval by a majority of the directors or members entitled to vote on the resolution. |
| When resolution to be decided at a meeting? | When not less than 1/3 of the total no. of directors for the time being requires so. |
Ø Circulation in Draft with necessary papers [Sec 175(1)]: No resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India by hand delivery or by post or by courier, or through such electronic means as may be prescribed and has been approved by a majority of the directors or members, who are entitled to vote on the resolution; however, where not less than one-third of the total number of directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board.
| Whether resolution along with necessary papers can be sent through email? Example: A company wants to send resolution along with necessary papers by email to all directors. Examine validity. Answer: Sec 175(1) allows sending of resolution along with necessary papers by email. Hence valid. |
| Whether resolution validly passed? Example: A company has 9 directors out of which 3 directors are abroad. The company circulated the resolution along with draft papers to all the directors. 4 out of 6 directors approved the resolution. Examine validity. Answer: A resolution is said to be duly passed by circulation if it has been approved by a majority of the directors or members, who are entitled to vote on the resolution. However, in the above case only 4 directors had approved the resolution and hence invalid. However, where not less than 1/3 of the total number of directors of the company for the time being requires that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board. |
Ø Resolution to be considered as a part of minutes [Sec 175(2)]: A resolution under sub-section (1) shall be noted at a subsequent meeting of the Board or the committee thereof, as the case may be, and made part of the minutes of such meeting.
Section176: Defects in appointment of directors not to invalidate actions taken. (Similar to Section 290)
No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company. However, it will not validate any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.
Section177: Audit Committee (Similar to Section 292A)
| Comment - This Section provides that every listed company and such other company as may be prescribed to have an audit committee which shall consist of a minimum of 3 directors with independent directors forming a majority and majority of members must have ability to read and understand financial statement. The Section further provides the functions of audit committee. A vigil mechanism in the prescribed manner to be established by every listed company or such class or classes of companies, as may be prescribed. The establishment of such mechanism shall be disclosed at the website of the company and In the Board's report of the Company. |
| TABLE | |
| Applicability | Every listed company or prescribed companies. |
| Composition | minimum of three directors with independent directors forming a majority |
| Transition Provision | If committee exists, it shall be re-constituted within 1 year from commencement of the Act. |
| Vigil Mechanism | Every listed company or prescribed companies shall establish a vigil mechanism for directors and employees to report genuine concerns. |
Ø Applicability for listed & other prescribed companies [Sec 177(1)]: The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
Ø Majority shall be Independent directors [Sec 177(2)]: The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority; however, majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.
Ø Reconstitution within one year [Sec 177(3)]: Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2).
Ø Functions of Audit Committee [Sec 177(4)]: Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall inter alia, include,—
v the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
v review and monitor the auditor's independence and performance, and effectiveness of audit process;
v examination of the financial statement and the auditors' report thereon;
v approval or any subsequent modification of transactions of the company with related parties;
v scrutiny of inter-corporate loans and investments;
v valuation of undertakings or assets of the company, wherever it is necessary;
v evaluation of internal financial controls and risk management systems;
v monitoring the end use of funds raised through public offers and related matters.
Ø Discussion with auditors [Sec 177(5)]: The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.
Ø Powers of Audit Committee in regards to Investigation [Sec 177(6)]: The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.
Ø Persons having right to be heard but not to vote [Sec 177(7)]: The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor's report but shall not have the right to vote.
Ø Disclosure of composition of Audit Committee [Sec 177(8)]: The Board's report under sub-section (3) of section 134 shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefore.
Ø Establishment of vigil mechanism [Sec 177(9)]: Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
Ø Adequate safeguards against victimization of persons [Sec 177(10)]: The vigil mechanism under sub-section (9) shall provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board's report.
Section178: Nomination and Remuneration Committee (NRC) and Stakeholders Relationship Committee (SRC) (New Provision)
| Comment - This new Section provides the mandatory constitution of NRC in the case of listed companies & other prescribed companies which shall consist of at least 3 non-executive director(s) with at least one half shall be independent director. The Chairperson may be appointed as member of NRC but cannot chair NRC. Such NRC shall determine the company's policies relating to the nomination and evaluation of every directors performance. It shall also determine company's policies relating to remuneration of the directors, KMP and other employees. Where the combined membership of the shareholders, debenture holders and other security holders is more than 1000 at any time during the financial year, the company shall constitute a SRC which shall consider and resolve the grievances of securities holders. The Chairperson of the Committee shall be a non-executive director. |
| TABLES | ||
| Nomination & Remuneration Committee (NRC) | Applicability | Every listed company or prescribed companies. |
| Composition | Minimum of 3 non-executive directors out of which not less than 1/2 shall be independent directors. | |
| Functions | To identify persons qualified to become directors & in senior management, recommend to the Board their appointment and removal & carry out evaluation of every director's performance, formulating the criteria for determining qualification, remuneration of directors, KMP etc. | |
| Stakeholders Relationship Committee (SRC) | Applicability | Every company with more than 1,000 security holders at any time during a FY. |
| Composition | A chairperson who shall be a non-executive director and such other members as may be decided by the Board. | |
| Functions | To consider and resolve the grievances of security holders of the company etc. | |
| Penalty | Company | Penalty Rs. 1 Lakh to Rs. 5 Lakhs |
| Officer in default | Imprisonment upto 1 year or fine Rs. 25000 to Rs. 1 Lakh or both | |
Ø Constitution of Nomination & Remuneration Committee (NRC) [Sec 178(1)]: The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the NRC consisting of three or more non-executive directors out of which not less than one half shall be independent directors; however, the chairperson of the company (whether executive or non-executive) may be appointed as a member of the NRC but shall not chair such Committee.
Ø Functions of NRC [Sec 178(2)]: The NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director's performance.
Ø Formulating the criteria for determining qualification, remuneration, etc by NRC [Sec 178(3)]: The NRC shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, KMP and other employees.
Ø Points to be considered by NRC while formulating the policy [Sec 178(4)]: The NRC shall, while formulating the policy under sub-section (3) ensure that—
v the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;
v relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
v remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long term performance objectives appropriate to the working of the company and its goals:
Provided that such policy shall be disclosed in the Board's report.
Provided that such policy shall be disclosed in the Board's report.
Ø Constitution of Stakeholders Relationship Committee [Sec 178(5)]: The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.
Ø Duties of Stakeholders Relationship Committee [Sec 178(6)]: The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
Ø Chairperson or Authorized member to attend general meeting [Sec 178(7)]: The chairperson of each of the committees constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.
"Senior Management" means personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads.
TIOL-DDT 2290
10.02.2014
Monday
10.02.2014
Monday
THE Public Accounts Committee of Parliament (2012-13) in their 66th Report had disapproved withdrawal of moneys by the Ministry of Finance (Department of Revenue) out of the Consolidated Fund of India (CFI) for interest payments on income tax refunds without Parliamentary approval. An expenditure on interest on refunds amounting to Rs. 10,499 crore was incurred by the CBDT in the year 2010-11 and a total expenditure of Rs. 37,365 crore over a period of five years between 2006-07 to 2010-11 without obtaining approval of Parliament through necessary appropriations. The practice was viewed as contravention of Article 114(3) of the Constitution of India by the C&AG. On a reference by the PAC Secretariat to the Ministry of Law and Justice, the Attorney General had opined that he was in complete agreement with the views of the C&AG. The Secretary, Revenue, Ministry of Finance had also assured the Committee that the Department would devise a procedure which is Constitutionally correct and administratively feasible. Thereafter, based on the observations of the Audit, depositions made by the representatives of the Ministry of Finance (Department of Revenue) and the opinion received from the AG, the Committee, in their Report [66th Report (15th Lok Sabha)] presented to Parliament on 26-02-13, had observed that they found no valid ground as to why the Department could not make broad estimates of the interest liability on tax refunds based on the studied trends of the past and seek excess grants where estimation fell short of Parliamentary authorisation. The Committee had, therefore, recommended that the Ministry of Finance follow the prescribed procedure in accordance with the Constitution and the Financial Rules to avoid such a deviation. Subsequently, on a reference made by the Ministry of Finance (Department of Revenue), the AG tendered a revised opinion which was just opposite to the opinion given by him to the Committee on an earlier occasion.
The Committee noted with deep concern that despite the Constitution prohibiting withdrawals from CFI except under Appropriation made by the legislature, the Department of Revenue has been making payment of interest on refunds without the approval of Parliament. The Committee reiterated their earlier recommendation that the Ministry devise a procedure in conformity with the Constitutional provisions and the Financial Rules so that interest payments on tax refunds are shown in the Annual Financial Statement (AFS) and Demand for Grants and receive Parliamentary approval as ordained by the Constitution.
The Committee noted that no tax can be imposed or collected, save by the authority of law as proclaimed by Article 265. In view of the same, any excess payment received by the State after the tax assessment is made, has to be refunded to the assessees. The amount received in excess of the tax liability, duly computed under the provisions of the Income Tax Act, is required to be refunded as per the procedure under Income Tax Act along with the interest arising thereon. The Committee did not accept the specious argument of the Ministry that the interest payments on such refunds are reductions from gross receipts. Since interest on refund of taxes is paid out from and out of the CFI, the withdrawal of moneys from the CFI for payment of interest requires authorisation of Parliament under Article 114(3) read with Article 266(3) of the Constitution.
The Committee noted that interest payments are the second largest component of revenue expenditure. The interest payment include payment of interest on Public Debt both internal and external, and other interest bearing liabilities of the Government which include insurance and Pension Funds, Provident Funds, Reserve Funds, deposits, interest on special securities issued to various Central Public Enterprises and interest payment on borrowing under market obligation scheme. The Committee noted that all the aforesaid interest payments come under the purview of revenue expenditure and form part of the Annual Budget and are appropriated with the prior approval of Parliament. The Committee further found that every year approximately 5-7 per cent of the total expenditure is incurred on interest payments by the Government.
The Committee found that the Department of Revenue has no option but to seek ex ante or ex post facto Parliamentary approval for interest payments on tax refunds. The Constitution leaves no doubt about the manner of authorization of expenditure or withdrawal of moneys from and out of the CFI other than seeking ex ante approval under Article 114 and 115(1)(a) or seeking ex post facto approval of Parliament under Article 115(1)(b) of the Constitution.
From the 96th Report of the PAC presented to the Lok Sabha on 06.02.2014.
We are RIGHT - says Government
THE Government is not prepared to accept the CAG and PAC view. In a clarification, the Finance Ministry says,
Government of India has been of the view that non reflection of interest on refund separately as expenditure in the Annual financial statement laid before both the houses of the Parliament did not violate any constitutional provision. It may also be clarified that the practice of not seeking specific appropriation for interest on refund as expenditure and treating it as reduction from gross tax revenue, has been consistently followed since the Income Tax Act came into force in 1961, with an exception in Budget Estimate (BE) for F.Y. 2001-2002, where estimated interest was separately shown as expenditure. However, in the Revised Estimate (RE) for the same year (as presented in the Budget for F.Y. 2002-2003), the interest was reduced to nil. No Budget Estimate (BE) for such interest was given in the Budgets for F.Y. 2002-2003 onwards. The learned Attorney General for India in his opinion dated 6.5.2013 also affirmed that refund on excess tax is not an expenditure under Article 112(1) of the Constitution and such outgo cannot be considered with other operational expenses.The Report of PAC dated 31.1.2014 was laid in Parliament on 6.2.2014 and the recommendations and observations of the Committee will receive due consideration and responded to within 6 months of the presentation, as per the requirement of the Committee.
Does it mean that just because the Government has been consistently and continuously committing a mistake, the mistake becomes the law? Government promises to respond within six months - the present Government has a maximum life of 75 days - who is going to respond?
Please also see
1. Interest on Refunds - Not Properly Accounted - CAG in DDT 1850 - 04.05.2012.2. Interest on Refunds of Income Tax/Customs/Excise/Service Tax - unauthorised and unconstitutional? in DDT 2266 - 06.01.2014
SECTION 234D OF THE INCOME-TAX ACT, 1961 - REFUNDS - INTEREST ON EXCESS REFUND - CBDT's CLARIFICATIONS ON NEWS REPORTS ABOUT HUGE INTEREST PAID BY GOVERNMENT ON REFUND OF EXCESS TAXES DURING 2006-2007 TO 2010-2011
PRESS RELEASE, DATED 8-2-2014
This is with reference to the news report appearing in The Hindu, Delhi on 8.2.2014 with the headline "Finance Ministry pays Rs. 37,365 cr. in interest on excess tax refund" and similar reports in some other newspapers. The emphasis of the reports is that huge interest was paid by the Government on refund of excess taxes during 2006-2007 to 2010-2011 and that as per PAC report of January 31, 2014; such interest is without the authorisation of Parliament.
2. These news reports have not taken into consideration the fact that the rate of interest and entitlement to interest on excess taxes are determined by the statutory provisions of the Income Tax Act, enacted by the Parliament. Interest payment is a statutory obligation and nondiscretionary in nature, which during 2006-2007 to 2010-2011 constituted 14.5% of refund. Such interest payment aggregated to Rs. 21263 crore during 2001-2002 to 2005-2006, constituting 20.79% of refunds.
3. Government has been of the view that non reflection of interest on refund separately as expenditure in the Annual financial statement laid before both the houses of the Parliament did not violate any constitutional provision. It may also be clarified that the practice of not seeking specific appropriation for interest on refund as expenditure and treating it as reduction from gross tax revenue, has been consistently followed since the Income Tax Act came into force in 1961, with an exception in Budget Estimate (BE) for F.Y. 2001-2002, where estimated interest was separately shown as expenditure . However, in the Revised Estimate for the same year (as presented in the Budget for F.Y 2002-2003), the interest was reduced to nil. No BE for such interest was given in the Budgets for F.Y 2002-2003 onwards. The learned Attorney General for India in his opinion dated 6.5.2013 also affirmed that refund on excess tax is not an expenditure under Article 112(1) of the Constitution and such outgo cannot be considered with other operational expenses.
4. The Report of PAC dated 31.1.2014 was laid in Parliament on 6.2.2014 and the recommendations and observations of the Committee will receive due consideration and responded to within 6 months of the presentation, as per the requirement of the Committee.
Regards,
CA VMVSR
Best Wishes
CA. V.M.V.SUBBA RAO
Chartered Accountant
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