IT : Where assessee surrendered income during search, explained manner in which it was derived in statement and paid tax as well as interest thereon, it was not necessary to file return before due date to get immunity from penalty for concealment under clause (2) of Explanation 5 to section 271(1)(c)

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[2013] 40 taxmann.com 244 (Chhattisgarh)

HIGH COURT OF CHHATTISGARH

Commissioner of Income-tax, Bilaspur C.G.

Abdul Rashid*

YATINDRA SINGH, CJ.
AND PRITINKER DIWAKER, J.

IT APPEAL NO. 33 OF 2004†

FEBRUARY 21, 2013

Section 271(1)(c), read with section 139 of the Income-tax Act, 1961 - Penalty - For concealment of income [Explanation 5] - Assessment year 1992-93 - During search, assessee surrendered income and made statement regarding manner in which it was derived - Assessee paid tax along with interest and filed belated return - Assessing Officer initiated penalty proceedings under section 271(1)(c) and held that assessee was not entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c) - Commissioner (Appeals) and Tribunal deleted penalty - Whether, where assessee made statement during search, explained manner in which surrendered amount was derived and paid tax as well as interest thereon, it was not necessary to file return before due date under section 139(1) to get benefit of immunity from penalty for concealment, under clause (2) of Explanation 5 to section 271(1)(c) - Held, yes [Para 25] [In favour of assessee]

HELD

■		The assessee is an individual. The due date for filing return under section 139(1) for the relevant assessment year 1992-93 was 31-8-1992. However, the return was filed belatedly i.e., after the due date for filing the return by the assessee under section 139(1), though a statement was made during search before the due date. The question is, whether it is the requirement of the law that the return should be filed before the due date, in order to get the benefit of immunity under clause (2) of the Explanation. [Para 11]
■		Since the time to file return was still there; the assessee could have filed his return till the last date. Infact, there cannot be any concealment of income unless the return was filed or could be there if no return is ever filed. However, the Explanation creates a legal fiction regarding concealment of income. [Para 13]
■		The Explanation provides that if during search, an assessee is found to be owner of asset that was acquired in the previous year for which return has not been filed, then it would be concealment of income. [Para 14]
■		It is because of the legal fiction under the Explanation that the amount surrendered by the assessee is treated to be concealed income. However, in two different contingencies, the section also provides immunity. These are mentioned in the clauses (1) and (2) to theExplanation. The legal fiction can be done away with, in case the assessee fulfils the conditions mentioned in either of them. [Para 15]
■		It was because of the fiction of law provided in the Explanation that surrendered amount was treated to be concealment. And if fiction is a poor ground for changing substantive rights then it should be strictly construed and immunity against the same, if any, should be liberally construed rather than other way round. [Para 17]
■		A Division Bench of the Allahabad High Court in CIT v. Radha Kishan Goel [2005] 278 ITR 454/[2006] 152 Taxman 290 explained the intention and object of immunity provided in the clauses to the Explanation as follows:

'The exception appears to be to provide an opportunity to the assessee to make a clean and fair confession and to surrender his income and also to deposit the tax and interest thereon which may result in an agreed assessment. The paramount intention appears to be that in the case of fair and clean confession and surrender of his income, during the course of search further litigation may be avoided and the Revenue may get the tax and interest, etc., at an earliest.' [Para 18]

■		If the intention and the object be as aforesaid, then there is no reason to deny the immunity especially, when the assessee had made a statement during search, explained the manner in which the surrendered amount was earned, and had paid tax along with interest on the surrendered amount. [Para 19]
■		The Supreme Court in the case of Asstt. CIT v. Gebilal Kanhaialal [2012] 348 ITR 561/210 Taxman 244/25 taxmann.com 214, explained that in order to get the benefit of the immunity, the following three conditions must be satisfied:

-		The first condition is that the assessee must make a statement under section 132(4) in the course of search stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1);
-		The second condition is that the assessee should specify in his statement under section 132(4), the manner in which such income stood derived;
-		The third condition is that the assessee has to pay the tax together with interest, if any, in respect of such undisclosed income. [Para 20]
-		The Supreme Court has not mandated filing of return before the due date in order to get benefit of immunity under clause (2) of theExplanation. [Para 21]

■		In case, the legislature wanted the fourth condition namely that return had to be filed before the time specified under section 139(1) then the words 'and files the same' would have also been added in clause (2) to the Explanation after the words 'sub-section (1) of section 139'. The fact that such words are not inserted indicates that such condition is not required. [Para 23]
■		In order to take benefit of the immunity under clause (2) of the Explanation, it is not necessary that the return should be filed before the due date. An assessee is entitled to the benefit of the immunity if the other conditions - namely making of a statement, providing therein the manner of obtaining surrendered income, and payment of tax along with interest on the surrendered income are satisfied. [Para 24]
■		In the present case, the CIT(A) as well as the Tribunal held that the assessee had made a statement during the search, explained the manner in which the surrendered amount was earned, and has paid the tax including interest thereon. There is no illegality in this finding. Thus, the assessee was entitled to get the benefit of immunity under clause (2) of the Explanation. [Para 25]

CASE REVIEW

CIT v. Radha Kishan Goel [2005] 278 ITR 454/[2006] 152 Taxman 290 (All.) (para 18) and Asstt. CIT v. Gebilal Kanhaialal [2012] 348 ITR 56/210 Taxman 244/25 taxmann.com 214 (SC) (para 20) followed.

CIT v. Abdul Rashid, ITAT Jabalpur, dated 10-6-2003 affirmed.

CASES REFERRED TO

Haddock v. Haddock (201 (1906) US 562) (para 16), CIT v. Radha Kishan Goel [2005] 278 ITR 454/[2006] 152 Taxman 290 (All) (para 18),Asstt.CIT v. Gebilal Kanhaialal [2012] 348 ITR 561/210 Taxman 244/25 taxmann.com 214 (SC) (para 20) and CIT v. S.D.V. Chandru [2004] 266 ITR 175/136 Taxman 537 (Mad.) (para 22).

Anand Dadaria for the Appellant. Anup Majumdar for the Respondent.

JUDGMENT

1. The main point involved in the present case is,

"Whether in order to get benefit of immunity mentioned in clause (2) of explanation-5 of section 271(1)(c)¹ of the Income Tax Act, 1961 (the Act) (the Explanation), is it necessary to file return before the due date specified under sub-section (1) of section 139 {section 139(1)} of the Act or not."

THE FACTS

2. The Income Tax Department (the Department) conducted a search in the residential premises of Shri Abdul Rashid (the Assessee) in the month of August, 1992. During the search, the Assessee surrendered an amount of Rs. 8,50,000/- and made a statement on 11.09.1992 regarding the manner in which the surrendered income was derived in the previous year ending on 31.03.1992.

3. Subsequently, the Assessee also paid tax along with interest on the surrendered amount on 05.10.1992.

4. The due date for filing return under section 139(1) of the Act for the Assessee for the assessment year (AY) 1992-93 was 31.08.1992. However, the return for the same was filed belatedly on 19.08.1994. The return included the surrendered income.

5. The Assessing Officer (the AO) started the assessment proceedings and the AO passed an assessment order on 21.03.1995 holding the taxable income of the Assessee to Rs. 11,18,990/-. This included the surrendered income as well.

6. The AO also initiated penalty proceedings under section 271 of the Act and imposed a penalty of Rs. 4,84,400/- on 29.10.1999 treating the Assessee to have concealed the particulars of the income to the extent of the surrendered amount in view of the Explanation.

7. The Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (the CIT-A). He held that the Assessee was entitled to the immunity mentioned under clause (2) of the Explanation and deleted the penalty.

8. The Department filed an appeal before the Income Tax Appellate Tribunal, Jabalpur Bench, Jabalpur (the Tribunal). It was dismissed on 10.06.2003. Hence, the present appeal.

POINTS FOR DETERMINATION

9. We have heard counsel for the parties. This appeal was admitted on the following substantial questions of law:

"(i)		Whether on the facts and in the circumstances of the case, learned Income Tax Appellate Tribunal was justified in law in upholding the cancellation of penalty of Rs. 4,84,000/- levied under Section 271(1) (c) of the Income Tax Act, 1961?
(ii)		Whether on the facts and in the cir of the case, learned Income Tax Appellate Tribunal was justified in law in holding that explanation-5 to Section 271(1)(c) squarely covered the case when the conditions stipulated in explanation-5 have not been fulfilled by the assessee?"

10. Nevertheless, the only aspect of the aforesaid questions that has been argued by the counsel for the Department is mentioned in the first paragraph of the judgement.

THE DECISION: NOT NECESSARY TO FILE RETURN BEFORE DUE DATE

11. The Assessee is an individual. The due date for filing return under section 139(1) of the Act for the relevant assessment year 1992-93 was 31st August, 1992. However, the return was filed belatedly on 19.08.1994 i.e. after the due date for filing the return by the Assessee under section 139(1) of the Act, though a statement was made during search before the due date on 11.08.1992. The question is, is it the requirement of the law that the return should be filed before the due date, in order to get the benefit of immunity under clause (2 ) of the Explanation.

12. The due date for filing return for the Assessee was 31.08.1992. However, subject to certain conditions, a belated return could also be filed. This was done by filing return on 19.08.1994.

13. The time to file return was still there; the Assessee could have filed his return till the last date. Infact, there cannot be any concealment of the income unless the return was filed or could be there if no return is ever filed. However, the Explanation creates a legal fiction regarding concealment of income.

14. The Explanation provides that if during search an Assessee is found to be owner of asset that was acquired in the previous year for which return has not been filed then it would be concealment of income.

15. It is because of the legal fiction under the Explanation that the amount surrendered by the Assessee is treated to be concealed income. However, in two different contingencies, the section also provides immunity. These are mentioned in the clause (1) and (2) to the Explanation. The legal fiction can be done away with, in case the Assessee fulfills the conditions mentioned in either of them.

16. In the dissenting judgement of Haddock v. Haddock (201 (1906) US 562), Justice Holmes rightly observed that,

'Of course this is a pure fiction and fiction is always a poor ground for changing substantive rights.'

17. In fact, there was no concealment. It was because of the fiction of law provided in the Explanation that surrendered amount was treated to be the concealment. And if fiction is a poor ground for changing substantive rights then it should be strictly construed and immunity against the same, if any, should be liberally construed rather than other way round.

18. A Division Bench of the Allahabad High Court in CIT v. Radha Kishan Goel [2005] 278 ITR 454/[2006] 152 Taxman 290 (All) explained the intention and object of immunity provided in the clauses to the Explanation as follows:

19. If the intention and the object be as aforesaid, then there is no reason to deny the immunity especially, when the Assessee had made a statement during search, explained the manner in which the surrendered amount was earned, and had paid tax along with interest on the surrendered amount.

20. This immunity in clause (2) to the Explanation was also considered by the Supreme Court in Asstt.CIT v. Gebilal Kanhaialal [2012] 348 ITR 561/210 Taxman 244/25 taxmann.com 214 (the Gebilal case). The Supreme Court explained that in order to get the benefit of the immunity, the following three conditions must be satisfied:

♦		The first condition is that the assessee must make a statement under s.132(4) in the course of search stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in s. 139(1);
♦		The second condition for availing of the immunity from penalty under s. 271(1)(c) is that the assessee should specify in his statement under s. 132(4), the manner in which such income stood derived;
♦		The third condition under cl. (2) is that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income.

21. In the Gebilal case, the Supreme Court has not mandated filing of return before the due date in order to get benefit of immunity under clause (2) of the Explanation.

22. A Division Bench of the Madras High Court in CIT v. S.D.V. Chandru [2004] 266 ITR 175/136 Taxman 537 has observed:

'The additional words which refer to the time specified in section 139(1) are only a reiteration of the legal requirement regarding the time within which returns should normally be filed.'

23. In case, the legislature wanted the fourth condition namely that return had to be filed before the time specified under section 139(1) of the Act then the words 'and files the same' would have also been added in clause (2) to the Explanation after the words 'sub-section (1) of section 139'. The fact that such words are not inserted indicates that such condition is not required.

24. In our opinion, in order to take benefit of the immunity under clause (2) of the Explanation, it is not necessary that the return should be filed before the due date. An Assessee is entitled to the benefit of the immunity if the other conditions—namely making of a statement, providing therein the manner of obtaining surrendered income, and payment of tax along with interest on the surrendered income—are satisfied.

25. In the present case, the CIT-A as well as the Tribunal have held that the Assessee had made a statement during the search, explained the manner in which the surrendered amount was earned, and has paid the tax including interest thereon. There is no illegality in this finding. Thus, the Assessee was entitled to get the benefit of immunity under clause (2) of the Explanation.

CONCLUSION

26. Our conclusions are as follows:

(a)		In order to get benefit of immunity under clause (2) of explanation-5 to section 271(1)(c) of the Act, it is not necessary to file the return before the due date provided that the Assessee had made a statement during the search, explained the manner in which the surrendered amount was derived, and paid tax as well as the interest on the surrendered amount;
(b)		In the present case all conditions as detailed in clause (2) to explanation-5 were satisfied;
(c)		The Assessee was entitled to the immunity.

In view of our conclusions, the appeal has no merit. It is dismissed.

P. SEN

*In favour of assessee.

†Arising out of CIT v. Abdul Rashid, ITAT Jabalpur, dated 10-6-2003.

1. 271. Failure to furnish returns, comply with notices, concealment of income, etc.

(1) If Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person―

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

Explanation 5.―Where in the course of a search under section 132, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income,―

(a)		for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or
(b)		for any previous year which is to end on or after the date of the search,

then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless,―

(1) …

(2) he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specified in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income.

IT : Where there was no intentional furnishing of inaccurate particulars of income and it was only due to a bona fide mistake assessee claimed deduction of NPA provision under section 36(1)(viia), rejection of said claim would not result in levying penalty under section 271(1)(c)

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[2013] 40 taxmann.com 283 (Punjab & Haryana)

HIGH COURT OF PUNJAB AND HARYANA

Commissioner of Income-tax–II, Amritsar

Pathankot Primary Co-operative Agriculture Development Bank Ltd.*

AJAY KUMAR MITTAL AND S.P. BANGARH, JJ.

IT APPEAL NO. 27 OF 2012 (O&M)†

SEPTEMBER 18, 2012

Section 271(1)(c), read with section 36(1)(viia), of the Income-tax Act, 1961 - Penalty - For concealment of income [Disallowance of wrong claim, effect of] - Assessment year 2006-07 - Assessee claimed deduction under section 36(1)(viia) in respect of NPA provision - Assessing Officer rejected assessee's claim and also passed a penalty order under section 271(1)(c) - Commissioner (Appeals) set aside penalty order holding that there was no intentional furnishing of inaccurate particulars of income in respect of claim of deduction of provision for NPA and it was only a bona fide mistake leading to wrong claim of deduction - Tribunal confirmed order of Commissioner (Appeals) - Whether finding recorded by authorities below being a finding of fact, no substantial question of law arose therefrom - Held, yes [Para 7] [In favour of assessee]

CASE REVIEW

Dy. CIT v. Pathankot Primary Co-operative Development Bank Ltd. [2012] 19 taxmann.com 45/50 SOT 51 (Asr.)(URO) (para 7) affirmed.

CASES REFERRED TO

CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC) (para 6).

Denesh Goyal for the Appellant.

ORDER

Ajay Kumar Mittal, J. - Delay in refiling the appeal is condoned.

2. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short "the Act") against the order dated 22.6.2011 passed by the Income Tax Appellate Tribunal, Amritsar Bench "A", Amritsar (hereinafter referred to as "the Tribunal") in ITA No. 372(ASR)/2010, for the assessment year 2006-07, claiming the following substantial question of law:—

"Whether on the facts and circumstances of the case, when the assessee has not discharged its onus that the wrong/inadmissible expenditure was a bona fide mistake with no intention of increasing its loss, the Hon'ble ITAT Bench was justified in law and on the facts in holding that mere making of claims, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee?"

3. Briefly the facts necessary for adjudication of the present appeal as narrated therein are that the assessee filed its return on 31.10.2006 declaring loss of Rs. 93,31,795/-. The said return was processed under Section 143(1) of the Act on 14.03.2007. The assessment was framed under Section 143(3) of the Act by the Assessing Officer vide order dated 20.10.2008 (Annexure A-2) and the loss was assessed at Rs. 22,65,588/-. The assessee had claimed expenses of Rs. 70,66,207/- for NPA provision under Section 36(viia) of the Act. The Assessing Officer made addition of Rs. 70,66,207/- holding that the assessee was not entitled to the said deduction. Accordingly, the penalty proceedings under Section 271(1)(c) of the Act were initiated for furnishing inaccurate particulars of income and penalty amounting to Rs. 22 lacs being 100% of tax sought to be evaded was imposed vide order dated 30.4.2009 (Annexure A-1). Against the penalty order dated 30.4.2009 (Annexure A-1), the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short "the CIT(A)"] who vide order dated 11.6.2010 (Annexure A-3) cancelled the penalty of ` 22 lacs levied under Section 271(1)(c) of the Act. Feeling dissatisfied, the revenue filed an appeal before the Tribunal. The Tribunal vide order dated 22.6.2011 (Annexure A-4) upheld the order of the CIT(A) and dismissed the appeal. Hence, the present appeal by the revenue.

4. We have heard learned counsel for the revenue.

5. Learned counsel for the revenue submitted that the quantum addition in the case of the assessee had been made by the Assessing Officer which had become final and in such a situation cancellation of penalty by the CIT(A) as well as by the Tribunal was arbitrary and bad in law.

6. Examining the legal position, it may be noticed that the Hon'ble Supreme Court in CIT v. Reliance Petroproducts (P) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC) had held that mere making of a claim which was ultimately found to be unsustainable may not by itself amount to furnishing of inaccurate particulars regarding the income. The revenue was required to show that the deduction claimed was against the statutory provision. It was recorded as under:—

"We have already seen the meaning of the word "particulars" in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not bring the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars."

7. In the present case, the assessee had claimed expenses of Rs. 70,66,207/- for NPA provision under Section 36(viia) of the Act in respect of debts which had become substandard/bad and doubtful thought it was not legally admissible. The income of the assessee was exempt under Section 80P of the Act and further the return which was filed was declaring loss and after disallowing the aforesaid expense, the balance still remained negative figure. The CIT(A) while deleting the penalty recorded that there was no intentional furnishing of inaccurate particulars of income in respect of claim of deduction of provision for NPA and it was due to bonafide mistake leading to wrong claim of deduction. The Tribunal while upholding the order of the CIT(A) concluded as under:—

'6. We have heard the rival submissions and have also carefully gone through the material available on record. There is no dispute that the provisions of section 36(viia) of the Act were not applicable to assessee's case as the primary cooperative agricultural development bank is explicitly excluded from claiming deduction on account of provisions for NPA. In the instant, the A.O. has categorically stated in the penalty order that the claim made by the assessee was wrong/inadmissible. In the instant case, the learned CIT(A) correctly observed that it was a bonafide mistake leading to wrong claim of deduction. It is seen that the assessee has contended that the provisions for NPA was made as per RBI guidelines in respect of which it has become sub-standard/bad and doubtful. The NPA provision was checked and verified by the auditor before finalizing the balance sheet. It is also seen that non performing assets are classified and quantified as per guidelines of RBI by the banks in respect of cases where recovery becomes difficult. Hence, the provision for NPA is integral part of the business of banking wherein such provision more or less corresponds to the bad debts. In the instant case, the auditors have checked this aspect and finalized the balance sheet after claiming the deduction of provision for NPA in the profit and loss account. It is also true that the assessee, being a co-operative bank is eligible to claim deduction of its entire income from the business of banking u/s 80P of the Act. Keeping in view the above facts it could be safely held that there was not a deliberate attempt to claim deduction of provision for NPA. In our view, the claim made by the assessee was bonafide though under the wrong interpretation of the provisions of section 36(iiia) of the Act. In our considered view, mere making of this claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. While taking such view, we are fortified by the decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. [2010] 230 CTR (SC) 320 wherein the Hon'ble Supreme Court held that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In that case, the Hon'ble Supreme Court concluded as under:—

"Merely because the assessee claimed deduction of interest expenditure which has not been accepted by the Revenue, penalty under s. 271 (1)(c) is not attracted; mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee."

The assessee claimed deduction, which was not accepted by the Revenue, penalty under section 271(1) (c) of the Act is not attracted. In the case of Reliance Petroproducts (P) Ltd. (supra), the Hon'ble Supreme Court conclude that "A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee". In our considered view, the ratio laid down by the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. (supra), is squarely applicable to the facts of the present case. In the instant case also, wrong claim made by the assessee was held inadmissible.

7. In the case of CIT v. The Shahabad Coop. Sugar Mills Ltd. [2011] 322 ITR 73 (P&H), the Hon'ble Punjab and Haryana High Court concluded that the assessee-society engaged in marketing of sugar by its members making of wrong claim under sections 80(2)(d) and 80P cannot be at par with concealment or giving of inaccurate information, which may invoke penalty under section 271(1)(c) of the Act.'

8. In view of the above findings which have not been shown to be perverse or erroneous in any manner, no question of law arises in the present appeal as the revenue was unable to show that the assessee had intentionally not furnished correct particulars. Accordingly, the present appeal is dismissed.

SUNIL

*In favour of assessee.

†Arising out of order of Tribunal in Dy. CIT v. Pathankot Primary Co-operative Development Bank Ltd. [2012] 19 taxmann.com 45/50 SOT 51 (Asr.)(URO).

IT: Where assessee-company purchased land through 'N' and money given to 'N' for that purchase was fully explained in assessee's books of account, such money could not be treated as assessee's undisclosed income

IT: Where assessee received amount of unsecured loan through banking channel and creditworthiness and identity of donors/creditors had been proved, such money could not be treated as unexplained

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[2013] 40 taxmann.com 285 (Allahabad)

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax-II, Lucknow

Shalimar Buildwell Pvt. Ltd.*

RAJIV SHARMA AND DR. SATISH CHANDRA, JJ.

IT APPEAL NO. 40 OF 2009†

OCTOBER 25, 2013

I. Section 69B of the Income-tax Act, 1961 - Undisclosed investments [Investment in land] - Assessment year 2005-06 - Assessee advanced a sum to one 'N' through banking channel to purchase a land - Later, 'N' resold same land to assessee-company - Assessing Officer treated said sum as unexplained income and made addition in hands of assessee - Whether it was a case of purchase of land by assessee-company through 'N' and when in hands of assessee-company source of such money was fully explained, addition made by Assessing Officer was not justified - Held, yes [Para 8] [In favour of assessee]

II. Section 68 of the Income-tax Act, 1961 - Cash credits [Unsecured loan] - Assessment year 2005-06 - Assessee had shown certain unsecured loan from 'L' HUF - Assessing Officer made addition of that amount in hands of assessee - Whether since in instant case money had come at all level through banking channel and creditworthiness and identity of donors/creditors had been proved, no addition could be made in hands of assessee - Held, yes [Para 13] [In favour of assessee]

D.D. Chopra for the Appellant. Dhruv Mathur and Mudit Agarwal for the Respondent.

ORDER

Dr. Satish Chandra, J. - The present appeal has been filed by the appellant-department under section 260A of Income Tax Act, 1961, against the judgment and order dated 05.12.2008 passed by Income Tax Appellate Tribunal, Lucknow in I.T.A.Nos. 534 and 648/Luc/2008, for the assessment year 2005-06.

2. On 19.11.2009, a Coordinate Bench of this Court has admitted the appeal on the following substantial questions of law:—

"1.		Whether in the facts and circumstances of the case, the Income Tax appellate Tribunal erred in law in deleting the addition of Rs.42.50 lacs under the head 'undisclosed investments' in the purchase of land?
2.		Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal erred in law in deleting the addition of Rs.10.00 lacs made by the Assessing Officer on account of unexplained loan?"

3. The brief facts of the case are that the assessee is a company engaged in development of land and construction. During the assessment year under consideration which is the second year of operation, the assessee filed the loss return for Rs.1,33,575/-. However, the A.O. has completed the assessment on positive income of Rs.51,16,420/-. During the scrutiny, the A.O. found that the assessee has deposited an amount of Rs.39 lacs in the bank account of Mr. Nankau. Actually, a sum of Rs.42.5 lacs was paid to him by the assessee who in return re-sold the land to the assessee. The A.O. has treated a sum of Rs.42.5 lacs as unexplained income and made the addition in the hands of the assessee. The first appellate authority as well as the Tribunal has deleted the addition.

4. At the same time, the A.O. made the addition of Rs.10 lacs pertaining to the loan received from M/s L.N.Seth, HUF. The same was upheld by the first appellate authority. However, the second appellate authority has deleted the addition. Being aggrieved, the department has filed the instant appeal.

5. With this background, Sri D.D.Chopra, learned counsel for the appellant-department submits that the assessee has advanced through banking channel a sum of Rs.39 lacs to Mr. Nankau to purchase the land. Later, Mr. Nankau has re-sold the same land to the assessee company for a consideration of Rs.42.5 lacs. He also submits that Mr. Nankau has officially received the amount and paid back the same to the assessee out of the books of account. He further submits that the status of Mr. Nankau at the relevant time, was penniless person prior to the purchase of the land by him. He belongs to the SC/ST category and he was not having any own means to purchase the land by making initial investment. The assessee's money was used. Later, the company has received back the land as well as the unaccounted money. Lastly, he justified the addition made by the A.O.

6. On the other hand, Sri Dhruv Mathur, learned counsel for the assessee submits that Mr. Nankau was a conduit to whom the money was provided by the assessee's company through banking channel. He has purchased the land and re-sold to the assessee's company. Mr. Nankau was examined on oath. No enquiry was made by the A.O. from the original seller of the land as to when and how and from whom they have received the money and sold the land, Mr. Nankau has withdrawn the money from the bank account to purchase the land. Mr. Nankau was also not examined. So, no addition is required. Lastly, he justified the impugned orders.

7. After hearing both the parties and on perusal of the record, it appears that the money was deposited by the company in the account of Mr. Nankau, who has withdrawn the same and purchased the land. Later, the land was re-sold to the assessee's company. In the hands of the assessee's company, the source of the advance was fully explained. In fact, the land was purchased by the assessee's company through Mr. Nankau. The A.O. made the addition merely on suspicion which is not desirable in the eye of law. The money used by the company through Mr. Nankau has been fully explained in the books of account. Nobody would like to convert the white money into black money.

8. In the present case, there is no material available on record to show that the assessee company has paid money in cash to the original seller of the land. When it is so, then we find no reason to interfere to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein, where an addition of Rs.42.5 lacs was deleted. The concrete findings of both the appellate authorities are hereby sustained.

9. Another grievance of the department is pertaining to the addition of Rs.10 lacs being credit balance in the account of M/s. L.N. Seth, HUF.

During the assessment year under consideration, the assessee has shown the unsecured loan from M/s. L.N.Seth, HUF in the balance-sheet. M/s. L.N.Seth, HUF had a bank account in the Karnataka Bank Ltd. in which he has received Rs.40 lacs and on the same day, disbursed Rs.32 lacs to the assessee. The assessee then returned a sum of Rs.31 lacs on 11.08.2004 leaving Rs.1 lac as credit from M/s L.N.Seth, HUF. Subsequently, M/s. L.N.Seth, HUF further gave a sum of Rs.5 lacs and Rs.4 lacs, total Rs.9 lacs, on 08.09.2004 and 12.10.2004 to the assessee. Thus, a sum of Rs.10 lacs remained outstanding against M/s. L.N.Seth, HUF in the balance sheet of the assessee.

10. The A.O. made an addition of this amount in the hands of the assessee which was upheld by the first appellate authority. However, the Tribunal has deleted the said addition.

11. Sri D.D.Chopra, learned counsel for the department submits that the assessee company has received the money from the father of the Director who received the money from his minor children and who in turn received the money as gift from NRE account of one Fatima Zohra Khan, who in turn received the money from Shri Shakeel Ahmed Khan, who claimed to be uncle of another director of the assessee company. He has drawn the attention to the chart prepared by the A.O. in his order to show that the same is unaccounted money. Lastly, he justified the addition made by the A.O.

12. On the other hand, learned counsel for the assessee has justified the order.

After hearing both the parties and on perusal of the record, it appears that M/s. L.N.Seth, HUF of the Karta and one of the Director of the assessee Company, has received the money from his minor children who had received the gift from NRE account. If the addition will have to be made, the same will have to be made in the hands of M/s. L.N. Seth, HUF, and certainly, not in the hands of the assessee company who has received the amount through banking channel from M/s L.N.Seth HUF, in whose account there was sufficient funds available.

13. In the instant case, money has come at all the level through banking channel and creditworthiness and identity of the donors/creditors have been proved. When it is so, then all the three conditions, namely, identity, creditworthiness; and banking transaction have been proved in the instant case. When it is so, then we find no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein.

14. The answer to both the substantial questions of law is in the favour of the assessee and against the department.

15. In the result, appeal filed by the department is hereby dismissed.

2014-TIOL-33-ITAT-HYD

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' HYDERABAD

ITA No.831/Hyd/2013
Assessment Year:2009-10

M/s MEENAKSHI INFRASTRUCTURE PVT LTD
HYDERABAD
PAN NO:AAECM0206D

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-16(2), HYDERABAD

Chandra Poojari, AM And Asha Vijayaraghavan, JM

Date of Hearing: December 12, 2013
Date of Decision: December 12, 2013

Appellant Rep by: Shri Ravi Sheshagiri Rao
Respondent Rep by: Smt K Haritha

Income Tax - Sections 10CCB, 80IA, 143(3) - Whether exemption u/s 80IA can be granted without Ministry of Commerce approval u/s 10CCB - Whether fulfillment of conditions neccessary for availing an exemption is sufficient in order to avail the benefits of the exemption - Whether mere moving an application to the Central Government for being notified under clause (iii) of section 80IA(4) to the Ministry of Commerce & Industry, can confer the benefit when the 2002 scheme is not in operation and not applicable - Whether in case there is search action in the assessee's premises, it can be a reason to remit the issue back to the file of AO to reconsider the issue as each assessment is independent and separate proceedings.

The assessee company, is engaged in the business of real estate, construction contracts, property development and development of software parks. It filed its return of income admitting total income of Rs. 12,83,15,990. AO completed the assessment u/s. 143(3) determining the taxable income of the assessee-company at Rs. 15,44,32,440 by disallowing exemption us. 80IA and excess depreciation. On appeal, CIT(A) observed that the assessee had not submitted any copy of agreements or approvals which were statutorily required u/s. 80IA. Further, as per the provisions of section 80IA(7), assessee was required to file along with the return of income an audit report, which was not submitted for claiming the deduction under that section. In fact the assessee admitted in its written submissions above that it had not obtained the formal certificate us 10CCB. Since the assessee had not complied with the vital statutory requirement as above, CIT(A) agreed with AO that the deduction u/s. 80IA cannot be allowable.

Held that,

++ similar issue came for consideration before this Tribunal in assessee's own case for A.Y. 2008-09 in ITA No. 19/Hyd/2012. The Tribunal vide order dated 20.6.2013 held that it is an admitted fact that there is no approval u/s. 10CCB of the Act for the assessee's project. The AR submitted before us that the assessee-company has applied for approval in time. However, the approval was not yet given by the Ministry of Commerce, Government of India. In the absence of statutory approval from Ministry of Commerce, Government of India, as per the provisions of section 80IA of the Act exemption cannot be granted;

++ similar issue came before this Tribunal in the case of SSPDL Ltd. vs. DCIT (2013-TIOL-421-ITAT-HYD), in which it is held that it is seen from the conditions laid down in the provisions of section 80IA(4)(iii) that approval from the Ministry of Commerce and Industry under the Industrial Park Scheme and subsequent notification in this regard by the CBDT is a sine qua non for claiming any deduction under the said section. Undisputedly, such approval or notification had not been received by the assessee. Under the circumstances, the Revenue authorities cannot be said to be incorrect in not allowing the claim of deduction u/s. 80IA. The contention of the assessee counsel is that the assessee got approval from the Ministry of Commerce and Industry vide their letter dated 22.12.2006 for setting up of infrastructure facility for STP unit under the STP Scheme at AlPHA CITY Industrial IT Park at Navalur Village, Old Mahabalipuram road, Kancheepuram, Chennai so as to grant deduction u/s. 80IA of the Act. According to the assessee, the assessee fulfilled the conditions laid down u/s. 80IA(4)(iii) and it is entitled for deduction u/s. 80IA of the Act. In this case admittedly the assessee applied for approval under Industrial Policy 2002 vide application dated 8.1.2007 under Non-automatic approval scheme. Under this scheme, the Empowered Committee could reject the application of the assessee after giving opportunity to the assessee and order of rejection shall be passed within 12 weeks from date of receipt of application. Assessee made a plea before us that since the Ministry of Commerce received the application of the assessee on 10.1.2007, the period of 12 weeks expired on 10.4.2007 and there was no communication until 15th January, 2009 and only on 15th January, 2009 it was informed to the assessee that the application of the assessee could not be considered under Industrial Policy Scheme 2002 and it was advised to apply to the CBDT under the Industrial Policy Scheme 2008. According to the assessee on 10.1.2007 when the application was made for approval, there was no such scheme and only scheme under which the assessee has to be considered is Industrial Policy 2002. The Ministry of Commerce having acted upon the application it should be granted with the approval under Industrial Policy, 2002;

++ he also brought to our notice that the Ministry of Commerce & Industries has granted approval under the IP Scheme, 1999 and 2002 to one assessee M/s. Haryana State Industrial and Infrastructure Development Corporation Ltd., Panchkula, Park at HSIIDC Ltd., Growth Centre, Bawal, NH-8, Dist. Rewari, Haryana vide their application No. 85/ SIA/IP/2008 dated 10.7.2008 approved on 17.3.2009. As such the assessee 's case has to be approved on similar lines. Further it was brought to our notice that the assessee also made application in response to the advice of Ministry of Commerce & Industries to the CBDT vide their application dated 5.3.2009. Further it was submitted that the assessee also filed a Writ Petition on 14.5.2009 before the Madras High Court against the delay made by the Department of Industrial Policy Promotion (DIPP), Ministry of Commerce & Industry which was pending. However, in the present case on the date of application made by the assessee, there was no scheme in operation under Industrial Park Policy, 2002. The 2002 scheme had lapsed as it was effective, notified and applicable up to 31st March, 2006. The 2002 scheme was no longer in operation. It is not possible to agree with the contention of the assessee that scheme 2002 was substituted with new scheme 2008. In our opinion, at the time of making initial application by the assessee to DIPP there was no scheme under Industrial Policy Scheme, 2002. A new scheme was framed and gazetted only on 8th January 2008 and this scheme has been implemented with effect from 1st April 2006. Being so, we cannot hold that the 2002 scheme continued to be in operation till 8th January, 2008. Being so, the assessee cannot take advantage or benefit u/s. 80IA(4)(iii) of the Act. A new scheme was framed on 8th January 2008 and made applicable with effect from 1st April, 2006. In view of the above, in our opinion, the assessee is not duly approved by the competent authority for availing benefit of deduction u/s. 80IA(4) of the Act, which is mandatory in nature. Mere moving an application to the Central Government for being notified under clause (iii) of section 80IA(4) on 8th January, 2007 to the Secretary, DIP & P, Ministry of Commerce & Industry, New Delhi cannot confer the benefit when the 2002 scheme was not in operation and not applicable. The benefit u/s. 80IA(4)(iii) could be availed by the assessee only after the approval by the DIPP under the scheme. Accordingly, the assessee cannot claim deduction u/s. 80IA(4) of the IT Act. This view of ours is also fortified by the judgement of Delhi High Court dated 24th January, 2012 in the case of Regency Soraj Infrastructures vs. Union of India & Ors., in WPC 13825/2009 and 7699/2010 = (2012-TIOL-106-HC-DEL-IT). Thus, the claim of the assessee in ground Nos. 2 to 7 is rejected;

++ being so, this issue is covered against the assessee. The learned AR tried to distinguish the above order of the Tribunal by submitting that in assessee's case application for approval was made in time and in the above case there was delay in submitting application for approval. Being so, the assessee may get approval from the Ministry of Commerce, Government of India and assessee's case to be remitted back to the Assessing Officer for fresh consideration after getting approval from Ministry of Commerce, Government of India on this issue. The assessee submitted that there was a search action in the case of the assessee u/s. 132 of the Act. The Assessing Officer is going to frame the assessment u/s. 153A of the Act covering this assessment year also. Accordingly, he prayed that the issue may be remitted back to the Assessing Officer. If there was search action in this case of the assessee and consequence of passing of order u/s. 153A, it cannot be a reason to remit the issue back to the file of the Assessing Officer to reconsider the issue as each assessment is independent and separate proceedings. Accordingly, this plea of the assessee is rejected. Further in the event of assessee getting approval from Ministry of Commerce, Govt. of India, it can file an application for restoration of this appeal. With that liberty to the assessee, we dismiss the appeal of the assessee. In the result, appeal of the assessee is rejected. Respectfully following the above order of the Tribunal, we are inclined to reject the claim of the assessee as the assessee has not fulfilled the basic condition provided u/s. 80IA(7) of the Act as per which the assessee is required to file along with the return of income an audit report in Form No. 10CCB. Being so, we confirm the order of the CIT(A) on this issue;

Assessee's appeal dismissed

Cases followed:

Regency Soraj Infrastructures vs. Union of India & Ors., (2012-TIOL-106-HC-DEL-IT)

SSPDL Ltd. vs. DCIT (2013-TIOL-421-ITAT-HYD)

ORDER

Per: Chandra Poojari:

This appeal by the assessee is directed against the order of the CIT(A)-V, Hyderabad dated 20.2.2013 for A.Y. 2009-10.

2. The assessee raised the following grounds:

1. The order of the learned CIT(A) is erroneous both on facts and in law.
2. The learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing the claim for deduction u/s. 80IA of the I.T. Act amounting to Rs. 2,49,43,580/-.

3. The learned CIT(A) ought to have appreciated the fact that simply because the audit report in Form 10CCB was not filed the deduction u/s. 80IA should not be disallowed.

4. The learned CIT(A) ought to have seen that the appellant complied with all the requirements of the provisions of sec. 80IA of the I.T. Act and, therefore, the assessee is eligible for deduction.

3. Brief facts of the case are that the assessee-company is engaged in the business of real estate, construction contracts, property development, development of software parks, etc., field its return of income on 30.09.2009 admitting total income of Rs. 12,83,15,990. The Assessing Officer completed the assessment u/s. 143(3) of the Act determining the taxable income of the assessee-company at Rs. 15,44,32,440 by disallowing exemption us. 80IA of the Act amounting to Rs. 2,49,43,580 and by disallowance of excess depreciation claim of Rs. 11,72,870.

4. On appeal, the CIT(A) observed that the assessee did not submit any copy of agreements or approvals which are statutorily required u/s. 80IA. Further, as per the provisions of section 80IA(7), the assessee is required to file along with the return of income an audit report in Form No. 10CCB, which was not submitted for claiming the deduction under that section. In fact the assessee admitted in its written submissions above that it had not obtained the formal certificate under section 10CCB. Since the assessee had not complied with the vital statutory requirement as above, the CIT(A) agreed with the Assessing Officer that the deduction u/s. 80IA cannot be allowable. Against this, the assessee is in appeal before us.

5. We have heard both the parties and perused the material on record. Similar issue came for consideration before this Tribunal in assessee's own case for A.Y. 2008-09 in ITA No. 19/Hyd/2012. The Tribunal vide order dated 20.6.2013 held as follows:

"9. We have heard both the parties and perused the material on record. In our opinion, it is an admitted fact that there is no approval u/s. 10CCB of the Act for the assessee's project. The AR submitted before us that the assessee-company has applied for approval in time. However, the approval was not yet given by the Ministry of Commerce, Government of India. In the absence of statutory approval from Ministry of Commerce, Government of India, as per the provisions of section 80IA of the Act exemption cannot be granted. Similar issue came before this Tribunal in the case of SSPDL Ltd. vs. DCIT (24 ITR (Trib) 290) = (2013-TIOL-421-ITAT-HYD). The Tribunal vide order dated 5.4.2013 held as under:

"6. We have heard both the parties and perused the material on record. It is seen from the conditions laid down in the provisions of section 80IA(4)(iii) of the IT Act read with Rule 18C of the IT Rules, 1962 that approval from the Ministry of Commerce and Industry under the Industrial Park Scheme and subsequent notification in this regard by the CBDT is a sine qua non for claiming any deduction under the said section. Undisputedly, such approval or notification had not been received by the assessee. Under the circumstances, the Revenue authorities cannot be said to be incorrect in not allowing the claim of deduction u/s. 80IA. The contention of the assessee counsel is that the assessee got approval from the Ministry of Commerce and Industry vide their letter dated 22.12.2006 for setting up of infrastructure facility for STP unit under the STP Scheme at AlPHA CITY Industrial IT Park at Navalur Village, Old Mahabalipuram road, Kancheepuram, Chennai so as to grant deduction u/s. 80IA of the Act. According to the assessee, the assessee fulfilled the conditions laid down u/s. 80IA(4)(iii) of the Act and it is entitled for deduction u/s. 80IA of the Act. In this case admittedly the assessee applied for approval under Industrial Policy 2002 vide application dated 8.1.2007 under Non-automatic approval scheme. Under this scheme, the Empowered Committee could reject the application of the assessee after giving opportunity to the assessee and order of rejection shall be passed within 12 weeks from date of receipt of application.

7. The assessee made a plea before us that since the Ministry of Commerce received the application of the assessee on 10.1.2007, the period of 12 weeks expired on 10.4.2007 and there was no communication until 15th January, 2009 and only on 15th January, 2009 it was informed to the assessee that the application of the assessee could not be considered under Industrial Policy Scheme 2002 and it was advised to apply to the CBDT under the Industrial Policy Scheme 2008. According to the assessee on 10.1.2007 when the application was made for approval, there was no such scheme and only scheme under which the assessee has to be considered is Industrial Policy 2002. The Ministry of Commerce having acted upon the application it should be granted with the approval under Industrial Policy, 2002.

8. He also brought to our notice that the Ministry of Commerce & Industries has granted approval under the IP Scheme, 1999 and 2002 to one assessee M/s. Haryana State Industrial and Infrastructure Development Corporation Ltd., Panchkula, Park at HSIIDC Ltd., Growth Centre, Bawal, NH-8, Dist. Rewari, Haryana vide their application No. 85/ SIA/IP/2008 dated 10.7.2008 approved on 17.3.2009. As such the assessee 's case has to be approved on similar lines. Further it was brought to our notice that the assessee also made application in response to the advice of Ministry of Commerce & Industries to the CBDT vide their application dated 5.3.2009. Further it was submitted that the assessee also filed a Writ Petition on 14.5.2009 before the Madras High Court against the delay made by the Department of Industrial Policy Promotion (DIPP), Ministry of Commerce & Industry which was pending. However, in the present case on the date of application made by the assessee, there was no scheme in operation under Industrial Park Policy, 2002. The 2002 scheme had lapsed as it was effective, notified and applicable up to 31st March, 2006. The 2002 scheme was no longer in operation. It is not possible to agree with the contention of the assessee that scheme 2002 was substituted with new scheme 2008. In our opinion, at the time of making initial application by the assessee to DIPP there was no scheme under Industrial Policy Scheme, 2002. A new scheme was framed and gazetted only on 8th January 2008 and this scheme has been implemented with effect from 1st April 2006. Being so, we cannot hold that the 2002 scheme continued to be in operation till 8th January, 2008. Being so, the assessee cannot take advantage or benefit u/s. 80IA(4)(iii) of the Act. A new scheme was framed on 8th January 2008 and made applicable with effect from 1st April, 2006. In view of the above, in our opinion, the assessee is not duly approved by the competent authority for availing benefit of deduction u/s. 80IA(4) of the Act, which is mandatory in nature. Mere moving an application to the Central Government for being notified under clause (iii) of section 80IA(4) on 8th January, 2007 to the Secretary, DIP & P, Ministry of Commerce & Industry, New Delhi cannot confer the benefit when the 2002 scheme was not in operation and not applicable. The benefit u/s. 80IA(4)(iii) could be availed by the assessee only after the approval by the DIPP under the scheme. Accordingly, the assessee cannot claim deduction u/s. 80IA(4) of the IT Act. This view of ours is also fortified by the judgement of Delhi High Court dated 24th January, 2012 in the case of Regency Soraj Infrastructures vs. Union of India & Ors., in WPC 13825/2009 and 7699/2010 = (2012-TIOL-106-HC-DEL-IT). Thus, the claim of the assessee in ground Nos. 2 to 7 is rejected."

10. Being so, this issue is covered against the assessee. The learned AR tried to distinguish the above order of the Tribunal by submitting that in assessee's case application for approval was made in time and in the above case there was delay in submitting application for approval. Being so, the assessee may get approval from the Ministry of Commerce, Government of India and assessee's case to be remitted back to the Assessing Officer for fresh consideration after getting approval from Ministry of Commerce, Government of India on this issue. The assessee submitted that there was a search action in the case of the assessee u/s. 132 of the Act. The Assessing Officer is going to frame the assessment u/s. 153A of the Act covering this assessment year also. Accordingly, he prayed that the issue may be remitted back to the Assessing Officer. If there was search action in this case of the assessee and consequence of passing of order u/s. 153A, it cannot be a reason to remit the issue back to the file of the Assessing Officer to reconsider the issue as each assessment is independent and separate proceedings. Accordingly, this plea of the assessee is rejected.

11. Further in the event of assessee getting approval from Ministry of Commerce, Govt. of India, it can file an application for restoration of this appeal. With that liberty to the assessee, we dismiss the appeal of the assessee.

12. In the result, appeal of the assessee is rejected."

6. Respectfully following the above order of the Tribunal, we are inclined to reject the claim of the assessee as the assessee has not fulfilled the basic condition provided u/s. 80IA(7) of the Act as per which the assessee is required to file along with the return of income an audit report in Form No. 10CCB. Being so, we confirm the order of the CIT(A) on this issue.

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

(Order pronounced in the open court on 12.12.2013)

2014-TIOL-45-HC-KOL-IT

IN THE HIGH COURT AT CALCUTTA

GA No. 3413 of 2013
W P No. 844 of 2013

SUMERMAL JAIN AND ANOTHER

THE DEPUTY COMMISSIONER OF INCOME TAX, KOLKATA AND OTHERS

Sanjib Banerjee, J

Dated: December 24, 2013

Appellants Rep by: Mr Anindya Mitra, Sr Adv., Mr J P Khaitan, Sr Adv., Ms Manju Agarwal, Adv.
Respondents Rep by: Mr S K Kapur, Sr Adv., Mr Ravi Kapur, Adv.

Income Tax - Writ - Sections 131, 132 - search - seizure - Whether in case search notices are issued after the initiation of search proceedings, such proceedings are valid - Whether the officer who issued the notices u/s 131(1A) can also be the authorised officer u/s 132(1) - Whether a Director General or a Director can be authorised officers u/s 132 (1)(B) - Whether a Joint Director or an Assistant Director or a Deputy Director, can also be considered as the authorised officer pertaining to a matter u/s 132(1).

Assessee, an individual, had contended that the search operations conducted at the residential and office premises were illegal. Assessee had carried several judgments to bear on the reasonableness of authorising a search and seizure operation u/s 132(1). In the earliest of the judgments, a Division Bench of the Delhi HC observed that the "information" had to be "something more than a mere rumour or a gossip or a hunch." It was added that when the action of issuance of an authorisation u/s 132 was challenged in court, "it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action u/s 132 was called for." The Division Bench emphasised that the "opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to interfere is very limited" as the court will not "act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action u/s 132 is called for."

According to the affidavit, in course of the investigation by the Revenue authorities into the affairs of a company by the name of EMTA Coal Limited, which was engaged in, inter alia, the development and operation of coal mines allotted to power utilities owned by the State and Central Governments, it was discovered that abnormally high amounts had been shown to had been paid on account of coal raising charges in FYs 2010-11, 2011-12 and 2012-13 to four companies by the names of Bardhaman Excavators Private Limited, Venus Excavators Private Limited, Landmark Excavators Private Limited and Zoom Transport Private Limited. Further enquiries into the business and affairs of such four companies conducted by the department revealed that such companies "were merely paper companies not providing any actual services to EMTA Coal Ltd."; that each of the four companies "had a small capital base with insignificant investment in plant and machinery"; that their receipts from EMTA ranged between Rs.25 crore and Rs. 45 crore per year during the relevant years; that there was a common auditor in all four companies; and, such companies were discovered to be non-functioning entities existing only on paper. The affidavit filed refers to "accommodation entries" for the EMTA Group being arranged through companies managed by the first petitioner, who appears to be the father of the second petitioner; that the addresses of the residential premises of the persons shown to be the directors of the four companies were traced to a firm by the name of Saraogi Jain and Co., which was controlled by the petitioners; that the directors of the four companies could not be traced out and appeared to be "dummy directors" which led to an inference of the four companies being used for "booking bogus expenses" by EMTA Coal Limited at the behest of the petitioners since the petitioners had acted as authorised representatives of two of the four companies in respect of theassessment records for two of the three financial years. It was stated in affidavit that there was "clear evidence to believe that the chain for siphoning the income of EMTA Group by showing bogus expenses had been masterminded by the petitioners" and the investigation has not been completed.

Assessee had contended that they were not available at the time of the search and seizure operation. There was a minor matter of Section 132(4) that the petitioners may have overlooked. Such provision recognises that the "authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing …" Any statement obtained during such examination may thereafter be used in evidence in any proceedings under the Act. The explanation to the sub-section provides that the examination of any person under the sub-section "may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding" under the Act. In the petitioners making themselves scarce at the time of the search and seizure operations, the authorised officer was denied the opportunity of exercising his authority u/s 132(4). It was thus that the subsequent notices issued u/s 131(1A) now fall for consideration. The notices issued under such provision on October 28, 2013 and November 18, 2013 had been assailed on the ground of lack of jurisdiction; there being no "reason to suspect" as required under the relevant sub-section; and, the notices not disclosing the basis therefor.

Held that,

++ the authority of the officer who has issued the two notices has been questioned on the ground that the notices were issued after the search and seizure operation was carried out and that the officer who has issued the notices was also the authorised officer within the meaning of Section 132(1). The first limb of the challenge on the count of authority is fashioned on the expression, "before he takes action under clauses (i) to (v) of that sub-section". It is the petitioners' submission that such clause governs the exercise of the authority to take any step u/s 131(1A) irrespective of the designation of the official exercising the authority. The alternative argument - the second limb - is that since the officer who issued the notices u/s 131(1A) in this case was also the authorised officer u/s 132(1), the disability envisaged by the relevant expression attached to such officer to render him incompetent to issue the notice;

++ director General or the four other designated officers had authority to exercise the powers conferred u/s 131(1), provided such officer has "reason to suspect" that any of the situations as envisaged in sub-section 131(1A) has arisen. On the other hand, if it is the authorised officer referred to in Section 132(1) who exercises the authority u/s 131(1A), such officer is competent to exercise such authority only prior to taking action under clauses (i) to (v) of Section 132(1). It is elementary on any reading of Section 131(1A) that the five categories of officers, other than the authorised officer referred to in Section 132(1), may exercise the authority under such provision, subject to meeting the other statutory requisites but without being impaired by the search and seizure process having been conducted u/s 132(1). With respect, the provision admits of no other construction or interpretation. The word "he" in the expression "before he takes action under clauses (i) to (v) of that sub-section", refers only to the authorised officer and not to the other five officers named earlier in the sub-section. Since a Director General or a Director cannot be authorised officers under Section 132 (1)(B) of the Act, the word "he" will not govern such officers; and, as a corollary the word "he" will not govern the three other officers indicated by designation in the opening limb of Section 131(1A) of the Act. The only other question that remains is whether a Joint Director or an Assistant Director or a Deputy Director, if such official is also the authorised officer pertaining to a matter under Section 132(1) of the Act, would be subject to the disability envisaged by the expression "before he takes action under clauses (i) to (v) of that sub-section". The answer to such question lies in the appreciation of the distinction made between superior officers named in the Section by designation and other officers who may be authorised officers within the meaning of Section 132(1). Such distinction is apparent from the proviso to sub-section (3) of Section 131. Such sub-section authorises the officers referred to in sub-sections (1), (1A) and (2) to impound and retain books of account or other documents produced in course of any proceedings under the Act. The proviso to Section 131(3) makes a distinction in the procedure to be adopted for impounding such material and the period for which such material may be retained by the authority, based on the designation of the authority;

++ since the notices u/s 131(1A) were issued in this case by a Deputy Director, he had due authority therefor. Given that such officer possessed the treasure trove of information pertaining to the aforesaid four companies connected with the EMTA group and the petitioners' nexus therewith, he had enough reason to suspect that income had been concealed or was likely to be concealed by the petitioners who were subject to his jurisdiction. There is no requirement, far less any statutory fiat, for the reasons to suspect or the basis for the suspicion to be disclosed in any notice issued u/s 131(1A). In any event, the first of such notices that the petitioners assail, the one dated October 28, 2013, refers to a previous notice u/s 131(1A) that required the petitioners to appear before the Deputy Director on August 2, 2013. The factum of such previous notice having been issued has been ignored by the petitioners. Despite a pointed query in such regard, the petitioners have not been able to demonstrate any averment in the subsequent application filed in court that the petitioners did not receive such notice. There is no merit in the petition and the petitioners could not have had any reason to believe that this exercise of kite-flying in court could have relieved them in any manner. That brings the discussion to why this petition and the subsequent application may have been instituted. It seems that the petitioners may either have taken a chance or may have instituted the petition for the purpose of temporarily warding off the inevitable by preying on the misplaced deference to the principle of sub judice that government officials betray in their conduct;

++ sections 131 and 132 of the Act are but the means to an end and not an end in themselves. It is evident that the petitioners perceived that if the means could be scuttled, the end would not come. The petition and the time taken to prosecute it are not appreciated. WP No. 844 of 2013 and GA No. 3413 of 2013 are dismissed with costs assessed at Rs. 6 lakh to be paid by the petitioners immediately to the department. It is recorded that the respondents were called upon only for the limited purpose of dealing with the judgments cited by the petitioners, which opportunity the respondents used by placing the "satisfaction note" before court. The respondents were not permitted to cite authorities in support of the view taken by the court in this matter. Certified website copies of this judgment, if applied for, be urgently made available to the parties, subject to compliance with all requisite formalities. Later the petitioners seek a stay of the operation of this order which is declined.

Assessee's writ dismissed

JUDGEMENT

Per: Sanjib Banerjee:

1. In some ways this petition epitomises how resourceful litigants hold the judicial system to ransom and subvert due process if the slightest uncomfortable question is posed as to the manner of their amassing the wealth they flaunt. The observations herein should be confined to the limited import of the issues raised in the present proceedings and should not spill over to prejudice the petitioners elsewhere; but it cannot be missed that the petitioners have invited the decision and the ramifications thereof on themselves.

2. The petition seeks a declaration that the search and seizure operation conducted at the residence and the office of the petitioners on August 1, 2013 was illegal. As a consequence, the petitioners seek appropriate writs of mandamus, prohibition and certiorari to arrest the effect of what the petitioners perceive to be an illegal process initiated under Section 132 of the Income Tax Act, 1961.

3. Ordinarily, the filing of the petition itself would have served the purpose for which the petitioners carried it to court; for the challenge to the propriety of the search and seizure under Section 132 of the Act would require affidavits to be called for and push the matter to hearing. It is now common knowledge that hearing matters are not taken up in a hurry as courts and judges are not afforded the kind of time that is necessary for hearing matters to be taken up after tackling the weight of the motions that are traditionally placed ahead in the cause list. Unfortunately for these petitioners, the hearing was expedited and taken up, whereupon an application has been filed in which notices issued under Section 131 of the Act subsequent to the institution of the petition have been sought to be challenged.

4. Strictly speaking, the challenge to the notices under Section 131 of the Act may not fall within the limited scope of the petition, which is confined to the propriety of the search and seizure process conducted on August 1, 2013 and August 22, 2013. However, the refusal to entertain the challenge to the subsequent notices may entail multiplicity of proceedings; and, thus, such aspect of the matter is also dealt with.

5. Section 132 of the Act permits certain high officers of the Income Tax Department to authorise certain specified classes of officers to conduct search and seizure operations as indicated in the Section, upon the high officer, in consequence of information in his possession, having reason to believe that any of the three conditions enumerated in clauses (a), (b) or (c) of sub-section (1) had arisen. The relevant part of Section 132(1) is set out for convenience, without indicating the nature of the search that may be conducted, since such aspect is irrelevant in the present context:

"132. (1) Where the Director General or Director or the Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner in consequence of information in his possession, has reason to believe that -

(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under subsection (4) of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or

(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Incometax Act, 1922 (11 of 1922), or under this Act, or

(c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property), then,-

(A) the Director General or Director or the Chief Commissioner or Commissioner, as the case may be, may authorise any Additional Director or Additional Commissioner or Joint Director, Joint Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer, or

(B) such Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner, as the case may be, may authorise any Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer.…"

6. It is evident from the plain language of the provision that there has to be information possessed by such high officer as named in the opening limb of the sub-section; and, that such information in the possession of the relevant officer should be the basis for the officer to believe that any of the three situations as recognised in clauses (a), (b) or (c) of the sub-section had arisen or was likely to arise, before such high officer can authorise one of the named subordinate officers to conduct a search and seizure operation in the manner provided. Clause (a) deals with a person who has failed to produce such material as was required of him pursuant to a summons issued under some specified provisions of the Act. The expression "in consequence of information in his possession, has reason to believe that" governs all three clauses. In respect of clause (a) there must be information that a summons under any of the specified provisions has been dishonoured. However, in respect of clauses (b) and (c) of the sub-section, the expression "in consequence of information in his possession, has reason to believe that" would imply that there is such information available with the high official that would prompt a prudent person to apprehend that there was a likelihood of either situation covered by the last two clauses arising.

7. The "reason to believe" has to be based on the "information" available with the high official for a reasonable person in the position of the high official to anticipate a breach or apprehend non-compliance of the kind envisaged in clause (b) or clause (c) of the sub-section. The "reason to believe" has, thus, to point towards a likelihood of either situation envisaged in clause (b) or clause (c) of the sub-section and such "reason to believe" must be founded on the information in the possession of the relevant high official before such official can authorise a search and seizure operation to be carried out under the provision. The nexus between the information and the situation envisaged in either clause (b) or clause (c) of the provision is the real test; for, if the nexus is discerned, it may be said that the high official had "reason to believe" based on the "information in his possession" to apprehend the breach or failure as contemplated in sub-section (b) or (c) of the provision. It is the extent of the information that will tell upon the "reason to believe". Again, in exercise of judicial review, the court will only look at the nexus and not assess it either with any degree of mathematical precision or by placing the court in the position of the authorising official. Only if it appears that the subjective satisfaction of the authorising official as implied by the expression "reason to believe" could not have been arrived at on the basis of the "information in his possession", that the court would interdict the process or the consequence of the search and seizure operation that may have been carried out.

8. The petitioners have carried several judgments to bear on the reasonableness of authorising a search and seizure operation under Section 132(1) of the Act. In the earliest of the judgments, reported at 194 ITR 32 (L.R. Gupta v. Union of India), a Division Bench of the Delhi High Court observed that the "information" had to be "something more than a mere rumour or a gossip or a hunch." It went on to add that when the action of issuance of an authorisation under Section 132 was challenged in court, "it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action under Section 132 was called for." The Division Bench emphasised that the "opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to interfere is very limited" as the court will not "act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under section 132 is called for."

9. In the judgments reported at 215 ITR 234 [Janak Raj Sharma v. Director of Inspection (Investigation)] and 242 ITR 302 (Ajit Jain v. Union of India), the "information" was received from the Central Bureau of Investigation which the courts regarded as not being enough material on facts for any "reason to believe" to be founded thereon for initiating action under Section 132(1) of the Act.

10. It is now necessary to dwell awhile on the affidavit that has been filed by the department to ascertain as to whether the warrant of authorisation issued by the Director of Income Tax (Investigation) could reasonably have been issued on the basis of the information in the possession of such official. The "satisfaction note" has been produced in court and it is evident therefrom that the matters referred to in paragraphs 6 to 25 of the affidavit filed by the department are substantially reflected in the note-sheet on the basis of which the official formed his opinion and authorised the search and seizure operation to be undertaken.

11. According to the affidavit, in course of the investigation by the revenue authorities into the affairs of a company by the name of EMTA Coal Limited, which is engaged in, inter alia, the development and operation of coal mines allotted to power utilities owned by the State and Central Governments, it was discovered that abnormally high amounts had been shown to have been paid on account of coal raising charges in financial years 2010-11, 2011-12 and 2012-13 to four companies by the names of Bardhaman Excavators Private Limited, Venus Excavators Private Limited, Landmark Excavators Private Limited and Zoom Transport Private Limited. Further enquiries into the business and affairs of such four companies conducted by the department revealed that such companies "were merely paper companies not providing any actual services to EMTA Coal Ltd."; that each of the four companies "had a small capital base with insignificant investment in plant and machinery"; that their receipts from EMTA ranged between Rs.25 crore and Rs. 45 crore per year during the relevant years; that there was a common auditor in all four companies; and, such companies were discovered to be non-functioning entities existing only on paper.

12. The affidavit refers to "accommodation entries" for the EMTA Group being arranged through companies managed by the first petitioner, who appears to be the father of the second petitioner; that the addresses of the residential premises of the persons shown to be the directors of the four companies were traced to a firm by the name of Saraogi Jain and Co., which is controlled by the petitioners; that the directors of the four companies could not be traced out and appeared to be "dummy directors" which led to an inference of the four companies being used for "booking bogus expenses" by EMTA Coal Limited at the behest of the petitioners since the petitioners had acted as authorised representatives of two of the four companies in respect of the assessment records for two of the three financial years. Paragraph 22 of the department's affidavit says that there was "clear evidence to believe that the … chain for siphoning the income of EMTA Group by showing bogus expenses had been … masterminded by the petitioners" and the investigation has not been completed. Paragraph 23 of the affidavit refers to "fraud on revenue on a massive scale … designed, executed and implemented" by the petitioners.

13. This is the quality of the "information" that the Director of Income Tax (Investigation), Kolkata, had and on which he founded the "reason to believe" that a situation covered by either clause (b) or clause (c) of Section 132(1) of the Act, or both, could arise. In the light of the facts covering the gamut of "information" in the possession of the authorising official in this case, it can scarcely be said that the "reason to believe" could not have been founded thereon to apprehend either a situation under clause (b) or clause (c) of the sub-section. Indeed, the wealth of the information that was available with the authorising official was so overwhelming that no reasonable person could have held any belief to not authorise the search and seizure operation.

14. And, as they say, the proof of the pudding is in the eating: the petitioners were not available at the time of the search and seizure operation. There is a minor matter of Section 132(4) of the Act that the petitioners may have overlooked. Such provision recognises that the "authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing …" Any statement obtained during such examination may thereafter be used in evidence in any proceedings under the Act. The explanation to the sub-section provides that the examination of any person under the sub-section "may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding" under the Act. In the petitioners making themselves scarce at the time of the search and seizure operations, the authorised officer was denied the opportunity of exercising his authority under 132(4) of the Act.

15. It is thus that the subsequent notices issued under Section 131(1A) of the Act now fall for consideration. The notices issued under such provision on October 28, 2013 and November 18, 2013 have been assailed on the ground of lack of jurisdiction; there being no "reason to suspect" as required under the relevant sub-section; and, the notices not disclosing the basis therefor.

16. The authority of the officer who has issued the two notices has been questioned on the ground that the notices were issued after the search and seizure operation was carried out and that the officer who has issued the notices was also the authorised officer within the meaning of Section 132(1) of the Act. The first limb of the challenge on the count of authority is fashioned on the expression, "before he takes action under clauses (i) to (v) of that sub-section". It is the petitioners' submission that such clause governs the exercise of the authority to take any step under Section 131(1A) of the Act irrespective of the designation of the official exercising the authority. The alternative argument - the second limb - is that since the officer who issued the notices under Section 131(1A) of the Act in this case was also the authorised officer under Section 132(1) of the Act, the disability envisaged by the relevant expression attached to such officer to render him incompetent to issue the notice.

17. Neither limb of submission on such aspect of the matter is of any merit. Grammatically, it would make a mockery of the expression "or the authorised officer referred to in sub-section (1) of Section 132 before he takes action under clauses (i) to (v) of that sub-section", which has parenthetical commas at either end to suggest such expression being a whole unto itself and an alternative to the cases of the authority under the provision being exercised by the Director General or a Director or a Joint Director or an Assistant Director or a Deputy Director by virtue of the opening lines of the sub-section preceding the relevant clause. In other words, the Director General or the four other designated officers have authority to exercise the powers conferred under Section 131(1) of the Act, provided such officer has "reason to suspect" that any of the situations as envisaged in sub-section 131(1A) has arisen. On the other hand, if it is the authorised officer referred to in Section 132(1) of the Act who exercises the authority under Section 131(1A) of the Act, such officer is competent to exercise such authority only prior to taking action under clauses (i) to (v) of Section 132(1) of the Act. It is elementary on any reading of Section 131(1A) of the Act that the five categories of officers, other than the authorised officer referred to in Section 132(1) of the Act, may exercise the authority under such provision, subject to meeting the other statutory requisites but without being impaired by the search and seizure process having been conducted under Section 132(1) of the Act. With respect, the provision admits of no other construction or interpretation.

18. The word "he" in the expression "before he takes action under clauses (i) to (v) of that sub-section", refers only to the authorised officer and not to the other five officers named earlier in the sub-section. The word "he" followed by "takes action under clauses (i) to (v)" identifies the "he" to be such person who can take action under Section 132(1) (i) to (v) of the Act. Since a Director General or a Director cannot be authorised officers under Section 132 (1)(B) of the Act, the word "he" will not govern such officers; and, as a corollary the word "he" will not govern the three other officers indicated by designation in the opening limb of Section 131(1A) of the Act. The only other question that remains is whether a Joint Director or an Assistant Director or a Deputy Director, if such official is also the authorised officer pertaining to a matter under Section 132(1) of the Act, would be subject to the disability envisaged by the expression "before he takes action under clauses (i) to (v) of that sub-section". The answer to such question lies in the appreciation of the distinction made between superior officers named in the Section by designation and other officers who may be authorised officers within the meaning of Section 132(1) of the Act. Such distinction is apparent from the proviso to sub-section (3) of Section 131 of the Act. Such sub-section authorises the officers referred to in sub-sections (1), (1A) and (2) to impound and retain books of account or other documents produced in course of any proceedings under the Act. The proviso to Section 131(3) of the Act makes a distinction in the procedure to be adopted for impounding such material and the period for which such material may be retained by the authority, based on the designation of the authority.

19. Two judgments have been placed by the petitioners on Section 131(1A) of the Act. The Division Bench judgment of the Allahabad High Court reported at 266 ITR 597 [Anita Sahai v. Director of Income-Tax (Investigation)] broadly accepted the submission made on behalf of the petitioner in that case that Section 131(1A) of the Act could be invoked prior to action being taken under Section 132(1)(i) to (v) of the Act, though the issue in that matter did not turn on the acceptance of such submission. A Single Bench judgment of the Madhya Pradesh High Court reported at 246 ITR 363 [Arjun Singh v. Assistant Director of Income-Tax (Investigation)] merely held that the power under Section 131(1A) "cannot be said to be an independent power in itself but is the power for the purpose of making enquiry and investigation relating to any income which has been concealed or is likely to be concealed …" Neither decision can bring much cheer to the hopeless cause that the petitioners espouse in the present case. Since the notices under Section 131(1A) of the Act were issued in this case by a Deputy Director, he had due authority therefor. Given that such officer possessed the treasure trove of information pertaining to the aforesaid four companies connected with the EMTA group and the petitioners' nexus therewith, he had enough reason to suspect that income had been concealed or was likely to be concealed by the petitioners who were subject to his jurisdiction. There is no requirement, far less any statutory fiat, for the reasons to suspect or the basis for the suspicion to be disclosed in any notice issued under Section 131(1A) of the Act. In any event, the first of such notices that the petitioners assail, the one dated October 28, 2013, refers to a previous notice under Section 131(1A) of the Act that required the petitioners to appear before the Deputy Director on August 2, 2013. The factum of such previous notice having been issued has been ignored by the petitioners. Despite a pointed query in such regard, the petitioners have not been able to demonstrate any averment in the subsequent application filed in court that the petitioners did not receive such notice.

20. There is no merit in the petition and the petitioners could not have had any reason to believe that this exercise of kite-flying in court could have relieved them in any manner. That brings the discussion to why this petition and the subsequent application may have been instituted. It seems that the petitioners may either have taken a chance or may have instituted the petition for the purpose of temporarily warding off the inevitable by preying on the misplaced deference to the principle of sub judice that government officials betray in their conduct.

21. Sections 131 and 132 of the Act are but the means to an end and not an end in themselves. It is evident that the petitioners perceived that if the means could be scuttled, the end would not come. The petition and the time taken to prosecute it are not appreciated. WP No. 844 of 2013 and GA No. 3413 of 2013 are dismissed with costs assessed at Rs. 6 lakh to be paid by the petitioners immediately to the department.

22. It is recorded that the respondents were called upon only for the limited purpose of dealing with the judgments cited by the petitioners, which opportunity the respondents used by placing the "satisfaction note" before court. The respondents were not permitted to cite authorities in support of the view taken by the court in this matter.

23. Certified website copies of this judgment, if applied for, be urgently made available to the parties, subject to compliance with all requisite formalities.

(Sanjib Banerjee, J.)

2014-TIOL-46-HC-RAJ-IT

IN THE HIGH COURT OF RAJASTHAN

AT JAIPUR

D.B. Income Tax Appeal No. 204/2011

COMMISSIONER OF INCOME TAX, JAIPUR-II

M/s VINAYAK PLASTO CHEM PVT LTD

Ajay Rastogi And J K Ranka, JJ

Dated : December 4, 2013

Appellant Rep. by : Mr. R B Mathur
Respondent Rep. by : None

Income Tax - Sections 69, 143(3), 158BC, 158BD, 260A - search - project report - undisclosed investment - Whether in case AO has not recorded his satisfaction before issuing notice u/s 158BD, it is binding on the assessee - Whether in case assessee has not transferred the case to AO having jurisdiction over the matter, assessment can be made u/s 158BC - Whether on the basis of merely a project report, addition on account of undisclosed investment can be made - Whether an addition has to be based on proper foundation, an estimated project report can be a criteria of evaluating actual investment made by the assessee - Whether u/s 69, burden of proof is on the assessee.

Assessee is a Private Limited company incorporated with an object of manufacturing cables, conductors, electrical transformers etc. Its residential and business premises was searched. During which, certain incriminating documents in the nature of computerized project report was found and seized, which pertained to assessee. Thus, notice u/s 158BD r.w.s 143(3) was issued requiring the assessee to file a return as contemplated u/s 158BD r.w.s 158BC. The assessee submitted a return for the block assessment declaring nil income. It was revealed from the seized premises of Vaidya Narayan Das Swami and as per the project report that the assessee had prepared a project report for availing loan from the financial institutions on plot of land and thereafter, after initial purchase, work shed building construction was made and assessee started production from 15.1.1997. On this, assessee replied that it was to obtain loan, it got prepared the project report for submitting to various financial institutions from where the assessee was willing to obtain loan and it was submitted that it was a tentative project report so that the company may obtain a loan and effectively make alteration and modification and construction necessary for the industry, which was needed by it. It was further submitted that whatever investment had been made was duly reflected in the books of accounts. However, the books of accounts had been lost and even an intimation report was submitted with the Police Station. Further, it was submitted that it contains only projection of the figures and do not suggest that assessee had made any investment or incurred cost to that extent. It was further submitted that the project report did not pertain to it and merely because the name of the assessee finds place, there was neither signatures of any of the Directors or relatives on these papers nor the date had not been mentioned and even the authenticity of the report was doubtful. However, the AO was not satisfied and dis-satisfied with the explanation offered by the assessee an addition of Rs.36,21,692 was made as per the figures mentioned in the project report. On the objection of initiating proceedings u/s 158BD that the proceedings had wrongly been initiated, AO held that the proceedings had been validly initiated and accordingly assessment was finalised. On appeal, CIT (A) regarding the issue of initiation of proceedings u/s 158BD, had concluded that the order was within jurisdiction. In so far as the addition made on the basis of project report was concerned, it had concluded that there was no justification for the said addition. On further appeal before Tribunal, Revenue had challenged the deletion of the addition on the basis of the project report to the extent of Rs.36,21,692/-, the assessee challenged the initiation of proceedings u/s 158BD. Tribunal had concluded that not only the addition had rightly been deleted by the CIT (A), but also accepted the contention on behalf of the assessee that the proceedings initiated u/s 158BD was bad and even quashed the assessment.

Before HC, the Revenue's counsel had submitted that Tribunal in a summary manner concluded that proceedings u/s 158BD were not proper without bringing any material on record. It was contended that the incriminating document namely project report having been found in search, an AO could validly form his opinion on such project report and proceedings u/s 158BD could have been initiated. It was further contended that Tribunal had erred in law in quashing the assessment. It was also contended that the proceedings u/s 158BD had rightly been initiated as incriminating documents were found in search on the premises of Vaidya Narayan Das Swami, which pertained to the respondent and the AO assessing Vaidya Narayan Das Swami could not have acted upon the said incriminating documents as it did not pertain to him and related to the present assessee and only AO having jurisdiction could have initiated proceedings u/s 158BD and which was rightly initiated. It was further cotended that there had been proper basis and prima facie evidence to initiate the proceedings u/s 158BD and only prima facie basis had to be formed and once the incriminating document relating to the assessee, may be they were signed or not, does not make any difference. The AO having the jurisdiction over the assessee had no option except to initiate the said proceedings. It was further contended that none of the figures in the project report matched with the figures even as per the return of income and/or profit and loss account/balance-sheet, which were on record over the years.

Held that,

++ in our view, AO having found the project report/incriminating document relating to the assessee in the course of search, had no option but to act under Section 158BD, which appears prima facie in order. The Apex Court in the case of Manish Maheshwari vs. ACIT & Anr. reported in AIR 2007 SC 1696 had an occasion to consider the point with reference to question No.1. In the aforesaid case, AO did not have jurisdiction over the case of above assessee, but some other AO had jurisdiction over the matter and the AO neither recorded any satisfaction, which was mandatory nor had it transferred the case to the assessing officer having jurisdiction over the matter and proceeded to assess himself when he had no jurisdiction on that assessee. Consequently, the Apex Court in the facts of above case observed that law in this regard is clear and explicit. The only question which arises for our consideration is as to whether the notice dated 06.02.1996 satisfies the requirements of Section 158BD. The said notice does not record any satisfaction on the part of AO. Documents and other assets recovered during search had not been handed over to the AO having jurisdiction in the matter. No proceeding u/s 158BC had been initiated. There is, thus, a patent non-application of mind. A prescribed form had been utilized. Even the status of the assessee had not been specified. It had only been mentioned that the search was conducted in the month of November, 1995. No other information had been furnished. As AO has not recorded its satisfaction, which is mandatory; nor has it transferred the case to the Assessing Officer having jurisdiction over the matter, we are of the opinion that the impugned judgments of the High Court cannot be sustained, which are set aside accordingly. The appeals are allowed. However, in the facts and circumstances of the case, there shall be no order as to costs. In the present case as observed, the authorised officer did pass on information to the AO, who had the jurisdiction and who proceeded ahead to assess. Therefore, in our view, in so far as, question no.1 is concerned, the Tribunal was not justified in quashing assessment when the present AO did have jurisdiction, as he was the relevant AO of the present assessee. However, addition was also challenged by the assessee on merits before the AO, CIT (A) as well as the Tribunal. Hence we consider the second question on merits;

++ on perusal of facts found we notice that Tribunal as well as CIT (A), both the appellate authorities have given a concurrent finding of fact that the assessee company got made the project report at different point of time for submitting them to financial institutions. The project report, which was submitted to the RFC with total project cost of Rs.61.40 Lacs against which RFC vide letter dated 29.3.1996 intimated to sanction Rs.31.25 Lacs against the application of Rs.38 Lacs made by the assessee and it was an admitted fact that the assessee did not avail any loan on the said project report. Similarly, the assessee company also furnished a fresh project report indicating the cost of project at Rs.65.06 Lacs to SBBJ, but the SBBJ Bank vide its letter dated 23.10.1996 sanctioned term loan of Rs.25 Lacs and cash credit limit of Rs.10 Lacs and these facts indicate that the project reports which were found in search were not acted upon by the assessee even for submitting the said reports before the RFC/SBBJ. It is also a finding of fact that the AO in making the addition has compared the figures of the project report with the actual figures as per the balance sheet as at 31.3.1997 and not as per the balance sheet as on 31.3.1998, when the project was fully implemented. It is the claim that figures match with the figures of balance sheet as at 31.3.1998, whereas the assessing officer considered with the figures as on 31.3.1997 when even it was under construction. In our view, the Tribunal came to a correct conclusion and no addition was called for. Merely because a project report shows an estimated figure does not prove that undisclosed investment to the tune of Rs. 36,21,692/- was really made by the assessee-respondent. Addition has to be based on proper foundation and cannot be made merely on the basis of such an estimated project report, which one may prepare for diverse purposes and really do not indicate as to actual investment having made by the assessee. Burden u/s 69 is on the revenue and it failed;

++ AO has blindly made addition merely on the basis of project report without bringing further evidence in the shape of say a valuation report which may have been obtained by the assessing officer from its valuation officer to indicate prima facie that investment to such an extent was made, then in our view the assessing officer could have been well justified to support its addition based on the project report viz a viz the valuation report or any other material evidence. However, nothing is apparent on the face of record as to whether any exercise in this direction was made or not. Therefore, in our view, both the appellate authorities have come to a concurrent finding of fact based on appreciation of evidence on record and no substantial question of law can be said to arise out of the impugned order as, it is entirely based on finding of fact. The first question shall be only of academic interest and would be examined in an appropriate case. Consequently, the appeal being devoid of merit is hereby dismissed in limine.

Revenue's appeal dismissed

JUDGEMENT

Per : J K Ranka :

This appeal under Section 260A of the Income Tax Act is directed against the order of the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur (for short ITAT) dated 21.11.2008 and is relevant for the block period 1.4.1995 to 20.3.2002.

2. The brief facts emerging on the face of record are that search operation came to be carried out by the authorised officers of the Income Tax Department on 20/03/2002 at the residential and business premises of Vaidya Shri Narayan Das Swami at Phulera. During the course of search, incriminating documents in the nature of computerized project report was found and seized, which pertained to the respondent-assessee, as per Annx.A-23 pages 1-12 of the Panchnama dated 20.3.2002. On the basis of the said proceedings, notice under Section 158BD read with Section 143(3) of the Income Tax Act came to be issued requiring the assessee-respondent to file a return as contemplated under Section 158BD read with Section 158BC. The assessee submitted a return for the block assessment in form No.2B declaring nil income. It is the case of the respondent that the assessee is a private limited company and was incorporated on 12.1.1996 with an object of manufacturing cables, conductors, electrical transformers etc. and is in the same business since 1997 and has been submitting its return of income regularly. It revealed from the Annx.A-23 seized from the premises of Vaidya Narayan Das Swami and as per the project report it transpired that the assessee had prepared a project report for availing loan from the financial institutions on plot of land bearing F-551-A, Road no.6 VKIA, Jaipur and thereafter, after initial purchase, work shed building construction was made and respondent assessee started production from 15.1.1997. On being queried about the project report, the assessee replied that the assessee to obtain loan got prepared the project report for submitting to various financial institutions from where the assessee was willing to obtain loan namely Rajasthan Financial Corporation (RFC) and/or State Bank of India and/or SBBJ and it was submitted that it is a tentative project report so that the company may obtain a loan and effectively make alteration and modification and construction necessary for the industry, which was needed by it. On being queried to prove the source of income and the investment as per the project report is concerned, it was submitted that whatever investment has been made is duly reflected in the books of accounts. However, the books of accounts have been lost and even an intimation report was submitted with the Vishwakarma Police Station. Further, in the alternative, it was submitted that it contains only projection of the figures and do not suggest that assessee has made any investment or incurred cost to that extent. In the last alternative, it was also submitted that the project report did not pertain to it and merely because the name of the assessee finds place, there is neither signatures of any of the Directors or relatives on these papers nor the date has not been mentioned and even the authenticity of the report is doubtful. However, the assessing officer was not satisfied and dis-satisfied with the explanation offered by the assessee an addition of Rs.36,21,692 was made as per the figures mentioned in the project report.

3. On the objection of initiating proceedings under Section 158BD of the Act that the proceedings have wrongly been initiated, the assessing officer held that the proceedings have been validly initiated and accordingly assessment came to be finalised.

4. Dis-satisfied with the assessment order, an appeal came to be preferred before the CIT (A) on both the issues namely challenging the proceedings under Section 158BD so also the aforesaid addition of Rs. 36,21,692/-. However, in so far as initiation of proceedings under Section 158BD is concerned, the CIT (A) came to the conclusion that the order is within jurisdiction. In so far as the addition made on the basis of project report is concerned, after considering the entire factual matrix and explanation offered by the assessee, the CIT (A) came to the conclusion that there is no justification for the said addition and accordingly deleted the said addition.

5. Dis-satisfied with the said order of the CIT (A), an appeal came to be preferred by the revenue before the Tribunal while cross objections were filed by the respondent-assessee. The revenue challenged the deletion of the addition on the basis of the project report to the extent of Rs.36,21,692/-, the assessee challenged the initiation of proceedings under Section 158BD.

6. The Tribunal after considering the entire issue came to the conclusion that not only the addition has rightly been deleted by the CIT (A) amounting to Rs.36,21,692/-, but also accepted the contention on behalf of the assessee that the proceedings initiated under Section 158BD was bad and even quashed the assessment. It is this order of the Tribunal, which has been assailed before us.

7. Shri R.B. Mathur, learned counsel for the revenue submitted that the Tribunal has in a summary manner come to the conclusion that proceedings under Section 158BD is not proper without bringing any material on record. He contended that the incriminating document namely project report having been found in the search, an assessing officer could validly form his opinion on such project report and proceedings under Section 158BD could have been initiated. He would further contend that the Tribunal has erred in law in quashing the assessment. He would further contend that the proceedings under Section 158BD have rightly been initiated as incriminating documents were found in a search on the premises of Vaidya Narayan Das Swami, which pertained to the respondent and the assessing officer assessing Vaidya Narayan Das Swami could not have acted upon the said incriminating documents as it did not pertain to him and related to the present assessee and only assessing officer having jurisdiction could have initiated proceedings under Section 158BD and which was rightly initiated. He would further contend that there had been proper basis and prima facie evidence to initiate the proceedings under Section 158BD and only prima facie basis has to be formed and once the incriminating document relating to the assessee, may be they were signed or not, does not make any difference. The assessing officer having the jurisdiction over the assessee had no option except to initiate the said proceedings.

8. He would further contend that the assessee got prepared the project report and naturally acted upon it and the figures did not match/tally with the figures shown in the return of income over the years. He would further contend that the books of accounts were stated to be lost when queries were raised to produce the books of accounts. If the said figures were part of books of accounts and the assessee came out with the plea that the books had been lost and just to create evidence requisition slip of one of the police station was produced, which is insufficient to come to the said conclusion. The Tribunal ought not to have decided the issue on merits and to give its own conclusion and in deleting Rs.36,21,692/- on merits.

9. He would further contend that none of the figures in the project report matched with the figures even as per the return of income and/or profit and loss account/balance-sheet, which were on record over the years. He contended that substantial questions of law arise out of the order of the Tribunal for consideration of this Court.

10. We have heard the learned counsel for the appellant/revenue and have perused the impugned order.

11. In our view, the assessing officer having found the project report/incriminating document relating to the assessee in the course of search, he had no option but to act under Section 158BD, which appears prima facie in order. The Hon'ble Apex Court in the case of Manish Maheshwari vs. Asstt. Commissioner of Income Tax & Anr. reported in AIR 2007 SC 1696 had an occasion to consider the point with reference to question No.1. In the aforesaid case, the assessing officer did not have jurisdiction over the case of above assessee, but some other assessing officer had jurisdiction over the matter and the assessing officer neither recorded any satisfaction, which was mandatory nor had it transferred the case to the assessing officer having jurisdiction over the matter and proceeded to assess himself when he had no jurisdiction on that assessee. Consequently, the Hon'ble Apex Court in the facts of above case observed as under:-

"Law in this regard is clear and explicit. The only question which arises for our consideration is as to whether the notice dated 06.02.1996 satisfies the requirements of Section 158BD of the Act. The said notice does not record any satisfaction on the part of the Assessing Officer. Documents and other assets recovered during search had not been handed over to the Assessing Officer having jurisdiction in the matter.

No proceeding under Section 158BC had been initiated. There is, thus, a patent non-application of mind. A prescribed form had been utilized. Even the status of the assessee had not been specified. It had only been mentioned that the search was conducted in the month of November, 1995. No other information had been furnished. The provisions contained in Chapter XIVB are drastic in nature. It has draconian consequences. Such a proceeding can be initiated, it would bear repetition to state, only if a raid is conducted. When the provisions are attracted, legal presumptions are raised against the assessee. The burden shifts on the assessee. Audited accounts for a period of ten years may have to be reopened.

As the Assessing Officer has not recorded its satisfaction, which is mandatory; nor has it transferred the case to the Assessing Officer having jurisdiction over the matter, we are of the opinion that the impugned judgments of the High Court cannot be sustained, which are set aside accordingly. The appeals are allowed. However, in the facts and circumstances of the case, there shall be no order as to costs."

12. However, in the present case as observed, the authorised officer did pass on information to the assessing officer, who had the jurisdiction and who proceeded ahead to assess. Therefore, in our view, in so far as, question no.1 is concerned, the Tribunal was not justified in quashing assessment when the present assessing officer did have jurisdiction, as he was the relevant assessing officer of the present assessee.

13. However, addition was also challenged by the assessee on merits before the assessing officer, CIT (A) as well as the Tribunal. Hence we consider the second question on merits.

14. On perusal of facts found we notice that Tribunal as well as CIT (A) both the appellate authorities have given a concurrent finding of fact that the assessee company got made the project report at different point of time for submitting them to financial institutions. The project report, which was submitted to the RFC with total project cost of Rs.61.40 Lacs against which RFC vide letter dated 29.3.1996 intimated to sanction Rs.31.25 Lacs against the application of Rs.38 Lacs made by the respondent-assessee and it is an admitted fact that the assessee did not avail any loan on the said project report. Similarly, the assessee company also furnished a fresh project report indicating the cost of project at Rs.65.06 Lacs to SBBJ, but the SBBJ Bank vide its letter dated 23.10.1996 sanctioned term loan of Rs.25 Lacs and cash credit limit of Rs.10 Lacs and these facts indicate that the project reports which were found in search were not acted upon by the assessee even for submitting the said reports before the RFC/SBBJ. It is also a finding of fact that the assessing officer in making the addition has compared the figures of the project report with the actual figures as per the balance sheet as at 31.3.1997 and not as per the balance sheet as on 31.3.1998, when the project was fully implemented. It is the claim that figures match with the figures of balance sheet as at 31.3.1998, whereas the assessing officer considered with the figures as on 31.3.1997 when even it was under construction.

15. In our view, the Tribunal came to a correct conclusion and no addition was called for. Merely because a project report shows an estimated figure does not prove that undisclosed investment to the tune of Rs. 36,21,692/- was really made by the assessee-respondent. Addition has to be based on proper foundation and cannot be made merely on the basis of such an estimated project report, which one may prepare for diverse purposes and really do not indicate as to actual investment having made by the assessee. Burden under Section 69 is on the revenue and it failed.

16. The assessing officer has blindly made addition merely on the basis of project report without bringing further evidence in the shape of say a valuation report which may have been obtained by the assessing officer from its valuation officer to indicate prima facie that investment to such an extent was made, then in our view the assessing officer could have been well justified to support its addition based on the project report viz a viz the valuation report or any other material evidence. However, nothing is apparent on the face of record as to whether any exercise in this direction was made or not. Therefore, in our view, both the appellate authorities have come to a concurrent finding of fact based on appreciation of evidence on record and no substantial question of law can be said to arise out of the impugned order as, it is entirely based on finding of fact. The first question shall be only of academic interest and would be examined in an appropriate case.

17. Consequently, the appeal being devoid of merit is hereby dismissed in limine.

IT : Allahabad HC: Maternity hospital entitled to tax exemption u/s 10(23C)(iiiae)

• The expression 'medical attention' in section 10(23C)(iiiae) cannot be read to be confined to medical treatment of persons who are only suffering from an illness or a mental disability. The views of Tribunal and Revenue that patients choose hospitals "only to be relieved of discomfort or pain during labor" cannot be accepted as there is considerable reduction of maternal mortality due to availability of expert medical care. Therefore, maternity hospitals which exist solely for philanthropic purposes and not for profit entitled to tax exemption under section 10(23C).

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[2014] 41 taxmann.com 283 (Allahabad)

HIGH COURT OF ALLAHABAD

Nehru Prasutika Aspatal Samiti

Commissioner of Income-tax

DR. DHANANJAYA YESHWANT CHANDRACHUD, CJ.
AND DILIP GUPTA, J.

IT APPEAL NO. 6 OF 2014

JANUARY 6, 2014

Shakeel Ahmad for the Appellant.

JUDGMENT

1. The appeal by the assessee under Section 260-A of the Income Tax Act, 1961 is from a judgement of the Income Tax Appellate Tribunal dated 14 August 2013.

2. The assessment year to which the appeal relates is A.Y. 2009-10.

3. The following substantial question of law has been formulated:

"Whether upon the facts and circumstances of the case, the Hon'ble Tribunal was justified in holding that the appellant's maternity hospital facilitating the deliveries is a natural process of god and cannot said to be any illness to be treated in appellant's hospital as envisaged under section 10(23C) (iiiae) of the Act."

4. The appeal is admitted on the aforesaid question and is taken for final disposal.

5. The Assessing Officer completed the assessment by an order dated 29 August 2011 under Section 143(3) of the Income Tax Act, 1961. The Assessing Officer assessed the total taxable income of the assessee at Rs.11,32,800. The assessee conducts a Maternity Hospital at Aligarh. An appeal was filed by the assessee before the CIT (A) claiming the benefit of exemption under Section 10(23C)(iiiae). The CIT (A) rejected the claim with the following observation:

"I hold that very reading of provision of Section 10(23C) (iiiae) do not match with the appellant's activity. The appellant hospital is a general hospital pertaining to maternity, while hospital/institution, as envisaged in section 10(23C)(iiiae) is in respect of mental diseases or illness rehabilitation and also to exist solely for philanthropic purposes. The appellant hospital has not proved any of these ingredients/requirements being fulfilled in its case."

6. Before the Tribunal, there was an appeal by the revenue and a cross objection by the assessee. The cross objection by the assessee was in regard to the denial of the claim for exemption under Section 10(23C) (iiiae).

7. The Tribunal held that that the appellant was not entitled to the benefit of the provisions of 10(23C)(iiiae). The reasons which weighed with the Tribunal are as follows:

"It is worthwhile pointing out that the child birth is the natural process of God and it is certainly the God's grace which is extended to sustain us through it. It is the act of God who designs a child conceived in the womb to be born into this world. In olden days deliveries of children were perfectly conducted by midwives at home, but in the modern age, it is only because the anxiety of people that they would not be able to manage the discomfort or pains during labor, they choose to take better facilities in the hospitals in presence of Doctors for this purpose. Thus, it may be said that the assessee's maternity hospital in the instant case would have been facilitating the deliveries, i.e. a natural process of God. It, therefore, can in no way be said to be any illness to be treated in the assessee's hospital as envisaged u/s. 10(23C)(iiiae). Therefore, the ingredients of section 10(23C)(iiiae) being not fulfilled, the ld. CIT(A) has rightly disallowed the claim of assessee."

8. The correctness of the view of the Tribunal falls for consideration.

9. Section 10 provides for those incomes which shall not be included in computing the total income of a previous year of any person. Clause (23C) relates to incomes which are received by any person on behalf of those categories which fall in any of the succeeding sub clauses.

10. Sub clause (iiiae) is as follows:

"any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed; "

11. In order to fall within sub clause (iiiae), the income must be received by any person on behalf of any hospital or other institution which exists solely for philanthropic purposes and not for the purpose of profit. Moreover, the aggregate annual receipts of such hospital or institution must not exceed the amount as may be prescribed. Both these conditions govern the entirety of sub clause (iiiae). But in addition to these two requirements, the hospital or institution must meet the description which is contained in the sub clause. Sub clause (iiiae) deals with hospitals or other institutions of the following nature:

(i)		those for the reception and treatment of persons suffering from illness or mental defectiveness; or
(ii)		for the reception and treatment of persons during convalescence; or
(iii)		for the reception and treatment of persons requiring medical attention or rehabilitation.

12. There is no basis or justification to hold, as the CIT (A) held in this case, that clause (iiiae) is to be confined to hospitals or institutions dealing with mental diseases or illness rehabilitation. Even if the clause is read as a whole, it is clear that the reception and treatment of persons suffering from illness or mental defectiveness is one category which is covered by clause (iiiae). The sub clause thereafter specifically refers to reception and treatment of persons during convalescence; or of persons requiring medical attention or rehabilitation. The expression 'medical attention' cannot be read to be confined to medical treatment of persons who are only suffering from an illness or a mental disability. If that was to be the intent of the legislature, the sub clause would have been framed differently by stipulating that the subsequent provisions for the reception and treatment of persons during convalescence, rehabilitation or in regard to providing medical attention would be of those who are suffering from an illness or mental disability. In other words, the prevalence of mental disability is not the governing requirement of the entirety of sub clause (iiiae). Similarly the expression 'illness' has not been statutorily defined for the purpose of sub clause and must receive its ordinary and natural meaning. A hospital which provides for maternity care will fulfill the description of a hospital for the reception and treatment of persons requiring medical attention. Sub clause (iiiae) must receive its plain and ordinary meaning.

13. The Tribunal has dealt at length with its own view of the process of child birth. The Tribunal regards child birth as an act of God and a natural process and has proceeded to refer to the fact that in the olden days, deliveries were performed by midwives at homes. According to the Tribunal it is only because of the anxiety of people in modern times to be relieved of discomfort or pain during labor, that patients choose hospitals. This, in our view, is not a correct assessment either of modern science or of statutory interpretation. It is a matter of common experience that a hospital providing for maternity care has to deal with emergencies and on occasion, such hospitals have to provide emergent care which is often necessary to save the lives of the mother and the child.

14. We, therefore, do not accept the view of the Tribunal that patients visit hospitals of this nature only with a view to relieve themselves of the discomfort of pain during labor. As modern science, technology and knowledge have advanced, there is a considerable reduction of maternal mortality due to availability of expert medical care.

15. In these circumstances, both the views of the CIT (A) and of the Tribunal are not sustainable with reference to the provisions of sub clause (iiiae) of clause (23C) of Section 10. However, as we have noted above, a hospital or institution to fall within the sub clause must exist solely for philanthropic purposes and not for the purpose of profit and the aggregate annual receipts of the hospital or institution must not exceed the amount as may be prescribed. Since these aspects have not been gone into either by the Assessing Officer, CIT(A) or by the Tribunal, we restore the proceeding back to the Assessing Officer for consideration afresh.

16. The substantial question of law is, accordingly, answering in the negative and in favour of the assessee. The appeal is, accordingly, disposed of. There shall be no order as to costs.

Sub-section (13A) was inserted in section 10 by the Direct Tax Amendment Act, 1964, to provide for exemption to an assessee in respect of any special allowance granted to him by his employer to meet expenditure incurred on payment of rent for residential accommodation occupied by him to the extent as provided for in the rules prescribed by the CBDT. The provision, as it stood up to 1984, did not specifically provide whether the accommodation should be owned by the assessee, or whether any outflow of money as an expenditure should actually take place? Even though the provision as such had provided that exemption would be given to an assessee in respect of allowance granted by his employer "to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee", yet the Hon'ble Punjab & Haryana High Court in CIT v. Justice S. C. Mittal [1980] 121 ITR 503 had held that exemption under section (13A) would be admissible even in a case where assessee occupied his own house as he disentitled himself from the rent which he would have been entitled to if he had not occupied the same himself. In that sense he suffered expenditure in that regard. This view was followed subsequently by the same Court in CIT v. Chief Justice M. S. Gujral [1980] 3 Taxman 364 (Punj. & Har.). The department did not find these judgments in conformity with the intention of the Legislature while introducing sub-section (13A). Accordingly, an amendment was introduced by Taxation Law Amendment Act, 1984 with retrospective effect from 1-4-1976 by inserting anExplanation to this section providing for a declaration for "removal of doubts" to the effect that exemption under section 10(13A) will not be available if residential accommodation occupied by the assessee is owned by him or he has not actually incurred an expenditure on payment of rent thereof. Thus, twin conditions, which were impliedly existing were clarified by this Explanation. These twin conditions were subject of interpretation in the recent judgment rendered by the ITAT Ahmedabad Bench in Bajrang Prasad Ramdharani's case. The facts of the case, arguments of the parties, judgment of the Tribunal and its implication in general have been given in the following paras.

FACTS OF THE CASE

The assessee was an employee. He was granted special allowance by his employer to meet the expenditure incurred on rent for the residential accommodation occupied by him. He was living along with his wife in the house owned by her. He had shown to have paid rent of Rs. 15,000 dated 3-7-2008 and Rs. 1,65,000 dated 31-3-2009 to her through bank transfer entry. He claimed exemption under section 10(13A) of the Act of Rs. 1,11,168. The case of assessee was picked up for scrutiny assessment and the assessment was framed under section143(3) of the Income-tax Act, 1961 after disallowing the claim on the ground that it was a colourable device.

THE CASE OF THE DEPARTMENT

The case of the Department was that the assessee had not given details of payment and evidences and that the assessee and his wife were living together, hence, the claim of payment of rent was just to avoid payment of taxes and to reduce the tax liability. Ld. CIT(A) confirmed the addition on the ground that the rent was paid by the assessee as a tenant to his wife who was a landlady. He found that the landlord and tenant were living together in the same house and the very fact that the landlord and tenant were staying together indicated that the whole arrangement was of the nature of a colourable device. There was apparently a confusion as to whether assessee was living in his own house or in the house owned by his wife? In the remand report this factual issue was left as such, as there was no finding as to whether assessee was living in his self-occupied property or with his wife?

ARGUMENTS OF ASSESSEE

It was argued by the counsel of the assessee that a bare reading of the provision would make it amply clear that the assessee was entitled to exemption under section 10(13A) of the Act. In support of the expenditure of house rent, requisite details and evidences were filed before the ld. CIT(A) who had called for a remand report from the AO.

THE DECISION OF THE TRIBUNAL

There are two conditions to be satisfied for allowing exemption under section 10(13A). They are: (a) the residential accommodation occupied by the assessee is not owned by him, (b) the assessee has actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. In the present case it was found that: (a) the assessee and his wife were living together as a family. Therefore, it could be inferred that the house owned by wife of the assessee was occupied by the assessee also; (b) as per remand report the assessee had submitted the rent receipt(s) of Rs. 15,000 dated 3-7-2008 and Rs. 1,65,000 dated 31-3-2009 and stated that the payments had duly been paid through bank transfer entry. Therefore, the assessee had fulfilled twin requirements of the provision, i.e., occupation of the house and the payment of rent. Under these circumstances, the assessee was held entitled to exemption under section 10(13A) of the Act.

COMMENTS

Position prior to insertion of the Explanation to section 10(13A) - When sub-section (13A) was inserted in the Income-tax Act, in 1964, the intention of the Legislature was clear - to allow exemption only in those cases where assessee was actually incurring expenditure by way of rent in respect of residential accommodation occupied by him for his own residence and for the residence of his family. This intention was evident by the use of the expressions "to meet expenditure actually incurred on payment of rent" and "residential accommodation occupied by the assessee" in the provision. The word "expenditure" was explained by the Hon'ble Karnataka High Court inPatil Vijaykumar v. Union of India [1985] 20 Taxman 363 wherein it was held that 'the word 'expenditure' in section 10(13A) means "the special allowance given to the assessee to meet' what is paid out or paid away'' on payment of rent in respect of residential accommodation occupied by him to the extent prescribed. "The Legislature has used the word 'expenditure' as meaning paying out or paying away or as something which is gone irretrievably. By using the words 'expenditure actually incurred', the Legislature had made its intent very clear and beyond any doubt". The Hon'ble Delhi High Court in All India Lakshmi Commercial Bank Officers' Union v. Union of India [1985] 20 Taxman 412 also expressed similar views when it held that " 'expenditure' is something which the assessee pays out of his own pocket or makes a disbursement to meet a liability". It further observed that the use of the expression "'to meet' suggests that the special allowance should be granted to discharge or to pay fully or to satisfy". When the original provision had used such expressions it clearly meant that exemption would be available to that employee only who had actually made the payment of rent. Even the expression "occupied by the assessee" also drew attention of the Court when the Hon'ble Karnataka High Court in Patil Vijaykumar's case (supra) observed that, "the assessee must be in occupation of a premises as a lessee of premises and must be paying rent to the landlord—the owner of the premises in his occupation". It means that the assessee can claim to have paid the rent only when he is in occupation of the residential accommodation not belonging to him but belonging to someone else and the relationship between the assessee and the person to whom the payments are made is that of a landlord and tenant. These two judgments pertained to the year when amendment by way of the Explanation to section 10(13A) was not inserted. Even according to the law laid down by the Supreme Court in CIT v. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95 in order to be exempt within the provisions of section 10(13A), the house rent allowance had to be actually incurred on payment of rent of accommodation hired for residence. It was therefore clear that intention of the Legislature to insert section10(13A) was to allow exemption only to those employees who occupied the house not owned by him; there was a relationship of tenant and landlord between the assessee-employee and the owner of the house and there was an actual payment of rent by the assessee-employee to the landlord whose house he was occupying for his residential accommodation.

The intention of the Legislature was further made clear by the insertion of rule 2A by the IT Amendment Rules, 1965 w.e.f. 1-4-1965 wherein limit for allowing exemption out of house rent allowance received from the employer was prescribed. Since for the Financial Year 1964-65 there were no rules existing for computation of allowance, CBDT vide Letter F. No. 12/19/64-IT(B), dated 20-2-1965 allowed exemption to entire house rent allowance given at flat rates. There were four different amounts to be computed as per rule 2A and least of the four was treated as an amount exempt under section 10(13A). One of the four amounts was "the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of the residential accommodation occupied by him exceeds one tenth of the amount salary due to the assessee in respect of the relevant period". If the provisions of section 10(13A) were to be harmoniously read, it would appear that the incurring of actual expenditure in monetary terms on a hired residential accommodation was essential for claiming exemption of house rent allowance. One could, therefore, safely infer that the computation machinery of exemption as provided for in rule 2A would not be workable unless the assessee provided a figure of actual amount of expenditure incurred on payment of rent. If there was no actual payment of rent, computation of exemption would not be possible and, hence, assessee would not be able to get any exemption. It has been held that rule 2A does not in any way run counter to the provision of the Act. – [Refer CIT v. H.V. Yazdi [1978] 114 ITR 14 (Cal.)] and they have to be read as only prescribing the limits of exemption under section 10(13A) [Refer All India Lakshmi Commercial Bank Officers' Union case (supra)].

In spite of law being clear that exemption under section 10(13A) would be available to an employee, in accordance with computation to be carried out under rule 2A if he receives house rent allowance from his employer, occupies a residential accommodation not owned by him and actually pays rent to the landlord, a controversy arose when the Hon'ble Punjab & Haryana High Court in Justice S. C. Mittal's case(supra) held that a person who occupies his own house is also entitled to exemption because he loses an opportunity cost. It observed "The provisions of section 10(13A) have been enacted to compensate the assessee regarding the expenditure incurred on payment of rent in respect of residential accommodation occupied by him. Where an assessee, who occupies his own house, disentitles himself from the rent to which he would have been otherwise entitled to and if he is compensated by his employer for such an expenditure by payment of a special house rent allowance subject to statutory limits, the said allowance would be immune from tax". In other words, a person who occupies his own house losses the rent, he would have otherwise got if that house had been given on rent to somebody else instead of he occupying it. This decision was followed in CIT v. B.R. Tuli, Ex-Judge, Punjab and Haryana High Court [1980] 125 ITR 460 (Punj. & Har.) & in M. S. Gujral case (supra).

Position after insertion of the Explanation in section 10(13A) - Since these decisions were not in harmony with the intention of the Legislature, an amendment was brought about in the statute by way of an insertion of the Explanation to section 10(13A). The Explanationdeclared for removal of doubts the intention of the Legislature as under:–

"Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—

(a)		the residential accommodation occupied by the assessee is owned by him; or
(b)		the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him;"

It was, therefore, clarified w.e.f. 1-4-1976 that exemption under section 10(13A) would not be available to an employee in respect of house rent allowance received by him from his employer if residential accommodation occupied by him was also owned by him or he had not actually made any payment of rent. The concept of opportunity cost, i.e., loss of rent by occupying own house was as good as incurring expenditure on payment of rent, as appearing from the decision in S.C. Mittal's case (supra) was done away with.

Therefore, when an employee receiving house rent allowance from his employer occupies house owned by him for his residential accommodation he will not be entitled to exemption. This view has now been uniformly held in various judgments such as: (1) CIT v. P. D. Singhania [2006] 156 Taxman 504 (All.), (2) CIT v. K. Balasubramaniam [1999] 106 Taxman 117 (Bom.), (3) CIT v. V. Karthikeyan[1999] 239 ITR 815 (Mad.), (4) CIT v. Rajeshwar Prasad [1995] 81 Taxman 503 (Raj.), (5) CIT v. M. Satyanarayana Sastry [1995] 216 ITR 582 (AP), (6) CIT v. K. Chockalingam [2001] 118 Taxman 657(Mad.).

From the above authorities it follows that exemption under section 10(13A) will be allowed as per computation made under rule 2A, out of house rent allowance paid by an employer to the assessee. The conditions for exemption are that employee occupies a house not owned by him for his residence and he actually makes a payment of rent for occupation of that house. Incurring of actual expenditure would mean that there should be an outflow of money by way of payment of rent. Occupation of a house not owned by an employee would mean that the employee is not the legal owner of the house. The fact of legal ownership belonging to somebody else and not to the assessee-employee can be established by ownership documents of the property and in whose hands the income from the house property has been offered and assessed. The actual payment of rent can be established by outflow from the bank account of the assessee-employee and credit into the account of the landlord, who may have also issued receipts for the rent received. From this it also follows that house may be owned by Son, Wife, HUF, Partnership firm, Company or any other taxable entity. In other words, the house property occupied by the assessee may be under ownership of anybody else except the assessee himself. The denial of exemption is only in a case where house property occupied by the assessee is owned by him and not by his family members who actually are eligible for being assessed as separate and independent taxable entities. The second condition that house should be occupied by him is satisfied if it is proved that he actually lives in that house. There is no further condition as to who else lives with him. There is also a third condition that assessee must actually pay rent to the landlord in lieu of his house occupied by the assessee. Such rent received by the landlord should be liable to be offered as income under the head house property by the landlord in his return of income. The issue of receipt by the landlord to the assessee-employee in lieu of the rent received is always considered desirable.

When claim of HRA exemption can be considered as a colourable device - Claim of exemption under section 10(13A) out of house rent allowance received from the employer can be considered as a colourable device if the Assessing Officer finds that the investment in the construction or purchase of house property was made by the assessee-employee but the property has been acquired in the name of the Son, Wife OR HUF. Thus, where Son, Wife or HUF are only benami owners but the real owner is assessee himself, then the claim of exemption under section 10(13A) may not be legally sustainable. However, in a case where property is gifted to a Son/Wife/Relative (covered under section 64 ) and income therefrom is clubbed under section 64 in the hands of assessee and the assessee occupies that house for his residential accommodation and pays rent to such Son/Wife/Relative, then income in the hands of the assessee would be computed independently and, therefore, he should be entitled to exemption under section 10(13A) and income of Son/Wife/Relative will be computed independently by declaring income from house property and total income so computed thereafter will only be clubbed in the hands of the assessee-employee. However, if it is established by the AO that gift of the property was done to claim exemption under section 10(13A) then such transfer may be held as a colourable device. Merely because an arrangement convenient to the taxpayer saves taxes cannot be held as a colourable device, unless it is established that arrangement was put in place only to avoid payment of tax. Where ownership of the house in the name of other party (other than the assessee) is already existing and assessee-employee occupies the house for family convenience or for some other intention, saving of tax is only a consequence, there cannot exist a colourable device.

Factors to be considered for deciding whether arrangements made by assessee-employee could be deemed as colourable devices? - Regular payment of rent by the assessee-employee to the landlord (may be his Wife/Son/HUF) is an indicator that occupation of the house and payment of rent is genuine. Existence of a rent agreement on commercial terms indicates relationship of tenant and landlord, but where no payment of rent is made and only a credit is shown it is difficult to infer that assessee had any liability of rent and he had actually incurred expenditure to meet such a liability. Actual outflow of cash is an essential criteria to satisfy the condition laid down in the section. Irregular or lump sum payment at the end of the year may technically satisfy the requirement of clause (b) of the Explanation but may arouse suspicion in the mind of the AO that arrangement is not genuine. For holding an arrangement as a colourable device, cumulative effect of several factors has to be seen and one factor on standalone basis may not be sufficient to legally sustain the finding of a colourable device in such cases. These factors can be briefly listed as follows: (1) who has made the investment in the house property, whether property is held benami by the landlord and real owner is assessee; (2) in whose return the income from house property is declared, whether such income is declared at all or not; (3) whether rent is actually paid through cash out flow; (4) whether such payment is regular or made lump sum at the end of the year; (5) whether any rent agreement is existing; (6) whether receipts are issued for payment of rent; (7) whether payment allegedly shown as rent was actually payment for some other purpose; (8) whether transfer of money as rent by the assessee-employee to the Son/Wife/HUF, being proclaimed landlord, is commensurate with rent agreed or there are apparent disparities in the rent promised and actual payment and whether the explanation for the difference is reasonably explained; (9) whether assessee employee is living elsewhere for most of the time and only for technical purposes the house owned by Son/Wife/HUF is shown as occupied by him for residential accommodation, so as to apparently avail of the benefit of exemption under section 10(13A) Whether Tribunal was justified in allowing HRA exemption to assessee in the instant case?

In the present case, on the basis of facts highlighted by the tribunal the decision so taken is appropriate and according to the proposition laid down by the Courts. It has been found as a fact that there was an occupation of the house and there was payment of rent and, therefore, twin conditions as laid down in the Explanation were satisfied. There were rent receipts also. The only factor which weighed in the mind of the AO that it was a colourable device as relationship between assessee and landlord, being husband and wife who were living together. This factor alone was not enough to arrive at a finding of a colourable device. The fact of irregular payment of rent was ignored, though this factor alone would also not weigh in favour of the AO as such. In view of limited facts brought on record by the AO, the Tribunal was justified in taking the view which they had taken.

CONCLUSION

According to the decision of the Tribunal in this case exemption under section 10(13A) will be available to an employee if he is able to show that: (i) he has received special allowance from his employer to compensate him for expenditure incurred on payment of rent of residential accommodation occupied by him, (ii) he has occupied an accommodation which is not owned by him, (iii) he has actually made the payment of rent to the owner (landlord) of the house. The onus then shifts to the AO to prove that entire arrangement was a sham. Unless he is able to bring material on record to hold so or to hold that assessee had used a colourable device to claim exemption, the claim of the assessee-employee cannot be denied.

Ways to Curtail your Labor Cost with Time and Attendance Solutions

Manpower, often referred to as labor is one of the primary concerns of every business. There comes the need of an efficient HR process in place to handle this manpower or labor. When we take HR process, we have two definitions. One part of it is concerned with acquiring manpower which is termed as recruitment and on the other part it is the administrative process that is related to management of this manpower or labor. There are various functions that are related to the HR administration in an organization.

Your business may be of any size, but there are some vital functions that influence and affect the payroll directly.Due to the advances that the technology has witnessed in terms of workforce management, monitoring the workforce has become more, a strategy rather than a tactic. Tracking time and attendance of the workforce is the prime factor in workforce monitoring and management.

Scheduling and tracking time and attendance of labor has been historically a tactical issue to deal with. This data is integrated with payroll and doing this is very complex for organization which involves much time and with more risks of errors.

During earlier days, time cards were collected from each and every employee and recorded separately in registers. Later these data were compiled to arrive at a cumulative one at a particular report that would be supportive for payroll. This involved more time since many things are manual. This made the entire process cumbersome and monotonous for HR leaders.

Business owners who understand and comprehend the technological advances often try to adapt and cope up with the pace of the business world. They must be able to understand the fact that if information management is accurate and faster, then it automatically influences all related factors in the ROI of the organization. The decision making process is quicker and efficiency is increased adding great value to the bottom-line of your business.

Productivity can be improved in a very powerful way if there is an automated and quick solution that is being implemented for time and attendance management for your employees. These results can be witnessed without even huge investment requirements since many time and attendance systems are being deployed on cloud. Implementing a robust time and attendance system involves neither more time nor money. It is just how you look at the implementation of these systems for your employees.

Labor expenses are being saved to a greater extent, since, by continuous tracking and monitoring, employees could be curtailed to perform their non-efficient and non-work related tasks. Some employees tend to work overtime for money, but which might not be of any use to the business and productivity. Such costs can be reduced by implementing an automated time and attendance system for employee attendance tracking.

Yet another advantage of having a time and attendance system in place is that the data that is used for payroll can be easily and accurately gathered. The analysis of this data can be done intensely to identify loopholes in the processes. The technology has advanced to such an extent that these time and attendance systems can be a helping for monitoring labor-spend.

DCIT vs. Swarna Tollway Pvt. Ltd (ITAT Hyderabad)

S. 32: Road constructed on Build-Operate-Transfer ("BOT") terms is eligible for depreciation even though assessee is not the legal owner of the road

The assessee, a SPV, was awarded a contract by the NHAI for widening, rehabilitation and maintenance of an existing two lane highway into a four lane one on the Tada-Nellore section of NH-5 on BOT basis. The entire cost of construction of Rs. 714 crore was borne by the assessee. The construction was completed during the FY 2004-05 after which the highway was opened to traffic for use and the assessee started claiming depreciation from AY 2005-06 onwards. The AO rejected the claim on the ground that the assessee had no ownership, leasehold or tenancy rights for the asset in question, i.e., the roads. On appeal, the CIT(A) reversed the AO. On appeal by the department to the Tribunal HELD dismissing the appeal:

Though the NHAI remains legal owner of the site with full powers to hold, dispose of and deal with the site consistent with the provisions of the agreement, the assessee had been granted not merely possession but also right to enjoyment of the site and NHAI was obliged to defend this right and the assessee has the power to exclude others. The very concept of depreciation suggests that the tax benefit on account of depreciation belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby loosing gradually investment cost by wear and tear and would need to replace the same by having lost its value fully over a period of time. The term "owned" as occurring in s. 32 (1) of the Act must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded there from and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings, though a formal deed of title may not have been executed and registered (Mysore Minerals 239 ITR 775 (SC),Noida Toll Bridge 213 Taxman 333 etc referred)

IT : Where assessee was engaged in purchasing old and used tyres/rubber scrap, which were cut into small pieces and thereafter grinded with help of machines and then end product was rubber crumb, assessee was engaged in manufacturing of rubber crumb and hence eligible to deduction under section 80-IB

■■■

[2013] 40 taxmann.com 346 (Himachal Pradesh)

HIGH COURT OF HIMACHAL PRADESH

Commissioner of Income-tax, Shimla

Doon Valley Rubber Industries*

A. M. KHANWILKAR, CJ.
AND KULDIP SINGH, J.

IT APPEAL NO. 2 OF 2009

NOVEMBER 6, 2013

Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [Manufacture] - Assessment year 2004-05 - Assessee was engaged in purchasing old and used tyres/rubber scrap, which were cut into small pieces and thereafter grinded with help of machines and then end product was rubber crumb, which was sold to tyre manufacturing company - It claimed deduction under section 80-IB - Whether assessee was engaged in manufacturing of rubber crumb and hence eligible to deduction under section 80-IB - Held, yes [Para 7] [In favour of assessee]

FACTS

■		The assessee was engaged in purchasing old and used tyres/rubber scrap, which were cut into small pieces and thereafter grinded with the help of machines and then the end product was rubber crumb, which was sold to the tyre manufacturing company. It claimed deduction under section 80-IB.
■		The Assessing Officer as well as the Commissioner (Appeals) disallowed the claim of deduction.
■		On second appeal, the Tribunal found that the end product of the assessee was different from its raw material and secondly it was commercially known to be different in the market. It, therefore, held that the assessee was entitled to deduction under section 80-IB.
■		On appeal to High Court:

HELD

■		The manufacturing process of rubber crumb not only involves recycling of the old tyres but also rubber scrap to be converted and transformed into rubber crumb, which incidentally can be reused for manufacture of new tyres. There is nothing to indicate that the old rubber tyres and rubber scrap could be straightway reused for manufacture of new tyres without resorting to processing, as is being done by the assessee. [Para 4]
■		The Tribunal was justified in concluding that the product (rubber crumb) produced by the assessee was commercially different from its raw material and further it is commercially known to be different in the market. In other words, the assessee was engaged in manufacturing of the said product. Therefore, it was entitled to deduction claimed under section 80-IB. As a result, the appeal filed by the revenue was liable to be dismissed. [Para 7]

CASE REVIEW

Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC) (para 8) and ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 (SC) (para 8) followed.

CASES REFERRED TO

Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC) (para 5), ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 (SC) (para 6), Aman Marble Industries (P.) Ltd. v. Collector of Central Excise 2003 (157) ELT 393 (SC) (para 6) and CIT v. Sesa Goa Ltd. [2004] 271 ITR 331/[2005] 142 Taxman 16 (SC) (para 6).

Vinay Kuthiala and Ms. Vandana Kuthiala for the Appellant. Vishal Mohan and Sushant Keprate for the Respondent.

JUDGMENT

A. M. Khanwilkar, CJ. - Heard counsel for the parties.

2. This appeal has been admitted on the substantial question of law as to whether cutting, grinding and sieving of old rubber tyres and rubber scrap and converting the same into rubber crumbs is "manufacture" and hence entitled to the deduction under Section 80-IB of that Act?

3. The Income Tax Officer, Nahan (HP) during the assessment of the respondent-firm for assessment year 2004-2005, disallowed the deduction under Section 80-IB claimed by the respondent. The assessee took the matter in appeal before the Commissioner of Income Tax (Appeals), Shimla which in turn affirmed the finding recorded by the first authority. The Income Tax Appellate Tribunal, however, in the appeal filed by the assessee, reversed the finding recorded by the two Authorities below and concluded that the assessee was entitled to deduction under Section 80-IB. For doing so, the Appellate Tribunal took into account the manufacturing process of rubber crumbs. The same is as under:

"MANUFACTURING PROCESS OF RUBBER CRUMB

	PURCHASE OF OLD TYRES/SCRAP

	TYRES CUT INTO SMALL PIECES WITH THE HELP OF CHOPPING MACHINE RUN WITH THE ELECTRIC MOTORS

	GRINDING OF SMALL PIECES OF TYRES IN THE GRINDERS RUN WITH THE HELP OF ELECTRIC MOTORS

	THE GRINDED MATERIAL IS SIEVED BY THE DIFFERENT MASH SIEVED, RUN WITH ELECTRIC MOTORS

	FINAL PRODUCT RUBBER CRUMB IS READY, HAVING DIFFERENT MASH"

4. After considering the factual aspects of the matter, the Appellate Tribunal, which is the final fact finding Authority, held that the assessee was engaged in purchasing old and used tyres/ rubber scrap etc., which were cut into small pieces and thereafter grinded with the help of machines and then the end product was rubber crumb, which was sold to the tyre manufacturing company. The Appellate Tribunal thus found, as of fact, that the end product of the assessee was different from its raw material and secondly it was commercially known to be different in the market. As regards this finding of fact reached by the Appellate Tribunal, we are in agreement with the same as in our opinion, the process not only involves re-cycling of the old tyres but also rubber scrap to be converted and transformed into rubber crumb - which incidentally can be re-used for manufacture of new tyres. There is nothing to indicate that the old rubber tyres and rubber scrap could be straightway reused for manufacture of new tyres without resorting to processing, as is being done by the assessee.

5. The question as to what amounts to manufacture is no more res integra. The three Judges Bench of the Apex Court in the case of Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771, has expounded thus:

'....The word "manufacture" has not been defined in the Act. In the absence of a definition of the word "manufacture" it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.'

6. In the latest decision of the Apex Court in the case of ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 , after analyzing its earlier decisions and including in the case of Aman Marble Industries (P.) Ltd. v. Collector of Central Excise [2003] 157 ELT 393 (SC), it has been noted that the expression used in Section 80IA - which is analogous to the expression used in Section 80-IB, which uses words manufactures or produces, as applicable to the present case mandates the Court to consider not only word "manufacture" but also the connotation of word "production". Having noted this position, the Court went on to observe that the said expressions have wider meaning as compared to the word "manufacture". Further, the word "production", means manufacture plus something in addition thereto. The Court also noticed the exposition in CIT v.Sesa Goa Ltd. [2004] 271 ITR 331/[2005] 142 Taxman 16 (SC) wherein it has been held that while every manufacture can constitute production, every production did not amount to manufacture. Further, the test for determining whether manufacture can be said to have taken place is whether the commodity, which is subjected to a process, can no longer be regarded as original commodity, but is recognized in trade as a new and distinct commodity. Further, the word "production", when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the by-products, intermediate products and residual products, which emerge in the course of manufacture of goods.

7. Keeping in mind the exposition in these decisions, we have no hesitation in holding that the Appellate Tribunal was justified in concluding that the product (Rubber crumb) produced by the assessee was commercially different from its raw material and further, it is commercially known to be different in the market. In other words, the assessee was engaged in manufacturing of the said product. Therefore, the assessee was entitled to deduction claimed under Section 80-IB of the Act. We find no reason to disagree with the said opinion of the Tribunal. As a result, this appeal should fail, the same is dismissed.

8. In fairness to counsel appearing for both the parties, we may place on record that they cited several other reported and unreported decisions. That indeed, indicates their industry. However, we are of the considered opinion that the question to be answered in this appeal can be conveniently answered only with reference to the exposition in the decisions of the Apex Court, referred to above, for which reason, we are not burdening this judgment with the other citations pressed into service by the respective counsel, across the Bar, during the hearing.

S.K.J.

*In favour of assessee.

--
Regards,

Pawan Singla , LLB

M. No. 9825829075

SC: Appointment of staff in Courts to be in consonance with Art. 14 & 16

Posted on 18 February 2014 by Vineet Kumar

Court

Supreme Court of India

Brief

The Bench comprising of Justice Dr. B.S. Chauhan, Justice J. Chelameswar and Justice M.Y. Eqbal directed all High Courts to re-examine the statutory rules dealing with the appointment of staff in the High Court as well as in the subordinate courts and in case any of the rule is not in conformity and consonance with the provisions of Articles 14 and 16 of the Constitution, the same may be modified. The Court also held that all vacancies in the High Courts and the subordinate courts should be filled up in strict compliance with the statutory rules and any appointment made in contravention of the statutory rules would be void ab-initio irrespective of any class of the post or the person occupying it.

Citation

I.R. Coelho (dead) by L.Rs. v. State of Tamil Nadu, AIR 2007 SC 861 Delhi Development Horticulture Employees' Union v. DelhiAdministration, Delhi & Ors., AIR 1992 SC 789 Excise Superintendent Malkapatnam, Krishna District, A.P. v. K.B.N. Visweshwara Rao & Ors., (1996) 6 SCC 216 Union of India & Ors. v. N. Hargopal & Ors., AIR 1987 SC 1227 Suresh Kumar & Ors. v. State of Haryana & Ors., (2003) 10 SCC 276

Judgement

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 979 OF 2014

(Arising out of SLP (C) No. 26090 of 2011)

Renu & Ors. …Appellants

Versus

REPORTABLE

District & Sessions Judge, Tis Hazari & Anr. …Respondents

Dr. B. S. CHAUHAN, J.

J U D G M E N T

1. The matter initially related to the appointment of Class IV

employees in the courts subordinate to Delhi High Court as the

dispute arose about the continuity of the employees appointed on

ad-hoc basis for 89 days which stood extended for the same period

after same interval from time to time. The matter reached the Delhi

High Court and ultimately before this Court. This court vide order

dated 10.5.2012 took up the matter in a larger perspective taking

cognizance of perpetual complaints regarding irregularities and

illegalities in the recruitments of staff in the subordinate courts

Page 1

throughout the country and in order to ensure the feasibility of

centralising these recruitments and to make them transparent and

transferable. This Court suo motu issued notice to Registrar Generals

of all the High Courts and to the States for filing their response mainly

on two points viz. (i) why the recruitment be not centralized; and (ii)

why the relevant rules dealing with service conditions of the entire

staff be not amended to make them as transferable posts. All the States

and High Courts have submitted their response and all of them are

duly represented in the court.

2. This Court had appointed Shri P.S. Narasimha, learned senior

counsel as Amicus Curiae to assist the court. The matter was heard on

28.1.2014 and deliberations took place at length wherein all the

learned counsel appearing for the States as well as for the High Courts

suggested that the matter should be dealt with in a larger perspective

i.e. also for appointments of employees in the High Court and courts

subordinate to the High Court which must include Class IV posts also.

A large number of instances have been pointed out on the basis of the

information received under the Right to Information Act, 2005 of

cases not only of irregularity but of favouritism also in making such

Page 2

appointments. It has been suggested by the learned counsel appearing

in the matter that this court has a duty not only to check illegality,

irregularity, corruption, nepotism and favouritism in judicial

institutions, but also to provide guidelines to prevent the menace of

back-door entries of employees who subsequently are ordered to be

regularised.

3. It was in view of the above that this Court vide its earlier orders

had asked learned counsel appearing for the States as well as the High

Courts to examine the records of their respective States/Courts and

report as to whether a proper and fair procedure had been adopted for

evaluating the candidates. A mixed response was received from

different counsel on these issues.

4. In view of the aforesaid submissions, we do not think it

necessary to peruse the record in order to gauge the amount of

irregularities or illegalities. Our basic concern is that the appointments

in judicial institutions must be made on the touchstone of equality of

opportunity enshrined in Article 14 read with Article 16 of the

Constitution of India, 1950 (hereinafter referred to as the

`Constitution') and under no circumstance any appointment which is

Page 3

illegal should be saved for the reason that the grievance of the people

at large is that complete darkness in the light house has to be removed.

The judiciary which raises a finger towards actions of every other

wing of the society cannot afford to have this kind of accusations

against itself.

5. Rule of law is the basic feature of the Constitution. There was a

time when REX was LEX. We now seek to say LEX is REX. It is

axiomatic that no authority is above law and no man is above law.

Article 13(2) of the Constitution provides that no law can be enacted

which runs contrary to the fundamental rights guaranteed under Part

III of the Constitution. The object of such a provision is to ensure that

instruments emanating from any source of law, permanent or

temporary, legislative or judicial or any other source, pay homage to

the constitutional provisions relating to fundamental rights. Thus, the

main objective of Article 13 is to secure the paramountcy of the

Constitution especially with regard to fundamental rights.

6. The aforesaid provision is in consonance with the legal

principle of "Rule of Law" and they remind us of the famous words of

the English jurist, Henry de Bracton – "The King is under no man but

Page 4

under God and the Law". No one is above law. The dictum – "Be you

ever so high, the law is above you" is applicable to all, irrespective of

his status, religion, caste, creed, sex or culture. The Constitution is the

supreme law. All the institutions, be it legislature, executive or

judiciary, being created under the Constitution, cannot ignore it.

The exercise of powers by an authority cannot be unguided or

unbridled as the Constitution prescribes the limitations for each and

every authority and therefore, no one, howsoever high he may be, has

a right to exercise the power beyond the purpose for which the same

has been conferred on him. Thus, the powers have to be exercised

within the framework of the Constitution and legislative provisions,

otherwise it would be an exercise of power in violation of the basic

features of the Constitution i.e. Part III dealing with the fundamental

rights which also prescribes the limitations.

7. Article 14 of the Constitution provides for equality of

opportunity. It forms the cornerstone of our Constitution.

In I.R. Coelho (dead) by L.Rs. v. State of Tamil Nadu, AIR

2007 SC 861, the doctrine of basic features has been explained by this

Court as under:

Page 5

"The doctrine of basic structure contemplates that there

are certain parts or aspects of the Constitution including

Article 15, Article 21 read with Articles 14 and 19 which

constitute the core values which if allowed to be

abrogated would change completely the nature of the

Constitution. Exclusion of fundamental rights would

result in nullification of the basic structure doctrine, the

object of which is to protect basic features of the

Constitution as indicated by the synoptic view of the

rights in Part III."

8. As Article 14 is an integral part of our system, each and every

state action is to be tested on the touchstone of equality. Any

appointment made in violation of mandate of Articles 14 and 16 of the

Constitution is not only irregular but also illegal and cannot be

sustained in view of the judgments rendered by this Court in Delhi

Development Horticulture Employees' Union v. Delhi

Administration, Delhi & Ors., AIR 1992 SC 789; State of Haryana

& Ors. v. Piara Singh & Ors. etc.etc., AIR 1992 SC 2130; Prabhat

Kumar Sharma & Ors. v. State of U.P. & Ors., AIR 1996 SC 2638;

J.A.S. Inter College, Khurja, U.P. & Ors. v. State of U.P. & Ors.,

AIR 1996 SC 3420; M.P. Housing Board & Anr. v. Manoj

Shrivastava, AIR 2006 SC 3499; M.P. State Agro Industries

Development Corporation Ltd. & Anr. v. S.C. Pandey, (2006) 2

Page 6

SCC 716; and State of Madhya Pradesh & Ors. v. Ku. Sandhya

Tomar & Anr., JT 2013 (9) SC 139.

9. In Excise Superintendent Malkapatnam, Krishna District,

A.P. v. K.B.N. Visweshwara Rao & Ors., (1996) 6 SCC 216, a larger

Bench of this Court reconsidered its earlier judgment in Union of

India & Ors. v. N. Hargopal & Ors., AIR 1987 SC 1227, wherein it

had been held that insistence of requisition through employment

exchanges advances rather than restricts the rights guaranteed by

Articles 14 and 16 of the Constitution. However, due to the possibility

of non sponsoring of names by the employment exchange, this Court

held that any appointment even on temporary or ad hoc basis without

inviting application is in violation of the said provisions of the

Constitution and even if the names of candidates are requisitioned

from Employment Exchange, in addition thereto, it is mandatory on

the part of the employer to invite applications from all eligible

candidates from open market as merely calling the names from the

Employment Exchange does not meet the requirement of the said

Articles of the Constitution. The Court further observed:

"In addition, the appropriate department…..should call

for the names by publication in the newspapers having

Page 7

wider circulation and also display on their office notice

…and employment news bulletins; and then consider the

case of all candidates who have applied. If this

procedure is adopted, fair play would be sub served. The

equality of opportunity in the matter of employment

would be available to all eligible candidates."

(Emphasis added)

(See also: Arun Tewari & Ors. v. Zila Mansavi Shikshak Sangh &

Ors., AIR 1998 SC 331; and Kishore K. Pati v. Distt. Inspector of

Schools, Midnapur & Ors., (2000) 9 SCC 405).

10. In Suresh Kumar & Ors. v. State of Haryana & Ors., (2003)

10 SCC 276, this Court upheld the judgment of the Punjab & Haryana

High Court wherein 1600 appointments made in the Police

Department without advertisement stood quashed though the Punjab

Police Rules, 1934 did not provide for such a course. The High Court

reached the conclusion that process of selection stood vitiated because

there was no advertisement and due publicity for inviting

applications from the eligible candidates at large.

11. In Union Public Service Commission v. Girish Jayanti Lal

Vaghela & Ors., AIR 2006 SC 1165, this Court held:

"........The appointment to any post under the State can

only be made after a proper advertisement has been

Page 8

made inviting applications from eligible candidates and

holding of selection by a body of experts or a specially

constituted committee whose members are fair and

impartial, through a written examination or interview or

some other rational criteria for judging the inter se merit

of candidates who have applied in response to the

advertisement made…………… Any regular

appointment made on a post under the State or Union

without issuing advertisement inviting applications

from eligible candidates and without holding a proper

selection where all eligible candidates get a fair chance

to compete would violate the guarantee enshrined

under Article 16 of the Constitution...."

(Emphasis added)

12. The principles to be adopted in the matter of public

appointments have been formulated by this Court in M.P. State Coop.

Bank Ltd., Bhopal v. Nanuram Yadav & Ors., (2007) 8 SCC 264 as

under:

"(1) The appointments made without following the

appropriate procedure under the rules/government

circulars and without advertisement or inviting

applications from the open market would amount to

breach of Articles 14 and 16 of the Constitution of India.

(2) Regularisation cannot be a mode of appointment.

(3) An appointment made in violation of the mandatory

provisions of the statute and in particular, ignoring the

minimum educational qualification and other essential

qualification would be wholly illegal. Such illegality

cannot be cured by taking recourse to regularisation.

Page 9

(4) Those who come by back-door should go through that

door.

(5) No regularisation is permissible in exercise of the

statutory power conferred under Article 162 of the

Constitution of India if the appointments have been made

in contravention of the statutory rules.

(6) The court should not exercise its jurisdiction on

misplaced sympathy.

(7) If the mischief played is so widespread and all

pervasive, affecting the result, so as to make it difficult to

pick out the persons who have been unlawfully benefited

or wrongfully deprived of their selection, it will neither

be possible nor necessary to issue individual show-cause

notice to each selectee. The only way out would be to

cancel the whole selection.

(8) When the entire selection is stinking, conceived in

fraud and delivered in deceit, individual innocence has

no place and the entire selection has to be set aside."

13. A similar view has been reiterated by the Constitution Bench of

this Court in Secretary, State of Karnataka & Ors. v. Umadevi &

Ors., AIR 2006 SC 1806, observing that any appointment made in

violation of the Statutory Rules as also in violation of Articles 14 and

16 of the Constitution would be a nullity. "Adherence to Articles 14

and 16 of the Constitution is a must in the process of public

employment". The Court further rejected the prayer that ad hoc

appointees working for long be considered for regularisation as such a

Page 10

course only encourages the State to flout its own rules and would

confer undue benefits on some at the cost of many waiting to

compete.

14. In State of Orissa & Anr. v. Mamata Mohanty, (2011) 3 SCC

436, this Court dealt with the constitutional principle of providing

equality of opportunity to all which mandatorily requires that vacancy

must be notified in advance meaning thereby that information of the

recruitment must be disseminated in a reasonable manner in public

domain ensuring maximum participation of all eligible candidates;

thereby the right of equal opportunity is effectuated. The Court held

as under:-

"Therefore, it is a settled legal proposition that no

person can be appointed even on a temporary or ad hoc

basis without inviting applications from all eligible

candidates. If any appointment is made by merely

inviting names from the employment exchange or putting

a note on the noticeboard, etc. that will not meet the

requirement of Articles 14 and 16 of the Constitution.

Such a course violates the mandates of Articles 14 and

16 of the Constitution of India as it deprives the

candidates who are eligible for the post, from being

considered. A person employed in violation of these

provisions is not entitled to any relief including salary.

For a valid and legal appointment mandatory

compliance with the said constitutional requirement is to

be fulfilled. The equality clause enshrined in Article 16

requires that every such appointment be made by an

Page 11

open advertisement as to enable all eligible persons to

compete on merit."

15. Where any such appointments are made, they can be challenged

in the court of law. The quo warranto proceeding affords a judicial

remedy by which any person, who holds an independent substantive

public office or franchise or liberty, is called upon to show by what

right he holds the said office, franchise or liberty, so that his title to it

may be duly determined, and in case the finding is that the holder of

the office has no title, he would be ousted from that office by judicial

order. In other words, the procedure of quo warranto gives the

Judiciary a weapon to control the Executive from making appointment

to public office against law and to protect a citizen from being

deprived of public office to which he has a right. These proceedings

also tend to protect the public from usurpers of public office who

might be allowed to continue either with the connivance of the

Executive or by reason of its apathy. It will, thus, be seen that before a

person can effectively claim a writ of quo warranto, he has to satisfy

the Court that the office in question is a public office and is held by a

usurper without legal authority, and that inevitably would lead to an

enquiry as to whether the appointment of the alleged usurper has been

made in accordance with law or not. For issuance of writ of quo

Page 12

warranto, the Court has to satisfy that the appointment is contrary to

the statutory rules and the person holding the post has no right to hold

it. (Vide: The University of Mysore & Anr. v. C.D. Govinda Rao &

Anr., AIR 1965 SC 491; Shri Kumar Padma Prasad v. Union of

India & Ors., AIR 1992 SC 1213; B.R. Kapur v. State of Tamil

Nadu & Anr., AIR 2001 SC 3435; The Mor Modern Co-operative

Transport Society Ltd. v. Financial Commissioner and Secretary

to Govt., Haryana & Anr., AIR 2002 SC 2513; Arun Singh v. State

of Bihar & Ors., AIR 2006 SC 1413; Hari Bansh Lal v. Sahodar

Prasad Mahto & Ors., AIR 2010 SC 3515; and Central Electricity

Supply Utility of Odisha v. Dhobei Sahoo & Ors., (2014) 1 SCC

161).

16. Another important requirement of public appointment is that of

transparency. Therefore, the advertisement must specify the number

of posts available for selection and recruitment. The qualifications and

other eligibility criteria for such posts should be explicitly provided

and the schedule of recruitment process should be published with

certainty and clarity. The advertisement should also specify the rules

under which the selection is to be made and in absence of the rules,

the procedure under which the selection is likely to be undertaken.

Page 13

This is necessary to prevent arbitrariness and to avoid change of

criteria of selection after the selection process is commenced, thereby

unjustly benefiting someone at the cost of others.

17. Thus, the aforesaid decisions are an authority on prescribing the

limitations while making appointment against public posts in terms of

Articles 14 and 16 of the Constitution. What has been deprecated by

this Court time and again is "backdoor appointments or appointment

de hors the rules".

In State of U.P. & Ors. v. U.P. State Law Officers

Association & Ors., AIR 1994 SC 1654, this Court while dealing

with the back-door entries in public appointment observed as under:

"The method of appointment is indeed not calculated to

ensure that the meritorious alone will always be

appointed or that the appointments made will not be on

the considerations other than merit. In the absence of

guidelines, the appointment may be made purely on

personal or political consideration and be arbitrary.

This being so those who come to be appointed by such

arbitrary procedure can hardly complain if the

termination of their appointment is equally arbitrary.

Those who come by the back-door have to go by the

same door….From the inception some engagements and

contracts may be the product of the operation of the

spoils system. There need be no legal anxiety to save

them." (Emphasis added)

Page 14

18. In Som Raj & Ors. v. State of Haryana & Ors., AIR 1990

SC 1176, this Court held as under:

"The absence of arbitrary power is the first postulate of

rule of law upon which our whole constitutional edifice

is based. In a system governed by Rule of Law, discretion

when conferred upon an executive authority must be

confined within clearly defined limits. The rules provide

the guidance for exercise of the discretion in making

appointment from out of selection lists which was

prepared on the basis of the performance and position

obtained at the selection. The appointing authority is to

make appointment in the order of gradation, subject to

any other relevant rules like, rotation or reservation, if

any, or any other valid and binding rules or instructions

having force of law. If the discretion is exercised without

any principle or without any rule, it is a situation

amounting to the antithesis of Rule of Law. Discretion

means sound discretion guided by law or governed by

known principles of rules, not by whim or fancy or

caprice of the authority."

19. In making the appointments or regulating the other service

conditions of the staff of the High Court, the Chief Justice exercises

an administrative power with constitutional backing. This power has

been entrusted to the safe custody of the Chief Justice in order to

ensure the independence of the Judiciary, which is one of the vital

organs of a Government and whose authority is to be maintained. The

discretion exercised by the Chief Justice cannot be open to challenge,

Page 15

except on well known grounds, that is to say, when the exercise of

discretion is discriminatory or mala fide, or the like(s).

20. Even under the Constitution, the power of appointment granted

to the Chief Justice under Article 229 (1) is subject to Article 16 (1),

which guarantees equality of opportunity for all citizens in matters

relating to employment. 'Opportunity' as used in this Article means

chance of employment and what it guaranteed is that this opportunity

of employment would be equally available to all.

21. As a safeguard, the Constitution has also recognized that in the

internal administration of the High Court, no other power, except the

Chief Justice should have domain. In order to enable a judicial

intervention, it would require only a very strong and convincing

argument to show that this power has been abused. If an authority has

exercised his discretion in good faith and not in violation of any law,

such exercise of discretion should not be interfered with by the courts

merely on the ground that it could have been exercised differently or

even that the courts would have exercised it differently had the matter

been brought before it in the first instance or in that perspective.

Page 16

22. Article 235 of the Constitution provides for power of the High

Court to exercise complete administrative control over the

Subordinate Courts. This control, undoubtedly, extends to all

functionaries attached to the Subordinate Courts including the

ministerial staff and servants in the establishment of the Subordinate

Courts. If the administrative control cannot be exercised over the

administrative and ministerial staff, i.e. if the High Court would be

denuded of its powers of control over the other administrative

functionaries and ministerial staff of the District Court and

Subordinate Courts other than Judicial Officers, then the purpose of

superintendence provided therein would stand frustrated and such an

interpretation would be wholly destructive to the harmonious, efficient

and effective working of the Subordinate Courts. The Courts are

institutions or organism where all the limbs complete the whole

system of Courts and when the Constitutional provision is of such

wide amplitude to cover both the Courts and persons belonging to the

Judicial Office, there would be no reason to exclude the other limbs of

the Courts, namely, administrative functionaries and ministerial staff

of its establishment from the scope of control. Such control is

exclusive in nature, comprehensive in extent and effective in

Page 17

operation. (Vide: The State of West Bengal & Anr. v. Nripendra

Nath Bagchi, AIR 1966 SC 447; Shri Baradakanta Mishra v.

Registrar of Orissa High Court & Anr., AIR 1974 SC 710;

Yoginath D. Bagde v. State of Maharashtra & Anr., AIR 1999 SCC

3734; Subedar Singh & Ors. v. District Judge, Mirzapur & Anr.,

AIR 2001 SC 201; High Court of Judicature for Rajasthan v. P.P.

Singh & Anr., AIR 2003 SC 1029; and Registrar General, High

Court of Judicature at Madras v. R. Perachi & Ors., AIR 2012 SC

232).

23. In M. Gurumoorthy v. The Accountant General, Assam and

Nagaland & Ors., AIR 1971 SC 1850, the Constitution Bench of this

Court held:

"The unequivocal purpose and obvious intention of the

framers of the Constitution in enacting Article 229 is that

in the matter of appointments of officers and servants of

a High Court it is the Chief Justice or his nominee who is

to be the supreme authority and there can be no

interference by the executive except to the limited extent

that is provided in the Article……Thus, Article 229 has a

distinct and different scheme and contemplates full

freedom to the Chief Justice in the matter of

appointments of officers and servants of the High Court

and their conditions of service."

Page 18

24. In this Case, this Court spelt out the powers of the Chief Justice

of the High Court in the matters of appointment of staff of the High

Court, but this Court did not lay down in any way that the Chief

Justice can exercise such powers in contravention of the provisions of

Articles 14 and 16 of the Constitution while making appointments in

the establishment of the High Court.

25. In H.C. Puttaswamy & Ors. v. The Hon'ble Chief Justice of

Karnataka High Court, Bangalore & Ors., AIR 1991 SC 295, while

dealing with a similar situation and interpreting the provisions of

Article 229 (2) of the Constitution and Karnataka State Civil Services

(Recruitment to Ministerial Posts) Rules, 1966, this Court held the

appointments made by the Chief Justice of the High Court without

advertising the vacancies as invalid being violative of Articles 14 and

16(1) of the Constitution. The Court came to the said conclusion as

the appointments were made without following the procedure

prescribed in the Rules. The Court further observed:

"While the administration of the Courts has perhaps,

never been without its critics, the method of recruitment

followed by the Chief Justice appears to be without

parallel…..……The methodology adopted by the Chief

Justice was manifestly wrong and it was doubtless

Page 19

deviation from the course of law which the High Court

has to protect and preserve.

The judiciary is the custodian of constitutional

principles which are essential to the maintenance of rule

of law. It is the vehicle for the protection of a set of

values which are integral part of our social and political

philosophy. Judges are the most visible actors in the

administration of justice. Their case decisions are the

most publicly visible outcome. But the administration of

justice is just not deciding disputed cases. It involves

great deal more than that. Any realistic analysis of the

administration of justice in the Courts must also take

account of the totality of the judges behaviour and their

administrative roles. They may appear to be only minor

aspects of the administration of justice, but collectively

they are not trivial. They constitute in our opinion, a

substantial part of the mosaic which represents the

ordinary man's perception of what the Courts are and

how the Judges go about their work. The Chief Justice is

the prime force in the High Court. Article 229 of the

Constitution provides that appointment of officers and

servants of the High Court shall be made by the Chief

Justice or such other Judge or officer of the Court as

may be directed by the Chief Justice. The object of this

Article was to secure the independence of the High Court

which cannot be regarded as fully secured unless the

authority to appoint supporting staff with complete

control over them is vested in the Chief Justice. There

can be no disagreement on this matter. There is

imperative need for total and absolute administrative

independence of the High Court. But the Chief Justice

or any other Administrative Judge is not an absolute

ruler. Nor he is a free wheeler. He must operate in the

clean world of law; not in the neighbourhood of sordid

atmosphere. He has a duty to ensure that in carrying

out the administrative functions, he is actuated by same

principles and values as those of the Court he is

serving. He cannot depart from and indeed must

remain committed to the constitutional ethos and

traditions of his calling. We need hardly say that those

Page 20

who are expected to oversee the conduct of others, must

necessarily maintain a higher standards of ethical and

intellectual rectitude. The public expectations do not

seem to be less exacting." (Emphasis added)

(See also: State of Assam v. Bhubhan Chandra Datta & Anr., AIR

1975 SC 889).

26. In Binod Kumar Gupta & Ors. v. Ram Ashray Mahoto &

Ors., AIR 2005 SC 2103, this Court did not accept the contention that

appointment could be made to Class-IV post in Subordinate Courts

under the Civil Court Rules without advertisement in the newspapers

inviting applications for the posts as that would lead to lack of

transparency and violation of the provisions of Article 16 of the

Constitution. The Court terminated the services of such appointees

who had worked even for 15 years observing that the Court otherwise

"would be guilty of condoning a gross irregularity in their initial

appointment."

27. To say that the Chief Justice can appoint a person without

following the procedure provided under Articles 14 and 16 would lead

to an indefinite conclusion that the Chief Justice can dismiss him also

without holding any inquiry or following the principles of natural

Page 21

justice/Rules etc., for as per Section 16 of General Clauses Act, 1897

power to appoint includes power to remove/suspend/dismiss. (Vide:

Pradyat Kumar Bose v. The Hon'ble Chief Justice of Calcutta

High Court, 1956 SC 285; and Chief Justice of Andhra Pradesh &

Anr. v. L.V.A. Dikshitulu & Ors., AIR 1979 SC 193).

But as no employee can be removed without following the

procedure prescribed by law or in violation of the terms of his

appointment, such a course would not be available to the Chief

Justice. Therefore, the natural corollary of this is that the Chief Justice

cannot make any appointment in contravention of the Statutory Rules,

which have to be in consonance with the scheme of our Constitution.

28. In State of West Bengal & Ors. v. Debasish Mukherjee &

Ors., AIR 2011 SC 3667, this Court again dealt with the provisions of

Article 229 of the Constitution and held that the Chief Justice cannot

grant any relief to the employee of the High Court in an irrational or

arbitrary manner unless the Rules provide for such exceptional relief.

The order of the Chief Justice must make reference to the existence of

such exceptional circumstances and the order must make it so clear

that there had been an application of mind to those exceptional

Page 22

circumstances and such orders passed by the Chief Justice are

justiciable. While deciding the matter, the court placed reliance on its

earlier judgment of the Constitution Bench in State of U.P.& Ors. v.

C.L. Agrawal & Anr., AIR 1997 SC 2431.

29. Thus, in view of the above, the law can be summarised to the

effect that the powers under Article 229 (2) of the Constitution cannot

be exercised by the Chief Justice in an unfettered and arbitrary

manner. Appointments should be made giving adherence to the

provisions of Articles 14 and 16 of the Constitution and/or such Rules

as made by the legislature.

30. In today's system, daily labourers and casual labourers have

been conveniently introduced which are followed by attempts to

regularise them at a subsequent stage. Therefore, most of the times

the issue raised is about the procedure adopted for making

appointments indicating an improper exercise of discretion even when

the rules specify a particular mode to be adopted. There can be no

doubt that the employment whether of Class IV, Class III, Class II or

any other class in the High Court or courts subordinate to it fall within

the definition of "public employment". Such an employment,

Page 23

therefore, has to be made under rules and under orders of the

competent authority.

31. In a democratic set up like ours, which is governed by rule of

law, the supremacy of law is to be acknowledged and absence of

arbitrariness has been consistently described as essence of rule of law.

Thus, the powers have to be canalised and not unbridled so as to

breach the basic structure of the Constitution. Equality of opportunity

in matters of employment being the constitutional mandate has always

been observed. The unquestionable authority is always subject to the

authority of the Constitution. The higher the dignitary, the more

objectivity is expected to be observed. We do not say that powers

should be curtailed. What we want to say is that the power can be

exercised only to the width of the constitutional and legal limits. The

date of retirement of every employee is well known in advance and

therefore, the number of vacancies likely to occur in near future in a

particular cadre is always known to the employer. Therefore, the

exercise to fill up the vacancies at the earliest must start in advance to

ensure that the selected person may join immediately after availability

of the post, and hence, there may be no occasion to appoint any

Page 24

person on ad-hoc basis for the reason that the problem of inducting the

daily labourers who are ensured of a regular appointment

subsequently has to be avoided and a fair procedure must be adopted

giving equal opportunity to everyone.

32. It has been rightly said:

"Perfection consists not in doing extraordinary things,

but in doing ordinary things extraordinary well."

33. We had the advantage of the response given by the High Courts

and the State. Some of the States like Jharkhand, Kerala, Madhya

Pradesh, Orissa, Sikkim and Uttrakhand have pointed out in their

respective affidavits that the recruitment of most of the posts are made

by centralised selection and some of those posts are transferable.

Some States like Jharkhand have pointed out that there is a centralised

recruitment of all the posts but division wise and are transferable

within the division. Some of the States like Punjab & Haryana and

Uttar Pradesh have pointed out that they have already drafted the rules

providing for centralised recruitment. The State of Himachal Pradesh

and the High Court thereof have shown inclination towards the

centralised recruitment. In the State of Madhya Pradesh, though rules

Page 25

do not provide for centralised recruitment but it is so done under the

administrative order of the Chief Justice of the High Court. Other

States and the High Courts have also made suggestions that it is the

need of the hour to provide for centralised recruitment.

34. We would like to make it clear that the High Court is a

constitutional and an autonomous authority subordinate to none.

Therefore, nobody can undermine the constitutional authority of the

High Court, and therefore the purpose to hear this case is only to

advise the High Court that if its rules are not in consonance with the

philosophy of our Constitution and the same may be modified and no

appointment in contravention thereof should be made. It is necessary

that there is strict compliance with appropriate Rules and the

employer is bound to adhere to the norms of Articles 14 & 16 of the

Constitution before making any recruitment.

35. In view of the above, the appeal stands disposed of with the

following directions:

i) All High Courts are requested to re-examine the statutory rules

dealing with the appointment of staff in the High Court as well

as in the subordinate courts and in case any of the rule is not in

Page 26

conformity and consonance with the provisions of Articles 14

and 16 of the Constitution, the same may be modified.

ii) To fill up any vacancy for any post either in the High Court or

in courts subordinate to the High Court, in strict compliance of

the statutory rules so made. In case any appointment is made in

contravention of the statutory rules, the appointment would be

void ab-initio irrespective of any class of the post or the person

occupying it.

iii) The post shall be filled up by issuing the advertisement in at

least two newspapers and one of which must be in vernacular

language having wide circulation in the respective State. In

addition thereto, the names may be requisitioned from the local

employment exchange and the vacancies may be advertised by

other modes also e.g. Employment News, etc. Any vacancy

filled up without advertising as prescribed hereinabove, shall be

void ab-initio and would remain unenforceable and

inexecutable except such appointments which are permissible to

be filled up without advertisement, e.g., appointment on

compassionate grounds as per the rules applicable. Before any

appointment is made, the eligibility as well as suitability of all

Page 27

candidates should be screened/tested while adhering to the

reservation policy adopted by the State, etc., if any.

iv) Each High Court may examine and decide within six months

from today as to whether it is desirable to have centralised

selection of candidates for the courts subordinate to the

respective High Court and if it finds it desirable, may formulate

the rules to carry out that purpose either for the State or on

Zonal or Divisional basis.

v) The High Court concerned or the subordinate court as the case

may be, shall undertake the exercise of recruitment on a regular

basis at least once a year for existing vacancies or vacancies

that are likely to occur within the said period, so that the

vacancies are filled up timely, and thereby avoiding any

inconvenience or shortage of staff as it will also control the

menace of ad-hocism.

36. Before parting with the case, we record our deep appreciation to

Shri P.S. Narasimha, learned senior counsel for rendering invaluable

assistance to the court as Amicus Curiae.

Page 28

Copy of the judgment be sent to the Registrar General/Registrar

(Administration) of all the High Courts by this Registry directly and

the said officer is requested to place the same before the Hon'ble

Chief Justice for information and appropriate action.

…………......................J.

(Dr. B.S. CHAUHAN)

……….........................J.

(J. CHELAMESWAR)

……….........................J.

(M.Y. EQBAL)

New Delhi;

February 12, 2014.

Page 29

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