Is e-voting mandatory for Listed Companies?
Section 108 of the Companies Act, 2013 ('Act, 2013') read with Rule 20 of the Companies (Management and Administration) Rules, 2014 ('MGT Rules') had made it mandatory for every listed company and company having not less than 1000 shareholders to provide e-voting facility at general meetings.
To bring the provisions of the Listing Agreement in line with the Act, 2013, SEBI vide its Circular CIR/CFD/POLICY CELL/2/2014 dated 17th April, 2014 amended Clause 35B to mandate listed entities to provide e-voting facility to its shareholders at General Meetings and postal ballot. If further provides that the modalities would be governed by the provisions of the Rules. The date of implementation of this Circular was with immediate effect.
Uptil now things were going fine. Then MCA entered with its Circular No. 20/2014 dated 17th June, 2014 making it non mandatory for companies to provide e-voting facility to its shareholders till 31st December, 2014. This was with a view to buy more time for compliance with procedural requirements with regard to e-voting, engagement of depository agencies and providing more clarity on matters like demand for poll/postal ballot etc.
And then the confusion arose.
What was the confusion?
Many listed companies[1] took a view that since MCA itself has deferred the applicability of providing e-voting facility at general meetings till 31st December of this year, it becomes implied that the revised Clause 35B of Listing Agreement stands deferred accordingly. They referred to Clauses 2 and 4.4 the SEBI Circular which states that:
"It has been decided to review the provisions of the Listing Agreement in this regard with the objectives to align with the provisions of the Companies Act, 2013, adopt best practices on corporate governance and to make the corporate governance framework more effective.
…………………
The revised Clause 35B would be applicable to all listed companies and the modalities would be governed by the provisions of Companies (Management and Administration) Rules, 2014. Circular No. CIR/CFD/DIL/6/2012 dated July 13, 2012 stands amended to that extent."
The prevailing interpretation is that since Clause 35B was inserted to align the provisions of Listing Agreement with those of the Act, 2013, therefore any extension granted by Act, 2013 would mutatis mutandis apply to the revised Clause 35B as well.
Our View
The concept and requirement of e-voting with regard to postal ballot was there in the Listing Agreement even before it was introduced by the Act, 2013. Thus the requirement of e-voting under Listing Agreement was independent of the provisions of the Act, 2013.
The amendment to Clause 35B was brought about to merely imbibe the provisions of the Act, 2013 viz. extending it to general meetings and the modalities in which such e-voting was to be carried out.
There has been a BSE clarification on in this regard which states that for listed companies, the provision of e-voting will be as per the SEBI Circular on 17th April, 2014.[2]
Further the SEBI Chairman, Mr. U. K. Sinha, in his statement to Business Line on 22nd June, 2014[3], clarified that providing of e-voting facility is mandatory for listed companies even if the same has been made non-mandatory by the MCA. His contentions were that 'listed companies cannot take shelter under the Corporate Affairs Ministry stance and not provide e-voting facility to its shareholders till end-December. He was quoted saying that "If there are two sets of requirements, it is settled principle as higher as the level of Supreme Court of India that the provisions of SEBI regulations will prevail so far as listed companies are concerned".
From the above, it becomes clear that the requirement of providing of e-voting facility is still mandatory for listed companies and the manner of conducting e-voting will be governed by the Companies (Management and Administration) Rules, 2014.
[1] http://www.bseindia.com/xml-data/corpfiling/AttachLive/Jaykay_Enterprises_Ltd_190614.pdf
[2] http://www.bseindia.com/corporates/Displaydata.aspx?Id=5a647f39-0bb4-4f82-98d8-7c50a3d1ef2a&Page=cir
[3] http://m.newshunt.com/in/english/business-line/market/mandatory-evoting-sebi-norm-to-prevail-for-listed-companies-says-sinha_30192466/992
[The above post is contributed by Shampita Das at Vinod Kothari & Co. She can be contacted at shampita@vinodkothari.com ]
Clarification relating to incorporation of a company i.e. company Incorporated outside India
General Circular no. 23/2014 – Date: 25.06.2014
Subject: Clarification relating to incorporation of a company i.e. company Incorporated outside India.
Government has received references seeking clarity about the status of subsidiaries incorporated/to be incorporated by companies incorporated outside India. Attention has, in particular, been drawn to the absence of the deeming provision of sub-section (7) of section 4 of the Companies Act, 1956 in the Companies Act, 2013 (New Act).
The matter has been examined in the Ministry in the light of sections 2(68), 2(71) and 2(87) of the New Act and it is clarified that there is no bar in the new Act for a company incorporated outside India to incorporate a subsidiary either as a public company or a private company. An existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company, as the case may be, without any change in the incorporation status of such company.
3. This issues with approval of Competent Authority
F. N: 1/ 13/2013 -CL-V
Yours faithfully,
(KMS Narayanan)
Assistant Director (Policy)
23387263
Companies (Management and Administration) Amendment Rules, 2014
Government of India
Ministry of Corporate Affairs
Notification
New Delhi, the 23rd June, 2014
G.S.R. (E).- In exercise of the powers conferred under sub-section (1) of section 88, sub-section (4) of section 88, sub-section (1) of section 89, sub-section (2) section 89, sub-section (6) of section 89, sub-section (1) of section 91, sub-section (2) of section 92, sub-section (3) of section 92, section 93, sub-section (1) of section 94, sub-section (4) of section 100, sub-section (2) of section 114, sections 102, 101, 105, 108, sub-section (5) of section 109, sections 112, 113, 110, sub-section (3) of section 186, section 115, sub-section (1) of section 117, sub-section (1) of section 118, sub-section (2) of section 119, section 120 and sub-section (1) of section 121, read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013) the central Government hereby makes the following rules to amend the Companies (Management and Administration) Rules, 2014, namely: -
1. (1) These rules may be called the Companies (Management and Administration) Amendment Rules, 2014.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Companies (Management and Administration) Rules, 2014, in rule 20,
(i) in sub-rule (1), the following shall be inserted, namely:-
"Provided that the Company may provide the facility referred to in this sub-rule on or before the 1st day of January 2015."
(ii) in sub-rule (3), for the words "which opts to provide", the words "which provides" shall be substituted.
[F. No. 01/34/2013 CL-V]
(Amardeep Singh Bhatia)
Joint Secretary to the Government of India
Note.- The principal rules were published in the Gazette of India vide notification number G.S.R. 260(E), dated the 31st March, 2014.
Increase Minor Income Exemption Limit to Rs. 10000 – ICAI
Income of minors – to increase exemption limits under section 10(32)
At present income of minors included in the hands of parents is exempt to the extent of Rs.1,500/- for each minor. The average expenditure to meet cost of a minor's education/health/living expenses which has gone up considerably in recent years, limit of
Rs.1,500/- fixed is woefully inadequate.
Rs.1,500/- fixed is woefully inadequate.
It is suggested that this should be raised to at least Rs.10,000/- for each minor child.
Source- Pre-Budget Memorandum 2014 on Direct Taxes by ICAI
Allow Deduction to salaried assesses of Payment for notice period – ICAI
As per the prevalent norm, the employees are required to serve notice within the stipulated time before leaving the organisation. The notice period, however, varies from organisation to organisation. For example, in an organisation the notice period may be 90 days or an employee has to pay 90 days salary amount to the organisation as an employee may get a better job opportunity in another organisation wherein he is required to join within 30 days. Accordingly the employee has to give 30 days notice in old organisation, and pay for short notice of 60days.
Generally the contract of service also provides that in case the employer is not satisfied with the performance of the employee he may terminate his services by giving a notice of 30 days or 30 days salary. In case the employer suspends the employee with immediate effect he pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount becomes taxable in the hands of the employee. However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him. If the new employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the said amount will be included in the total income of the employee and tax will be deducted thereon even if such income belonged to the exemployer and is taxable in his hands. Thus, in effect the assessee will be liable to pay tax on 14 months salary i.e. salary for more than 12 months without any deduction available to him.
It is suggested that said anomaly may be resolved and appropriate provisions be inserted so that income from notice period pay is chargeable in the hands of ex-employer and deduction of the amount of notice period pay paid be made available to the employee as he has not effectively received that income.
Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India
CBDT releases E-filing Utility of ITR-5 for AY 2014-15; Who Can File ITR 5?
CA Sandeep Kanoi
After Long Wait CBDT has Finally Released ITR 5 which is applicable for Income Tax Return (ITR) of firms, AOPs, BOIs and LLPs for Assessment year 2014-15. CBDT has Released Java Utility of ITR-5 and we expect Excel Utility also to be released soon.
1. Who can use this ITR-5 Return Form?
This Form can be used a person being a firm, LLPs, AOP, BOI, artificial juridical person referred to in section 2(31 )(vii), cooperative society and local authority. However, a person who is required to file the return of income under section 139(4A) or 139(4B) or 139(4C) or 139(4D) shall not use this form.
2. Annexure-less Return Form
No document (including TDS certificate) should be attached to this Return Form. All such documents enclosed with this Return Form will be detached and returned to the person filing the return. Tax-payers are advised to match the taxes deducted/collected/paid by or on behalf of them with their Tax Credit Statement (Form 26AS). (Please refer to www.incometaxindia.gov.in)
3. Manner of filing this Return Form
From assessment year 2014-15 onwards this Return Form can be filed with the Income Tax Department in any of the following ways, -
(i) by furnishing the return electronically under digital signature;
(ii) by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V;
However, a firm whose accounts are liable to audit under section 44AB shall compulsorily furnish the return in the manner mentioned at (i) above. Where the Return Form is furnished in the manner mentioned at 3(ii), the assessee should print out two copies of Form ITR-V. One copy of ITR-V, duly signed by the assessee, has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bangaluru–560100 (Karnataka). The other copy may be retained by the assessee for his record.
From assessment year 2013-14 onwards in case an assessee who is required to furnish a report of audit under sections 10(23C)(iv), 10(23C)(v), 10(23C)(vi), 10(23C)(via), 10A, 10AA, 12A(1)(b), 44AB, 44DA, 50B, 80-IA, 80- IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E, 115JB or 115VW he shall file the report electronically on or before the date of filing the return of income. Further, the assessee who is liable to file the above reports electronically shall file the return of income in the manner provided at 3(ii) or 3(iii).
4. Filling out the acknowledgement
Only one copy of this Return Form is required to be filed. Where the Return Form is furnished in the manner mentioned at 3(i), the acknowledgement slip attached with this Return Form should be duly filled.
So far CBDT has released in addition to ITR-5 the following ITRs which can be downloaded from e-Filing website of Income Tax.
| Income Tax Return Utility Downloads for A.Y. 2014-15 | |||
| ITR | Description | Excel Utility | Java Utility |
| ITR 1 (SAHAJ) | For Individuals having Income from Salary & Interest. | Yes | Yes |
| ITR 2 | For Individuals & HUFs not having Income from Business or Profession | Yes | Yes |
| ITR 3 | For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship | Yes | |
| ITR 4 | For Individuals & HUFs having income from a proprietory business or profession | Yes | |
| ITR 4S (SUGAM) | For Individuals/HUF having income from presumptive business | Yes | |
| ITR 5 | For firms, AOPs,BOIs and LLP | Yes | |
Instructions to Follow Judicial discipline in adjudication proceedings
F. No. 201/01/2014-CX.6
Dated- 26th June, 2014
Government of India, Ministry of Finance, Department of Revenue, Central Board of Excise & Customs
Subject – Instructions regarding need to follow Judicial discipline in adjudication proceedings.
Kind attention is invited to the order of Hon'ble High Court of Gujarat at Ahmedabad in case of M/s E. I. Dupont India Pvt Ltd (hereinafter referred to as M/s Dupont) in Special Civil Application no 14917 to 14921 of 2013 dated 25-10-2013 [2013-TIOL-1172-HC-AHM-CX]. M/s Dupont had filed appeal before the Hon'ble High Court against rejection of a refund claim on an issue which had earlier been decided by the Hon'ble High Court against the revenue, though in a matter relating to a different assessee. Thus for deciding the refund, a binding precedent judgment existed.
2) However the binding precedent was not followed which led to litigation before the Hon'ble High Court to which Hon'ble High Court took a serious view. It may be noted that on the subject of consequential refund, where the department has gone in appeal, there already exists a circular no 695/11/2003 –CX dated 24-02-2003. This circular of the Board is binding on all field officers. Had this circular been followed in the case, unnecessary litigation as well as adverse observation of the Hon'ble High Court could have been avoided. This circular is once again brought to the notice of field officers with direction that it is followed scrupulously.
3) The judgment of Hon'ble High Court in M/s Dupont case (supra) under reference may be perused by the field officers for complete understanding of the issues involved and directions of the Hon'ble High Court on need to follow judicial discipline. Judgment of the Hon'ble Supreme Court in case of Union of India vs. Kamlakshi Finance Corporation Ltd. [1991 (55) E.L.T. 433 (S.C.) = 2002-TIOL-484-SC-CX-LB] may also be perused as this is an authoritative pronouncement on the issue and has also been cited by the Hon'ble High Court.
4) The contents of this instruction may be brought to the notice of all adjudicating authorities under your jurisdiction with direction to follow the same scrupulously.
Yours faithfully,
(Pankaj Jain)
Under Secretary (CX)
Clarification on applicability of requirement for resident director
General Circular no. 25/2014, Dated: 26th June, 2014
Subject: Clarification on applicability of requirement for resident director.
Section 149(3) of the Companies Act, 2013 (Act) requires every company to have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Government has received requests from stakeholders for clarification with regard to applicability of these provisions in the current calendar/financial year.
2. The matter has been examined. It is clarified that the 'residency requirement' would be reckoned from the date of commencement of section 149 of the Act i.e. 1st April, 2014 The first 'previous calendar year' for compliance with these provisions would, therefore, be Calendar year 2014. The period to be taken into account for compliance with these provisions will be the remaining period of calendar year 2014 (i.e. 1st April to 31st December). Therefore, on a proportionate basis, the number of days for which the director(s) would need to be resident in India. during Calendar year.2014, shall exceed 136 days.
3. Regarding newly incorporated companies it is clarified that companies incorporated between 1.4.2014 to 30.9.2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation. Companies incorporated after 30.9.2014 need to have the resident director from the date of incorporation itself.
This issues with the approval of the competent authority.
No: 1/ 22/13 -CL-V
Yours faithfully,
(KMS Narayanan)
Asstt. Director (Policy)
23387263
Increase Investment Limit U/s. 54EC to Rs. 1 crore
Section 54EC-Capital gain not to be charged on investment in certain bonds
Section 54EC provides that the capital gains arising from the transfer of a long term capital assets will be exempt, if the whole or part of the capital gain, is invested in the long term specified assets at any time within a period of six months after the date of transfer. Further, proviso to this section provides exemption shall be available only when investment made in long term specified asset by an assessee during any financial year does not exceed Rs. 50,00,000/-.
Suggestions
a) As the financial year may differ from assessee to assessee, it is suggested that the term "financial year" be substituted with the term "previous year".
b) Considering the inflationary conditions in the economy, it is further suggested that the said limit of Rs.50 Lakhs may be raised to Rs. 1 crore.
Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India
ICAI suggests Certification of deductions claimed U/s. 54, 54F, 54EC etc
Certification of deductions claimed under section 54, 54F, 54EC etc
a) At present deductions u/s 54, 54F, 54EC etc. are not subject to any audit or certification. The possibility that the assessee claims inaccurate amount of deduction under such provisions cannot be ruled out. In order to reduce such possibility of furnishing of inaccurate particulars by the assessee and further to reduce the burden of the Department in scrutinising such claims made by the assessee in his return, it is suggested that such provisions may be amended to require the assessee to obtain a certificate from an Accountant certifying the accuracy of the claim. Further, a ceiling may be created for deductions u/s 54, 54F, 54EC etc. that deduction amount in excess of Rs. 30 lakhs in aggregate may be certified by a Chartered Accountant.
It is suggested that the assessee claiming deduction exceeding a specified amount under the provisions of section 54, 54F, 54EC etc may be required to obtain a certificate from a Chartered Accountant certifying the accuracy of the claim.
Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India 7EG.dpuf
Consideration of service tax while deducting TDS
Whether Service Tax should be considered while deducting Income tax at source (TDS) or not ?
Often we have no clarity on the question that while making the payment of rent or professional or technical fees, the deduction of income tax at source (TDS) should be made on which amount? Including service tax or excluding service tax?
Representations/letters have been received from the Central Board of Direct Taxes seeking clarification as to whether TDS provisions under section 194-I and 194-J of the Income-tax Act will be applicable on the gross amount payable (inclusive of service tax) or net amount payable (exclusive of service tax).
Who is liable to deduct TDS on Rent? Any person, other than an individual or a HUF who pays Rent to a resident in India, amounting in aggregate to more than Rs. 180000 in a financial year. However w.e.f. 01/06/2002, individuals and HUF who were covered under section 44AB (a) and (b) in the preceding previous year, are also required to deduct tax at source.
As per the Circular No. 4/2008 dated 28-04-2008 issued by the CBDT, "Service tax paid by the tenant is not a part of the income hence it does not partake the nature of income of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided that tax deduction at source (TDS) under sections 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax (only from rent and not on amount of service tax charged on rent).
Who is liable to deduct TDS u/s 194J? Any person, other than an individual or a HUF, who pays any sum by way of Professional Fees, Fees for Technical Service, any remuneration or fees or commission paid to a director, which is not in the form of salary, royalty or any sum referred to in clause (va) of section 28 which relates to non-complete payment is liable to deduct TDS u/s 194J.
However, the CBDT have taken a totally different stand on deduction of income tax on payments of Professional or Technical fees. As per the Circular no.275/73/2007-IT (B), dated 30th June 2008, the payments made under section 194-I differ significantly from payments made under section 194J in the way that in the case of 194I, TDS has to be deducted on any income paid as rent. However, in the case of section 194J TDS has to be deducted on any sum paid as professional and technical fees (on the gross amount paid/payable i.e. inclusive of service tax). The CBDT had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the CBDT has decided not to extend the scope of Circular No. 4/2008 dated 28-04-2008, to such payment under section 194J.
The CBDT has preferred to different treatments for similar sections and no clarification is given for the same. Therefore this being a matter of issue, a correct circular is desired to clarify that tax need to be deducted only on amount paid to payee which is on his own account for fees, charges, consideration, rent etc. as the case may be. Charges like such taxes will not be subject to TDS.
(Apoorva Desai-Apudesai92@gmail.com)
MUMBAI, JUNE 26, 2014: THE issues before the Bench are - Whether principle of apportionment embedded in section 14A has any application when no expenditure has been incurred in relation to the exempt income and the primary object of investment was to acquire controlling stake in the group concern and not earning any income out of investment and Whether depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. And the verdict favours the assessee.
Facts of the case
The assessee received dividend income of Rs. 36,90,456/- which is exempt from the Income Tax. The assessee worked out the disallowance u/s 14A at Rs. 103915/- and added back the same in the statement of the total income. The Assessee claim that no borrowed funds was used and the interest expenditure is on the bank term loans, therefore, there is no nexus between the interest expenditure and the investment in shares. The AO disallowed the administrative expenses by applying Rule 8D. The AO accordingly worked out the disallowance at Rs. 8,83,569/- on administrative expenses. The CIT(A) has confirmed the disallowance made by the AO.
On Appeal before the Tribunal the A.R submitted that the assessee has not incurred any expenditure in respect of the investment in question and for earning tax free income. The AR further pointed out that the investments were in the group concerned of the assessee, therefore, these were only passive investment made for the purpose of holding controlling stake in the group concern and not for the purpose of earning any dividend or active investment, therefore, the assessee was not required to incur any expenditure in keeping these investments. The DR on the other hand has submitted that the issue is now covered against the assessee by the decision of the Tribunal in the assessee's own case.
Having heard the parties, the Tribunal held that,
++ the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. The investment are in the group concern no reason to believe that the assessee would have incurred any administrative expenses .When no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The addition/disallowance made by AO u/s 14A r.w. Rule 8D deleted;
++ regarding disallowance/adjustment made while computing the book profit u/s 115JB, there are divergent views of the Tribunal on this point. Without going into the controversy of the quantum of adjustment, in view of the finding in respect of disallowance u/s 14A the assessee's appeal is allowed being consequential;
++ on the issue of the CIT(A) directing the AO to allow the depreciation at Rs. 35,22,140/- after working out the WDV of the assets for earlier years, it is clear that the depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. In view of the earlier years order of this Tribunal, No substance in the appeal of the revenue.
The assessee received dividend income of Rs. 36,90,456/- which is exempt from the Income Tax. The assessee worked out the disallowance u/s 14A at Rs. 103915/- and added back the same in the statement of the total income. The Assessee claim that no borrowed funds was used and the interest expenditure is on the bank term loans, therefore, there is no nexus between the interest expenditure and the investment in shares. The AO disallowed the administrative expenses by applying Rule 8D. The AO accordingly worked out the disallowance at Rs. 8,83,569/- on administrative expenses. The CIT(A) has confirmed the disallowance made by the AO.
On Appeal before the Tribunal the A.R submitted that the assessee has not incurred any expenditure in respect of the investment in question and for earning tax free income. The AR further pointed out that the investments were in the group concerned of the assessee, therefore, these were only passive investment made for the purpose of holding controlling stake in the group concern and not for the purpose of earning any dividend or active investment, therefore, the assessee was not required to incur any expenditure in keeping these investments. The DR on the other hand has submitted that the issue is now covered against the assessee by the decision of the Tribunal in the assessee's own case.
Having heard the parties, the Tribunal held that,
++ the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. The investment are in the group concern no reason to believe that the assessee would have incurred any administrative expenses .When no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The addition/disallowance made by AO u/s 14A r.w. Rule 8D deleted;
++ regarding disallowance/adjustment made while computing the book profit u/s 115JB, there are divergent views of the Tribunal on this point. Without going into the controversy of the quantum of adjustment, in view of the finding in respect of disallowance u/s 14A the assessee's appeal is allowed being consequential;
++ on the issue of the CIT(A) directing the AO to allow the depreciation at Rs. 35,22,140/- after working out the WDV of the assets for earlier years, it is clear that the depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. In view of the earlier years order of this Tribunal, No substance in the appeal of the revenue.
(See 2014-TIOL-372-ITAT-MUM)
IT : Where Assessing Officer passed reassessment order without recording reasons for initiating reassessment proceedings despite repeated requests for same, order so passed being invalid, deserved to be quashed
■■■
[2014] 45 taxmann.com 561 (Gujarat)
HIGH COURT OF GUJARAT
Torrent Power SEC Ltd.
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI, MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO.24740 OF 2006
MARCH 12, 2014
Section 148 of the Income-tax Act, 1961 - Income escaping assessment - Issue of notice for (Recording of reasons) - Assessment year 2001-02 - Whether where Assessing Officer passed reassessment order without recording reasons for initiating reassessment proceedings despite repeated requests for same, order so passed being invalid, deserved to be quashed - Held, yes [Para 21] [In favour of assessee]
FACTS
| ■ | For the relevant assessment year, the assessee filed its return declaring certain taxable income. The assessee's case was selected for scrutiny and finally an assessment order was passed. | |
| ■ | Subsequently, the Assessing Officer issued a notice seeking to reopen assessment proceedings. | |
| ■ | The assessee made a request to supply a copy of reasons recorded for initiating reassessment proceedings. | |
| ■ | No reasons despite persistent correspondences, were furnished and a reassessment order was passed. | |
| ■ | The assessee, thus, filed instant petition challenging validity of reassessment order. |
HELD
| ■ | The assessee is entitled to know the grounds on which the proceedings are initiated by reassessment which may also include those assessments which are completed on scrutiny. In the cases where the very assumption of jurisdiction is unsustainable, the assessee is not to pass through any undesired hazard of undergoing the process of reopening. [Para 17] | |
| ■ | It is apparent from the various judicial pronouncements that the directions issued in these judgments not only require the consideration of the preliminary objections, if any raised against the notice and also in relation to the reasons recorded, but also to dispose of the objections by speaking order and Assessing Officer is further directed to provide a reasonable time to challenge such order of rejection of objections on judicial side by way of writ petition. [Para 18] | |
| ■ | In the instant case, the conduct on the part of the respondent clearly pointed out that the passing of the order of reassessment was in clear violation and in breach of such mandatory requirements. There is no earthly reasons for not furnishing the reasons recorded despite repeated requests. [Para 21] | |
| ■ | In the light of such glaring facts, the contention on the part of the respondent of upholding the order of reassessment cannot be sustained. [Para 22] | |
| ■ | Resultantly, the petition deserves to be allowed. |
CASES REFERRED TO
GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963 (SC) (para 3),Garden Finance Ltd. v. Asstt. CIT [2004] 268 ITR 48/137 Taxman 49 (Guj.) (para 7), Arvind Mills Ltd. v. Asstt. CWT (No. 2) [2004] 270 ITR 469/141 Taxman 210 (Guj.) (para 15) and Union of Indiav. Kamalakshi Finance Corpn. Ltd. AIR 1992 SCC 711 (para 20).
Mrs. Swati Soparkar for the Petitioner. Ms. Nitin Mehta for the Respondent.
ORDER
Ms. Sonia Gokani, J. - This petition challenges the notice of reopening issued under section 148 of the Income-tax Act, 1961 ("the Act" for short) for the assessment year 2001-02 on 10.11.2005.
2. The petitioner herein is a company incorporated under the Companies Act, which for the concerned Assessment Year, filed return of income which was taken in scrutiny assessment and the same was finalized on 19.2.2004.
3. On 10/12/2005, a notice of reopening came to be issued by the Assessing Officer for the Assessment Year 2001-02 upon the petitioner after such notice of reopening was communicated the petitioner on 8.12.2005 requested the Assessing Officer by filing the return to treat the income as declared in the original return as his income and also made a request for supply of reasons recorded for such reopening. Such reasons were not furnished to the petitioner although specific reference was made to the decision of the Apex Court rendered in case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963.
4. On 7.11.2006 a show cause notice issued under section 142(1) was received by the petitioner on the ground that the depreciation on meters and capacitors were claimed by the petitioner at 100% which otherwise it was entitled to claim only at the rate of 25%.
5. Aggrieved by issuance of such notice, the petitioner contended vide its communication dated 13.11.2006 inter alia that this would mean that reassessment proceedings have been initiated without furnishing the reasons recorded in complete disregard to the pronouncement of the Apex Court in the case of GKN Driveshafts (India) Ltd. (supra).
6. It appears that the respondent vide its letter dated 16.11.2006 acknowledged the communication sent on behalf of the petitioner seeking the copy of the reasons recorded and assured to supply the copy thereof. Simultaneously, it was stated therein that the assessment proceedings on merits need to be proceeded with, and therefore, the formal notice under section 142(1) was attached by fixing the date of hearing on 24.11.2006.
7. On 23.11.2006 authorized representative of the petitioner again made a request to supply a copy of reasons recorded and further relied on the decision of this Court rendered in the case of Garden Finance Ltd. v. Asstt. CIT [2004] 268 ITR 48/137 Taxman 49 in which this Court has further elaborately explained the ratio rendered in the case of GKN Driveshafts (India) Ltd. (supra).
8. No reasons despite such persistent correspondences, have been furnished, the petitioner approached this Court by way of the present petition seeking quashment of the impugned notice and this Court vide its order dated 19.12.2006 permitted the assessment proceedings to go on, however, injuncting the respondent not to make any demand of the tax till further order. Such order of protection has continued till the date.
9. Although on due service of Rule, for and on behalf of the respondent, appearance is made but, affidavit-in-reply has not been furnished.
10. Learned counsel Mr. B.S. Soparkar appearing for the petitioner has urged that non-supply of the reasons recorded is in complete contravention to the decision of the Apex Court and the some of the pronouncements made by this Court as well. He urged fervently that the reassessment proceedings have been finalized in the case of the petitioner and although before such notice of reassessment and after such reassessment proceedings, the issue of depreciation on which reassessment proceedings was initiated, has been concluded in favour of the assessee, the Assessing Officer in the reassessment proceedings has made additional demands. He urged the Court that the action of the respondent being in complete contravention of the law laid down by the Apex Court deserves indulgence.
11. Learned counsel Mr. Nitin Mehta appearing for the Revenue has strongly attempted to defend the action of the Assessing Officer. He urged that the proceedings, since have been concluded, the petitioner herein has option open to approach the appellate forum and, therefore, the Court may not interfere at this stage. He further urged that during the course of reassessment proceedings, the petitioner has participated and, therefore, also at the initial stage reasons if have not been furnished that should not be the ground for the Court to intervene. Much time, according to him, has passed and that also should be one of the potent reasons for the Court not to interfere at this stage.
12. On thus having heard learned advocates for both the sides and on having given thoughtful consideration to the rival contentions this petition deserves to succeed for the reasons to follow hereinafter.
13. The Apex Court in the case of GKN Driveshafts (India) Ltd. (supra) has confirmed the judgment of the Delhi High Court rendered in the case of GKN Driveshafts (India) Ltd. (supra).The Court laid down the procedure and the same has been also further amplified by two judgments of this Court. The Apex Court directed that in the event of notice issued under section 148, proper course of action on the part of the assessee is to file the return in pursuance of such notice and if he so desires, to seek reasons for the notice. In such eventuality, the Assessing Officer is bound to furnish the reasons within a reasonable time and on receipt of such reasons, the assessee would be entitled to file objections to the issuance of notice. Having received such objections, the Assessing Officer is bound to dispose of the same by a speaking order. In the words of the Apex Court :—
"We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years."
14. It is to be noted that this Court in the case of Garden Finance Ltd. (supra) had followed and further explained this judgment further by holding thus "if the assessee lodges primary objections before the Assessing Officer with reference to the impugned notice under section 148 of the Act and also in relation to the reasons disclosed in additional affidavit, the Assessing Officer would consider and decide the preliminary objections by passing a speaking order". "In case the same is adverse, such order can be challenged by preferring a writ petition and Assessing Officer shall not proceeded with the reassessment proceedings for a period from the date of dispatch of the order to the assessee".
15. In the case of Arvind Mills Ltd. v. Asstt. CWT (No.2) [2004]270 ITR 469/141 Taxman 210 (Guj.), the notice under section 17 of the Wealth Tax Act was challenged on the ground that the assessment jurisdiction itself was bad and also for the reason that the reassessment orders was passed ignoring the order of the Apex Court rendered in the case of GKN Driveshafts (India) Ltd. (supra), the Court held that after notice for reassessment has been issued the assessee is required to file the return and seek reasons by issuance of such notice. The Assessing Officer is bound to supply the reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file preliminary objections to the issuance of notice and the assessing Officer needs to dispose of such objections by passing a speaking order, without proceeding with the assessment in respect of assessment year for which such notice has been issued". The Court also held that without dealing with and disposing of the said objections, by passing the speaking order, the respondent proceeded to pass the impugned reassessment order on merits of the controversy. Once the Apex Court had directed that the Assessing Officer was bound to dispose of the objections by passing speaking order, it was not open to the respondent to contend that in absence of any provision, the respondent would not have passed the speaking order".
16. The gist of the settled law, as rendered in the case of GKN Driveshafts (India) Ltd. (supra) is that it is incumbent upon the Assessing Officer to furnish the reasons recorded and to provide an opportunity at the threshold which may have effect to terminate many proceedings at preliminary stage, as contemplated in the said ratio.
17. The assessee is entitled to know the grounds on which the proceedings are initiated by reassessment which may also include those assessments which are completed on scrutiny. In the cases where the very assumption of jurisdiction is unsustainable, the assessee is not to pass through any undesired hazard of undergoing the process of reopening.
18. It is apparent from the discussion of the judicial pronouncement discussed hereinabove that the directions issued in these judgments not only require the consideration of the preliminary objections, if any raised against the notice and also in relation to the reasons recorded, but also to dispose of the objections by speaking order and Assessing Officer is further directed to provide the reasonable time to challenge such order of rejection of objections on judicial side by way of writ petition.
19. At this stage, reference is surely not necessary to the law on the issue that the ratio laid down in the decisions of the Apex Court and also those rendered by this Court, all quasi judicial authorities and Tribunal are bound to follow. Such is mandate of law. Not only that but the orders of higher appellate authorities must be followed unreservedly by the subordinate authorities.
"20. Fulfilment of such requirement is a must on account of judicial discipline well woven in various pronouncements not only for the purpose of adopting the approach of consistency in all quasi judicial proceedings but the same is obligatory and additionally, this also would have an effect of checking allegations of use of powers in arbitrary manner."
20. The Apex Court in the case of Union of India v. Kamalakshi Finance Corpn. Ltd. AIR 1992 SCC 711 has held that the judgment of higher appellate authorities requires to be followed without reservation by other authorities. In the words of the Apex Court:—
"The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not "acceptable" to the department- in itself an objectionable phrase- and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws."
21. On reverting to the facts of the instant case, the stand of the respondent is to be decided on the basis of the aforementioned legal principles, it can be noted from the facts narrated hereinabove and as made available to this Court that in response to the notice under section 148 of the Act dated 10.11.2005, the reasons had been sought for vide communication dated 8.12.2005 thereof by the petitioner. Time and again, such requests continued even after the notice under section 142(1) was issued on 16.11.2005. Vide communication dated 13.11.2006, such a request was reiterated. The assessee had sought to depend upon the ratio laid down by the Apex Court as also of this Court to substantiate its stand of need to furnish the reasons and dispose of the objection, if raised pursuant to such supply. The assessee came to know of the reasons during the course of reassessment proceedings. This, in our opinion, is nothing but an apparent violation of the principles laid down by the Apex Court in GKN Driveshafts (India) Ltd. (supra) and as rendered by this Court in the case of Arvind Mills Ltd. (supra)and Garden Finance Ltd. (supra).The right made available by these decisions to the assessee of availing reasons on asking and of raising the objections against the reasons recorded at the preliminary stage itself, is an option made available to the assessee in the form of the right and that is surely not an option available to the Revenue. At the instance of assessee, such reasons are not made available. And therefore, the very object set out while laying down the ratio in the GKN Driveshafts (India) Ltd. (supra) and those judgments rendered following GKN Driveshafts (India) Ltd. (supra) has been rendered nugatory. The conduct on the part of the respondent clearly pointed out that the passing of the order of reassessment was in clear violation and in breach of such mandatory requirements. There is no earthly reasons for not furnishing the reasons recorded despite repeated requests and when respondent ensured to provide the same in one of the correspondences. Such flagrant violation of decision may also lead to infer the arbitrary and highhanded action on the part of the Assessing Officer.
22. In the light of such glaring facts, the contention on the part of the respondent of upholding the order of reassessment cannot be sustained.
23. Resultantly, the petition deserves to be allowed partially, quashing the order of reassessment with a direction that the Assessing Officer shall furnish the reasons recorded within four weeks of this order and the assessee shall file the objections to such reasons recorded within four weeks thereof. On receipt of such objections. The Assessing Officer shall dispose of the same in accordance with the law and furnish copy of such order of rejection to the assessee. After receiving such copy if in case the order passed is adverse to the cause of the petitioner assessee, reasonable time of 8 weeks from the receipt of the order shall be made available to the petitioner for it to challenge the same by way of writ petition if it so desires.
24. Petition stands disposed of. Rule is made absolute accordingly.
SUNIL*In favour of assessee.
IT: Where assessee incurred expenditure prior to setting up of its business, no allowance of assessee's claim under section 37(1) or section 32(1) during said period could be made out
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[2014] 45 taxmann.com 530 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'A'
ALD Automotive (P.) Ltd
v.
Deputy Commissioner of Income-tax, Circle 15(1), Mumbai*
I.P. BANSAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL NO. 309 (MUM.) OF 2012
[ASSESSMENT YEAR 2005-06]
[ASSESSMENT YEAR 2005-06]
APRIL 17, 2014
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Setting up of business) - Assessment year 2005-06 - Whether where state of preparedness of company was only towards commencing its business, company was clearly in setting up stage - Held, yes - Whether, where expenses were incurred by assessee prior to setting up of business, assessee's claim of allowance of business loss during said period was not maintainable - Held, yes [Para 5.2][In favour of revenue]
Section 32 of the Income-tax Act, 1961 - Depreciation - Rate/allowability of (Setting up of business) - Assessment year 2005-06 - Whether where expenses were incurred by assessee prior to setting up of its business, assessee's claim for depreciation during said period was not maintainable - Held, yes [Para 5.2] [In favour of revenue]
FACTS
| ■ | The assessee, a newly incorporated company filed its return of income for the year by claiming a business loss and depreciation both for being carry forward and set off in the subsequent year/s in the absence of any income or receipt in the relevant year. | |
| ■ | As sought, the assessee could not produce any evidence to prove that the business activity of the assessee had started during such relevant year. | |
| ■ | Subsequently, the assessee's claim for business loss as well as for depreciation were not allowed. | |
| ■ | On appeal, the Commissioner (Appeals) examined the matter in detail and after relying on various decisions, he disallowed the claim of the assessee. | |
| ■ | On appeal: |
HELD
| ■ | It is when the company (entity) can discharge the functions for which it (the firm) is established, it can be said that the business has been set up. It is only when it could start functioning as a business or a manufacturing organization that the unit could be said to set up. Prior thereto the processes are preparatory in nature. The business of the assessee-company can be to have been set up only on the receipt of the power connection and not earlier on the purchase of raw material or even the installation of machinery subsequently. | |
| ■ | The company claims to have appointed MD as well as Chief Operations Manager, putting the infrastructure in place by acquiring office premises, staff, furniture and fittings, etc. No grant of any operational lease by the year-end should not, therefore, be of any consequence. If the infrastructure has indeed been set up and the company is in position or is ready to grant operational leases, which is to comprise its principal business and that toward the commencement of which line of business efforts were, as stated, being made, it can be said to have set up its business. However, as also noted by both the authorities below, the assessee's case is wholly unsubstantiated. The only material on record is toward the appointment of MD, even though there is some doubt in its respect inasmuch as the resolution by the Board of Directors of the company confirming his appointment is dated 17-2-2007. | |
| ■ | Even so, when did the Chief Operation Manager join? When was the other staff, along with their names and reference to the different positions/functions they are to discharge? When was the office premises purchased or taken on rent or hire? What is the furniture and fixture - without which the premises cannot be put to use, acquired and when? It is said so as the company's financial statements do not reflect the same. Has the company procured the necessary hardware in terms of computer systems or has it only made some preliminary purchases thereof, i.e., in the process of setting up its' infrastructure? Has the company procured the necessary software for operating its computer systems, even assuming the same to have been purchased in the numbers necessary to complete a transaction observing the operating guidelines? Have the operating licenses/permits, as required from the regulatory authorities, been obtained? Whether, the firm arrangements for capital - both owned as well as borrowed (by way of lines of credit) for either operational leases or fleet management (which is its other principal business), both being highly capital incentive, been formalized? Has the company entered into a relationship with any vehicle supplier inasmuch as, as distinct from a financial lease, the risk and reward of the ownership in case of an operating lease rests with the lessor, so that the terms of the lease could not be agreed upon (with the customers) unless it has a complete understanding of the product, the risks associated with the ownership and management thereof, including by way of insurance, costs, applicable taxes. Why, even a financial lease or arrangement would require an arrangement/s or tie up with the vehicle supplier or manufacturer, enabling competitive offers to the customers through their preferred financial channels. Then, again, has the company undertaken study of the legal issues incident on its business, in the absence of which it is doubtful that the business could be commenced? So on and so forth. | |
| ■ | No answers emanate from either the material on record or the assessee's explanations, with the expenses as incurred itself revealing the state of preparedness of the company toward commencing its business. It was viewed that the company is clearly in the setting up stage. Besides, clearly, it is only the expenditure, post set-up that could be claimed as a business expenditure, while admittedly the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its' incorporation itself, which are only, likewise, capital costs. Alternatively speaking, the implication of no incorporation expenses or the company being established on the very date of its incorporation, are both unsupported as well as bizarre propositions. No case for allowance of the assessee's claim under section 37(1) or section 32(1), as the case may be, is accordingly made out. [Para 5.2] | |
| ■ | In the result, the assessee's appeal is dismissed. [Para 6] |
CASES REFERRED TO
Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) (para 3), CIT v. L&T McNeil Ltd. [1993] 202 ITR 662 (Bom.) (para 3), CIT v. Industrial Solvents & Chemicals (P.) Ltd.[1979] 119 ITR 608 (Bom.) (para 3), CWT v. Ramaraju Sungical Cotton Mills Ltd. [1967] 63 ITR 478 (SC) (para 3), Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.) (para 3), T.M. Chacko & Partners v. CIT [1992] 195 ITR 904 (Ker.) (para 3), J.R. Mehta v. CIT [1980] 126 ITR 476/4 Taxman 522 (Bom.) (para 3), S.P.V. Bank Ltd. v. CIT [1980] 126 ITR 773/[1981] 5 Taxman 155 (Ker.) (para 3), CIT v. Omer Khayyam Wineries (P.) Ltd. [1979] 120 ITR 859 (AP) (para 3), CITv. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom.) (para 3), Bhogilal Menghraj & Co. (P.) Ltd. v. CIT [1979] 119 ITR 968/1 Taxman 286 (Bom.) (para 5.1), CIT v. Sorabhai Sons (P.) Ltd.[1973] 90 ITR 318 (Guj.) (para 5.3) and CIT v. Saurashtra Cement & Chemical Industries Ltd.[1973] 91 ITR 170 (Guj.) (para 5.3).
B.P. Agarwal for the Appellant. M.L. Perumal for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-5, Mumbai ('CIT(A)' for short) dated 11.11.2011, dismissing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2005-06 vide order dated 14.12.2007.
2. The only issue arising in the instant appeal is the maintainability in law and in the facts and circumstances of the case of the disallowance of the loss of Rs.36,63,262/-claimed by the assessee under Chapter IV-D of the Act.
3. The brief facts of the case are that the assessee-company was incorporated on 11.02.2005 to carry on:
| (a) | the business as operators of carriers, transport vehicle, agricultural vehicles, commercial vehicles, and vehicles of all other descriptions; and | |
| (b) | the activity of providing services and facilities of letting on hire, buying, selling, hiring, licensing, repairing, maintaining, etc. of vehicles of all descriptions as well as equipment, accessories and spare parts. |
The return of income (ROI) for the year was furnished on 30.10.2005, claiming the business loss at Rs.31,16,350/- and depreciation at Rs.5,46,912/-, both for being carry forward and set off in the subsequent year/s in the absence of any income, or receipt or for that matter for the current year. The expenses claimed were basically for or toward:
| (1) | school fees of the children of the Director; | |
| (2) | rent paid for the director's residence; and | |
| (3) | commission paid to the broker for rental premises. |
Similarly, the addition to the fixed assets included in the main purchase of two cars. No evidence to prove that the business activity had started during the current year was produced. Under the circumstances, the claim for business loss as well as for depreciation could not be allowed. In appeal, the matter was examined in detail, with emphasis on the obtaining legal position. The same was no longer res integra in view of the decisions inter alia in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) and CIT v. L & T McNeil Ltd. [1993] 202 ITR 662 (Bom.), so that when the business is established and ready to commence business, it can be said to be set up. But before it is ready to commence business, it is not set up. Further, there may be an interregnum and, therefore, a time interval between the time a business is set up and when it is commenced, in which case all the expenditure incurred after the set up of the business would be permissible for deduction, i.e., in principle. Reference was made to the decision in the case of CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.); and CWT v. Ramaraju Surgical Cotton Mills Ltd.[1967] 63 ITR 478 (SC); the apex court in the latter cases approving and applying the principles laid down in Western India Vegetable Products Ltd.'s case (supra), also stating the facts of the said cases as well as quoting there-from to bring forth clarity to the matter. The law was, in fact, well settled, and the question stands answered by the hon'ble courts on the facts of a particular case, as was in the case of Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.), since confirmed by the apex court and relied upon by the assessee before him, which did not differ in ratio from that in Western India Vegetable Products Ltd.'s case (supra). The matter was also examined by him from the stand point of the allowability of an expense u/s.37 of the Act. A number of decisions were relied upon by him, as under, also stating the question/s referred to the hon'ble courts and the basis of its answer; all leading to the same afore-stated ratio; where the business had not been set up, the expense could not be regarded as an expense of the business, much less as incurred wholly and exclusively for the purposes of business, so as to meet the mandate of section 37(1):
| (a) | T. M. Chacko & Partners v. CIT [1992] 195 ITR 904 (Ker) | |
| (b) | J. R. Mehta v. CIT [1980] 126 ITR 476/4 Taxman 522 (Bom); | |
| (c) | S. P. V. Bank Ltd. v. CIT [1980] 126 ITR 773/[1981] 5 Taxman 155 (Ker); | |
| (d) | CIT v. Omer Khayyam Wineries (P.) Ltd. [1979] 120 ITR 859 (AP); | |
| (e) | CIT v. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom); and | |
| (f) | CIT v. Industrial Solvents & Chemicals (P.) Ltd.'s case (supra); |
The disallowance being confirmed, the assessee, thus aggrieved, is in second appeal.
4. Before us, the case of both the parties was along the same lines, i.e., as before the authorities below. Merely because no revenue has been generated would not in any manner imply that business had not been set-up. The appointment of the CEO and MD of the company, Mr. K. Sujit Reddy, had been finalized, as apparent from the TDS certificate in Form 16 for the relevant year (PB pgs. 13-15). The payment of the school fee of his children is thus only a part of the Directors' remuneration, and by itself to no adverse consequence. The company had been incorporated to carry on the business of providing operating leases of vehicles to customers and the appointment of the MD on 15.02.2005 was only toward the same (PB pg.12). Further, the Chief Operations Manager had also been appointed, with the offer letter by the company having been accepted by him on 03.03.2005 (PB pgs. 12(a)-12 (d)).
5. We have heard the parties, and perused the material on record.
5.1 The question before us is whether the assessee company can be said to have set up its business during the relevant year and, if so, when? Without doubt even as observed by the Bench during hearing itself, if it has, merely because no sales have been made or no positive deal struck with any customer, generating revenue, would not operate to preclude deduction of any expenditure incurred for the purposes of its business by the assessee, i.e., post the establishment thereof (business). The law in the matter, even as found by the ld. CIT(A) with reference to a host of decisions, including by the hon'ble apex court (refer para 3 of this order), and to no rebuttal or possibly so by the assessee before us, is well settled, which may be capsule in the following observations by the hon'ble jurisdictional high court : (cache note)
'There is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered. It is only after the business is set up that the previous year of that business commences and any expense incurred prior to the setting up of a business would not be permissible deduction. When a business is established and is ready to commence business then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions.'
The first question, then, that falls for consideration is when the business can be said to have been set up. As explained, it is when the company (entity) can discharge the functions for which it (the firm) is established; the apex court applying the principle laid down in Western India Vegetable Products Ltd.'s case (supra) in Ramaraju Surgical Cotton Mills Ltd.'s case (supra) to decide if in the facts and circumstances of the said case could the company's unit be said to have been set up or, equivalently speaking, established, to answer the question in the negative in-as-much as the manufacture of absorbent cotton wool, for which the unit was being set up, could not take place or be produced. It is only when it could start functioning as a business or a manufacturing organization that the unit could be said to set up. Prior thereto the processes are preparatory in nature. The hon'ble court in Bhogilal Menghraj & Co. (P.) Ltd. v. CIT [1979] 119 ITR 968/1 Taxman 286 (Bom) held the business of the assessee-company to have been set up only on the receipt of the power connection and not earlier on the purchase of raw material or even the installation of machinery subsequently, even as clarified by it earlier in Industrial Solvents & Chemicals (P.) Ltd.'s case (supra).
5.2 Coming to the facts of the case, the company claims to have appointed MD as well as Chief Operations Manager, putting the infrastructure in place by acquiring office premises, staff, furniture and fittings, etc. No grant of any operational lease by the year-end should not, therefore, be of any consequence. We agree, so that if the infrastructure has indeed been set up and the company is in position or is ready to grant operational leases, which is to comprise its principal business and that toward the commencement of which line of business efforts were, as stated, being made, it can be said to have set up its business. However, as also noted by both the authorities below, the assessee's case is wholly unsubstantiated. The only material on record is toward the appointment of MD, even though there is some doubt in its respect inasmuch as the resolution by the Board of Directors of the company confirming his appointment is dated 17.02.2007 (PB pg.12). Even so, when did the Chief Operation Manager join? When was the other staff, along with their names and reference to the different positions/functions they are to discharge? When was the office premises purchased or taken on rent or hire? What is the furniture and fixture - without which the premises cannot be put to use, acquired and when? We say so as the company's financial statements (PB pgs. 16-24) do not reflect the same. Has the company procured the necessary hardware in terms of computer systems or has it only made some preliminary purchases thereof, i.e., in the process of setting up its' infrastructure? Has the company procured the necessary software for operating its computer systems, even assuming the same to have been purchased in the numbers necessary to complete a transaction observing the operating guidelines? Have the operating licenses/permits, as required from the regulatory authorities, been obtained? Whether, the firm arrangements for capital - both owned as well as borrowed (by way of lines of credit) for either operational leases or fleet management (which is its other principal business), both being highly capital incentive, been formalized? Has the company entered into a relationship with any vehicle supplier in-as-much as, as distinct from a financial lease, the risk and reward of the ownership in case of an operating lease rests with the lessor, so that the terms of the lease could not be agreed upon (with the customers) unless it has a complete understanding of the product, the risks associated with the ownership and management thereof, including by way of insurance, costs, applicable taxes. Why, even a financial lease or arrangement would require an arrangement/s or tie up with the vehicle supplier or manufacturer, enabling competitive offers to the customers through their preferred financial channels. Then, again, has the company undertaken study of the legal issues incident on its business, in the absence of which it is doubtful that the business could be commenced? So on and so forth. No answers emanate from either the material on record or the assessee's explanations, with the expenses as incurred itself revealing the state of preparedness of the company toward commencing its business. In our clear view, the company is clearly in the setting up stage. Besides, clearly, it is only the expenditure, post set-up, that could be claimed as a business expenditure, while admittedly the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its' incorporation itself, which are only, like wise, capital costs. Alternatively speaking, the implication of no incorporation expenses or the company being established on the very date of its incorporation, are both unsupported as well as bizarre propositions. No case for allowance of the assessee's claim u/s. 37(1) or section 32(1), as the case may be, is accordingly made out.
5.3 The assessee has placed some case law in its compilation, to which no reference though was made during hearing. The same accordingly cannot be considered as a part of the tribunal's record in terms of rule 18 of the Appellate Tribunal Rules, 1963. We have nevertheless perused the same, and reiterate our understanding of the law as explained hereinbefore, being in fact well-settled, so that the issue in each case turns out on the application of those principles upon a factual and functional analysis, i.e., confirms to the issue being primarily factual, as would be apparent from a perusal of the decisions relied upon by the hon'ble courts by both the parties, and indeed affirmed by them, as in the case ofForging & Stamping (P.) Ltd. (supra). Further, in fact, the decisions by the hon'ble jurisdictional high court consider those by the hon'ble Gujarat high court, as in the case of CIT v. Sarabhai Sons (P.) Ltd.[1973] 90 ITR 318; CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj)and Sarabhai Management Corpn. Ltd.'s case (supra) relied upon by the assessee. We have in the facts of the case found the assessee's case to be factually wholly unsubstantiated and, thus, unproved, if not disproved.
6. In the result, the assessee's appeal is dismissed.
IT : Where assessee having surrendered certain income in course of search, filed return wherein said amount was duly disclosed and taxes were paid accordingly, there was sufficient compliance of provisions of section 271AAA(2) and, thus, impugned penalty order deserved to be set aside
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[2014] 45 taxmann.com 563 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'A'
Assistant Commissioner of Income-tax, Central Circle, Patiala
v.
Munish Kumar Goyal*
T.R. SOOD, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NOS. 1003 & 1004 (CHD.) OF 2013†
[ASSESSMENT YEAR 2010-11]
[ASSESSMENT YEAR 2010-11]
MARCH 27, 2014
Section 271AAA of the Income-tax Act, 1961 - Penalty - Where search has been initiated (Applicability of) - Assessment year 2010-11 - Where where assessee having surrendered certain income in course of search, filed return wherein said amount was duly disclosed and taxes were paid accordingly, there was sufficient compliance of provisions of section 271AAA(2) and, thus, impugned penalty order deserved to be set aside - Held, yes [Para 10] [In favour of assessee]
FACTS
| ■ | A search was conducted in the premises of the assessee wherein a sum of Rs. 4 crores was surrendered. This surrender was honoured and the assessee filed a return accordingly by including a sum of Rs. 4 crores was surrendered. Taxes were also paid accordingly. | |
| ■ | In response to show cause notice for levy of penalty, it was submitted that the assessee had already surrendered a sum of Rs. 4 crore and, therefore, all the conditions of section 132(4), read with sub-section (2) of section 271AAA were complied with and no penalty should be levied. | |
| ■ | The Assessing Officer took a view that for allowing immunity it was not sufficient to disclose the income but the assessee was duty-bound to specify the manner in which the income had been earned. Since this was not done, he excluded a part of amount declared and levied penalty at the rate of 10 per cent on the balance amount. | |
| ■ | The Commissioner (Appeals), however, deleted the penalty. | |
| ■ | On revenue's appeal: |
HELD
| ■ | A plain reading of section 271AAA would show that if the assessee during the course of search admits certain undisclosed income and pays taxes on the same then penalty cannot be levied in terms of sub-section (1) of this section. In the instant case, the amount of Rs. 4 crore which was surrendered during search has been declared by the assessee in the return and taxes have been paid accordingly. Therefore the assessee is normally entitled for the immunity provided in section 271AAA itself. However, the revenue has raised further dispute that whether the assessee has disclosed the manner in which income has been earned. [Para 10] | |
| ■ | Once the income is surrendered during the course of search under section 132(4) it can be safely assumed that during discussion the assessee must have disclosed the manner. In any case there is force in the submission of the assessee that if the explanation of the assessee has been accepted for a sum of Rs. 19,87,500 out of total surrender of Rs. 4 crore then same manner should have been adopted for the whole of the amount. It is not clear from the penalty order how explanation for Rs. 19,875,500 was accepted. In any case the Commissioner (Appeals) has considered all these issues in detail and the revenue has not referred to any material or decision which can controvert the finding of the Commissioner (Appeals). [Para 11] | |
| ■ | In the result, appeal of the revenue is dismissed. [Para 14] |
CASES REFERRED TO
ACIT (OSD) v. Kanakia Spaces (P.) Ltd. [IT Appeal No. 6763 (Mum.) of 2011, dated 10-7-2013] (para 7), Asstt. CIT v. A.N. Annamalaisamy (HUF) [2013] 38 taxmann.com 440 (Chennai) (para 7), Pramod Kumar Jain v. Dy. CIT [2013] 33 taxmann.com 651 (Cuttack) (para 7) and Smt. Raj Rani Gupta v. Dy. CIT [IT Appeal No. 3371 (Delhi) of 2011, dated 30-3-2012] (para 7).
J.S. Nagar for the Appellant. Ashok Kumar Goyal for the Respondent.
ORDER
T.R. Sood, Accountant Member - These appeals are directed against the order dated 2.8.2013 of the Ld CIT(A)-I, Ludhiana. Issues are common in these appeals and the same were heard together and are being disposed off by this consolidated order.
ITA No. 1003/Chd/2013
2. In this appeal the Revenue has raised the following grounds:
| "1 | The Ld. CIT(A) has erred both in law and on facts while deleting the penalty of Rs. 38,01,250/- without appreciating the facts that the assessee has failed to substantiate the manner in which undisclosed income was derived so as to qualify for non-levy of penalty within the meaning of sub-section (2) of Sec 271AAA of the Act. | |
| 2 | It is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing officer be restored." |
3. After hearing both the parties we find that a search was conducted in the premises of the assessee wherein assessee surrendered a sum of Rs. 4 crore. This surrender was honoured and the assessee filed a return accordingly by including a sum of Rs. 4 crore and declared total income of Rs. 4,18,11,330/-. Taxes were also paid accordingly. Penalty proceedings u/s 217AAA were initiated. In response to show-cause notice for levy of penalty it was submitted that the assessee has already surrendered a sum of Rs. 4 crore and therefore all the conditions of Sec 132(4), read with sub-sec (2) of Sec 271AAA are complied and no penalty should be levied. The Assessing officer after considering the submissions observed that for allowing immunity it was not sufficient to disclose the income but the assessee was duty-bound to specify the manner in which the income has been earned. Since this was not done he excluded a sum of Rs. 1987500/- out of total sum of Rs. 4 crore and levied penalty @ 10% on the balance amount amounting to Rs. 3801250/-.
4. On appeal, it was mainly submitted that undisclosed income has been defined as any money, bullion, jewellery, other valuable articles or things or any entry in the books of account or documents. Since only certain documents were found and the assessee made surrender, therefore same are not covered under the definition of undisclosed income and therefore eligible for grant of immunity by Sub-sec (2) of Sec 271AAA. Since the assessee has already paid all the taxes, therefore immunity should have been granted. Reliance was placed on certain case laws.
5. The Ld. CIT(A) considered the submissions and was satisfied and deleted the penalty.
6. Before us. the Ld. D.R. for the Revenue strongly supported the order of Assessing officer. He further submitted that since the assessee has not disclosed the manner in which such income has been earned, therefore assessee is not entitled to immunity.
7. On the other hand, the Ld. Counsel for the assessee submitted that surrender made on account of certain documents found during survey, cannot be described as undisclosed income. The undisclosed income has been defined in Exp to Sec 271AAA itself. The undisclosed income mean an income which is represented by any money, bullion, jewellery or other valuable articles or thing or not entered in the books of accounts or other documents, other transactions found in the course of search. Once it is not undisclosed income then penalty cannot be levied. Further the assessee had surrendered a sum of Rs. 4 crores whereas penalty has been levied at Rs. 3,80,12,500/-. If the Revenue has accepted the manner in respect of about Rs. 1987500 out of same surrender then why same manner has not been accepted in respect of rest of the matter, is not clear. He also relied on the following decisions:
ACIT (OSD) v. Kanakia Spaces (P.) Ltd. [IT Appeal No. 6763 (Mum.) of 2011, dated 10-7-2013]
Asstt. CIT v. A.N. Annamalaisamy (HUF) [2013] 38 taxmann.com 440 (Chennai).
Pramod Kumar Jain v. Dy. CIT [2013] 33 taxmann.com 651 (Cuttack)
Smt. Raj Rani Gupta v. Dy. CIT [IT Appeal No. 3371 (Delhi) of 2011, dated 30-3-2012]
8. We have gone through the rival submissions carefully. The Ld. CIT(A) has decided this issue vide para 5 which is as under:
'I have considered the basis of penalty imposed by the AO and the arguments of the AR on the issue. The perusal of the provisions of section 271AAA make it clear that the penalty can be levied on undisclosed income of the specified year if the conditions specified in sub-section (2) of section 271AAA are not satisfied. It, therefore, follows that first thing to determine is what is the amount of undisclosed income under the given circumstances. The concept of undisclosed income has been clearly defined by Explanation to section 271AAA and the same reads as under:—
"Undisclosed income" means—
| (i) | any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of search under section 132, which has-A |
| (a) | not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or | |
| (b) | otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search; or |
| (ii) | any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted;……." |
The perusal of above detailed definition shows that it is exhaustive definition and there is clear identification of the income represented "either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents of transactions found in the course of search under section 132". It is seen that there is clear and direct association between the income on one hand and assets/documents on the other hand found during the course of search. It follows that if certain income is not represented by any assets/documents/entry found during the search, the same would not be covered under the definition of undisclosed income but would invite penalty proceedings u/s 271(1)(c) on the fulfilment of other requisite conditions. This means that entire disclosure of income at the time of search operation may not fall under the definition of undisclosed income if it could not be relatable to some assets/documents/entry found during the course of search operation. It also means that if the AO during the course of search operation. It also means that if the AO during the course of search assessment proceedings makes certain additions independent of the incriminating material/documents found during the course of search operation then such an assessed income would not invite penalty proceedings u/s 271AAA but under section 271(1)(c). It also means that initiation of penalty proceedings would depend upon the nature of the income assessed and there could be penalty proceedings u/s 271AAA as well as 271(1)(c) for the same assessment year, however in respect of different income. The AO in the penalty order has clearly accepted that disclosure of income by the assessee to the tune of Rs. 3,80,12,500/- is not represented by any assets/documents found during the course of search operation and has also observed that the same was part of the undisclosed income just because this disclosure had come during the course of search and was therefore as a result of the search. There is a clear acceptance of the fact that the said disclosure is not with reference to any assets/documents found during the course of search. It is only because the said disclosure happened during the search that the same has been clubbed in the definition of undisclosed income requiring the assessee to fulfil the condition as specified in sub-section (2) of 271AAA. I am of the clear view that income to the extent of Rs. 3,80,12,500/- does not come under the definition of undisclosed income as defined under section 271AAA and therefore no penalty u/s 271AAA could be levied. The second aspect of the penalty order passed by the Assessing Officer is that whether the assessee had fulfilled the requisite conditions as specified under sub-section (2) of section 271AAA. The Assessing Officer has accepted that the assessee had made the disclosure under section 132(4) during the course of search operation and specified the manner of earning such income and it also substantiated the same on the basis of seized documents to the tune of Rs. 19,87,500/-. The AO's view that the assessee is required to substantiate the quantum of undisclosed income does not seem logical from the bare reading of the provisions of section 271A of sub-section (2). The requirement of the law is that the assessee should state the manner of earning undisclosed income and also substantiate the same. It would not be correct interpretation of the provisions to stretch the requirement to substantiate the quantum as well. There is no doubt with regard to the fact that the assessee's manner of earning undisclosed income being financing activities has been substantiated by the seized documents. The requirement of the law has therefore been fulfilled as the assessee had stated the manner of earning unaccounted income, substantiating the same and also paid the due taxes along with the interest within the specified time limit. Even if the entire income by any logic is included in the definition of undisclosed income, the penalty under section 271AAA would not be leviable because of fulfillment of requirement of sub section (2) of section 271AAA.'
9. We further find that Section 271AAA reads as under:
'271AAA. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of June, 2007 but before the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year.
(2) Nothing contained in sub-section (1) shall apply if the assessee,—
| (i) | in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; | |
| (ii) | substantiates the manner in which the undisclosed income was derived; and | |
| (iii) | pays the tax, together with interest, if any, in respect of the undisclosed income. |
(3) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).
(4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section.
Explanation.—For the purposes of this section,—
| (a) | "undisclosed income" means— |
| (i) | any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— |
| (A) | not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or | |
| (B) | otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search; or |
| (ii) | any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted; |
| (b) | Not relevant……….' |
10. Plain reading of sub-section would show that if the assessee during the course of search in a statement admits to some undisclosed income and pay taxes on the same then penalty cannot be levied in terms of sub-sec (1) of this Section. In the case before us, the amount of Rs. 4 crore which was surrendered during search, has been declared by the assessee in the return and taxes have been paid accordingly. Therefore the assessee is normally entitled for the immunity provided in Sec 271AAA itself. However, the Revenue has raised further dispute that whether the assessee has disclosed the manner in which income has been earned. In the penalty order passed by the Assessing officer following questions and answers have been extracted:
"Q. Do you want to say anything more ?
Ans. I voluntarily surrender a sum of Rs. 4.00 crore (Rs. Four crore) for current financial year i.e. 2009-10 relevant to A.Y. 2010-11 in any (should be 'my') individual capacity. They cover all the discrepancies in the seized papers during the course of search proceedings."
11. Therefore clearly the Revenue has not asked the assessee to disclose the manner in which such income was earned. In any case once the income is surrendered during the course of search u/s 132(4) it can be safely assumed that during discussion the assessee must have disclosed the manner. In any case we find force in the submissions of the Ld. Counsel for the assessee that if the Explanation of the assessee has been accepted for a sum of Rs. 1987500 out of total surrender of Rs. 4 crore then same manner should have been accepted for the whole of the amount. It is not clear from the penalty order how explanation for Rs. 1987500 was accepted. In any case the Ld. CIT(A) has considered all these issues in detail and the D.R. for the Revenue has not referred to any material or decision which can controvert the findings of the CIT(A). In the following cases which have been relied on by the Ld. Counsel for the assessee which was clearly held that penalty is not leviable.
12. Further the assessee has relied on the following decisions:
Kanakia Spaces (P.) Ltd. (supra)
A.N. Annamalaisamy (HUF) (supra)
Pramod Kumar Jain (supra)
Smt. Raj Rani Gupta (supra)
13. The Ld. D.R. for the Revenue was not able to place before us any decision which supports his case, therefore we find nothing wrong with the order of the Ld. CIT(A) and confirm the same.
14. In the result, appeal of the Revenue in ITA No. 1003/Chd/2013 is dismissed.
ITA No. 1004/Chd/2013
15. In this appeal the facts and contentions are identical to the facts and contentions in the above noted case in ITA No. 1003/Chd/2013 which we have adjudicated above except that in this case total surrendered amount was Rs. 2.60 crore out of which penalty was levied only at Rs. 1.60 crore. Therefore following our above order, we confirm the order of the Ld. CIT(A) and delete the penalty.
16. In the result, appeal of the Revenue in ITA No. 1004/Chd/2013 is dismissed.
17. In the result, both the appeals of the Revenue are dismissed.
SUNIL*In favour of assessee.
†Arising out of order of Tribunal dated 2-8-2013.
IT : Reopening of assessment in relation to a matter which is subject matter of block assessment, is without jurisdiction
■■■
[2012] 28 taxmann.com 8 (Guj.)
HIGH COURT OF GUJARAT
Prakash Jewellers
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI AND MS. HARSHA DEVANI, JJ.
SPECIAL CIVIL APPLICATION NO. 12394 OF 2002
SEPTEMBER 3, 2012
Section 147, read with section 158BC, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - In case of Block assessment under section 158BC - Assessment year 1999-2000 - A search was conducted in the case of assessee, a partnership firm, in course of which certain gold ornaments were seized - Assessee claimed that said ornaments belonged to its customers - Assessing Officer rejected assessee's contention and included value of seized ornaments in assessee's taxable income while making block assessment - Commissioner (Appeals) as well as Tribunal deleted addition made by Assessing Officer - Assessing Officer thereupon initiated reassessment proceedings taking a view that value of ornaments seized belonging to assessee escaped assessment - Whether when value of gold ornaments which assessee claimed to be belonging to its customers was subject-matter of block assessment, same could not be made subject-matter of regular assessment under Chapter XIV of Act - Held, yes - Whether, therefore, reopening of assessment in relation to a matter which was subject-matter of block assessment was evidently without jurisdiction - Held, yes - Whether even otherwise, once issue had already been decided by appellate authority, it was not open for Assessing Officer to seek to reopen assessment on same grounds as this would tantamount to Assessing Officer sitting in appeal over order of Commissioner (Appeals) - Held, yes - Whether in view of above, impugned reassessment proceedings deserved to be quashed - Held, yes [Paras 12, 15 & 16] [In favour of assessee]
FACTS
• A search was conducted in the case of assessee, a partnership firm, in course of which certain gold ornaments were seized. The assessee claimed that said ornaments belonged to its customers.
• The AO rejected the assessee's contention and included the value of seized ornaments in the assessee's taxable income while making block assessment.
• The Commissioner (Appeals) as well as Tribunal deleted addition made by AO.
• The AO thereupon initiated reassessment proceedings taking a view that value of ornaments seized belonging to assessee escaped assessment.
• On writ :
HELD
Undisclosed income which is subject matter of block assessment cannot be made basis for reopening of assessment
• When the undisclosed income determined by the Assessing Officer included Rs. 29,77,726 being the value of gold ornaments which the assessee claimed to be belonging to its customers was subject-matter of block assessment, the same could not be made the subject-matter of regular assessment under Chapter XIV of the Act. Under the circumstances, the reopening of assessment in relation to a matter which was subject-matter of block assessment was evidently without jurisdiction. [Para 12]
Reopening of assessment when addition made in block assessment was deleted by appellate authorities
• Another notable aspect of the matter is that in the block assessment the issue regarding gold ornaments had been considered by the Assessing Officer, in the assessee's appeal, the Commissioner (Appeals) had examined the issue on merits and had recorded that in the facts of the present case, the assessee had discharged the onus in respect of the deposits of gold received by it. It was recorded that the assessee had not only filed confirmations of parties but also filed affidavits of the depositors. The genuineness of the affidavits has been verified by the Assessing Officer through examination of the depositors in person over a few days. The depositors were produced by the assessee for such examination at the instance of the Assessing Officer. It was further recorded that the Assessing Officer also sent the Ward Inspector to the area the depositors came from and the Inspector duly submitted a report on these enquiries.
• Nothing amiss was found in all these enquiries conducted by the Assessing Officer himself and through Ward Inspector. In not a single case did the Assessing Officer record any finding that the facts narrated in any affidavit were false. The Commissioner (Appeals), accordingly, was of the view that the onus that lay on the assessee had been amply discharged and if the Assessing Officer still wanted to make an addition, the onus was on the Assessing Officer to establish that the claim was not genuine and that the facts stated in the affidavits were false etc. Such onus had not been discharged by the Assessing Officer to the slightest. Finding that there was no justification in making the addition, the Commissioner (Appeals) had directed deletion of such addition. [Para 13]
• In appeal by the Department, the Tribunal after re-appreciating the evidence on record has found as a matter of fact that the assessee had successfully proved to the hilt the genuineness of the transactions encompassing all its aspects. The Tribunal found that the assessee had duly discharged its onus, and, therefore, did not find any justification for reversing the order passed by the Commissioner (Appeals) and upheld the deletion of addition. [Para 14]
• Thus, it is apparent that the Assessing Officer seeks to reopen the assessment in relation to an item, viz., gold ornaments which was already subject-matter of block assessment wherein such addition was made in the order under section 158BC and was subject-matter of appeal before the Commissioner (Appeals) (and subsequently before the Tribunal). The said issue has been treated as being subject-matter of block assessment and examined on merits by the Commissioner (Appeals) and has been deleted. Once such issue has already been decided by the appellate authority, it is not open for the Assessing Officer to seek to reopen the assessment on the same grounds as this would tantamount to the Assessing Officer sitting in appeal over the order of the Commissioner (Appeals). [Para 15]
• For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice issued under section 148 of the Act is hereby quashed and set aside. [Para 16]
N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733 / 101 Taxman 525 (Guj.) (para 10) and Cargo Clearing Agency (Gujarat) v. Jt. CIT [2008] 307 ITR 1 (Guj.) (para 11).
J.P. Shah for the Petitioner. Manav A. Mehta for the Respondent.
JUDGMENT
Ms. Harsha Devani, J. - The petitioner, a partnership firm, has challenged the notice dated 22nd January, 2002 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') seeking to reopen its assessment for assessment year 1999-2000.
2. The facts of the case as stated in the petition are that on 27th January, 1999, search proceedings were conducted under section 132 of the Act in the case of the petitioner. The authorised officers seized certain ornaments as also registers which were showing the names of parties who had given these ornaments by way of loan or for remaking. Such registers also showed the weight of the ornaments given by the parties. During the course of block assessment proceedings under Chapter XIV-B, the petitioner filed its return on 30th August, 1999 disclosing 'nil' income. The petitioner produced affidavits of various parties who had given these ornaments and also produced such parties before the Assessing Officer who confirmed the fact of lending or giving of ornaments and also replied the questions put by the Assessing Officer about the source, ownership, capacity, identity etc. Pursuant to inquiry made by him, the Assessing Officer did not propose any addition in respect of jewellery. However, when the order was presented for the approval of the Joint Commissioner of Income Tax, he directed such addition. Accordingly, assessment was framed under section 158BC of the Act on 27th March, 2001 computing the undisclosed income at Rs. 48,49,902/- which was the value of the ornaments taken as undisclosed investments of the petitioner. The petitioner carried the matter in appeal before the Commissioner (Appeals), who, by his order dated 9th May, 2001 allowed the appeal on almost all points except the point of application of section 40A(3) of the Act. Against the order of the Commissioner (Appeals), the Department went in appeal to the Tribunal. In the said appeal, the petitioner preferred cross-objections against the upholding of the addition under section 40A(3) of the Act. By an order dated 19th September, 2002, the Tribunal disposed of the appeal as well as the cross-objections, wherein it upheld the deletion of addition of Rs. 29,77,726/-.
3. After the Commissioner (Appeals) had decided the appeals, the Assessing Officer issued the impugned notice dated 22nd January, 2002, (that is, before the Tribunal had decided the appeal preferred by the Department) proposing to reopen the petitioner's assessment for assessment year 1999-2000. The petitioner's Chartered Accountants by a letter dated 28th January, 2002 drew the attention of the Assessing Officer to the fact that all the aspects had been examined by the Assessing Officer in the assessment under section 158BC and requested the respondent to furnish copies of the reasons recorded. However, by a communication dated 28th August, 2002, the petitioner was informed that all the records were with the Departmental Representative appearing before the Tribunal and that copy of the reasons would be supplied only after he receives back the record. It is at this stage that the petitioner has filed the present petition.
4. In the aforesaid factual background, Mr. J.P. Shah, learned counsel for the petitioner assailed the impugned notice by submitting that the Assessing Officer seeks to reopen the assessment on issues which have already been decided by the Commissioner (Appeals) in favour of the petitioner as confirmed by the Tribunal. Inviting attention to the reasons recorded, it was pointed out that the assessment was sought to be reopened in relation to the deletion of addition of Rs. 29,77,726/- made by the Commissioner (Appeals) during the course of block assessment. Referring to the order of Commissioner (Appeals), it was pointed out that such issue has been dealt with on merits by the Commissioner (Appeals) who on the basis of the evidence on record found that there is no justification for making such addition and had deleted the same. From the order passed by the Tribunal in the appeal preferred by the Department, it was pointed out that the Tribunal has recorded that the assessee was successful in proving to the hilt the genuineness of the transactions encompassing all its aspects. The assessee had duly discharged its onus. Therefore, there was no justification at all for reversing the order of the Commissioner (Appeals) on this issue. The learned counsel submitted that the Commissioner (Appeals) as well as the Tribunal have examined the issue on merits and have held in favour of the petitioner and as such the reopening of assessment in relation to such issue is without authority of law inasmuch when the very same issue has been scrutinised by the Commissioner (Appeals) as well as by the Tribunal, the Assessing Officer can have no reason to believe that income chargeable to tax has escaped assessment. It was argued that the reopening of assessment is contrary to the scheme of the Act, inasmuch as matters detected during the course of search, would be subject matter of block assessment and not regular assessment. Therefore, for this reason also the reopening of assessment is bad in law. Under the circumstances, the impugned notice being without jurisdiction is required to be quashed and set aside.
5. Opposing the petition, Mr. Manav Mehta, learned standing counsel for the respondent reiterated the averments made in the affidavit-in-reply filed by the respondent as well as the reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act.
6. The undisputed facts of the case are that the Assessing Officer pursuant to an action under section 132 of the Act framed block assessment under section 158BC of the Act wherein he held that the so called customers' gold weighing 7396.94 gms belongs to the assessee and taking the rate of gold at Rs. 402.5 per gram made addition of Rs. 29,77,726/- in the hands of the assessee. In the assessee's appeal such addition came to be deleted by the Commissioner (Appeals). Such deletion came to be confirmed by the Tribunal in revenue's appeal against such deletion. Thereafter, in respect of the very same item the assessment is sought to be reopened under section 147 of the Act.
7. Before adverting to the merits of the case, it may be necessary to refer to the reasons recorded by the Assessing Officer for reopening of assessment which read thus:-
REASONS FOR REOPENING THE CASE
M/S. PRAKASH JEWELLERS - A.Y. 1999-2000.
In this case survey u/s. 133A was carried out at the business premises of the assessee on 28.1.1999. This was converted into search u/s. 132 of the Act. During the course of search action, gold ornaments and silver articles weighing of 16156.7 grams of old ornaments and 72.649 Kg. of silver articles aggregating total value of Rs. 68,89,252/- were found. Out of which 7092.3 grams of gold ornaments were sized and 18.648 Kg of silver and silver ornaments were put under deemed seizure u/s. 132(1) - second proviso. The assessee firm is engaged in job work of gold and silver ornaments and also trading thereof. It filed the return of income for the block period declaring total income of Rs. NIL on 30.8.1999 at Mumbai. Subsequently due to order u/s. 127(2) of the Act passed by the CIT, Mumbai City-XII dtd.22.12.1999, the case is assigned to the erstwhile Investigation Circle-3(1).
The block assessment for the period of A.Y. 1988-89 to A.Y. 1997-98 and partial period from 1.4.98 to 28.1.98 was made u/s.158BC(c) of the Act determining total undisclosed income of Rs.48,49,902/- comprising mainly of gold ornaments claimed to belonging to customers of Rs.29,77,726/- on 27.3.2001.
Being aggrieved by the said order the assessee preferred an appeal to the CIT(A)-III, Surat. The Ld. CIT(A) vide order No.CAS/III/51/2000-01 dtd.9.5.2001 while deciding assessee's appeal deleted the majority of the additions including the aforesaid addition of Rs. 29,77,726/- made by the Assessing Officer. He directed the A.O. to exclude all recorded materials for the consideration for the purpose of block assessment in view of specific provisions of law because such additions can be made only in the block assessment.
During the course of search, physical stock of gold found was 16153.7 gms. while the stock as per books was 1473.28 grms. and the excess stock as per books comes to 7396.94 gms. which claimed to be pertaining to customers given for conversion into new ornaments on job work basis.
During the course of search, as well as assessment proceedings u/s.158BC of the I.T. Act assessee had failed to prove the creditworthiness and identity of the persons to whom the so called jewellery was claimed to be belonging. Following glaring mistake were observed which proves that jewellery found does not belonging to outsiders but belongs assessee himself. It is therefore required to be taxed in the A.Y. 1999-2000.
I. In the register maintained in Form No.11, address of customers is not written and it was claimed by the assessee that as customers are known. There is no need of any address to when the assessee was asked during the course of search and thereafter to provide address by merely seeing register, assessee failed to do so and said that they will contact certain person and then address of these persons.
II. The incoming receipt books kept by the assessee in which the first copy which should have been handed over to the customer is lying with the assessee thereto the column of the signature is blank, whereas in genuine case it should be with the customer or at least should bear the signature of the customer.
III. During the course of search in the case of assessee a bunch of Majuri bills have been found all torn of from bounded book and containing serial numbers hand written. These majuri bills pertain to period 1.4.97 to 31.3.98 (Seized as per Annexure B-S-1/26). Comparison of the same with register No.11 of the same period indicate that on every third day i.e. within three days of receipt of old ornament, newly made ornaments are given back to the customer and majuri bill is drawn on exact weight as received from customer and weight of old and new ornament is exactly the same. In fact, majuri bill drawn on 31.3.98 has been drawn in respect of old ornaments received on 28.3.98. Thus, last year's detail clearly bring out the fact that within 3 days ornaments have been returned. Same is the case with the incoming receipt book. Last year's incoming receipt book does not contain first copy i.e. customers copy. If customers do not claim copy what is the need of tearing it. It is nothing but preparing paper work to cover up real transaction. This year due to search action u/s.132, the assessee did not had the time to meticulously plan and complete the paper work and physically checking of stock altered all calculations.
IV. It is known that if any customer gives old ornaments for conversion into new ornaments he would definitely provide details of items, i.e. whether bangles, necklace etc. to prepared, the designs etc. and jewellers would note the same in the order book but no such order details have been found and order book which have been seized contains details of such persons whose name are not written in register No. 11 etc. Thus, there is no order detail in respect of these huge stock brought in to perform the job work.
V Once the customer takes back his gold ornament, at the time of delivery the jeweller would ask in normal course, copy of receipt or at least take signature of the person indicating fact of return of jewellery. But in the assessee's case, there is none, neither copy of receipt (which in any way is not issued to customer) not there is any signature or fact of return mentioned in register. Nor outgoing receipt book contains any such entry.
VI Loose majuri bills found and seized indicate that within three days of receipt of gold customers took back their gold. Then how in current year, gold is with the assessee for such long period and that too exhibited in show room over the counter and ready for sale.
VII. Certain order books have been seized and inventoried, during the course of search. These order books contain name and address/telephone number of customers and also details of weight of old ornament received. But none of these are mentioned in Register No.11. Why it is not so is clear because Register No.11 does not represent record of persons who have given gold for job work, rather, it represents partly introduction of assessee's own unaccounted gold and partly name of persons who have exchanged their old ornaments for new one of same value or have paid difference of greater value.
VIII. In quality wise stock register, nowhere there is indication in regard to incoming items as to whether they belong to customers or whole stock belong to assessee.
IX. During the search proceedings, no record or register was found which contain details of remolding the ornaments including nature of items like bangles, chain design, etc. and when he was asked to explain, it was explained no such records are maintained.
From the foregoing discussion, it is clear that jewellery claim to be belong to customers actually belong to assessee himself. Besides, since the Ld. CIT(A)-III, Surat has deleted the additions of Rs. 29,77,726/- from the block assessment with the remarks that such additions can be made only in regular assessment u/s. 143(3) or 144 of the I.T. Act. Therefore, I have reason to believe that the income chargeable to tax in this case amounting to Rs. 29,77,726/- has escaped assessment which is required to be taxed by reopening the assessment u/s.147 of the Act, 1961. Thus, it is fit case for issuing notice u/s.148 of the I.T. Act, 1961.
8. A perusal of the reasons recorded shows that in the block assessment made under section 158BC(c) of the Act total undisclosed income of the petitioner had been determined at Rs. 48,49,902/- comprising mainly of gold ornaments valued at Rs. 29,77,726/- claimed to be belonging to customers. It is also amply clear that the Assessing Officer was well aware of the fact that the Commissioner (Appeals) had, on merits, deleted majority of the additions including the addition of Rs. 29,77,726/- made in the block assessment under section 158BC of the Act. Moreover, it may be significant to note that on a conjoint reading of the assessment order under section 158BC of the Act and the reasons recorded it is found that from the third unnumbered paragraph to paragraph VII of the reasons, the respondent has, word by word, reproduced either wholly or major portions of the contents of paragraphs 14-2, 14-15, 14-6, 14-7 and 14-9 of the assessment order. In paragraphs VIII and IX of the reasons, the respondent has observed that in quality wise stock register it is nowhere indicated as to whether the incoming items belong to the customers or the whole stock belongs to the assessee and in paragraph IX he has recorded that during the course of search proceeding no record was found containing details of remolding of ornaments and that the assessee upon being called upon to explain the same had stated that no such records are maintained. After the above discussion, the respondent has observed that it is clear that the jewellery claimed to be belonging to the customers actually belong to the assessee. He has also emphasized that the Commissioner (Appeals) has deleted the addition of Rs. 29,77,726/- with the remarks that such additions can be made only in regular assessment under section 143(3) or 144 of the Act. Based on the above the respondent has stated that he has reason to believe that income chargeable to tax has escaped assessment.
9. Thus two things are apparent. Firstly, that the issue in respect of which the assessment is sought to be reopened was subject matter of the block assessment. Secondly, that the addition of Rs. 29,77,726/- made by the Assessing Officer during the course of block assessment under section 158BC of the Act had been deleted by the Commissioner (Appeals).
10. At this juncture, it may be germane to refer to leading two decisions of this court on the question of reopening of assessment in the context of block assessment. In N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733 / 101 Taxman 525 (Guj.) a Division Bench of this court held that the assessment of undisclosed income is altogether a different matter from the regular assessments. Under section 158BB of the Act, for computing the undisclosed income of the block period, the Assessing Officer has to compute the total income of the relevant previous years on the basis of the evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. The evidence found as a result of search or requisition would be the evidence that has been gathered by the authorised officer under sections 132 and 132A of the Act, which would include the statements recorded by the authorised officer during the course of search and seizure under section 132(4) of the Act. The evidence found and material available is to be the basis for computing the aggregate of the total income of the previous years falling in the block period. The court held that under section 158BB(1), read with section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year required to be assessed in the normal regular assessment under section 143(3), where the Assessing Officer makes an inquiry to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner and on the basis of the evidence produced by the assessee, the evidence obtained on the specific points and all relevant material which he has gathered assesses the total income or loss and determines the sum payable thereon as per that assessment. This exercise under section 143(2) and (3) for regular assessment stands in contrast to the exercise of the Assessing Officer under section 158BB read with section 158BC (b), where he has to assess only the undisclosed income of the block period on the basis of the evidence found and material available as a result of the search conducted by the authorised officer under section 132 of the Act. These provisions operate entirely for different purposes, one for assessing undisclosed income of the block period while the other for assessing the total income or loss of the previous year in a regular assessment.
11. In Cargo Clearing Agency (Gujarat) v. Jt. CIT [2008] 307 ITR 1 (Guj), a Division Bench of this court after an in-depth study of the scheme of Chapters XIV and XIVB of the Act held that the Legislature does not intend to reopen assessments completed under Chapter XIV-B of the Act assessing the undisclosed income by adopting the special procedure provided in the said Chapter. Observing that the entire Chapter XIV-B of the Act relates to assessment of search cases, viz., undisclosed income found as a result of search, the court expressed the view that one cannot envisage escapement of undisclosed income once a search has taken place and material recovered, on processing of which undisclosed income is brought to tax. Section 147 of the Act itself indicates that the same is in relation to income escaping assessment and applies in a case where either income chargeable to tax has escaped assessment by virtue of non-disclosure by way of non-filing of return, or non-disclosure by way of omission to disclose fully and truly all material facts for the purpose of assessment, or processing of material already available on record, if the same is within the stipulated period of limitation. Therefore, to contend that undisclosed income has escaped assessment despite an assessment having been framed under Chapter XIV-B of the Act by adopting the special procedure by the said Chapter is to contend what is inherently not possible. The court held that once assessment has been framed under section 158BA of the Act in relation to undisclosed income for the block period as a result of search there is no question of the Assessing Officer issuing notice under section 148 of the Act for reopening such assessment as the said concept is abhorrent to the special scheme of assessment of undisclosed income for block period.
12. Examining the facts of the present case in the light of the principles enunciated in the above decisions, admittedly as is apparent on a plain reading of the reasons recorded, the stock of gold ornaments valued at Rs. 29,77,726/- was subject matter of block assessment under section 158BC of the Act. The Assessing Officer after considering the material on record in fact made an addition of Rs. 29,77,726/- as undisclosed income of the petitioner. Such addition was set aside by the Commissioner (Appeals). The order of Commissioner (Appeals) deleting such addition was upheld by the Tribunal. Thus, when the undisclosed income determined by the Assessing Officer included Rs. 29,77,726/- being the value of gold ornaments which the assessee claimed to be belonging to its customers was subject matter of block assessment, the same cannot be made the subject matter of regular assessment under Chapter XIV of the Act. Under the circumstances, the reopening of assessment in relation to a matter which was subject matter of block assessment is evidently without jurisdiction.
13. Another notable aspect of the matter is that in the block assessment the issue regarding gold ornaments valued at Rs.29,77,726/- had been considered by the Assessing Officer. In the assessee's appeal, the Commissioner (Appeals) had examined the issue on merits and had recorded that in the facts of the present case, the assessee had discharged the onus in respect of the deposits of gold received by it. It was recorded that the assessee had not only filed confirmations of parties but had filed affidavits of the depositors. The genuineness of the affidavits has been verified by the Assessing Officer through examination of the depositors in person over a few days. The depositors were produced by the assessee for such examination at the instance of the Assessing Officer. It was further recorded that the Assessing Officer also sent the Ward Inspector to the area the depositors came from and the Inspector duly submitted a report on these enquiries. Nothing amiss was found in all these enquiries conducted by the Assessing Officer himself and through Ward Inspector. In not a single case did the Assessing Officer record any finding that the facts narrated in any affidavit were false. The Commissioner (Appeals), accordingly, was of the view that the onus that lay on the assessee had been amply discharged and if the Assessing Officer still wanted to make an addition, the onus was on the Assessing Officer to establish that the claim was not genuine and that the facts stated in the affidavits were false etc. Such onus had not been discharged by the Assessing Officer to the slightest. Finding that there was no justification in making the addition, the Commissioner (Appeals) had directed deletion of such addition.
14. In appeal by the Department, the Tribunal after re-appreciating the evidence on record has found as a matter of fact that the assessee had successfully proved to the hilt the genuineness of the transactions encompassing all its aspects. The Tribunal found that the assessee had duly discharged its onus, and, therefore, did not find any justification for reversing the order passed by the Commissioner (Appeals) and upheld the deletion of addition of Rs. 29,77,726/-. Now, the Assessing Officer seeks to reopen such concluded issue by issuance of the impugned notice. The sole ground appears to be a passing remark made by the Commissioner (Appeals) in his order wherein the Commissioner (Appeals), while dealing with the contention raised on behalf of the petitioner that what is found recorded at the time of search cannot be treated as undisclosed income for the purpose of Chapter XIV-B and that section 158BA (3) clarifies this position, has agreed with the said contention that what is found recorded is to be excluded for the purpose of block assessment. He has further recorded that it is not that addition cannot be made in respect of recorded material, but such addition can be made only in the regular assessment under section 143(3)/144 and not in the block assessment under section 158BC. Thus, such remark of the Commissioner (Appeals) relating to what was found recorded at the time of the search namely, items which were excluded for the purpose of block assessment has been misconstrued by the Assessing Officer as a licence to reopen the assessment in respect of the very same items which were subject matter of the block assessment.
15. Thus, it is apparent that the Assessing Officer seeks to reopen the assessment in relation to an item, viz., gold ornaments valued at Rs.29,77,726/- which was already subject matter of block assessment wherein such addition was made in the order under section 158BC of the Act and was subject matter of appeal before the Commissioner (Appeals) (and subsequently before the Tribunal). The said issue has been treated as being subject matter of block assessment and examined on merits by the Commissioner (Appeals) and has been deleted. Such addition was not deleted on the ground that the same was subject matter of regular assessment. Under the circumstances, once such issue has already been decided by the appellate authority, it is not open for the Assessing Officer to seek to reopen the assessment on the same grounds as this would tantamount to the Assessing Officer sitting in appeal over the order of the Commissioner (Appeals). Moreover, as has rightly been contended by the learned counsel for the petitioner, when the Commissioner (Appeals) as well as the Tribunal have examined the issue on merits and have held in favour of the petitioner, the Assessing Officer can have no reason to believe that income chargeable to tax has escaped assessment. For this reason also, the reopening of assessment under section 147 of the Act is without jurisdiction. Consequently, the notice under section 148 of the Act is rendered unsustainable.
16. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 22nd January, 2002 issued under section 148 of the Act is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.
Regards,
Pawan Singla , LLB
M. No. 9825829075 IT : No penalty for cash loans exceeding Rs. 20,000 from agriculturists living in remote areas when transaction were not doubted
■■■
[2014] 45 taxmann.com 566 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax, Ahmedabad-IV
v.
Maa Khodiyar Construction*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 325 OF 2014†
APRIL 28, 2014
Section 269SS, read with sections 273B and 271D, of the Income-tax Act, 1961 - Deposits - Mode of accepting/taking (Reasonable cause) - Assessment year 2006-07 - Instead of taking loan in account payee cheque or bank draft, assessee took loans in cash exceeding Rs. 20,000 from agriculturists living in remote village - Not only substantiating evidence like 7/12 extracts from land records were produced, but, also additionally, transactions were reflected in accounts of assessee and advancement of loan to assessee had been reflected in books of account of those persons from whom loan had been received - Identity of those persons had also been well established - Assessee also had given satisfactory reasons for taking such loan - Whether since genuineness of very transactions were never doubted by revenue authorities, and breach was due to reason that agriculturists were living in remote areas, default was to be treated as a mere technical or venial breach and penalty was not to be levied on assessee - Held, yes [Paras 12 & 13] [In favour of assessee]
FACTS
| ■ | The assessee firm was engaged in the business of civil construction. | |
| ■ | On scrutiny, the Assessing Officer noticed that the assessee had accepted an amount of Rs. 42.74 lakhs by way of cash loan exceeding Rs. 20,000 from 10 different persons. As said amounts were not received through account payee cheque or bank draft, the Assessing Officer held that there was violation of section 269SS. He, therefore, levied penalty under section 271D. | |
| ■ | On appeal, the Commissioner (Appeals) noted the facts that these persons were agriculturists and staying in remote areas. Relying on the decision of the Apex Court, he held that a technical or venial breach of provisions cannot lead to levy of penalty. He, therefore, set aside the order of the Assessing Officer. | |
| ■ | On further appeal, the Tribunal concurred with the decision of the Commissioner (Appeals). | |
| ■ | On appeal to High Court: |
HELD
| ■ | For not inviting the rigour of penalty under section 271D of the Act as consequence, on the part of the assessee, the reasonable cause needs to be shown. What is pleaded by the respondent was that all these persons were agriculturists and that the genuineness of the transactions at no point of time had been doubted by the revenue. They stayed in remote areas. Both the authorities, therefore, were of the opinion that reasonable cause had been sufficiently made out and when the very transactions were never doubted by the revenue authorities, the breach is to be treated as a mere technical or venial breach. [Para 12] | |
| ■ | The requirement of section 273B is for the assessee to prove that there was a reasonable cause for its having failed to abide by the provisions of section 269SS. As emerges from the record, not only the substantiating evidence like 7/12 extracts were produced, but, also additionally, transactions were reflected in the accounts of assessee and the advancement of loan to the assessee had been reflected in the books of account of those persons from whom the loan had been received. The identity of those persons has also been well established. The assessee also had given satisfactory reason for taking such loan. His bona fide belief that such transactions would not attract provision of section 269SS on the ground that they were agriculturists and lived in remote villages also was one of the grounds which has weighed both the authorities. [Para 13] | |
| ■ | In view of above, no error has been committed by both the authorities below in deleting the penalty. It is true that the respondent has income from other business and these transactions were not between agriculturists having only agriculture income, not liable to tax which have been exempted from such rigour of law and yet, the cause advanced is when found to be sufficiently reasonable, no interference would be desirable. [Para 14] | |
| ■ | Both the authorities have rightly construed the provisions and applied the law to the facts and the surrounding circumstances aptly. Therefore, the appeal, deserves to be dismissed. [Para 16] |
CASES REFERRED TO
Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (para 4), CIT v. Samora Hotels (P.) Ltd.[2012] 19 taxmann.com 285/211 Taxman 189 (Delhi) and K.V. George v. CIT [2014] 42 taxmann.com 261 (Ker.) (para 6).
Varun K. Patel for the Appellant.
ORDER
Ms. Sonia Gokani, J. - Aggrieved by the order of the Income Tax Appellate Tribunal, Ahmedabad ["Tribunal" for short] dated 23rd August 2013, Revenue has challenged the same in the present Tax Appeal preferred under Section 260A of the Income-tax Act, 1961 ("the Act" for short), raising following two questions for our consideration :—
| '(A) | "Whether in the facts and circumstances of the case, the ITAT has erred in law in rejecting the Revenue's appeal against the decision of CIT (A) in dealing the penalty levied u/s. 271D of the Income-tax Act, even though the assessee is not covered by the exception to Section 269SS of the Act provided in second proviso to the said Section 269SS, as the assessee had taxable income under the Act and accepted cash exceeding the limit provided under the said Section 269SS ?" | |
| (B) | "Whether 'genuineness of the loan/deposit' or 'bona fide nature of the loan/deposit transaction' is the criteria for examining the contravention of the provisions of Section 269SS of the Income Tax Act, 1961 for levying penalty u/s. 271D of the Income Tax Act, 1961 ?"' |
2. The assessee firm is engaged in the business of civil construction. For the A.Y 2006-07, assessee filed return of income declaring the total income at Rs. 4.76 lakhs [rounded off]. Revised return thereafter was filed, which was processed and the case of the assessee was selected for scrutiny. It was noticed by the Assessing Officer that assessee had accepted an amount of Rs. 42.75 lakhs by way of cash loan from ten different persons. The assessee was required to furnish confirmation from those parties, which all was provided in writing. It was, however, noticed that the amount had been received in cash from those persons in violation of provisions of Section 269SS of the Act, and therefore, penalty proceedings under Section 271D had been initiated.
3. The Assessing Officer levied the penalty for having found breach of Section 269SS of the Act. He also noted that even if the persons advancing the loan were agriculturists, the assessee was assessable under the Income Tax Act and Section 269SS would not permit him to take recourse to taking the amount in cash and penalty was a must.
4. This was challenged before the CIT [A], who noted the fact that the loan in cash exceeding Rs. 20,000/- had been taken and also recorded the fact that 7/12 extracts in support of these persons being agriculturists were submitted before the Assessing Officer. Having noted that these persons were agriculturists and are staying in remote areas, CIT [A] relying on the decision of the Apex Court in case of Hindustan Steel Ltd.v. State of Orissa [1972] 83 ITR 26 held that a technical or venial breach of provision cannot lead to levy of penalty, and therefore, set-aside the order of Assessing Officer mainly holding that none of the transactions had been doubted by the Revenue.
5. Aggrieved, Revenue preferred appeal before the Tribunal which concurred with the decision of the CIT [A], and therefore, the present appeal raising aforementioned questions of law.
6. It is contended by the Revenue that though the genuineness of the transactions had not been doubted and assuming that these agriculturists were residing in the remote areas that would not permit the respondent to make any breach of provision of Section 269SS of the Act. Any transaction above a sum of Rs. 20,000/- in cash would invite the rigor of levying of penalty. It is also argued that a huge amount of Rs. 42.75 lakhs had been taken in cash, and therefore, both the authorities committed error in deleting the penalty. Reliance is placed on the decisions of Delhi High Court in case of CIT v. Samora Hotels (P.) Ltd. [2012] 19 taxmann.com 285/211 Taxman 189 and of Kerala High Court in case of K.V George v. CIT [2014] 42 taxmann.com 261.
7. Delhi High Court in case of Samora Hotels (P.) Ltd. (supra) has answered the question in favour of the Revenue and against the assessee in a case where assessee company had entertained a bona fide belief that the loans accepted by it from its Directors and shareholders were not covered by the provisions of Section 269SS of the Act. Such belief also, according to the Court, was not borne out from the record. When asked to furnish the details, the assessee did not take the plea that the said receipts were loans, but, maintained that because they were the receipts from directors and shareholders, they were not covered under section 269SS. In other words, the specific plea was taken by the company that the amounts in question represented the share application money and that these were not loans or deposits at all. When clear stand of the assessee was that the said amounts were not loans or deposits, the Delhi High Court observed that the assessee company could not have entertained a bona fide belief that the loans accepted by it from directors and shareholders were not covered by the provisions of Section 269SS of the Act.
8. In case of K.V George (supra), the Kerala High Court held that the burden is on the assessee to prove that there was reasonable cause for receiving cash from various persons. It was a case where the assessee had accepted loans exceeding the limit specified under the Act from certain creditors. When asked to explain the reasonable cause, the assessee had failed to explain the same and instead had stated that substantial amount was received from the creditors. Nothing was emerging as to why such amount was received by way of cash except that the assessee had to put up an industrial unit. In such factual matrix, the High Court was not convinced about the genuineness of the transactions and hence, held against the assessee and in favour of the Revenue.
9. Section 269SS of the Act at this stage requires consideration alongwith Sections 271D and 273B of the Act. Any loan or deposit, if accepted by any person otherwise than by an account payee cheque or account payee bank draft from any person exceeding rupees twenty thousand rupees or more. Section 269SS of the Act prohibits the same after the 30th June 1984. Section 271D makes such person who received the amount in contravention of provision of Section 269SS liable for penalty, a sum equal to the amount of loan or deposit so accepted. Section 273B of the Act of course carves out the way in certain cases and provides that no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions which includes Section 271D if he proves that there was reasonable cause for the said failure.
10. What is therefore necessary to prove is the reasonable cause by the assessee on its having failed to abide by the conditions incorporated in the said provision of Section 269SS.
11. Reverting to the facts of the instant case, a sum of Rs. 42.75 lakhs has been taken by way of loan by the respondent from ten different persons. Admittedly, this was by way of loan in cash exceeding rupees twenty thousands and the same therefore contravenes the provision of Section 269SS of the Act.
12. For not inviting the rigour of penalty u/s. 271D of the Act as consequence, on the part of the assessee, the reasonable cause needs to be shown. What is pleaded by the respondent was that all these persons were agriculturists and that the genuineness of the transactions at no point of time had been doubted by the Revenue. They stayed in remote areas. Both the authorities, therefore, were of the opinion that reasonable cause had been sufficiently made out and when the very transactions were never doubted by the Revenue authorities, the breach is to be treated as a mere technical or venial breach.
13. We notice that the requirement of Section 273B is for the assessee to prove that there was a reasonable cause for its having failed to abide by the provisions of Section 269SS. As emerges from the record, not only the substantiating evidence like 7/12 Extracts were produced, but, also additionally, transactions were reflected in the accounts of assessee and the advancement of loan to the assessee had been reflected in the books of account of those persons from whom the loan had been received. The identity of those persons has also been well established. The assessee also had given satisfactory reason for taking such loan. His bona fide belief that such transactions would not attract provision of Section 269SS on the ground that they were agriculturists and lived in remote villages also was one of the grounds which has weighed with both the authorities.
14. In view of forgoing discussion, we are of the opinion that no error has been committed by both the authorities below in deleting the penalty. It is true that the respondent has income from other business and these transactions were not between agriculturists having only agriculture income, not liable to tax which have been exempted from such rigor of law and yet, the cause advanced is when found to be sufficiently reasonable, no interference would be desirable.
15. Reliance placed on the decision in case of Hindustan Steel Ltd. (supra) also requires a specific reproduction at this stage where the Apex Court has held that, "...An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or act in conscious disregard to its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute."
16. We find that both the authorities have rightly construed the provisions and applied the law to the facts and the surrounding circumstances aptly. Tax Appeal, resultantly, deserves no further consideration and hence, the same is dismissed.
SB †Arising out of Tribunal, dated 23-8-2013.
Regards
Prarthana Jalan
COMPANIES (MEETINGS OF BOARD AND ITS POWERS) AMENDMENT RULES, 2014 - AMENDMENT IN RULE 6
NOTIFICATION [F.NO.1/32/2013-CL-V.PT.], DATED 12-6-2014
In exercise of the powers conferred under sections l73, 175, 177, 178, 179, 184, 185, 186, 187, 188, 189 and section 191 read with section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules to amend the Companies (Meetings of Board and its Powers) Rules, 2014, namely:—
1. (1) These rules may be called the Companies (Meetings of Board and its Powers) Amendment Rules, 2014.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Companies (Meetings of Board and its Powers) Rules, 2014, in rule 6, after the Explanation, the following shall be inserted, namely:—
"Provided that public companies covered under this rule which were not required to constitute Audit Committee under section 292A of the Companies Act, 1956 (1 of 1956) shall constitute their Audit Committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier:
Provided further that public companies covered under this rule shall constitute their Nomination and Remuneration Committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier.".
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