Memorandum & Articles of Association under Companies Act,2013
CS M. Kurthalanathan
Memorandum and Articles of Association:Introduction:
Memorandum of association is the charter of the company and defines the scope of its activities. An article of association of the company is a document which regulates the internal management of the company.
Memorandum of association defines the relation of the company with the rights of the members of the company interest and also establishes the relationship of the company with the members.
Definition- Memorandum:
As per Section 2(56) of the Companies Act,2013 "memorandum" means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.
Memorandum Of Association:
Section 4 of the Companies Act,2013 deals with MOA. The Memorandum of a company shall contain the following;
1. Name Clause:
The name of the company with the last word "Limited" in the case of a public limited company, or the last words "Private Limited" in the case of a private limited company.
2. Situation Clause:
The State in which the registered office of the company is to be situated.
3.Object Clause:
The objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.
4.Liability Clause:
The liability of members of the company, whether limited or unlimited, and also state,—
(i) in the case of a company limited by shares- liability of its members is limited to the amount unpaid, if any, on the shares held by them; and
(ii) in the case of a company limited by guarantee-the amount up to which each member undertakes to contribute—
(A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member,as the case may be; and
(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;
5.Capital Clause:
(i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
In the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company.
Identical/undesirable names;
The name stated in the memorandum shall not—
(a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or
(b) be such that its use by the company—
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government
A company shall not be registered with a name which contains—
(a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or
(b) such word or expression, as prescribed in the Companies (Incorporation) Rules, 2014.
unless the previous approval of the Central Government has been obtained for the use of any such word or expression.
Reservation of name:
A person may make an application in Form No. INC.1 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 to the registrar for the reservation of a name set out in the application as-
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name
The Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of sixty days from the date of the application.
Penalty:
If the company has not been incorporated, the reserved name shall be cancelled and the person making application shall be liable to a penalty which may extend to Rs.1,00,000/-
Action:
If the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard—
- either direct the company to change its name within a period of three months, after passing an ordinary resolution;
- take action for striking off the name of the company from the register of companies; or
- make a petition for winding up of the company.
Form of Memorandum:
The memorandum of a company shall be in respective forms as outlined below
| S.No | Table | Form |
| 1 | Table A | MOA of a company limited by shares |
| 2 | Table B | MOA of a company limited by guarantee and not having share capital |
| 3 | Table C | MOA of a company limited by guarantee and having share capital |
| 4 | Table D | MOA of an unlimited company and not having share capital |
| 5 | Table E | MOA of an unlimited company and having share capital |
Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void
MOA- CA2013 Vs CA1956:
| S.No | CA,2013 | CA,1956 |
| 1 | It requires classification of objects as (i) Objects for which the company is proposed to be incorporated and (ii) Any other matter considered necessary in furtherance thereof. | The objects of the company should be classified in the memorandum as (i) main objects (ii) Incidental or ancillary objects (iii) Other objects |
| 2 | It requires that the memorandum shall state liability of members of the company whether unlimited or limited | The unlimited companies were not required to state in the memorandum that liability of the members of the company is unlimited. |
| 3 | A company shall not be registered with a name which contains any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body | There is no such provision |
| 4 | It incorporates the procedural aspects of application for availability of name of proposed company or proposed new name for existing company | There is no such provision |
| 5 | It provides that the MOA of a company shall be in respective forms specified in Tables A,B,C,D,E of Schedule I of the 2013 Act as may be applicable to the company. It does not allow the memorandum to be in a form as near to the applicable Forms in Schedule I as the circumstances admit | It provides that the MOA of a company shall be in a such one of the forms in Table B,C,D,E of Schedule I of the 1956 Act as may be applicable to the case or in a Form as near thereto as the circumstances admit. |
Articles of Association:
Definition –Articles:
As per Section 2(5) of the Companies Act,2013 "articles" means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.
Section 5 of the Companies Act,2013 deals with AOA.
The articles of a company shall contain the regulations for management of the company.
The articles shall also contain such matters, as may be prescribed.
It shall be not prevent a company from including such additional matters in its articles as may be considered necessary for its management.
Provisions for Retrenchment:
The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.
The provisions for entrenchment shall only be made by
| Private Company |
|
| Public company | By a special resolution |
Notice to Registrar:
Where the articles contain the provisions for entrenchment, the company shall give notice to the Registrar of such provisions in Form No.INC.2 or Form No.INC.7, as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company or in case of existing companies, the same shall be filed in Form No.MGT.14 within thirty days from the date of entrenchment of the articles, as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014
Form of Article :
The articles of a company shall be in respective forms as outlined below;
| S.No | Table | Form |
| 1 | Table F | AOA of a company limited by shares |
| 2 | Table G | AOA of a company limited by guarantee and having share capital |
| 3 | Table H | AOA of a company limited by guarantee and not having share capital |
| 4 | Table I | AOA of an unlimited company and having share capital |
| 5 | Table J | AOA of an unlimited company and not having share capital |
A company may adopt all or any of the regulations contained in the model articles applicable to such company.
In case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company.
Nothing in this section shall apply to the articles of a company registered under any previous company law unless amended under this Act
AOA- CA,2013 Vs CA,1956:
| S.No | CA,2013 | CA,1956 | ||||
| 1` | It is compulsory for every company to have its own articles and file the same with ROC for registration. | Optional for a Public company limited by shares. Compulsory for other Companies | ||||
| 2 | The articles may contain provisions for entrenchment. The provisions for entrenchment shall only be made by;
The company shall give notice to the Registrar for entrenchment provisions. | There is no such provision | ||||
| 3 | The articles of a company shall be in the respective forms specified in Tables G,H,I,J in Schedule I as may be applicable to such company. The liberty to have articles or in a form as near thereto as circumstances admit, which was available in the 1956 Act is no longer available in the 2013 Act. | The articles of any company, not being a company limited by shares shall be in such Tables C,D,E in Schedule I as may be applicable or in a form as near thereto as circumstances admit. |
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under the Companies Act,2013
Non Bailable offences under Service Tax do not have retrospective effect
We are sharing with you an important judgement of the Hon'ble High Court of Calcutta, in the case of Sudip Das, {[2014] 44 taxmann.com 48 (Calcutta)} on following issue:
Issue:
Whether assessee can be denied bail under Section 89(1)(d)(ii) of the Finance Act, 1994 ("the Finance Act") read with Sections 90 and 91 thereof as amended/ introduced vide the Finance Act, 2013 (w.e.f May 10, 2013), for non – payment of service tax exceeding Rs. 50 lakhs collected during the period prior to May 10, 2013, on pretext that the offence being a continuing one?
Facts & Background:
Mr. Sudip Das ("the assessee" or "the Petitioner") was arrested by the Department under Section 89(1)(d)(ii) of the Finance Act read with Sections 90 and 91 thereof, as amended/ introduced by the Finance Act 2013, for non-payment of service tax exceeding Rs. 50 lakhs collected from the customers during the period 2008–2012.
Relevant extracts of the said Sections of the Finance Act are reproduced below for ease of reference:
"89. Offences and penalties.—
(1) Whoever commits any of the following offences, namely,—
a) …………..;or
b) …………..; or
c) …………..; or
d) collects any amount as service tax but fails to pay the amount so collected to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due, shall be punishable,—
(i) …………..
(ii) in the case of the offence specified in clause (d), where the amount exceeds fifty lakh rupees, with imprisonment for a term which may extend to seven years……."
"90. Cognizance of offences
(1) An offence under clause (ii) of sub-section (1) of section 89 shall be cognizable.
(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973(2 of 1974), all offences, except the offences specified in sub-section (1), shall be non-cognizable and bailable."
"91. Power to arrest
(1) If the Commissioner of Central Excise has reason to believe that any person has committed an offence specified in clause (i) or clause (ii) of sub-section (1) of section 89, he may, by general or special order, authorise any officer of Central Excise, not below the rank of Superintendent of Central Excise, to arrest such person………"
The assessee argued that since the alleged offence arose between the period 2008-2012, was Bailable and cognizability/ non-bailability was introduced vide the Finance Act, 2013 which was effective from May 10, 2013 and not retrospective. Therefore, assessee was eligible for bail. The Department denied bail to the assessee alleging that the offence is a continuing one and is alive even today, therefore, amended provisions are applicable.
Being aggrieved by the Contention of the Department, the assesseefiled petition before the Hon'ble High Court of Calcutta.
Held:
It is held by the Hon'ble High Court of Calcutta that the amendment brought vide the Finance Act, 2013 does not have any retrospective effect, therefore, question of bailability and non-bailability almost comes to a point of merger, benefit of which should be extended to accused person.
It was further held by the Hon'ble High Court of Calcutta that even though the alleged offence is alive till now but it is equally correct that when it was originated, alleged offence was bailable as per law. Hence, bail was granted subject to certain conditions.
Therefore, the Hon'ble High Court of Calcutta rejected the contention of the Department and decided the case in favour of the assessee/ Petitioner.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)
Things you should know for construction of your house
Balwant Jain, CFO, Apna Paisa
From the phrase "Roti, Kapda aur Makan", it is evident that Makaan is one of the three basic needs of a person. A person puts in a significant portion of his present and future savings in order to have a roof over his head. Earlier people used to get the house constructed with the money received on their retirement but nowadays young persons are able to get this dream fulfilled with the help of easy availability of home loan and are able to fulfil this dream in the prime of their youth. In this article I wish to cover two aspects related to home loan for the purpose of construction of a house. Firstly I wish to cover the feasibility of availing a home loan for the construction of a house. Secondly I will cover tax benefits available on home loan for the construction of a house.
Home loan eligibility:
As far as availing a home loan is concerned, the lenders treat loan taken for ready to move in house property and a booking of an under-construction property on the same footing with regard to eligibility, tenure and rate of interest. However in case of booking for an under-construction property, the disbursement of such loan happens in stages linked with the stages of completion of the construction. There are ample lenders willing to lend for such properties.
However in case of self-construction of a house on your own plot of land, you have relatively lesser number of lenders willing to give you loans. In case of self-construction on a plot, the buyer can go for a composite loan which would include the cost of the plot and cost of construction both. The lender will disburse you its part of the loan after you have fully contributed for your share in the cost. The lender releases money in tranches on the basis of certificate provided by an architect or civil engineer. You also have to submit photograph in support of the stage of completion of the construction. In some of the cases the lender may depute its own architect for verification of the stages of completion of the construction in stead of relying on the certificate furnished by you.
Repayment of such loans in the form of EMI (Equated Monthly Installments) starts once the lender has fully disbursed the loan which normally coincides with completion of the construction. However it is not necessary that the EMI will only start after completion of the construction. Till such time your regular EMIs start, you may have to pay the interest on the money already disbursed by the lender. This is known as pre-EMI interest.
Tax Provisions:
As per the provisions of Section 80 C, you are entitled to claim an amount upto Rs. 100,000 for principal repayment of the home loan obtained from banks, Housing Finance Companies etc. along with other deductions like ULIP, PF, PPF, ELSS, NSC etc. However in cases where you have already started paying EMI which includes interest and principal even before completion of the construction, you cannot claim any deduction on account of any principal repayment made before construction of the property is completed. Moreover in case you sell the property, constructed within five years from the end of the financial year in which possession of the house is taken, all the deductions claimed by you on account of such repayment will be reversed and shall be treated as income of the year in which you sell such property.
In addition to the tax rebate for repayment of the loan under Section 80C you are allowed to claim rebate under Section 24 (b) in respect of interest paid on such loans. However the benefit for payment of interest can only be claimed from the year in which construction of such property is completed. However unlike principal repayment before completion of the construction, you do not lose your right to claim the interest paid before completion of the construction. You are allowed to claim the accumulated Pre- EMI interest paid till the year prior to completion of the construction in five equal instatements along with your regular interest for the year.
In respect of self-occupied property generally you can claim interest upto Rs. 1.50 lakhs. However this claim of Rs. 1.50 lakhs comes down to Rs. 30,000 in case construction of the house is not completed within a period of three years from the end of the year in which this loan was taken. In case the house is let out you can claim full interest in respect of such loan. It is interesting to note that there is no provision for reversing the tax benefits availed under Section 24(b) if the house is sold before completion of five years from the end of the financial year in which it was completed.
This way you can see that construction of a house gives you various benefits but the various time limits have to be met so that you do not lose the various benefits available for construction of a house.
Apnapaisa is India's Online marketplace for Loans – Home loans, Car Loans, Personal Loans and Investments. Author can be reached at www.facebook.com/apnapaisa.
2014-TIOL-608-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Tax Appeal No. 1029 of 2013
Tax Appeal No. 1030 of 2013
Tax Appeal No. 1030 of 2013
COMMISSIONER OF INCOME TAX
Vs
INDUSTRIAL EXTENSION BUREAU
Akil Kureshi And Sonia Gokani, JJ
Dated: February 10, 2014
Appellant Rep by: Mr Sudhir M Mehta, Adv.
Respondents Rep by: Mr JP Shah for Mr Manish J Shah, Adv.
Respondents Rep by: Mr JP Shah for Mr Manish J Shah, Adv.
Income Tax - Section 11 - Whether the Tribunal commits any error in granting the benefit to the assessee for the entire amount when it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to Section 11(1).
The Assessee was a registered public charitable trust. The AO noticed that a sum of Rs. 59.17 lakhs which was the income of the assessee was not spent by the Trust. The AO added such amount to the income of the assessee. The CIT [A] accepted that amount of Rs. 59,17,600/= should be allowed to be accumulated since declaration was already made before the last date of filing the return. He, however, rejected the claim towards larger amount observing that such option had to be exercised before the due date of filing the return. Therefore, granted benefit to the extent of Rs. 59,17,600/= and not for the entire amount of Rs. 1,05,67,047/.The Tribunal allowed the assessee's appeal and rejecting the revenue's by observing that the CIT (A) ought to have considered the submissions of the assessee that the requirement of exercising option is being directory in nature, therefore, a liberal approach to have been adopted.
Having heard the parties, the HC held that,
++ a charitable trust unable to utilize its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85% would have an option either in terms of clause (2) of Explanation to subsection (1) thereof, or as provided under subsection (2). The assessee did exercise such option. Such option was exercised before last date of filing the return, which was 30th September 2009 and secondly, that such option was exercised in terms of clause (2) of Explanation to Section 11 (1). This was clearly not an option under subsection (2) of Section 11. The caption of the said communication as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the AO that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee's option was to be covered by the provision of Section 11 (2);
++ the Tribunal committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to Section 11 (1) of the Act.
The Assessee was a registered public charitable trust. The AO noticed that a sum of Rs. 59.17 lakhs which was the income of the assessee was not spent by the Trust. The AO added such amount to the income of the assessee. The CIT [A] accepted that amount of Rs. 59,17,600/= should be allowed to be accumulated since declaration was already made before the last date of filing the return. He, however, rejected the claim towards larger amount observing that such option had to be exercised before the due date of filing the return. Therefore, granted benefit to the extent of Rs. 59,17,600/= and not for the entire amount of Rs. 1,05,67,047/.The Tribunal allowed the assessee's appeal and rejecting the revenue's by observing that the CIT (A) ought to have considered the submissions of the assessee that the requirement of exercising option is being directory in nature, therefore, a liberal approach to have been adopted.
Having heard the parties, the HC held that,
++ a charitable trust unable to utilize its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85% would have an option either in terms of clause (2) of Explanation to subsection (1) thereof, or as provided under subsection (2). The assessee did exercise such option. Such option was exercised before last date of filing the return, which was 30th September 2009 and secondly, that such option was exercised in terms of clause (2) of Explanation to Section 11 (1). This was clearly not an option under subsection (2) of Section 11. The caption of the said communication as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the AO that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee's option was to be covered by the provision of Section 11 (2);
++ the Tribunal committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to Section 11 (1) of the Act.
Revenue's appeal dismissed
Cases followed:
Trustees of Tulsidas Gopalji Charitable And Chaleshwar Temple Trust v. CIT, 207 ITR 368
CIT v. Ziarat Mir Syed Ali Hamdani, [2001] 248 ITR 769.
Trustees of Tulsidas Gopalji Charitable And Chaleshwar Temple Trust v. CIT, 207 ITR 368
CIT v. Ziarat Mir Syed Ali Hamdani, [2001] 248 ITR 769.
JUDGEMENT
Per: Akil Kureshi:
1. Leave to amend Questions framed in Tax Appeal No. 1029 of 2013.
2. These appeals arise in the following background -
Respondent-assessee, who is common in both the appeals, is a registered public charitable trust. For the Assessment Year 200910, the assessee filed return of income which was taken in scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that a sum of Rs. 59.17 lakhs [rounded off] which was the income of the assessee was not spent by the Trust. After putting the assessee to notice, he added such amount to the income of the assessee. The assessee approached the CIT [A] and contended that the assessee always desired to exercise option available under clause (2) of Explanation to Section 11 (1), for which purpose, a communication was also addressed on 22nd September 2009. However, on being pointed out that there was an error in the figure indicated and such figure, in subsequent letter dated 13th February 2011 was written, correcting the figure from Rs. 59,17,600/= to Rs. 1.05,67,047/=.
3. This was opposed by the Revenue contending that the assessee had once exercised option available under clause (2) of Explanation to Section 11 (1), for which no declaration in the prescribed form was made. In any case, the request of correcting the figure came long after the last date of return has expired.
4. CIT [A] accepted the assessee's contention in part. He accepted that amount of Rs. 59,17,600/= should be allowed to be accumulated since declaration was already made before the last date of filing the return. He, however, rejected the claim towards larger amount observing that such option had to be exercised before the due date of filing the return. This was not done. This period cannot be extended indefinitely. He, therefore, granted benefit of Explanation (2) to Section 11 to the extent of Rs. 59,17,600/= and not for the entire amount of Rs. 1,05,67,047/=, as requested by the assessee.
5. This order of CIT [A] gave rise to two cross appeals. Revenue questioned CIT [A]'s order granting any benefit at all to the assessee. The assessee similarly filed appeal before the Tribunal to the extent its prayer was curtailed. These appeals were disposed of by the Tribunal by a common judgment allowing the assessee's appeal and rejecting the revenue's. In the process, the Tribunal made following observations :-
"6. We have heard the rival contentions and perused the material available on record. As per Section 11 (1) of Explanation (2) – if, in the previous year, the income applied to charitable or religious purposes in India falls short of (85) per cent of the income derived during that year from property held under trust, or as the case may be, held under trust in part, by any amount (i) for the reason that the while or any part of the income has not been received during that year, or (ii) for any other reason, then, in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under subsection (1) of Section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes. The contention of the learned counsel for the assessee is that the option has been exercised and he has drawn our attention towards page no. 8 of paper-book and also drew our attention towards page nos. 9 and 10. In letter dated 22/09/2009, it has been brought to the notice of DDIT, Gandhinagar for option exercised by the trust to allow to spend the surplus of Rs. 59,17,600/= which was further revised vide letter dated 20/06/2012 to Rs. 1,05,67,043/=. The only controversy is to be decided is whether the letters dated 22/09/2009 and 20/06/2012 are valid option which would entitle the assessee in terms of the Explanation2 of Section 11 (1). We find that the Hon'ble High Court of Jammu & Kashmir has held that the requirement of exercising the option is directory in nature. Further, it has been held that subsection (1) & (4) of Section 139 have to be read together and, on such a reading, the inevitable conclusion is that a return made within the time specified in subsection (4) has to be considered as having been made within the time prescribed in subsection (1) or subsection (2) of Section 139 of the Act. In other words, if a return is filed within the time specified in subsection (4) of Section 139 of the Act and the option contemplated by the Explanation to Section 11 (1) is exercised in writing alongwith such return, the requirements of the Explanation to Section 11 (1) would stand satisfied. In the instant case, the contention of the assessee is that it has exercised option and while exercising the option, the amount written of Rs. 59,17,600/= was wrongly mentioned. However, the same ought to have been Rs. 1,05,67,047/=. We find that ld. CIT (A) has agreed with the assessee to the extent that the A.O has decided this issue on a wrong basis. However, learned CIT (A) did not allow to correct the mistake on the basis that the extended time limit available till the finalization of assessment proceedings as has been decided in case of Section 11 (2) is therefore not available to the assessee. As it is an option which decides taxation of income in two years, it cannot but extent to after the return has been filed. It would, in a way, mean revising the return through back door which is not permissible. Even otherwise, the letter of extra accumulation was filed only in November 2011, when even the time of filing the revised return u/s. 139 (5) has elapsed. This could not be permitted. Therefore, the assessee was allowed of income under Explanation (2) to Section 11 to the extent of Rs. 59,17,600/=. We have considered all aspects of the matter. In the present case, there is no dispute that the mistake was committed while exercising option for allowing accumulation of income. The contention of the assessee is that such mistake is bona fide and the assessee cannot be deprived of legal claim on the basis that the claim was not made within time, since the requirement of exercising option is directory in nature. Under the peculiar facts of the present case, we feel that learned CIT (A) ought to have considered the submissions of the assessee that the requirement of exercising option is being directory in nature, therefore, a liberal approach to have been adopted. We are, therefore, of the view that in the light of the judgment(s) of Hon'ble High Court of J&K, the Assessing Officer has decided this issue on a wrong basis, therefore, we do not find any merit in the ground of the Revenue, the same is hereby rejected."
6. We notice that under Section 11 of the Act, a charitable trust unable to utilize its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85% would have an option either in terms of clause (2) of Explanation to subsection (1) thereof, or as provided under subsection (2). When such an option is covered under subsection (2) i.e., the income is sought to be accumulated or set apart for the period prescribed, that the requirement of making a declaration in the prescribed manner arises. In case of an option under clause (2) of Explanation to subsection (1), there is no such requirement of making declaration but the requirement is exercising of such option in writing before the expiry of the time allowed under subsection (1) of Section 139 for furnishing the return of income.
7. In the present case, the assessee did exercise such option as is apparent from the letter dated 22nd September 2009 at page9 of the paper-book supplied by the counsel for the assessee. In such letter, the assessee conveyed to the Department that the assessee gave a notice of option exercised by the Trust to allow to spend surplus amount of Rs. 59,17,600/= that may remain at the end of the previous year ended on 31st March 2009, during the immediately following the previous year i.e., 200910. In the caption, the assessee referred to as the subject Notice of option exercised as required under clause (2) of Explanation to Section 11 (1). Two things are thus abundantly clear – firstly, that such option was exercised before last date of filing the return, which was 30th September 2009 and secondly, that such option was exercised in terms of clause (2) of Explanation to Section 11 (1) of the Act. This was clearly not an option under subsection (2) of Section 11. The caption of the said communication dated 22nd September 2009 as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the Assessing Officer that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee's option was to be covered by the provision of Section 11 (2) of the Act.
8. It is true that in such option exercised on 22nd September 2009, the assessee indicated a smaller figure of Rs. 57,17,600/= and it was only later that the same was corrected to Rs. 1,05,67,047/=. However, the Tribunal has taken note of facts on record namely that the option in fact was exercised within the time permitted under the statute. It was a bona fide error to indicate a wrong figure. The intention to avail carry over of the unspend income to the next year was clear. We notice that in case of Trustees of Tulsidas Gopalji Charitable And Chaleshwar Temple Trust v. Commissioner of Income Tax, reported in 207 ITR 368, the Bombay High Court and in case of Commissioner of IncomeTax v. Ziarat Mir Syed Ali Hamdani, reported in [2001] 248 ITR 769, the Jammu & Kashmir High Court have held that the requirement of exercising an option within the time permitted under clause (2) of Explanation to Section 11 (1) of the Act is directory and not mandatory. Substantial compliance thereof would therefore be sufficient. Even otherwise, without going to the extent of holding such time limit as directory and not mandatory, in the facts of the present case, in our opinion, the Tribunal committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to Section 11 (1) of the Act.
9. In the result, Tax Appeals are dismissed.
2014-TIOL-595-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Special Civil Application No.6382 of 2008
Civil Application No.2273 of 2009
Civil Application No.2273 of 2009
UNIPON (INDIA) LTD
Vs
INCOME TAX SETTLEMENT COMMISSION & 1
Akil Kureshi And Sonia Gokani, JJ
Dated: April 09-16, 2014
Appellants Rep by: Mr S N Soparkar, Sr Counsel With Mrss Swati Soparkar, Adv.
Respondent Rep by: Mr Manish Bhatt, Sr Counsel With Mrs Mauna M Bhatt, Adv.
Respondent Rep by: Mr Manish Bhatt, Sr Counsel With Mrs Mauna M Bhatt, Adv.
Income Tax - Sections 32(2), 72(1), 245C, 245D(2A) - Settlement Commission -additional income - brought forward losses - unabsorbed depreciation - Whether for the purpose of computing additional tax payable u/s 245D(2A), resort must be given to the sub-sections (1A) to (1D) of section 245C - Whether while passing the order for settlement of a case, an assessee would be entitled to set off the unabsorbed depreciation against his income from other sources disclosed as additional income - Whether the Settlement Commission can undertake the full-fledged assessment proceedings of the cases filed before it - Whether in case of an application filed before Settlement commission, the tax liability of the assessee would be calculated on the aggregate of the total income returned and the income disclosed in the application - Whether a special provision in the Act would prevail over any other general term of a concept contained in the Act.
The assessee is a Private Limited Company. It had challenged an order passed by the SETCOM. Under such order, SETCOM held that the assessee failed to pay additional tax and interest on the income disclosed in the application for settlement as required u/s 245D(2A). For the AY 2005-2006, assessee had filed the return of income declaring nil income. In an application u/s 245C for settlement of case, assessee had disclosed additional income of Rs.72,00,000/-which did not form part of the original return. In terms of amended subsection (2A) of section 245D w.e.f 1.6.2007, the assessee was required to pay the additional tax on the income disclosed in the application for settlement along with the interest thereon, on or before 31.7.2007 in order to proceed further with the application for settlement. The assessee had deposited a sum of Rs.20 lakhs by 31.7.2007. The SETCOM in order to verify the compliance of section 245D(2A), called for a report from the CIT, who made a report suggesting that the assessee was required to pay a total amount of Rs.35,55,000/-by way of tax and interest on the additional income disclosed for the AY 2005-2006 whereas the petitioner had paid only Rs.20 lakhs till 31.7.2007. The SETCOM therefore, issued a show cause notice to the assessee why the proceedings before the Commission be declared as abated for the failure of the assessee to comply with the provisions of section 245D(2A). In response to such notice, assessee canvassed before SETCOM that in the year, it had unabsorbed depreciation of Rs.34,29,183/-. The disclosure of Rs.72,00,000/-was adjusted against such unabsorbed depreciation leaving the revised net total income for the year under consideration at Rs.37,70,817/-. The assessee had therefore, computed the tax on such total income and paid the same along with interest. On the basis of such computation, assessee had contended that the requirement of depositing additional tax with interest u/s 245D(2A) was fully satisfied. The Revenue, on the other hand, contended that the provisions of the Act were clear. The application of the assessee could be allowed to proceed only if the additional tax on the income disclosed in the application for settlement along with interest was paid before 31.7.2007. Thereafter the SETCOM had concluded that the assessee had disclosed 'NIL' total income in the return of income. Having disclosed an additional income of Rs.72 lacs in the settlement application, the applicant was required to pay tax on a total income of Rs.72 lacs. The provisions of sub-sections 1A to 1D of section 245C clearly show that there was no room for allowing set off of brought forward business losses or unabsorbed depreciation/investment allowance. Further, the set off of unabsorbed depreciation/brought forward business loss against income from short term capital gain or from other sources in the normal computation of total income in itself was questionable. It was, therefore, held that the assessee had failed to pay the additional tax and interest on the income disclosed in the application as was required u/s.245D(2A).
Before HC, the assessee's counsel had submitted that the SETCOM had committed a serious error in declaring that the application of the assessee be abated for non payment of tax plus interest before the due date. It had argued that in terms of section 32(2) read with section 72(1), the assessee was allowed to set off unabsorbed depreciation against his income from other sources. This was clearly so held by the SC in case of CIT, Calcutta v. Jaiupria China Clay Mines(P) Ltd reported in 59 ITR 555. The SETCOM therefore, committed an error in observing that the very question of such set off even in normal computation was questionable. It was further argued that SETCOM had to compute the tax liability of an applicant in terms of provisions contained in the Act. In the final order that the Commission would pass, effect of section 32(2) read with section 72(1) would have to be given. Combined effect of these provisions would be that the assessee's income from other sources would be squared off against unabsorbed depreciation. The tax liability of the assessee would be decided accordingly. Under such circumstances, the assessee would be taxed not on Rs. 72,00,000/- which formed the additional disclosure in the application for settlement but on Rs.37,70,817/- after adjusting sum of Rs.34,29,183/pertaining to unabsorbed depreciation. In this context reference was made to the decision of the SC in case of E.K. Lingamurthy and another v. Settlement Commissioner (IT and WT) and another 2009-TIOL-07-SC-IT. In the said case, the Court held that while computing total income for the block period, undisclosed income must be set off against the brought forward losses. It was held that the Settlement Commission had erred in disallowing such set off. Reliance was also placed on decision of Bombay HC in case of Gobind Builders and Developers v. Income Tax SETCOM and others 2008-TIOL-295-HC-MUM-IT wherein in similar situation in the context of liability of an assessee to pay additional tax while applying for settlement, the Court held that computation of such additional tax would have to be done after allowing set off of the unabsorbed depreciation against the income disclosed under the application for settlement.
On the other hand, the Revenue's counsel had opposed the petition contending that for the purpose of making deposit of additional tax in terms of section 245D(2A), special computation was provided under sub-sections(1A) to (1D) of section 245C. These provisions do not permit set off of unabsorbed depreciation against the additional income disclosed in the application for settlement. When such special formula was provided by the legislature, general rules for computation of total income and tax liability of an assessee cannot be applied disregarding the formula so provided under the Act. It was further submitted that at the stage of verifying whether the additional tax as required u/s 245D(2A) was deposited or not, complex exercise of ascertaining the ultimate possible tax liability of an assessee cannot be undertaken. These being summary proceedings, the legislature desired that different stages envisaged before the SETCOM would be completed without waste of time. It was submitted therefore, while verifying whether the applicant before the SETCOM had deposited the tax as required u/s 245D(2A), the formula under sub-sections (1A) to (1D) of section 245C had to be applied.
Held that,
++ the fact that in normal computation of petitioner's tax liability, the petitioner would be entitled to set off the unabsorbed depreciation against his income from other sources of Rs.72,00,000/-is legally not disputable. Combined effect of section 32(2) and section 72(1) would be that the carried forward unabsorbed depreciation would be available for sett off against the business income or income from other sources of an assessee in a particular year. This is precisely what the Supreme Court held in case of Jaiupria China Clay Mines(P) Ltd. Even before us the Revenue has not seriously contested this legal position. We would therefore, proceed on such basis. It is also true that while passing order for settlement of a case, the Commission is required to apply the provisions contained under the Act. It is held by the SC in number of decisions that the Settlement Commission does not undertake the fullfledged assessment proceedings, and therefore, cannot be challenged as if it is an appealable order, nevertheless, its order can be challenged on the limited ground that the same is not in accordance with law. "In accordance with law would include in accordance with the provisions of the Act. Reference in this regard may be made to the decision of SC in case of Jyotendrasinjhi v. S.I. Tripathi and others 2002-TIOL-993-SC-IT. In that view of the matter, it does appear to us that if the application for settlement was properly instituted and if allowed to be proceeded further, after crossing different stages envisaged under the Act, the Settlement Commission would have to decide the tax liability of the petitioner, unless further additions are made for appropriate reasons, on the basis of additional disclosed income by giving benefit of set off of unabsorbed depreciation. It was in this context, counsel had vehemently contended that the petitioner cannot be expected to deposit by way of additional tax which ultimately may not result into its tax liability in an order that the Settlement Commission may pass. It was in this context that the Bombay High Court had also understood and appreciated the provisions contained in section 245C and 245D of the Act;
++ under sub section (1) of Section 245C of the Act, the applicant for settlement of a case has to deposit additional amount of income tax payable on "such income, reference to this being the disclosure of his income which has not been disclosed before the Assessing Officer. Sub section (1A) of Section 245C prescribes the manner in which the additional amount of income tax payable in terms of sub section (1) of Section 245C in respect of income disclosed in an application made under the said sub section shall be computed by providing that the same shall be calculated in accordance with the provisions of sub sections (1B) to (1D). Sub section (1B) envisages two situations; first is where the applicant had not furnished a return in which case the tax shall be calculated on the income disclosed in the settlement application considering such income as total income of the assessee. The second situation is and with respect to which we are concerned, where the applicant had furnished return in respect of the total income of the assessment year under consideration, in such a case, the tax would be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income. In terms of Clause (ii) of said section (1B) therefore the tax would be calculated on the aggregate of the returned total income and the disclosed income, treating the aggregate thereof as the total income of the applicant. Sub section (1C) of Section 245C provides for the additional amount of income tax payable in respect of income disclosed. Clause (b) thereof which covers our situation provides that the amount of tax calculated under Section 245C(1B)(ii) shall be reduced by the amount of tax calculated in the total income returned for that year. In simple terms, therefore, where an assessee has furnished return of income and applies for settlement of his case, one has to calculate his total income for the purpose of the said provision by aggregating the total income returned and the income disclosed in the application. Applicant's liability to pay additional tax would be the amount of tax calculated on such total income minus the amount of tax calculated on the total income returned for that year;
++ in case of The Dargah Committee, Ajmer vs. The State of Rajasthan and anr reported in AIR 1962 SC page 574, the Supreme Court considered a regulation section which provided that any money recoverable by the committee shall be recovered as if it were a tax levied by the committee on the property and shall be charged thereon. In this context, it was observed that if the fiction introduced by the said section is to be deemed as if it were a tax it is obvious that full effect must be given to this legal fiction. In case of M/s. Khemka & Co.(Agencies) Pvt. Ltd v. State of Maharashtra reported in (1975) 2 Supreme Court Cases 22 the Supreme Court had the occasion to consider the deeming provision enacted by using expression "as if. Section 9(2) of the Central Sales Tax adopted the machinery for assessment, reassessment, collection and enforcement of tax including penalty if any of the State under the Sales tax law of the State as if the tax or penalty were payable under the sales tax law of the State. In the present case, legislature has created a deeming fiction by providing that the tax of the applicant would be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income. This device is created for a special purpose and has a localized effect. It comes into existence only for the purpose of calculating the tax to be deposited by an applicant for settlement of a case. In such a situation, the aggregate of the total income returned and the income disclosed would be considered as total income;
++ under the circumstances, the contention of the counsel for the petitioner that the term "total income should be construed as defined under Section 5 of the Act for the purpose of calculating additional tax of an applicant for settlement of a case cannot be accepted. This is for multiple reasons. Firstly, as discussed earlier Clause (ii) of sub section (1B) of Section 245C of the Act gives rise to deeming fiction where total income has to be considered as if the aggregate of the total income returned and the income disclosed would be the total income. Such deeming fiction must be allowed its full effect. Secondly, the very same clause uses the term "total income returned in a different context and the aggregate of the total income returned and the income disclosed which would partake the character of a total income for this limited purpose. Thirdly, such deeming fiction cannot be discarded by bringing into consideration such term used elsewhere by the legislature. It is well known that legislature provides for definition of various terms frequently used in the statutes. The definition section usually comes with the expression "unless the context otherwise provides or "unless there is anything repugnant to. Such definition section defines various terms repeatedly used in a statute which would carry the meaning as contained in the definition. It is also well known that the statute defines often times terms for the special purpose of a section or even for a subsection. Examples are replete in the Act itself where the definitions are provided only for the purposes of a particular section or even a sub-section. In the present case, this formula which contains a special definition for a special purpose would, therefore, have its effect only for Section 245C. Being a special provision it would prevail over any other general term of a concept contained in the Act. Section 245C(1) of the Act also requires the applicant to provide besides other details, true and full disclosure of his income which has not been disclosed before the Assessing Officer and amount of income-tax payable on "such income". Reference to "such income thus is the income disclosed in the settlement application which was not disclosed before the Assessing Officer;
++ the reason for the legislature to provide a simple formula is not far to seek. As noted, the different stages before the Settlement Commission once an application is made by the assessee for settlement of his case, comes with time frame. Even the final order which the Settlement Commission may pass has a deadline beyond which if no order is passed, the proceedings would abate. At a stage where the Settlement Commission is required to ascertain where an assessee applicant has paid the additional tax with interest thereon only upon which application can be allowed to proceed further, no complex exercise or verification is envisaged. If the concept of total income contained in the Act is imported at such a stage, it can give rise to multiple disputes and lengthy debates with respect to the total income of an assessee and whether full tax on such income has been paid or not. At such a stage, the legislature does not envisage the Commission to go into a complex exercise of ascertaining the total income of the assessee and further ascertaining his tax liability on such income. The legislature has, therefore, provided for a simple formula possible of a simple arithmatical application. It may be that in a given case the assessee may be entitled to a refund once the Settlement Commission passes its final order. Such isolated case, however, would not govern the interpretation of sub sections (1B) and (1C) of Section 245C. Any such interpretation would give rise to complex consideration by the Settlement Commission of the assessee's total income not as defined in sub section (1B) to but as otherwise understood and referred to in Section 5. Likewise, the computation of the tax on such total income and the resultant liability of the assessee for paying additional tax also would become a complex exercise. In income tax proceedings multiple claims, of deductions and exemptions give rise to often times complex considerations. Often the liability itself is fluctuating due to court pronouncements. Sometimes a legal question or interpretation of a provision may be in the virgin field not covered by any Court judgement. The legislature never intended that at the stage of ascertaining whether the assessee has deposited the additional tax on an application made for settlement of the case, such complex exercise should be undertaken by the Settlement Commission. Further, in our opinion, accepting any such interpretation would defeat the very purpose of introducing the simplicity of computation of "total income of an assessee for the purpose of the said provision and his liability to pay additional tax with interest thereon;
++ the Bombay High Court in case of Gobind Builders Developers vs. Income Tax Settlement Commission and ors. has adopted somewhat different approach. The court has held that what is payable under sub section (1) of Section 245C is the tax on total income which would mean whatever allowance or disallowance that the assessee was entitled to the same would also be available. We are unable to persuade ourselves to adopt this interpretation. In our opinion bringing the concept of total income for computing the assessee's liability to deposit additional tax while making application for settlement would amount to ignoring the deeming fiction created by the legislature in Clause (ii) of sub section (1B) of Section 245C. For the computation of such additional tax payable the total income would be the total returned income added by the disclosed income by the assessee. Counsel Mr. Soparkar however contended that even viewed from this angle the assessee had discharged his additional tax liability. Such contention also cannot be accepted. The assessee's returned total income was nil. We may recall that the assessee had filed nil return. In terms of Clause (ii) of sub section (1B) of Section 245C therefore, Rs. 72 lacs which the assessee declared in the application for settlement would be his total income for the purpose of computing the additional tax liability. Admittedly the assessee had not deposited the tax with interest thereon calculated on amount of Rs. 72 lacs. The Commission, therefore, correctly did not allow such application to be proceeded further. The reasons adopted by the Commissioner are, however, somewhat different from what we have expressed in the judgement. Be that as it may, the petition must be and is dismissed. Interim relief, if any is vacated. Rule is discharged. In view of the order passed in the main matter civil applications are disposed of.
Assessee's petition dismissed
JUDGEMENT
Per: Akil Kureshi:
1. The petitioner has challenged an order dated 17.12.2007 passed by the Settlement Commission. Under such order, the Settlement Commission held that the petitioner failed to pay additional tax and interest on the income disclosed in the application for settlement as required under section 245D(2A) of the Income Tax Act, 1961 ("the Act for short).
2. The petition arises in the following factual background:
2.1. The petitioner is a private limited company. For the assessment year 2005-2006, the petitioner filed the return of income on 31.3.2006 declaring nil income. On 22.6.2006, the petitioner applied to the Settlement Commission for settlement of his assessment for the said assessment year under section 245C of the Act. In such application, the petitioner disclosed additional income of Rs.72,00,000/-which did not form part of the original return. In terms of amended subsection (2A) of section 245D of the Act with effect from 1.6.2007, the petitioner was required to pay the additional tax on the income disclosed in the application for settlement along with the interest thereon, on or before 31.7.2007 in order to proceed further with the application for settlement. The petitioner deposited a sum of Rs.20 lakhs by 31.7.2007. The Settlement Commission in order to verify the compliance of section 245D(2A) of the Act, called for a report from the Commissioner of Income tax, Ahmedabad. The Commissioner made a report suggesting that the petitioner was required to pay a total amount of Rs.35,55,000/-by way of tax and interest on the additional income disclosed for the assessment year 2005-2006 whereas the petitioner had paid only Rs.20 lakhs till 31.7.2007. The Settlement Commission therefore, issued a show cause notice to the petitioner why the proceedings before the Commission be declared as abated for the failure of the petitioner to comply with the provisions of section 245D(2A) of the Act.
2.2. In response to such notice, the petitioner canvassed before the Settlement Commission that in the year under consideration, the assessee had unabsorbed depreciation of Rs.34,29,183/-. The disclosure of Rs.72,00,000/-was adjusted against such unabsorbed depreciation leaving the revised net total income for the year under consideration at Rs.37,70,817/-. The assessee had therefore, computed the tax on such total income and paid the same along with interest. The computation putforth by the petitioner before the Settlement Commission was as under:
| "Income as per Return: | ||
| Profit and gain from business and profession | 47143810 | |
| Profit and gain from speculation | 810572 | |
| Total Income | 47954382 | |
| Additional Disclosure | ||
| Profit and gain from business and profession | ||
| Capital Gains | ||
| STCG | 6730189 | 6730189 |
| Income from other sources | ||
| Dividend | 4960 | |
| Others | 464851 | |
| Total | 469811 | |
| Total Disclosure | 7200000 | |
| Revised Gross Total Income | 55154382 | |
| Less : | ||
| Set off of B/f losses Business losses | 47954382 | |
| Unabsorbed depreciation | 3429183 | |
| Total set off of losses | 51383565 | |
| Revised Net Total Income | 3770817 |
2.3. On the basis of such computation, the petitioner contended that the requirement of depositing additional tax with interest under section 245D(2A) was fully satisfied. The Revenue, on the other hand, contended that the provisions of the Act were clear. The application of the petitioner could be allowed to proceed only if the additional tax on the income disclosed in the application for settlement along with interest is paid before 31.7.2007. In the present case, same was not done. For the purpose of computing the additional tax payable under section 245D(2A) of the Act, resort must be had to sub-sections (1A) to (1D) of section 245C of the Act. These provisions would not permit any set off for the purpose of computing liability of paying the additional tax.
2.4. The Settlement Commission held as under :
"10. We have considered the facts of this case as also the arguments advanced by both the parties. We are in agreement with the CIT(DR). The applicant had disclosed 'NIL' total income in the return of income filed on 31.03.06. Having disclosed an additional income of Rs.72 lacs in the settlement application, the applicant was required to pay tax on a total income of Rs.72 lacs. The provisions of sub-sections 1A to 1D of section 245C clearly show that there is no room for allowing set off of brought forward business losses or unabsorbed depreciation/investment allowance. Further, the set off of unabsorbed depreciation/brought forward business loss against income from short term capital gain or from other sources in the normal computation of total income in itself is questionable. We, therefore, find that the applicant has failed to pay the additional tax and interest on the income disclosed in the application as was required u/s.245D(2A)."
2.5. It is this decision of the Settlement Commission which is challenged before us.
3. From such decision it can be seen that the Settlement Commission rejected the petitioner's contention, that the tax required to be paid under section 245D(2A) was fully paid, on two grounds. Firstly, that sub-sections (1A) to (1D) of section 245C do not permit the set off of brought forward business losses or unabsorbed depreciation/investment allowance and secondly, that the very question of such set off of unabsorbed depreciation or brought forward business losses against income from short term capital gains or from other sources in the normal computation of income, is itself questionable.
4. On the basis of such facts, Shri S.N. Soparkar submitted that the Settlement Commission has committed a serious error in declaring that the application of the petitioner be abated for non payment of tax plus interest before the due date. Counsel raised the following contentions in support of his challenge:
1) In terms of section 32(2) read with section 72(1) of the Act, the petitioner was allowed to set off unabsorbed depreciation against his income from other sources. This was clearly so held by the Supreme Court in case of Commissioner of Income-tax, Calcutta v. Jaiupria China Clay Mines(P) Ltd reported in 59 ITR 555. The Settlement Commission therefore, committed an error in observing that the very question of such set off even in normal computation is questionable.2) The Settlement Commission has to compute the tax liability of an applicant in terms of provisions contained in the Act. In the final order that the Commission would pass, effect of section 32(2) read with section 72(1) of the Act would have to be given. Combined effect of these provisions would be that the petitioner's income from other sources would be squared off against unabsorbed depreciation. The tax liability of the petitioner would be decided accordingly. Under such circumstances, the petitioner would be taxed not on Rs. 72,00,000/- which formed the additional disclosure in the application for settlement but on Rs.37,70,817/- after adjusting sum of Rs.34,29,183/pertaining to unabsorbed depreciation. In this context reference was made to the decision of the Supreme Court in case of E.K. Lingamurthy and another v. Settlement Commissioner (IT and WT) and another reported in (2009) 314 ITR 305(SC) = 2009-TIOL-07-SC-IT. In the said case, the Court held that while computing total income for the block period, undisclosed income must be set off against the brought forward losses. It was held that the Settlement Commission had erred in disallowing such set off.3) Heavy reliance was placed on decision of Bombay High Court in case of Gobind Builders and Developers v. Income-tax Settlement Commission and others reported in (2009) 309 ITR 167(Bom) = 2008-TIOL-295-HC-MUM-IT wherein in similar situation in the context of liability of an assessee to pay additional tax while applying for settlement, the Court held that computation of such additional tax would have to be done after allowing set off of the unabsorbed depreciation against the income disclosed under the application for settlement.
5. On the other hand, Shri Manish Bhatt for the department opposed the petition contending that for the purpose of making deposit of additional tax in terms of section 245D(2A) of the Act, special computation is provided under sub-sections(1A) to (1D) of section 245C. These provisions do not permit set off of unabsorbed depreciation against the additional income disclosed in the application for settlement. When such special formula is provided by the legislature, general rules for computation of total income and tax liability of an assessee cannot be applied disregarding the formula so provided under the Act. Counsel further submitted that at the stage of verifying whether the additional tax as required under section 245D(2A) was deposited or not, complex exercise of ascertaining the ultimate possible tax liability of an assessee cannot be undertaken. These being summary proceedings, the legislature desired that different stages envisaged before the Settlement Commission would be completed without waste of time. In this context, therefore, while verifying whether the applicant before the Settlement Commission had deposited the tax as required under section 245D(2A), the formula under sub-sections (1A) to (1D) of section 245C had to be applied.
6. Having thus heard learned counsel for the parties and having perused the documents on record, facts emerge more or less as undisputed. Such undisputed facts are that for the assessment year 2005-2006, the petitioner made an application to the Settlement Commission for settlement of the case. In such application, the petitioner declared an undisclosed income of Rs.72 lakhs. In the return filed for the said assessment year, the petitioner had disclosed nil income. For the said year, the petitioner had unabsorbed depreciation of Rs.34,29,183/-. The short question is whether the petitioner was required to deposit additional tax on Rs. 72,00,000/- or on Rs.37,70,817/- (i.e. Rs.72,00,000 – Rs.34,29,183) after setting off the unabsorbed depreciation against such additional income?
7.The fact that in normal computation of petitioner's tax liability, the petitioner would be entitled to set off the unabsorbed depreciation against his income from other sources of Rs.72,00,000/-is legally not disputable.
8.Section 32(2) of the Act reads as under :
"32(2) Where in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years."
9. In turn Section 72(1) of the Act reads as under :
"(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and(i) It shall be set be off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year:(ii) If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on"
10. Combined effect of section 32(2) and section 72(1) would be that the carried forward unabsorbed depreciation would be available for sett off against the business income or income from other sources of an assessee in a particular year. This is precisely what the Supreme Court held in case of Jaiupria China Clay Mines(P) Ltd (supra). Even before us the Revenue has not seriously contested this legal position. We would therefore, proceed on such basis.
11. It is also true that while passing order for settlement of a case, the Commission is required to apply the provisions contained under the Act. It is held by the Supreme Court in number of decisions that the Settlement Commission does not undertake the fullfledged assessment proceedings, and therefore, cannot be challenged as if it is an appealable order, nevertheless, its order can be challenged on the limited ground that the same is not in accordance with law. "In accordance with law would include in accordance with the provisions of the Act. Reference in this regard may be made to the decision of Supreme Court in case of Jyotendrasinjhi v. S.I. Tripathi and others reported in 1993 Supp(3) Supreme Court Cases 389 = 2002-TIOL-993-SC-IT, in which it was held and observed as under :
"16. It is true that the finality clause contained in Section 245-I does not and cannot bar the jurisdiction of the High Court under Article 226 or the jurisdiction of this court under Article 32 or under Article 136, as the case may be. But that does not mean that the jurisdiction of this Court in the appeal preferred directly in this court is any different than what it would be if the assessee had first approached the High Court under Article 226 and then come up in appeal to this court under Article 136. A party does not and cannot gain any advantage by approaching this Court directly under Article 136, instead of approaching the High Court under Article 226. This is not a limitation inherent in Article 136; it is a limitation which this court imposes on itself having regard to the nature of the function performed by the Commission and keeping in view the principles of judicial review. May be, there is also some force in what Dr. Gauri Shankar says viz., that the order of commission is in the nature of a package deal and that it may not be possible, ordinarily speaking, to dissect its order and that the assessee should not be permitted to accept what is favourable to him and reject what is not. According to learned counsel, the Commission is not even required or obligated to pass a reasoned order. Be that as it may, the fact remains that it is open to the Commission to accept an amount of tax by way of settlement and to prescribe the manner in which the said amount shall be paid. It may condone the defaults and lapses on the part of the assessee and may waive interest, penalties or prosecution, where it thinks appropriate. Indeed, it would be difficult to predicate the reasons and considerations which induce the commission to make a particular order, unless of course the commission itself chooses to, give reasons for its order. Even if it gives reasons in a given case, the scope of enquiry in the appeal remains the same as indicated above viz., whether it is,contrary to any of the provisions of the Act. In this context, it is relevant to note that the principle of natural justice (and alteram partem) has been incorporated in Section 245-D itself. The sole overall limitation upon tire Commission thus appears, to be that it should act in accordance with the provisions of the Act. The scope of enquiry, whether by High Court under Article 226 or by this Court under Article 136 is also the same whether the order of the Commission is contrary to any of the provisions of the Act and if so, has it prejudiced the petitioner/appellant apart from ground of bias, fraud & malice which, of course, constitute a separate and independent category. Reference in this behalf may be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement Commission 176 I.T.R. 169, which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S.R. Pandian, J. observed that in such a case this Court is " concerned with the legality of procedure followed and not with the validity of the order.' The learned Judge added 'judicial review is concerned not with the decision but with the decisionmaking process." Reliance was placed upon the decision of the House of Lords in Chief Constable of the N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders' of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant The main controversy in these appeals relates to the interpretation of the settlement deeds though it is true, some contentions of law are also raised. The commission has interpreted the trust deeds in a particular manner, Even if the interpretation placed by the commission the said deeds is not correct, it would not be a ground for interference in these appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. it is equally clear that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other assessment years."
12. In that view of the matter, it does appear to us that if the application for settlement was properly instituted and if allowed to be proceeded further, after crossing different stages envisaged under the Act, the Settlement Commission would have to decide the tax liability of the petitioner, unless further additions are made for appropriate reasons, on the basis of additional disclosed income by giving benefit of set off of unabsorbed depreciation. It was in this context, learned senior counsel Shri Soparkar had vehemently contended that the petitioner cannot be expected to deposit by way of additional tax which ultimately may not result into its tax liability in an order that the Settlement Commission may pass. It was in this context that the Bombay High Court had also understood and appreciated the provisions contained in section 245C and 245D of the Act.
13. The question before us therefore, is of the interpretation of sub-sections (1A) to (1D) of section 245C of the Act, ofcourse, bearing in mind other provisions contained in Chapter XIXA of the Act.
16.04.2014
14. Chapter XIX-A of the Act pertains to settlement of cases. Section 245A contained in the said Chapter defines certain terms for the purpose of the said Chapter. Section 245B provides for the constitution of the Income Tax Settlement Commission. Section 245BA pertains to jurisdiction and powers of Settlement Commission.
15. Section 245C pertains to the application for settlement of cases. Sub section (1) of Section 245C provides inter alia that an assessee may, at any stage of a case relating to him, make an application in prescribed form and manner containing a full and true disclosure of his income which has not been disclosed, the manner in which such income has been derived, the additional amount of income tax payable on such income to the Settlement Commission to have the case settled. Proviso to sub section (1) of Section 245C inter alia requires the applicant to pay such tax and interest thereon which would have been paid under the provisions of the Act had the income disclosed in the application been declared in the return of income before the Assessing Officer on the date of application and the proof of such payment to be attached with the application. Since this requirement of payment of tax with interest on declared income was introduced w.e.f. 01.06.2007 opportunity was given to those applicants, who had already made such applications by the said date and whose applications were still pending, to pay such amounts on or before 31.07.2007 as provided in sub section (2A) of Section 245D of the act.
15.1. Sub section (1A) of Section 245C provides that for the purposes of sub section (1) the additional amount of income tax payable in respect of the income disclosed in an application made under sub section (1) shall be the amount calculated in accordance with the provisions of sub sections (1B) to (1D). Since entire controversy revolves around these provisions we may reproduce the same here:
"(1A) For the purpose of sub section (1) of this section the additional amount of income tax payable in respect of the income disclosed in an application made under sub section (1) of this section shall be the amount calculated in accordance with the provisions of sub sections (1B) to (1D).(1B) Where the income disclosed in the application relates to only one previous year,(i) if the applicant has not furnished a return in respect of the total income of that year, then, tax shall be calculated on the income disclosed in the application as if such income were the total income;(ii) if the applicant has furnished a return in respect of the total income of that year, tax shall be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income.(1C) The additional amount of income tax payable in respect of the income disclosed in the application relating to the previous year referred to in sub section (1B) shall be(a) in a case referred to in clause(i) of that sub section, the amount of tax calculated under that clause;(b) in a case referred to in clause (ii) of that sub section, the amount of tax calculated under the clause as reduced by the amount of tax calculated on the total income returned for that year;(1D) Where the income disclosed in the application relates to more than one previous year, the additional amount of income tax payable in respect of the income disclosed for each of the years shall first be calculated in accordance with the provisions of sub sections (1B) and (1C) and the aggregate of the amount so arrived at in respect of each of the years for which the application has been made under sub section (1) shall be the additional amount of income tax payable in respect of the income disclosed in the application.
16. Section 245D of the Act pertains to procedure on receipt of an application under Section 245C. Under sub section (1) of Section 245D on receipt of an application under Section 245C, the settlement commission, within seven days from the receipt of the application, would issue a notice to the applicant requiring him to explain why the application made by him be allowed to be proceeded with. On hearing the applicant, the Settlement Commission, within 14 days from the date of the application, pass an order in writing either rejecting the application or allowing the application to be proceeded with. Proviso to sub section (1) of Section 245D provides that where no order has been passed within the aforesaid period by the Settlement Commission, the application shall be deemed to have been allowed to be proceeded with. Sub section (2A) of Section 245D, as noticed earlier, provides for payment of tax and interest by the applicants who had applied before the Settlement Commission before 01.06.2007 and whose applications were pending as on 01.06.2007. Sub section (2A) reads as under:
"(2A) Where an application was made under section 245C before the 1st day of June,2007, but an order under the provisions of sub section (1) of this section, as they stood immediately before their amendment by the Finance Act,2007, has not been allowed to be proceeded with if the additional tax on the income disclosed in such application and the interest thereon is paid on or before the 31st day of July, 2007.
17. Under said section (2B) of Section 245D of the Act, the Settlement Commission with respect to the applications which have been allowed to be or deemed to have been allowed to be proceeded with shall call for a report from the Commissioner which would be furnished by the Commissioner within 30 days from the receipt of communication from the Settlement Commission.
18. Under Sub section (2C) of Section 245D of the Act, the Settlement Commission would proceed to pass an order on the basis of the report by the Commissioner within 15 days of the receipt of the report if so found appropriate declaring the application as invalid after giving an opportunity of being heard to the applicant. Further proviso to sub-section (2C) makes it clear that where the Commissioner has not furnished the report within the period prescribed, the Settlement Commission would proceed further in the matter without the report of the Commissioner. Sub sections (3) and (4) of Section 245D of the Act pertain to the power of the Settlement Commission to call for the records from the Commissioner and to direct further enquiry or investigation, if necessary, and to pass such order as it thinks fit.
19. Sub section (4A) of Section 245D of the Act lays down time limit for passing order under sub section (4). Under Section 245H the Settlement Commission has the power to grant immunity from prosecution and penalty. Section 245HA pertains to abatement of proceedings before the Settlement Commission, in particular, it provides that where in respect of any application under Section 245C and order under sub section (4) of Section 245D has not been passed within the time or period specified under sub section (4A) of Section 245D of the Act, the proceedings before the Settlement Commission shall abate on the specified date.
20. Some of these provisions were referred to in order to appreciate that the proceedings before the Settlement Commission under Chapter XIXA of the Act are special proceedings aimed at simplifying the procedure for bringing within the taxnet otherwise undisclosed income by an assessee with the temptation to avoid prosecution and penalty. These special provisions, therefore, have been made in the said Chapter in order to bring about an early end to such settlement proceedings. Different stages envisaged after an assessee makes an application for settlement of his case come with time limits. For example, as we saw, on receipt of an application under Section 245C of the Act, the Settlement Commission would, within 7 days from the date of the receipt of the application, issue a notice to the applicant. Within 14 days from the date of the application, the Settlement Commission would pass an order in writing either rejecting or allowing the application to be proceeded with. If no such order is passed within such time, the application would be deemed to have been allowed to be proceeded with. Likewise, a report called for from the Commissioner under sub section (2B) of Section 245D of the Act has to be furnished within 30 days of the communication by the Settlement Commission. Sub section (4A) of Section 245D lays down time limits for passing orders under sub section (4) in terms of Section 245HA(1)(iv). If no such order is passed within the time prescribed, the proceedings before the Settlement Commission would abate from such date. Thus, it can be seen that the proceedings before the Settlement Commission have to be completed within the time frame and various stages envisaged under Section 245D of the Act also come with various time frames.
21. Bearing in mind this general scheme of settlement of cases contained in Chapter XIXA we may peruse more closely sub sections (1A) to (1D) of Section 245C of the Act. Before that we may recall, under sub section (1) of Section 245C of the Act, the applicant for settlement of a case has to deposit additional amount of income tax payable on "such income, reference to this being the disclosure of his income which has not been disclosed before the Assessing Officer. Sub section (1A) of Section 245C prescribes the manner in which the additional amount of income tax payable in terms of sub section (1) of Section 245C in respect of income disclosed in an application made under the said sub section shall be computed by providing that the same shall be calculated in accordance with the provisions of sub sections (1B) to (1D). Sub section (1B) envisages two situations; first is where the applicant had not furnished a return in which case the tax shall be calculated on the income disclosed in the settlement application considering such income as total income of the assessee. The second situation is and with respect to which we are concerned, where the applicant had furnished return in respect of the total income of the assessment year under consideration, in such a case, the tax would be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income. In terms of Clause (ii) of said section (1B) therefore the tax would be calculated on the aggregate of the returned total income and the disclosed income, treating the aggregate thereof as the total income of the applicant. Sub section (1C) of Section 245C provides for the additional amount of income tax payable in respect of income disclosed. Clause (b) thereof which covers our situation provides that the amount of tax calculated under Section 245C(1B)(ii) shall be reduced by the amount of tax calculated in the total income returned for that year.
22. In simple terms, therefore, where an assessee has furnished return of income and applies for settlement of his case, one has to calculate his total income for the purpose of the said provision by aggregating the total income returned and the income disclosed in the application. Applicant's liability to pay additional tax would be the amount of tax calculated on such total income minus the amount of tax calculated on the total income returned for that year.
23. Sub section (1B) and (1C) of Section 245C thus provide for a special formula for arriving at an applicant's liability to pay additional tax for maintaining an application for settlement. Such special formula containes a deeming fiction. Such deeming fiction for the purpose of calculating additional tax payable defines term "total income in artificial manner. Use of the deeming fiction is the wellknown legislative device to give rise to an artificial situation or fiction. Such device can be created not necessarily by using the term "deemed to be. The expression "as if is also seen as giving rise to a deeming fiction.
24. In case of The Dargah Committee, Ajmer vs. The State of Rajasthan and anr reported in AIR 1962 SC page 574, the Supreme Court considered a regulation section which provided that any money recoverable by the committee shall be recovered as if it were a tax levied by the committee on the property and shall be charged thereon. In this context, it was observed that if the fiction introduced by the said section is to be deemed as if it were a tax it is obvious that full effect must be given to this legal fiction. In case of M/s. Khemka & Co.(Agencies) Pvt. Ltd v. State of Maharashtra reported in (1975) 2 Supreme Court Cases 22the Supreme Court had the occasion to consider the deeming provision enacted by using expression "as if. Section 9(2) of the Central Sales Tax adopted the machinery for assessment, reassessment, collection and enforcement of tax including penalty if any of the State under the Sales tax law of the State as if the tax or penalty were payable under the sales tax law of the State.
25. In the present case, legislature has created a deeming fiction by providing that the tax of the applicant would be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income. This device is created for a special purpose and has a localized effect. It comes into existence only for the purpose of calculating the tax to be deposited by an applicant for settlement of a case. In such a situation, the aggregate of the total income returned and the income disclosed would be considered as total income.
26. Under the circumstances, the contention of the counsel for the petitioner that the term "total income should be construed as defined under Section 5 of the Act for the purpose of calculating additional tax of an applicant for settlement of a case cannot be accepted. This is for multiple reasons. Firstly, as discussed earlier Clause (ii) of sub section (1B) of Section 245C of the Act gives rise to deeming fiction where total income has to be considered as if the aggregate of the total income returned and the income disclosed would be the total income. Such deeming fiction must be allowed its full effect. Secondly, the very same clause uses the term "total income returned in a different context and the aggregate of the total income returned and the income disclosed which would partake the character of a total income for this limited purpose. Thirdly, such deeming fiction cannot be discarded by bringing into consideration such term used elsewhere by the legislature. It is well known that legislature provides for definition of various terms frequently used in the statutes. The definition section usually comes with the expression "unless the context otherwise provides or "unless there is anything repugnant to. Such definition section defines various terms repeatedly used in a statute which would carry the meaning as contained in the definition. It is also well known that the statute defines often times terms for the special purpose of a section or even for a subsection. Examples are replete in the Act itself where the definitions are provided only for the purposes of a particular section or even a sub-section. In the present case, this formula which contains a special definition for a special purpose would, therefore, have its effect only for Section 245C. Being a special provision it would prevail over any other general term of a concept contained in the Act. Section 245C(1) of the Act also requires the applicant to provide besides other details, true and full disclosure of his income which has not been disclosed before the Assessing Officer and amount of income-tax payable on "such income". Reference to "such income thus is the income disclosed in the settlement application which was not disclosed before the Assessing Officer.
27. The reason for the legislature to provide a simple formula is not far to seek. As noted, the different stages before the Settlement Commission once an application is made by the assessee for settlement of his case, comes with time frame. Even the final order which the Settlement Commission may pass has a deadline beyond which if no order is passed, the proceedings would abate. At a stage where the Settlement Commission is required to ascertain where an assessee applicant has paid the additional tax with interest thereon only upon which application can be allowed to proceed further, no complex exercise or verification is envisaged. If the concept of total income contained in the Act is imported at such a stage, it can give rise to multiple disputes and lengthy debates with respect to the total income of an assessee and whether full tax on such income has been paid or not. At such a stage, the legislature does not envisage the Commission to go into a complex exercise of ascertaining the total income of the assessee and further ascertaining his tax liability on such income. The legislature has, therefore, provided for a simple formula possible of a simple arithmatical application. It may be that in a given case the assessee may be entitled to a refund once the Settlement Commission passes its final order. Such isolated case, however, would not govern the interpretation of sub sections (1B) and (1C) of Section 245C. Any such interpretation would give rise to complex consideration by the Settlement Commission of the assessee's total income not as defined in sub section (1B) to but as otherwise understood and referred to in Section 5 of the Act. Likewise, the computation of the tax on such total income and the resultant liability of the assessee for paying additional tax also would become a complex exercise. In income tax proceedings multiple claims, of deductions and exemptions give rise to often times complex considerations. Often the liability itself is fluctuating due to court pronouncements. Sometimes a legal question or interpretation of a provision may be in the virgin field not covered by any Court judgement. The legislature never intended that at the stage of ascertaining whether the assessee has deposited the additional tax on an application made for settlement of the case, such complex exercise should be undertaken by the Settlement Commission. Further, in our opinion, accepting any such interpretation would defeat the very purpose of introducing the simplicity of computation of "total income of an assessee for the purpose of the said provision and his liability to pay additional tax with interest thereon.
28. The Bombay High Court in case of Gobind Builders Developers vs. Income Tax Settlement Commission and ors. (supra) has adopted somewhat different approach. The court has held that what is payable under sub section (1) of Section 245C is the tax on total income which would mean whatever allowance or disallowance that the assessee was entitled to the same would also be available. We are unable to persuade ourselves to adopt this interpretation. In our opinion bringing the concept of total income for computing the assessee's liability to deposit additional tax while making application for settlement would amount to ignoring the deeming fiction created by the legislature in Clause (ii) of sub section (1B) of Section 245C. For the computation of such additional tax payable the total income would be the total returned income added by the disclosed income by the assessee.
29. Counsel Mr. Soparkar however contended that even viewed from this angle the assessee had discharged his additional tax liability. Such contention also cannot be accepted. The assessee's returned total income was nil. We may recall that the assessee had filed nil return. In terms of Clause (ii) of sub section (1B) of Section 245C therefore, Rs. 72 lacs which the assessee declared in the application for settlement would be his total income for the purpose of computing the additional tax liability. Admittedly the assessee had not deposited the tax with interest thereon calculated on amount of Rs. 72 lacs. The Commission, therefore, correctly did not allow such application to be proceeded further. The reasons adopted by the Commissioner are, however, somewhat different from what we have expressed in the judgement. Be that as it may, the petition must be and is dismissed. Interim relief, if any is vacated. Rule is discharged.
30. In view of the order passed in the main matter civil applications are disposed of.
2014-TIOL-584-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Tax Appeal No. 271 of 2014
COMMISSIONER OF INCOME TAX AHMEDABAD-IV
Vs
BANASKANTHA DIST CO-OP MILK PRODUCERS UNION LTD
Akil Kureshi And Sonia Gokani, JJ
Dated : March 31, 2014
Appellant Rep. by : Mr Varun K Patel, Adv
Respondent Rep. by : None
Respondent Rep. by : None
Income Tax - Sections 14A, 80IB, 80P(2), Rule 8D - Whether the provisions of section 14A read with Rule 8D would be applicable to Chapter VIA.
The assessee, a cooperative society, is engaged in the business of procuring, processing and manufacturing milk and milk products and supply of the same and claimed deduction u/s 80IB. The assessee claimed deduction u/s 80P(2)(d) on account of interest receipt. The assessee had also claimed deduction u/s 80P(2)(d) of Rs.82,44,575/- on account of dividend received. The assessee had debited interest of Rs.7,64,45,713/-. The AO disallowed the claim of expenses u/s 14A to the tune of Rs.18,21,203/- on the ground that sub-clause (3) of section 14A provides that expense which has been incurred in relation to the income which does not form part of total income cannot be allowed. The CIT(A) deleted the addition made by the AO u/s 14A r/w rule 8D .The Tribunal held that the CIT(A) has rightly held that the provisions of Section 14A have wrongly been invoked in this case.
Having heard the parties, the HC held that,
++ provisions of Chapter VIA (sections 80A to 80U) refer to deductions to be made in computing the total income. Such deductions, in no manner, can be compared with the exempted income, which does not form part of the total income as provided in sections 10 to 13A u/s III. Section 14A was introduced retrospectively with effect from 1.4.1962 byFinance Act, 2001, for the purpose of computing the total income under Chapter IV. And, any expenditure incurred by the assessee in relation to exempted income, for the purpose of computing the total income, while applying section 14A, no deduction shall be allowed. The investment in shares made by the assessee which earned him the dividend was from his own income. Moreover, from the very provision of section 14A, the same would have no application in respect of the income not being taxable on account of deduction u/s 80P(2)(d). Both the authorities have rightly held that there is no application of section 14A as far as the deduction u/s 80A to 80U under Chapter VIA are concerned.
The assessee, a cooperative society, is engaged in the business of procuring, processing and manufacturing milk and milk products and supply of the same and claimed deduction u/s 80IB. The assessee claimed deduction u/s 80P(2)(d) on account of interest receipt. The assessee had also claimed deduction u/s 80P(2)(d) of Rs.82,44,575/- on account of dividend received. The assessee had debited interest of Rs.7,64,45,713/-. The AO disallowed the claim of expenses u/s 14A to the tune of Rs.18,21,203/- on the ground that sub-clause (3) of section 14A provides that expense which has been incurred in relation to the income which does not form part of total income cannot be allowed. The CIT(A) deleted the addition made by the AO u/s 14A r/w rule 8D .The Tribunal held that the CIT(A) has rightly held that the provisions of Section 14A have wrongly been invoked in this case.
Having heard the parties, the HC held that,
++ provisions of Chapter VIA (sections 80A to 80U) refer to deductions to be made in computing the total income. Such deductions, in no manner, can be compared with the exempted income, which does not form part of the total income as provided in sections 10 to 13A u/s III. Section 14A was introduced retrospectively with effect from 1.4.1962 byFinance Act, 2001, for the purpose of computing the total income under Chapter IV. And, any expenditure incurred by the assessee in relation to exempted income, for the purpose of computing the total income, while applying section 14A, no deduction shall be allowed. The investment in shares made by the assessee which earned him the dividend was from his own income. Moreover, from the very provision of section 14A, the same would have no application in respect of the income not being taxable on account of deduction u/s 80P(2)(d). Both the authorities have rightly held that there is no application of section 14A as far as the deduction u/s 80A to 80U under Chapter VIA are concerned.
Revenue's appeal dismissed
JUDGEMENT
Per : Sonia Gokani, J :
1. Revenue has preferred this appeal aggrieved by the order of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 30.8.2013 raising following substantial questions of law for our consideration:-
"(i) Whether in facts and circumstances of the case, the learned ITAT has erred in law in confirming the order of CIT(A) deleting the addition of Rs.87,39,536/- made by the assessing officer u/s 14A of Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules?(ii) Whether, in the facts and circumstances of the case, the learned ITAT has erred in law in holding to the effect that the provisions of section 14A does not apply to income for which deduction under Chapter VI-A (section 80A to 80U) of the Income Tax Act is available?(iii) Whether the words 'income which does not form part of total income under this Act' used in section 14A of the Income Tax Act, 1961 include the income which is not chargeable to tax pursuant to provisions of Chapter VIA (section 80A to 80U) of the Income Tax Act?"
2. We have heard learned counsel Mr. Varun Patel for the Revenue and with his assistance scrutinized the material on record. Questions proposed though are three in numbers, essentially lead to a single issue as to whether provision of section 14A read with Rule 8D of the I.T. Act and Rules would be applicable to income, not chargeable to tax by virtue of provisions of Chapter VIA (sections 80A to 80U) of the Act? Brief facts necessary for adjudication are as follows:
3. For the the assessment year 2005-06, the assessee filed the return of income. The assessee is a cooperative society engaged in the business of procuring, processing and manufacturing milk and milk products and supply of the same and claimed deduction under section 80IB. In the scrutiny assessment, it was noticed by the assessing officer that the assessee claimed deduction of Rs.2,28,90,110/-under section 80P(2)(d) of the Act on account of interest receipt. The assessee had also claimed deduction under section 80P(2)(d) of Rs.82,44,575/- on account of dividend received. The assessee had debited interest of Rs.7,64,45,713/-. The assessing officer disallowed the claim of expenses under section 14A of the Act to the tune of Rs.18,21,203/- on the ground that sub-clause (3) of section 14A provides that expense which has been incurred in relation to the income which does not form part of total income cannot be allowed.
3. Aggrieved by the order of the assessing officer, assessee carried the matter before CIT(Appeals). CIT(Appeals) deleted the addition of Rs.18.21 lakhs (rounded off) made by the assessing officer under section 14A read with rule 8D of the Income Tax Rules,1962 giving detailed reasonings.
4. This was carried in appeal before the Tribunal by the dissatisfied Revenue. The Tribunal placed reliance on the decision of ITAT Chennai Bench Tamil Nadu Silk Producers Federation Ltd. reported in 105 ITD 623, wherein it has been held that provisions of section 14A cannot be applied to the provisions of Chapter VIA where the deductions are to be made in computing the total income and the same cannot be compared with the exempted income, which does not form part of the total income as provided in Chapter III. The Tribunal also took into account that the provisions of section 14A when introduced retrospectively for the purpose of computing the total income under chapter IV and no deduction could be allowed in respect of the expenditure incurred by the assessee in relation to such exempted income, provisions of section Chapter VI-A does not speak about deduction to be made as per provisions of section 6A even though as a result of such deduction taxable income is reduced wholly or partially.
5. Having noted such decision and discussion of CIT(Appeals), the Tribunal held thus:-
"4. With this brief background, we have heard both the sides. Our attention has been drawn on the balance sheet of the assessee drawn as on 31st of March 2008, wherein it was found that the paid up share capital was to the tune of Rs.37,05,88000/-. Our attention has also been drawn that the assessee had reserves another funds of Rs.20,43,06,246/- as against that the investment in shares, NSC, KVP were at Rs.8,17,57,010. On the basis of these figures, the vehement contention is that the assessee had sufficient own funds and, therefore, there was no reason to invoke the provisions of Section 14A of the IT Act. The other plank of argument before us is that the assessee has not claimed that any part of income was totally exempt from the Income Tax. But the fact was that the profit as per P & L A/c was Rs.7,80,29,871/- against which the assessee has claimed deduction u/s 80IB and u/s.80P(2) (d) of the IT Act. The total assessable income was computed at Rs.4,00,68,881/-. The assessee has, therefore, argued before us that the provisions of Section 14A cannot be applied to the provisions of Chapter-VIA, i.e., in respect of deductions u/s.80A to Section 80U of the IT Act. The argument of the assessee is that the deduction under the said Chapter is to be made out of the computation of the total income. Those deductions are not like exempted income. So the argument in relation to income which does not form part of the total income, i.e. as income exempt under the Act. In this regard, a decision of ITAT Chennai Bench pronounced in the case of Tamil Nadu Silk Producers Federation Ltd.(supra) has been cited. Respectfully following this decision as also considering the totality of the facts and circumstances of the case, we are of the considered opinion that learned CIT(A) has rightly held that the provisions of Section 14A have wrongly been invoked in this case. In the result, we hereby affirmed the finding of learned CIT(A) and dismiss this ground of the Revenue."(emphasis supplied)
6. Section 14A of the Act reads as under:-
" Expenditure incurred in relation to income not includible in total income.14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.(3) The provisions of sub-section(2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
7. Question to be addressed is as to whether section 14A would apply to provision of Chapter VIA. Provision of section 14A when examined, it operates in respect of the income not forming part of the total income. It could be noted that provisions of Chapter VIA (sections 80A to 80U) refer to deductions to be made in computing the total income. Such deductions, in no manner, can be compared with the exempted income, which does not form part of the total income as provided in sections 10 to 13A under Chapter III of the Act. Section 14A was introduced retrospectively with effect from 1.4.1962 by Finance Act, 2001, for the purpose of computing the total income under Chapter IV. And, any expenditure incurred by the assessee in relation to exempted income, for the purpose of computing the total income, while applying section 14A, no deduction shall be allowed. However, there is a clear absence of any reference of deduction to be made in computing the total income as per provision of Chapter IVA in section 14A. Undoubtedly, as provided under Chapter VIA while computing the total income of the assessee from his gross total income in accordance with and subject to the provision of this chapter, the deductions specified are permissible. As a resultant effect, the taxable income of the assessee would surely get reduced and yet there is marked difference between the exempted income and the deduction provided under Chapter VIA. We notice that the investment in shares made by the assessee which earned him the dividend was from his own income. Moreover, from the very provision of section 14A, the same would have no application in respect of the income not being taxable on account of deduction under section 80P(2)(d). Both the authorities have rightly held that there is no application of section 14A as far as the deduction under section 80A to 80U under Chapter VIA of the Act are concerned.
8. We notice that the Delhi High Court in the case of Commissioner of Income-Tax vs. Kribhco reported in [2012] 349 ITR 618 (Delhi) = 2012-TIOL-551-HC-DEL-IT decided identical question of law by elaborately discussing the law on the subject whereby it has held that section 14A would have no applicability in relation to deductions to be made while computing total income under Chapter IV. In the words of the Delhi High Court it was observed as under:-
"31. While dealing with the detailed arguments raised by the Revenue, the Division Bench of this Court observed that broadly speaking the figure of total income is arrived at, as per the Act, in four stages. Firstly, the income of the resident assessee is computed by including all incomes, profits and gains arising in India or outside. Similarly income of resident but not ordinary resident or nonresident, are computed in accordance with Section 5 Chapter II, which forms the basis of Charge. Secondly, Chapter III with the heading "Incomes not included in the total income", comprises of Sections 10 to 13 and these incomes are not included in total income but some exemptions are only partial and not total. Thirdly, even in case of income, profit and gains included for arriving at the total income, the entire income is not liable to tax. Deductions as stipulated in Chapter IV can apply, e.g.. Sections 34, 35A and 35B etc. Even in Chapter VI, deductions for set off or carry forward of loss is allowed. Fourthly and lastly, certain deductions were permissible under Chapter VII and Chapter VIII and which had been substantial or partly replaced and were placed under Chapter VI-A. These were deductions which were reduced from the income computed in accordance with the earlier provisions/Chapters of the Act. These deductions were made in the computation of total income and, therefore, definition of "gross total income", which was/is arrived at without reference to the deduction allowable under Chapter VI-A, was introduced. The deductions available under Chapter VI-A were either wholly or partly reduced from the "gross total income". The contention of the Revenue that once deduction stands allowed, the "income" in view of the deduction ceases to be a part of the total income, was rejected by the Division Bench of this Court in Dalmia Cement (Bharat) Ltd. [1980] 126 ITR 736 (Delhi), for the following additional reasons:-(1) The word "part" used in the Rule was to describe income fulfilling the description i.e. the category or class of the income. In other words it should indicate an identifiable section, category or class of income rather than mere portion or amount of such income. The question raised should be "whether this income was included" and not "whether any deduction was allowed". The use of the word "part" contemplates a type of income which by its very nature does not form part of the total income. The word "includible" supports that reference to the general nature and class of income rather than factual inclusion.(2) It is not the actual quantification of the income which matters but whether or not income was excluded from the total income. It is the class of income rather than the amount which would determine whether or not the said class of income forms part of the total income. Incomes of the categories referred to in Chapter VI-A were to be taken into account as a part of total income and they do form part of the gross total income which was the first step in the process. Accordingly, even after the deduction allowable under Chapter VI-A, they form a part of the total income and do not get excluded merely because deduction is allowed.(3) The Legislature had enacted sections 80C to 80U in Chapter VI-A, as a measure of relief from taxable liability. It incorporates and allows deductions. The income from these "sources" was included in the income, but subjected to deduction. Qualification would vary from section to section. Further in some cases the deduction was full and in some cases it was partial but this was not material and it did not mean that if an amount was deducted it did not form part of the total income.32. Thus, the income on which the deduction is allowed forms a part of the total income, though not included in the amount or quantum on which tax is paid.33. It can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VIA of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA, the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression "income which does not form part of the total income" refers to the nature, character or type of income and not the quantum.34. Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words "do not form part of the total income under this Act" is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced.35. It is clear from the aforesaid reasoning that the decisions in the case of Distributors (Baroda) Private Limited and Cambay Electric Supply Industrial Co. Ltd (supra) have proceeded on the specific language of the said Sections, whereas in the other decisions Stumpp Schuele and Somappa Private Limited and South Indian Bank (supra) and those of the High Courts mentioned above have gone on the general principle relating to deductions allowed and whether a deduction once allowed has the effect that the income on which deduction ceases to be part of the total income. It has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income.36. In view of the aforesaid position, we answer the questions of law mentioned above in affirmative, i.e., against the appellant- Revenue and in favour of the respondentassessee. In the facts of the present case, there will be no order as to costs."
9. We choose to follow ratio laid down in the said decision of Delhi High Court and see any reason to interfere with the findings/conclusions rendered by both the Revenue authorities, namely, CIT(Appeals) and the Tribunal and answer the question in favour of assessee and against the Revenue. Tax Appeal is accordingly disposed of.
2014-TIOL-534-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Special Civil Application No.24743 of 2006
N K INDUSTRIES LTD
Vs
INCOME TAX OFFICER (OSD)
Akil Kureshi And Sonia Gokani, JJ
Dated: March 11, 2014
Appellant Rep by: Mr J P Shah For Mr Manish J Shah, Advs.
Respondent Rep by: Mr M R Bhatt Sr Adv. With Mrs Mauna M Bhatt, Adv.
Respondent Rep by: Mr M R Bhatt Sr Adv. With Mrs Mauna M Bhatt, Adv.
Income tax - Sections 32, 36(1)(iii), 143(3), 147(c), 148, 154, 234B, 263 - Keywords - reopening assessment, audit objections, hypothetical income
Whether and when a reopening of a case can be objected on the mere ground that it was brought to notice of the AO by the audit officer, although the AO on his/her application of mind finds that the ground is valid - Whether and when an income which is not earned or said to be "hypothetical income" can be taxable under the Income Tax act - Whether assessment can be reopened based on audit objections which gives rise to only such hypothetical income.
The assessee's assessment was reopened by AO u/s 148 for the AY 2001-2002. The reasons supplied was based on the objections raised by the audit party. First objection was the company had given loan amounting and the same was considered doubtful, therefore, interest was not charged. As per the mercantile accounting system accrued interest was to be considered as income. Second objection was that the company had obtained interest bearing loan and given interest free loan to another company under the same management which cannot be said to have been used for business purpose of the assessee. However, the interest debited to P/L Account should have been disallowed. Further, the audit party raised an objection on the calculation of depreciation on plant and machinery and office equipment, and concluded that the assessee had availed excessive depreciation. Based on all these objections, the AO found enough reasons to conclude that the income has escaped assessment, and therefore, the reopening of assessment was warranted.
Since the notice u/s 148 was issued well within the limitation period of 4 years, so there was no argument on the fulfillment of conditions u/s 147 for reopening of assessment. Therefore, the counsel of the assessee mainly contended that AO had acted at the behest of the audit party and that the reopening of the assessment was not based on independent reason to believe held by the AO.
Having heard the parties, the High Court held that,
++ the objection mentioned in para 3(a) and 3 (b) are not acceptable in the light of judgment delivered by. Supreme Court in the case of CIT vs. M/s. Shoorji Vallabhdas & Co. in which it was held that income does not arise at all, there cannot be a tax, even though in books an entry is made about "hypothetical income" which is not materialized. Issue arose in the audit is fully covered by the findings of the Apex Court. Also in the case of GodharaElectricity Company Limited v. Commissioner of Income-Tax Supreme Court has held hypothetical income cannot be brought to tax unless it is accrued;
++ with respect to the first of the two reasons recorded by the Assessing Officer therefore it clearly emerges that she was acting at the instance of the audit party, though she herself held a contrary belief that no income chargeable to tax has escaped assessment on these two counts. Had this being the sold reason for issuing notice for reopening, we would have perhaps allowed the petition and quashed the notice. In the present case, however, the Assessing Officer was convinced that on third ground recorded in the reasons, income chargeable to tax had escaped assessment. It is true that such ground was also brought to her notice by the audit party and that by itself would not mean that she was acting at the instance of the audit party. As held by the Supreme Court in case of Commissioner of Income-Tax v. P.V.S Beedies Private Limited, if a particular issue is brought to the notice of the Assessing Officer by the audit party and the Assessing Officer of his/her application of mind finds that the ground is valid, reopening of assessment cannot be quashed merely because such ground was brought to the notice of the Assessing Officer by the audit party. In this context, even the counsel for the petitioner was unable to dispute that the question of depreciation require re-examination since the question whether the asset for which the depreciation was claimed was put to use before 30th September of the year under consideration, and therefore, whether full depreciation at the specified rate during the year under consideration was allowable;
++ on this ground, we are not inclined to quash the notice. The petition is therefore dismissed.
Assessee's petition dismissed
Cases followed:
Godhara Electricity Company Limited v. Commissioner of Income-Tax (2002-TIOL-217-SC-IT)
JUDGEMENT
Per: Akil Kureshi:
Petitioner has challenged a notice dated 16th January 2006, as annexed at Annexure-B to the petition, issued by the respondent-Assessing Officer under Section 148 of the Income-tax Act, 1961 {"the Act" for short]. Vide such notice, she proposed to reopen assessment of the petitioner for the Assessment Year 2001-2002. Such assessment was originally framed after scrutiny. At the request of the petitioner, the Assessing Officer supplied the reasons recorded for issuing such notice. Such reasons read as under:-
"In this case, return of income for A.Y 2001-02 was filed on 31.10.2001 declaring therein total loss of Rs. 32,36,408/= which was finalized u/s. 143 (3) on 30.03.2004 on a total loss of Rs. 26,12,838/=.2. On perusal of audit report furnished alongwith the return of income it was noticed at Sr. 12B that "the company had given loan amounting to Rs. 660.62 lakhs and the same is considered doubtful and therefore, interest was not charged". As per the mercantile accounting system accrued interest has to be considered as income. The interest worked out at the rate of 18% on Rs. 660.62 lacs comes to Rs. 1,18,91,160/=. The Company has failed to disclose the said income amounting to Rs. 1,18,91,160/=. This has resulted in under assessment of Rs. 92,67,322/= [Rs. 1,18,91,160 - Rs. 26,23,838 loss determined u/s. 143 (3)].3. It is seen from the P&L account for F.Y 2000-01 attached with the return that the company had paid interest to others of Rs. 2,10,876/= and to bank and financial institution Rs. 7,14,237/=. After adjustment of interest received of Rs. 5,27,260/= net interest paid on loan borrowed debited to P&L account of Rs. 3,97,853/=. On the other hand, it had granted interest free unsecured loan of Rs. 652.63 lacs to the company under the same management. The loanee company's net worth was negative and there was no stipulation of repayment. Since, the company had obtained interest bearing loan and given interest freeloan to another company under the same management which cannot be said to have been used for business purpose of the assessee. Therefore, interest of Rs. 3,97,853/= debited to the P&L account requires to be disallowed u/s. 36 [1](iii).4. It is also noticed from the statement of income that allowable depreciation u/s. 32 of the I.T Act was Rs. 2,42,60,145/=. However, annexure-I shows computation of depreciation pertaining to machinery as under:-
Add : Addition after 01.10.2000 Plant & Machinery Office Equipments-Heater
Petitioner raised objection to the notice for reopening under communication dated 27th February 2006. Such objections were, however, rejected by the Assessing Officer by an order dated 14th November 2006. At that stage, the petitioner filed this petition.
In the present case, notice for reopening had been issued within a period of four years from the end of the relevant assessment year. Under such circumstances, the additional requirement arising out of the proviso to Section 147 of the Act of the income escaping the assessment due to failure on the part of the assessee to disclose truly and fully all material facts would not arise. It is also not a case of the petitioner that any of the grounds on which the reopening is based was scrutinized in the original assessment, and that therefore, the Assessing Officer could be stated to have formed an opinion on any of these controversial issues. The main contention of the petitioner, however, was that the Assessing Officer had acted at the behest of the audit party and that the reopening of the assessment was not based on independent reason to believe held by the Assessing Officer. In this context, we had perused the original file presented by the learned counsel for the Revenue. It thus emerge that certain aspects of the matter were brought to the notice of the Assessing Officer by the audit party. It also appears that of the two objections raised by the audit party, the Assessing Officer had serious dispute. She, in fact, stated that such objections are not acceptable. She also recorded her reasons for stating so. This would be apparent from the internal communication in the form of a letter dated 9th August 2005 written by the Assessing Officer to the Commissioner of Income. Relevant portion thereof reads as under:"
3. The Revenue Audit party has raised the following audit objections:-
(a) It was noticed from the audit report that the company had given loan amounting to Rs. 660.62 lakhs and the same was considered doubtful, therefore, interest was not charged. As per the mercantile accounting system accrued interest was to be considered as income. The interest worked out at the time of 18% comes to Rs. 1,18,91,160/=. This amount has not been reflected in P&L Account by the assessee company and also this point was not considered at the time of assessment proceedings, which resulted in under assessment of income of Rs. 92,67,322/= with short levy of tax of Rs. 46,62,620/= including interest of Rs. 14,19,058/= under section 234B.(b) The assessee company had debited to P&L Account net interest paid on borrowed loan to the extent of Rs. 3,97,853/= on the other hand the assessee company had granted interest free unsecured loan of Rs. 952.63 lakhs to the companies under the same management. The loanee company's networth was negative and there was no stipulation of repayment. Since the assessee company had obtained interest bearing loan and given interest free loan to the company under the same management, which obviously not used for business purpose. Therefore, interest of Rs. 3,97,853/= debited to the P&L A/c. requires to be disallowed u/s. 36 (1)(iii) which resulted in short levy of tax of Rs. 1,57,350/=.(c) The assessee company has put plant and machinery and office equipment worth Rs. 2,02,129/= after 01/10/2000 on which depreciation @ 12.5% works out to Rs. 25,266/=. The assessee company has worked out the depreciation on W.D.V of Rs. 4,26,080/= @ 12.5% Rs. 53,260/=. Claiming excess depreciation at Rs. 27,994/= which resulted in short levy of tax of Rs. 1,107/=.
4. The objection mentioned in para 3(a) and 3 (b) are not acceptable in the light of judgment delivered by Hon. Supreme Court in the case of CIT vs. M/s. Shoorji Vallabhdas & Co. [46 ITR 114] = (2002-TIOL-947-SC-IT) in which it was held that income does not arise at all, there cannot be a tax, even though in books an entry is made about "hypothetical income" which is not materialized. Issue arose in the audit is fully covered by the findings of the Apex Court. Also in the case of Godhara Electricity Company Limited v. Commissioner of Income-Tax [225 ITR 746] = (2002-TIOL-217-SC-IT) Hon. Supreme Court has held hypothetical income cannot be brought to tax unless it is accrued.
5. However, the following remedial actions are available in this case:-
Sr.No. , Remedial Action Time Limitation 1 U/s. 263 31/03/2006 2 U/s. 147 31/03/2006 Remedial action u/s. 154 is available only for the objection raised in para 3 (c) of the Act. However, this point can be considered at the time of action u/s. 263 or u/s. 147 as the case may be.
With respect to the first of the two reasons recorded by the Assessing Officer therefore it clearly emerges that she was acting at the instance of the audit party, though she herself held a contrary belief that no income chargeable to tax has escaped assessment on these two counts. Had this being the sold reason for issuing notice for reopening, we would have perhaps allowed the petition and quashed the notice. In the present case, however, the Assessing Officer was convinced that on third ground recorded in the reasons, income chargeable to tax had escaped assessment. It is true that such ground was also brought to her notice by the audit party and that by itself would not mean that she was acting at the instance of the audit party. As held by the Supreme Court in case of Commissioner of Income-Tax v. P.V.S Beedies Private Limited, reported in [1999] 237 ITR 13 (SC) = (2002-TIOL-895-SC-IT), if a particular issue is brought to the notice of the Assessing Officer by the audit party and the Assessing Officer of his/her application of mind finds that the ground is valid, reopening of assessment cannot be quashed merely because such ground was brought to the notice of the Assessing Officer by the audit party. In this context, even the counsel for the petitioner was unable to dispute that the question of depreciation require re-examination since the question whether the asset for which the depreciation was claimed was put to use before 30th September of the year under consideration, and therefore, whether full depreciation at the specified rate during the year under consideration was allowable.
On this ground, we are not inclined to quash the notice. The petition is therefore dismissed. Rule is discharged. Interim relief, if any, stands vacated.
Regards,
Pawan Singla , LLB
M. No. 9825829075No disallowance U/s. 14A for investment in shares of subsidiaries & Joint Ventures
For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments.
Assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted.
Source- JM Financial Limited vs. ACIT (ITAT Mumbai), ITA NO. 4521/Mum/2012, Date of pronouncement -26.3.2014
Sec. 234E TDS Fee- Bombay HC Grants Stay On Operation Of Notices
HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.771 OF 2014
Rashmikant Kundalia and another
versus
Union of India and others
DATE : 28 April 2014
PC :
1. Affidavit of service dated 10 April 2014 is filed indicating that Respondent nos.1 and 2 have received the notice on 31 March 2014 and 8 April 2014 respectively. Though served, none appears for Respondent nos.1 and 2.
2. However, the Petitioner has not joined the author of the impugned notice as a party Respondent. Hence, leave to add the Deputy Commissioner of Income Tax, Centralized Processing Cell – TDS (Assessing Officer) as Respondent no.3. Amendment to be carried out within four days.
3. Notice to the newly added Respondent returnable on 17 June 2014.
4. Till then, there shall be ad-interim stay in terms of prayer clause (d).
(CHIEF JUSTICE)
(M.S.SANKLECHA, J.)
Related Post
CENVAT Credit On Debit Note……??…… YES
Manas S. Joshi
"CENVAT credit on input service can be availed on the basis on Debit Note raised by the service provider" ……… can you believe this………..? If I make this sentence without referring to any supporting reference then probably I would be wrong. But thanks to the Delhi Bench of the Hon'ble Tribunal which has allowed CENVAT credit of input service on the basis of Debit Note raised by the service provider. This is one of the rarest judgments which I recently came across and therefore, I wish to bring this judgment to the notice of the readers to understand the intention of the law makers more clearly.All of us are well aware that CENVAT credit of input services can be availed only on the basis of "certain valid documents". List of such "valid" documents is given in Rule 9 of the Cenvat Credit Rules, 2004. The relevant text of Rule 9 is reproduced below for your ready reference:
RULE 9. Documents and accounts. —(1) The CENVAT credit shall be taken by the manufacturer or the provider of output service or input service distributor, as the case may be, on the basis of any of the following documents, namely :-
(a) an invoice issued by -
(i) a manufacturer for clearance of -
(I) inputs or capital goods from his factory or depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer;
(II) inputs or capital goods as such;
(ii) [Deleted];
(iii) [Deleted];
(iv) a first stage dealer or a second stage dealer, as the case may be, in terms of the provisions of Central Excise Rules, 2002; or
(b) a supplementary invoice, issued by a manufacturer or importer of inputs or capital goods ……………………………
Explanation. – ……………………… or
(bb) a supplementary invoice, ……………..; or
(c) a bill of entry; or
(d) a certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office; or
(e) a challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax; or]
(f) an invoice, a bill or challan issued by a provider of input service on or after the 10th day of September, 2004; or
(g) an invoice, bill or challan issued by an input service distributor under rule 4A of the Service Tax Rules, 1994:
Provided that ……………………..
(2) No CENVAT credit under sub-rule (1) shall be taken unless all the particulars as prescribed under the Central Excise Rules, 2002 or the Service Tax Rules, 1994, as the case may be, are contained in the said document:
Provided that if the said document does not contain all the particulars but contains the details of duty or service tax payable, description of the goods or taxable service, assessable value, Central Excise or Service tax registration number of the person issuing the invoice, as the case may be, name and address of the factory or warehouse or premises of first or second stage dealers or provider of output service, and the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, is satisfied that the goods or services covered by the said document have been received and accounted for in the books of the account of the receiver, he may allow the CENVAT credit.
If you read the underlined text of Rule 9, it can be clearly understood that CENVAT credit can be availed only on the basis of documents which are specifically prescribed in sub-Rule (1) of Rule 9. Moreover, such documents should contain certain information in order to make such document as "valid" document for availing CENVAT credit. However, it is clarified that if all the required information is not contained in such a document but contain basic information and the Assistant / Deputy Commissioner satisfied that services mentioned in such a document is actually received and accounted for in the books of accounts, then in that case, CENVAT credit may be allowed. (which means this benefit will depend upon the discretion of the Assistant / Deputy Commissioner and therefore, such situation would definitely call for litigation).
Considering the above aspects, it was advisable to raise an invoice or a supplementary invoice against provision of any service. (means just to mention "Invoice" or "Supplementary Invoice" on the top of the document rather than mentioning "Debit Note").
Further, the issue of raising Debit Note will raise in a situation where manufactured goods were removed at certain rate and subsequently such rate gets enhanced due to negotiations or in a situation where service provider raised an invoice and subsequently came to know that he actually raised an invoice for lesser amount and therefore, now he needs to raise an invoice for the remaining amount. In both the cases, I have observed that manufacturer or service provider prefers to raise a Debit Note to give the effect of the balance amount. However, as per Rule 9(1) of Cenvat Credit Rules, 2004, "Debit Note" is not specifically prescribed as a "valid" document, it was advisable to raise a separate invoice or a supplementary invoice so that the receiver of the goods or services can take CENVAT credit.
Furthermore, I have also observed that during the audit or any investigation, the department officers have asked the assessee to reverse CENVAT credit which was availed on the basis of Debit Note and when the assessee started making argument with the officer, the assessee had no option but to reverse CENVAT credit simply because the word "Debit Note" does not appear in Rule 9 of Cenvat Credit Rules, 2004 which made the assessee's case more weak.
Now at least we have got some support from the Hon'ble Tribunal in this regard. I was going through various judgments and fortunately I came across a judgment of the Delhi Bench of the Hon'ble Tribunal in the case of Shree Cement Ltd. v/s CCE, Jaipur-II reported in 2013 (29) STR 77 (Tri. Del.) wherein the Hon'ble Tribunal heard similar matter and held that substance is more important than a format and mainly based on this ground, CENVAT credit was allowed on the basis of Debit Note.
While allowing CENVAT credit on Debit Note, the Hon'ble Tribunal observed that while enacting Rule 9(1)(f) of Cenvat Credit Rules, 2004, legislature intended a "bill" issued shall also serve the purpose of claiming CENVAT credit. A "bill" means a document which gives right to an actionable claim. A party raising a bill communicates its intention to the recipient of service making him aware of his contractual obligation and value involved to provide such service. That may be a substitute of invoice because of phraseology used in Rule 9(1)(f) of Cenvat Credit Rules, 2004. The Hon'ble Tribunal further held that benefit of CENVAT credit cannot be denied if service tax amount mentioned in the Debit Note is actually deposited to the Government treasury.
While concluding the judgment, the Hon'ble Tribunal mentioned that at the interest of Revenue, the adjudicating authority may send copy of Debit Notes relied by the assessee to the concerned jurisdictional officer for verifying whether service tax collected by such Debit Notes is actually deposited into the Government treasury and if it is found that service tax is not deposited into the Government treasury, then in such a case, benefit of CENVAT credit may be denied.
Word of Caution
Though the Hon'ble Tribunal has allowed the benefit of CENVAT credit on the basis of Debit Note, it is always advisable to avail CENVAT credit on the basis of "valid documents" mentioned in Rule 9 until the word "Debit Note" does not appear in Rule 9 of Cenvat Credit Rules, 2004. Assessee may request the service provider to raise an invoice or a supplementary invoice rather than issuing Debit Note in order to avoid unnecessary litigation.
(Manas Joshi, Excise & Service Tax Consultant, Mobile: 9890016800, E-mail:__._,_.___
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