[aaykarbhavan] Judgments and Information. GSTR CLI, I T R Tribunal

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ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

OnLine Edition Vol. 2				Print Edition Vol. 32, Part 5, dated 30-6-2014
SUPREME COURT	HIGH COURTS	ENGLISH CASES	CLB	SUPREME COURT	HIGH COURTS	ENGLISH CASES	CLB
SAT	DRAT	STATUTES	JOURNAL	SAT	DRAT	STATUTES	JOURNAL
NEWS-BRIEFS	AAR	TAXATION TRIBUNAL	CESTAT	NEWS-BRIEFS	AAR	TAXATION TRIBUNAL	CESTAT

PRINT EDITION

APPELLATE TRIBUNAL ORDERS

F Refund : Interest on refund : Where Department not able to point out mistake in computation of interest, allowance of interest proper : Dy. CIT v. Ernst and Young P. Ltd. (Kolkata) p. 639 (30-4-2014)

F Business expenditure : Where reimbursement of expenses not liable to TDS, expenses allowable : Dy. CIT v. Ernst and Young P. Ltd. (Kolkata) p. 639 (30-4-2014)

F International transactions : Export : Exempt income declared by assessee less exempt income when benchmarked with ALP, taxable base in India not eroded : Motif India Infotech P. Ltd. v. Asst. CIT (Ahd) p. 652 (25-3-2014)

F Penalty : Where no finding that details supplied by assessee in return erroneous, addition made on debatable issue does not warrant levy of penalty : Dy. CIT v. Punjab Urban Planning and Development Authority (Chandigarh) p. 668

F Penalty : Expense estimated on scientific basis allowable irrespective of actual discharge, penalty cannot be levied : Dy. CIT v. Jubliant Enpro P. Ltd. (Delhi) p. 702 (19-5-2014)

F Income-tax, wealth-tax and interest on wealth-tax not deductible, penalty to be imposed : Dy. CIT v. Jubliant Enpro P. Ltd. (Delhi) p. 702 (19-5-2014)

F Where failure on assessee to prove cumulatively identity of creditors, creditworthiness of creditor and genuineness of transactions, amount to be considered as unexplained credit : Kerala Sponge Iron Ltd. v. Asst. CIT (Cochin) p. 718 (April 11, 2014)

JOURNAL

F Income from renting in case of real estate enterprises-Relevant head-Rajat Mohan, Chartered Accountant p. 46

F Menace of black money : Analysis of Supreme Court decision : Ram Jethmalani v. Union of India-Pankaj R. Toprani, Advocate-High Court p. 38

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Deductor to be deemed as assesee in deafult only in respect of actual tax liability of Non-Resident

Posted In Income Tax | Articles | No Comments »

CBDT in its Instruction No. 2/2014 [F No. 500/33/2013-FTD-l], Dated 26-02-2014 issued in view of the judicial develpments in the cases of GE India Technology P Ltd. vs CIT [2010] 7 taxmann.com and Transmission corporation of AP Ltd v. CIT [1999] 105 Taxmann 742 decided by Supreme Court, has stated that a person who fails to deduct tax on payments made to non-residents, will be held as assessee in default only to the extent of tax actualy payable by such NRI and not in respect of TDS on the whole of amount.

It is pertinent to note here that while making any payment to Non resident, a tax u/s 195 is required to be deducted by the person making payment to such Non Resident, irrespective of the tax liability of such Non Resident. Such provisions sometime may prove bit harsh especially in cases where payment is of capital receipt in nature, say a sale of immovable property by Non resident.

To mitigate this hardship section 195(2) of Income Tax Act, provides an option to apply to the jurisdictional assessing officer for determination of actual tax liability on such payment made to Non resident, whereby tax is deducted only to the extent of tax determined by the assessing officer.

However, in cases where no application is made, tax is required to be deducted on the whole of amount. Now, in the instruction cited above, the CBDT has directed all its officers to treat the person making payment to a non-resident, who has not deducted any tax, as assessee in default u/s 201 only in respect of actual tax liability of non resident to whom the payment has been made.

 

The Instruction is a positive development. This Instruction clarifies that withholding tax liability of the payer is with reference to the sum subject to tax under the provisions of the Income Tax Act. Furthermore, the consequences of default proceedings for non-withholding under the Income Tax Act would be limited only to such tax liability.

Accordingly, a payer cannot be treated as an Assessee in Default for non-withholding from payments which are not subject to tax under the Act. This clarification is in line with the SC decision in the case of GE case(supra). Furthermore, for remittances where only a portion may be subject to tax in India (e.g., a portion of a composite contract or capital gains income), payers may determine their withholding tax liability with reference to the taxable portion of the remittance, if the payer is fairly certain about such determination.

However, considering the consequences of a tax withholding default, the payer may prefer to be cautious and may continue to approach the Tax Authority where the determination of taxability or portion of the taxable sum is not fairly certain.

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

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Companies Act 2013- Meetings Of The Board & Committees

Posted In Company Law | Articles | 1 Comment »

MEETINGS OF THE BOARD

1.   Frequency of Meeting:

-         First Meeting:      First Meeting of Board of Directors within 30 (Thirty) days from the date of Incorporation of company. -

-  Subsequent Meetings:

One person Company, Small company and Dormant company:

• At least one meeting of Board of directors in each half of calendar year
• Minimum Gap B/W two meetings at least 90 days.

Other than Companies mentioned above:

• Minimum No. of 4 meetings of Board of Director in a calendar year
• Maximum Gap B/W two meetings should not be more the 120 days.

2. Calling of Meeting: Meeting of Board of Director should be called by giving 7 days notice to Directors at his registered address through:

• By hand delivery
• By post
• By Electronic means

Meeting at shorter Notice: A meeting of Board of Directors can be called by shorter notice subject to the conditions:

• If the company is require to have independent director:

-       Presence of at least one Independent director is required.

-      In case of absence, decision taken at such meeting shall be circulated to all the directors, and

-       shall be final only on ratification thereof by at least one Independent Director

• If the company doesn't require to have independent director: The meeting can be called at a shorter notice without any conditions to be complied with.

3.      Quorum of Board Meeting:

• 1/3 rd of total strength OR 2 (Two) Directors, whichever is higher.
• Where meeting of Board could not be held for want of quorum, the meeting shall
  automatically adjourn to same time, same place at next week (Not being national holiday).
• If number of directors reduced below quorum, then the remaining directors may hold the meeting for the following purposes:
  • To call a General meeting
  • Increase the number of directors.
• Quorum in case of Interested Directors:
  • If interested director exceed or equal to 2/3 of total strength the remaining directors not being less than 2 (two) shall be the quorum.

Note:

1. Total strength shall not include directors whose places are vacant.
2. Interested director means, a director interested in accordance with section 184(2).
3. Director participating in a meeting through video conferencing or other audio visual means shall be counted for the purpose of quorum, unless he is to be excluded for any items of business under any provisions of the Act or the rules.
4. OPC Having One Director: Provision of Section 173 and 174 shall not apply to an OPC having one director.

4. Participation of Directors in Board Meetings: directors may, apart from attending the meeting physically, participate in the meeting by way of video conferencing & other audio visual means.

• Matter which can't be dealt at a meeting held though Video conferencing:
  • Approval of the annual financial statements;
  • Approval of the Board's report;
  • Approval of the prospectus;
  • Audit Committee Meetings for consideration of accounts; and
  • Approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
• Procedure for conducting of meeting through Video Conferencing:

Requirements before Meeting:

• The notice of the meeting shall, inform regarding the option  available to participate through video conferencing mode and provide all  the   necessary information to enable the directors to  participate  through video conferencing.

• A director intending to participate through video conferencing or audio visual means shall communicate prior intimation sufficiently in advance to the Chairperson or the company secretary of the company, so that company is able to make suitable arrangements in this behalf.

• Alternatively a director may intimate at the beginning of the calendar year his desire, to participate through the electronic mode, which shall be valid for that calendar year.

Duties of

COMPANY: to make necessary arrangements to avoid failure of video or audio visual Connection.

CHAIRMAN & COMPANY SECRETARY:

(I)   To safeguard the integrity of the meeting by ensuring sufficient security and Identification procedures;

(II)To ensure availability of proper equipment or facilities for providing transmission of the communications for effective participation at the Board meeting;

Requirement during the Meeting:

• The Chairperson shall take a roll call where every director participating through video conferencing shall state Name, Location, confirmation of receipt of agenda and non-presence of any person other than the concerned director.
• Chairperson or Company Secretary shall, inform the Board about persons other than the directors who are present for the said meeting with the request of the chair and confirm the presence of quorum.
• Every participant shall identify himself for the record before speaking on any item of business on the agenda.
• If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the roll and note the vote of each director.
• At the end of discussion on each agenda item, the Chairperson of the meeting shall announce the summary of the decision taken on such item along with names of the directors, if any, who dissented from the decision taken by majority.
• PLACING & SIGNING OF STATUTORY REGISTERS: The statutory registers which are required to be placed in the meeting shall be placed at the scheduled venue and where registers are required to be signed by the directors, the same shall be deemed to have been signed by the directors participating through electronic mode, if they have given their consent to this effect and it is so recorded in the minutes of the meeting.

Post Meetings Requirements:

• The minutes shall disclose the particulars of the directors who attended the meeting through video conferencing.
• CIRCULATION OF DRAFT MINUTES & COMMENTS THEREON: The draft minutes shall be circulated among all the directors within fifteen days of the meeting either in writing or in electronic means.
• Every director who attended the meeting shall confirm or give his comments in writing, about the accuracy of recording of the proceedings of the meeting in the draft minutes, within seven days or some reasonable time as decided by the Board. If no confirmation or comments received within the stipulated period, approval shall be presumed.
• DUTIES OF COMPANY SECRETARY: To record proceedings and prepare the minutes of the meeting; To store for safekeeping and marking the tape recording(s) as part of the records of the company at least before the time of completion of audit of that particular year.

Note:

1. Persons who are differently abled may make request to the Board to allow a person to accompany him.
2. If a statement of a director in the meeting through video conferencing or is interrupted, the Chairperson or Company Secretary shall request for a repeat or reiteration by the Director.
3. Meeting of Committees can also be conducted through video conferencing.

5. Passing of Resolution by Circulation: A company may get approval on a resolution by Board of Director without conducting a board meeting; company can do it by passing of resolution by circulation. PROCEDURE OF PASSING OF RESOLUTION BY CIRCULATION:

i. The company will circulate draft resolution along with necessary papers, if any to all the directors at their registered address through.

• Hand Delivery
• Post
• Electronic Means

ii. Resolution should be approved by majority of Directors, who are entitled to vote on the resolution.

iii. Resolution passed by circulation shall be noted at a subsequent meeting of the Board and made part of the minutes of such meeting.

Note: If before passing of resolution request is made by 1/3 of total number of directors to decide such matter at meeting, the chairperson shall put the resolution to be decided at meeting of the Board.

6. POWER EXERCISABLE BY BOARD:

•  The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. In exercising such power or doing such act or thing, the Board shall be subject to the provisions of this Act, or the memorandum or articles, or regulations made by the company in general meeting:

• POWERS TO BE EXERCISED ONLY AT BOARD MEETING:

- UNDER THE ACT:

• Make calls on shareholders in respect of money unpaid on their shares;
• Authorize buy-back of securities under section 68;
• Issue securities, including debentures, whether in or outside India;
• Borrow monies;
• Invest the funds of the company;
• grant loans or give guarantee or provide security in respect of loans;
• Approve financial statement and the Board's report;
• Diversify the business of the company;
• Approve amalgamation, merger or reconstruction;
• Take over a company or acquire a controlling or substantial stake in another company;

- UNDER RULES:

• Make political contributions;
• Appoint or remove key managerial personnel (KMP);
• Take note of appointment(s) or removal(s) of one level below the Key Management Personnel;
• Appoint Internal auditors and secretarial auditor;
• Take note of the disclosure of director's interest and shareholding;
• Buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company;
• Invite or accept or renew public deposits and related matters;
• Review or change the terms and conditions of public deposit;
• Approve quarterly, half yearly and annual financial statements or financial results as the case may be.

NOTE:

1. The power to invest, borrow and grant loan / guarantee / security can be exercised by a committee duly authorize by the board.
2. The resolution in pursuance of powers of the board mentioned above shall be filed with the registrar in form MGT-14 within 30 days of passing such resolution.

COMMITTEES:

MANDATORY COMMITTEES AND THEIR THRESHOLDS & COMPOSITIONS:

1. AUDIT COMMITTEE:

Meeting of Audit Committee:

• Audit Committee should meet at least four times in a year.
• Maximum Gap between 2 Meetings is 4 Months.
• Minimum 2 Director must be present.

COMPOSITION OF AUDIT COMMITTEE:

NOTE:

1. THE FREQUENCY OF AUDIT COMMITTEE IS PROVIDED AS PER REVISED CLAUSE 49 OF LISTED AGREEMENT (Applicable from 1^st October 2014)
2. Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries.
3. The Auditor of a company and the key managerial personnel shall have a right to heard in the meeting of audit committee when it consider the auditor's report but shall not have right to vote.
4. VIGIL MECHANISM:

• Every LISTED company and company, which has:

-Accepted deposits from public;

- Borrowed money from Bank and Public Financial Institution in excess of Rs. 50 crore shall establish a Vigil Mechanism.

• The Mechanism shall, be established for director and employee to report genuine concerns and also provide for adequate safe guards against victimization of persons using such mechanism.
• The companies which are required to constitute an audit committee shall oversee the vigil mechanism   through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on

• In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism.

2. NOMINATION & REMUNERATION COMMITTEE:

COMPOSITION OF REMUNERATION & NOMINATION COMMITTEE:

Note:

1. The Chairman of the nomination and remuneration committee could be present at the Annual General Meeting, to answer the shareholders' queries.
2. NO SPECIFIC FREQUENCYOF MEETING OF NOMINATION & REMUNERATION COMMITTEE PROVIDED UNDER THE ACT.

GESTATION PERIOD FOR AUDIT, NOMINATION & REMUNERATION COMMITTEE:

According to the Companies (Meeting and Powers of Board) Amendment Rules, 2014 companies which were not required to have Audit Committee under CA-1956, but required under CA-2013 shall constitute the same within one year from 12^th June, 2014 or appointment of independent director,whichever is earlier.

Similarly, Public Companies which are required to have Nomination & Remuneration committee under CA-2013 shall constitute the same within one year from 12^th June, 2014 or appointment of independent director, whichever is earlier.

3. STAKEHOLDERS RELATIONSHIP COMMITTEE: Every company having more than 1000 (One thousand) Share Holders + Debenture Holders + Deposit Holders + Other Security Holders shall constitute a Stakeholders Relationship Committee, which shall consider & resolve the grievance of security holders.

Composition:

• Chairperson: Non-Executive Director
• Members: As may be decided by the Board-

4. CORPORATE SOCIAL RESPONSIBILITY COMMITTEE: Every Company:

• having net worth of Rs. 500 crore or more, or
• turnover of Rs. 1000 crore or more or
• a net profit of Rs. 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board

COMPOSITION OF COMMITTEE:

• At least 3 (three) directors, out of which at least 1 (one) director shall be an Independent Director.
• In case of UNLISTED PUBLIC COMPANY Not required to have an Independent Director, the committee can be constituted without an Independent Director.
• In case of PRIVATE COMPANY, the committee can be constituted without an Independent Director. Further, in case of a Private Company having 2 (two) Directors, the committee can be constituted with only 2 (two) Directors.

(CS DIVESH GOYAL, ACS-35817, +91-8130757966, csdiveshgoyal@gmail.com)

- See more at: http://taxguru.in/company-law/companies-act-2013-meetings-board-committees.html#sthash.OWqNl6RI.dpuf

CBEC seeks adherence to judicial discipline in the matter of refunds

Posted In Excise Duty | Articles | No Comments »

The Central Board of Excise & Customs ("the CBEC") has issued Instruction F. No. 201/01/2014-CX.6 dated June 26, 2014 ("the Instruction") for all the Commissioners to follow judicial discipline in the matters relating to refund.

The CBEC has invited attention to the order of the Hon'ble High Court of Gujarat ("the HC") in the case of E.I. Dupont India Pvt. Ltd. [2013-TIOL-1172-HC-AHM-CX]. In this case, E.I. Dupont had filed an appeal before the HC against rejection of a refund claim on an issue which had earlier been decided by the HC against the Revenue, though in a matter relating to a different assessee. Thus for deciding the refund, a binding precedent judgment existed. However, the binding precedent was not followed, which led to litigation before the HC to which it took a serious view.

The CBEC noted that on the subject of refund, where the Department has gone in appeal, a Circular No. 695/11/2003-CX dated February 24, 2003 ("the Circular") already existed in this regard and had the Circular been followed in the instant case, unnecessary litigation as well as adverse observation of the HC could have been avoided.

Therefore, the CBEC has directed the adjudicating authorities to peruse the judgment of the HC in the case of E.I. Dupont India Pvt. Ltd. (supra) for complete understanding of the issues involved and directions of the HC to follow judicial discipline. Further, the officers have also been directed to peruse the judgement of the Hon'ble Supreme Court in Union of India Vs. Kamlakshi Finance Corporation Ltd. [2002-TIOL-484-SC-CX-LB] which is an authoritative pronouncement on the issue and which has also been cited by the HC.

Moreover, the CBEC wants the Commissioners to bring the contents of the Instruction to the notice of all adjudicating authorities under their jurisdiction with directions to follow the same scrupulously.

Let's hope for the best for granting refund to the assessee.

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

- See more at: http://taxguru.in/excise-duty/cbec-seeks-adherence-judicial-discipline-matter-refunds.html#sthash.ZhRvR0sG.dpuf

 HC disallows interest as its liability accrued in later years when equity was converted into debt with retro-effect

July 2, 2014[2014] 45 taxmann.com 437 (Delhi)

IT: Deduction under section 36(1)(iii) on account of payment of interest on loan converted from share capital, was not admissible as where liability to pay interest had not crystallized during relevant previous year

IT: Deduction under section 36(1)(iii) on account of payment of interest on loan converted from share capital, was not admissible as where liability to pay interest had not crystallized during relevant previous year

■■■

[2014] 45 taxmann.com 437 (Delhi)

HIGH COURT OF DELHI

Krishak Bharati Cooperative Ltd.

v.

Commissioner of Income-tax*

SANJIV KHANNA AND SANJEEV SACHDEVA, JJ.

IT APPEAL NOS. 84 & 85 OF 2000

AUGUST  23, 2013 

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Accrual of liability) - Assessment years 1987-88 and 1988-89 - Assessee was a co-operative society - Government was major equity shareholder of said society - Vide their letters dated 1-4-1988 and 20-4-1988, Government had converted part of their equity share-capital into loan with retrospective effect from 26-12-1983 and 20-1-1984 - Thereafter, assessee filed revised return and claimed deduction on account of payment of interest under section 36(1)(iii) on said loan during relevant year - It was found that liability to pay interest on said loan had not accrued during relevant previous years - Till then, said sum was part of equity share capital - Whether, therefore, deduction under section 36(1)(iii) was not admissible to assessee during relevant previous years - Held, yes [Para 10] [In favour of revenue]

FACTS

 

■		The assessee, a society, built a fertilizer plant. The Government, equity shareholder of said society, videtheir letters dated 4-4-1988 and 20-4-1988 had converted a part of their equity capital amounting to Rs. 16 crores into a loan with retrospective effect, i.e., Rs. 6 crores from 26-12-1983 and Rs. 10 crores from 20-1-1984. As a result of the said conversion, the assessee became liable to pay interest on the said amount.
■		The assessee in its revised return for two assessment years 1987-88 and 1988-89 claimed deduction on account of interest paid under section 36(1)(iii).
■		The Assessing Officer did not accept the claim for interest on the ground that the liability had not accrued during the relevant previous years but had accrued subsequently only by letter dated 20-4-1988.
■		In first appeal, the assessee did not succeed in the assessment year 1987-88 but succeeded in the assessment year 1988-89.
■		The Tribunal observed that the liability to pay interest had not accrued during the relevant previous years and, therefore, the interest which was payable in terms of said letter could not be claimed as an expenditure under section 36(1)(iii) in the two assessment years.

HELD

 

■		The assessee is following mercantile system of accounting. Under the said system, both accrued credits and liabilities have to be taken into consideration. Accrual normally takes place before the amount is actually received or paid. Expenditure as a debt or a legal liability once incurred is treated as expenditure, even before it is actually disbursed. [Para 8]
■		There is difference between contractual liabilities and statutory liabilities. Statutory liabilities are incurred under the statute and become payable in terms of the charging Section of the applicable statute. Contractual liabilities, on the other hand, become due and payable as per the terms of the contract and when quantification is settled by an agreement or otherwise. In the present case, the transaction in question was contractual in nature and not statutory, though Government was a party to the said transactions with the assessee as it had invested substantial amounts, including Rs. 16 crores, which was subsequently vide letters dated 4-4-1988 and 20-4-1988 converted into a loan. These two letter state that in view of the official cost estimates, the Government had decided, in partial modification of their earlier letter dated 25-3-1986, to convert an amount of Rs. 16 crores already drawn by the assessee as equity into loan with retrospective effect. Interest on the said amount, which was now converted into loan, should be disbursed and paid to the Government. Letter dated 20-4-1988 further clarified and stated that conversion of equity into loan would be in two stages; Rs. 10 crores would be treated as converted into a loan with effect from 20-1-1984 and Rs. 6 crores would be treated as converted into a loan as on 26-12-1983. The said letter further records that dividend of 3 per cent for the year 1986-87 might be worked out and paid on Rs. 328 crores in place of Rs. 344 crores. It is apparent that dividend had already been paid and the letter further records that interest may be paid to the Government immediately after making adjustment of dividend on Rs. 16 crores with effective date of conversion of Rs. 16 crores mentioned in the letters. [Para 9]
■		It is clear from the said correspondence that Government was earlier a shareholder and was entitled to dividend on share capital to the extent of Rs. 16 crores, which had been issued or were allotted by the assessee. Pursuant to the letters dated 4-4-1988 and 20-4-1988 there was a change in the character of the relationship between the parties to the extent of Rs. 16 crores, which became a loan for the first time. The relationship of a shareholder came to an end. The said conversion took place after end of the respective previous years. In these circumstances, it cannot be held that the liability had accrued or crystallized during the relevant assessment years. It is clear that the liability had accrued and had crystallized subsequently after the end of the previous years on 30-6-1986 and 30-6-1987. During the previous years, the assessee had no clue or even an indication that this liability might accrue or the shareholding to the extent of Rs. 16 crores would be converted into a loan. Before said letters of conversion, neither assessee was liable to pay any amount as interest nor Government had any right to claim any interest from assessee but Government was entitled to dividend and in fact that dividend had been paid. Till the two letters were written, there was not even a possibility or whisper that any liability would accrue or arise. The Government did not have any right to claim interest before these two letters were written and/or were accepted by the assessee, whether under pressure or otherwise.
■		Profits and gain of business are computed on ordinary commercial principles. However, when there is a statutory interdict or stipulation, regardless of the ordinary commercial principles, the statute has to be followed. Section 36(1)(iii) does not help the assessee in form of any statutory interdict. There is no statutory provision that this amount should be allowed as interest accrued pursuant to the two letters dated 4-4-1988 and 20-4-1988. No such contention has been raised or even argued. Under the ordinary principles of accountancy, the two amounts were not liabilities. It was only after letters dated 4-4-1988 and 20-1-1988, interest became payable and accrued liabilities were incurred. Interest became due and payable for the first time. Period for which interest became payable, is different and should not be confused with time/date when liability accrued. As per the ordinary principles of commercial accountancy, the said liabilities cannot be allowed as an expenditure in the earlier years. [Para 11]

CASE REVIEW

 

Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 14); Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1/18 Taxman 491 (Delhi) (para 18) and Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.) (para 19) distinguished.

CASES REFERRED TO

 

CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC) (para 12), CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) (para 12), Laxmi Devi Sugar Mills v. CIT [1993] 200 ITR 603/69 Taxman 238 (SC) (para 12), Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) (para 13), Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 14), CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 (SC) (para 15), Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) (para 17), Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC) (para 17), Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1/18 Taxman 491 (Delhi) (para 18) and Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.) (para 19).

Rajat Navet for the Appellant. N.P. Sahni and Ruchesh Sinha for the Respondent.

ORDER

 

Sanjiv Khanna, J. - The petitioner, a multi-State Cooperative Society, has filed two appeals under Section 260A of the Income Tax Act, 1961 (Act, for short), which relate to Assessment Years 1987-88 and 1988-89. By order dated 7th November, 2000, the following two substantial questions of law were admitted for hearing:—

"(1)		Whether in the facts and circumstances of the case an amount of Rs.1,88,17,168/- was deductible from the petitioner's income as a deduction, by virtue of Section 36(1)(iii), on account of interest accrued in respect of capital converted into loan for the period 1st July, 1986 to 30th June, 1987?
(2)		Whether in the facts and circumstances of the case an amount of Rs.62,66,667/- was deductible from the petitioner's income as a deduction, by virtue of Section 36(1)(iii), on account of interest accrued in respect of capital converted into loan for the period 1st April, 1986 to 30th June, 1986?"

2. The facts are not in dispute. The appellant had built a fertilizer plant at Hazira, West Bengal. Government of India held equity share capital in the appellant society. By their letter dated 20th April, 1988, the Government of India converted a part of their equity share capital amounting to Rs.16 crores into a loan with retrospective effect; Rs.6 crores from 26th December, 1983 and Rs.10 crores from 20th January, 1984. As a result of the said conversion, the appellant became liable to pay interest on the said amount, which was payable with effect from 26th December, 1983 on loan of Rs.6 crores and 20th January, 1984 for loan of Rs.10 crores. Interest payable on the said loan was capitalised upto 28th February, 1986, i.e., the date on which the commercial production started in the fertilizer plant at Hazira.

3. In respect of Assessment Year 1987-88, the appellant had filed return of income on 20th June, 1987 and for the Assessment Year 1988-89 the return of income was filed on 28th June, 1988. In the two returns, interest payable for the aforesaid period to the Government of India in terms of letter dated 20th April, 1988 was not treated as an accrued liability. Interest payable on or after 1st March, 1986 in view of the letter of the Government of India dated 20th April, 1988 was not shown and claimed as an expenditure in the profit and loss account filed with the two returns. However, during pendency of the assessment proceedings, the appellant filed revised returns (dates are not available) and claimed deduction of interest under Section 36(1)(iii) for the period 1st March, 1986 to 30th June, 1986 (four months) amounting to Rs.62,66,667/- and Rs.1,88,17,168/- for the period 1st July, 1986 to 30th June, 1987 (it is apparent that the accounting year of the assessee during the two years was from 1st July to 30th June of the relevant previous year).

4. The Assessing Officer did not accept the claim for interest on the ground that the liability had not accrued during the relevant previous years but had accrued subsequently only because of letter dated 4th April, 1988.

5. In first appeal, the appellant assessee did not succeed in the Assessment Year 1987-88 but succeeded in the Assessment Year 1988-89.

6. The appellant and the Revenue preferred appeals before the tribunal against the two conflicting orders passed by the first appellate authority.

7. The tribunal by their common order dated 6th December, 1999 has accepted the stand of the Revenue and observed that the liability to pay interest had not accrued during the relevant previous years and, therefore, the interest which was payable in terms of letter dated 4th April, 1988 written by the Government of India cannot be claimed as an expenditure under Section 36(1)(iii) of the Act in the two assessment years. It can be claimed as an expenditure in the period relevant to the assessment year when letter dated 4th April, 1988 was written and received.

8. At the very outset, we note that the appellant is following mercantile system of accounting. Under the said system, both accrued credits and liabilities have to be taken into consideration. Accrual normally takes place before the amount is actually received or paid. Expenditure as a debt or a legal liability once incurred is treated as expenditure, even before it is actually disbursed.

9. There is difference between contractual liabilities and statutory liabilities. Statutory liabilities are incurred under the statute and become payable in terms of the charging Section of the applicable statute. Contractual liabilities, on the other hand, become due and payable as per the terms of the contract and when quantification is settled by an agreement or otherwise. In the present case, the transaction in question was contractual in nature and not statutory, though Government of India was a party to the said transactions with the appellant-assessee as it had invested substantial amounts, including Rs.16 crores, which was subsequently vide letters dated 4th April, 1988 and 24th April, 1988 converted into a loan. These two letters state that in view of the official cost estimates, the Government of India had decided, in partial modification of their earlier letter dated 25th March, 1986, to convert an amount of Rs.16 crores already drawn by the appellant as equity into loan with retrospective effect. Interest on the said amount, which was now converted into loan, should be disbursed and paid to the Government of India. Letter dated 20th April, 1988 further clarified and stated that conversion of equity into loan would be in two stages; Rs.10 crores would be treated as converted into a loan with effect from 20th January, 1984 and Rs.6 crores would be treated as converted into a loan as on 26th December, 1983. The said letter further records that dividend of 3% for the cooperative year 1986-87 might be worked out and paid on Rs.328 crores in place of Rs.344 crores. It is apparent that dividend had already been paid and the letter further records that interest may be paid to the Government of India immediately after making adjustment of dividend on Rs.16 crores with effective date of conversion of Rs.16 crores mentioned in the letters.

10. It is clear from the said correspondence that Government of India was earlier a shareholder and was entitled to dividend on share capital to the extent of Rs.16 crores, which had been issued or were allotted by the appellant-assessee. Pursuant to the letters dated 4th April, 1988 and 20th April, 1988 there was a change in the character of the relationship between the parties to the extent of Rs.16 crores, which became a loan for the first time. The relationship of a shareholder came to an end. The said conversion took place after end of the respective previous years, subject matter of the present appeals. We do not think, in these circumstances, it can be held that the liability had accrued or crystallised during the relevant assessment years. It is clear that the liability had accrued and had crystallised subsequently after the end of the previous years on 30th June, 1986 and 30th June, 1987. During the previous years, the appellant assessee had no clue or even an indication that this liability might accrue or the shareholding to the extent of Rs.16 crores would be converted into a loan. Before the said letters, neither the appellant was liable to pay any amount as interest nor Government of India had any right to claim any interest from the appellant. Government of India was entitled to dividend and in fact it appears that dividend had been paid. Till the two letters were written, there was not even a possibility or whisper that any liability would accrue or arise. Government of India did not have any right to claim interest before these two letters were written and or were accepted by the appellant, whether under pressure or otherwise.

11. Profits and gain of business are computed on ordinary commercial principles. However, when there is a statutory interdict or stipulation, regardless of the ordinary commercial principles, the statute has to be followed. Section 36(1)(iii) of the Act does not help the appellant -assessee in form of any statutory interdict. There is no statutory provision that this amount should be allowed as interest accrued pursuant to the two letters dated 4th April, 1988 and 20th April, 1988. No such contention has been raised or even argued. We do not think that under the ordinary principles of accountancy the two amounts were liabilities. It was only after letters dated 4th April, 1988 and 20th April, 1988, interest became payable and accrued liabilities were incurred. Interest became due and payable for the first time. Period for which interest became payable, is different and should not be confused with time/date when liability accrued. As per the ordinary principles of commercial accountancy, the said liabilities cannot be allowed as an expenditure in the earlier years.

12. In CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC) bonus was paid in the year 1949, after an award under the Industrial Disputes Act. However, as the books for the year 1948 was not closed, this amount added and shown as expenditure in the year relating to the years 1948 and 1947. Referring to the nature and character of bonus in the said case, i.e., profit bonus, it was observed that it was not wages and at least not a liability for computing income tax as it was not an expense in ordinary course of term. It was also observed that reopening of accounts does not fit in with the scheme of the Indian Income Tax as was observed in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC), which relates to case of receipts but the proposition of law could be equally applied to expenses. [see also Laxmi Devi Sugar Millsv. CIT [1993] 200 ITR 603/69 Taxman 238 (SC)].

13. Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Supreme court was concerned with liability towards gratuity under the statutory provisions and whether the amount calculated on actuarial valuation of the estimated liability could be treated as expenditure in the profit and loss account. It was observed that estimated liability under the gratuity schemes when properly ascertained, it was possible to arrive at proper discounted present value. Liability, though contingent provided it is discounted i.e. its present value, if ascertainable, could be taken as trading expenses once they were sufficiently certain, capable of valuation and if profits cannot be properly estimated without taking them into account. It was a case of an accrued liability in praesenti but payable in future.

14. Learned counsel for the appellant has relied upon Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and submits that in this case the assessee was following mercantile system of accounting and the claim of expenditure was allowed though no entry had been made in the books of accounts. The facts of the said case are distinguishable as the liability under the said case was under the sales tax laws, i.e., statutory liability, which was created and had accrued when a dealer either made the sales or purchases and the obligation to pay tax had arisen and was attracted. In Laxmi Devi Sugar Mills (supra), the government had issued a notification on December 23, 1960 declaring that the workers were entitled to bonus after the concerned accounting year for the assessee had ended on September 19, 1960. The Supreme Court observed that the accounting year concerned therein was one prior to the coming into force of the Bonus Act. Therefore, there was no existing liability upon the assessee to pay bonus during the said accounting year. In other words, during the relevant accounting year, the liability to pay bonus had not fastened on to the assessee. The liability itself was created subsequent to the closing of the accounting year. In the said situation, merely because the assessee has made a provision would not entitle a deduction under section 10(2)(x) read with section 10(5) of the Indian Income-tax Act, 1922.

15. In CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 (SC), the court observed that it is well established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive income, the income can be said to have accrued to him though it may be received later on, on it being ascertained. The legal position is that a debt is a liability payable in praesenti or in future but it should have arisen and obligation must have come into existence. The fact, that the amount has to be ascertained, does not make it any less a debt, if the liability is certain and what remains is only a quantification of the amount: debitum in praesenti, solvendum in futuro.

16. Payment of a liability is distinct from creation or accrual of the liability and under the mercantile system profits and gains of persons are computed on the basis of principle of accrual during the period for which profits and gains have to be computed. It is not material that the liability is to be discharged at a future date or by mistake or failure, no entry of the accrued liability was made in the books of accounts. An assessee will be entitled to a particular expenditure or deduction depending upon provisions of law and not on the basis of existence or absence of entries in the books, which are not conclusive. The same principle applies to accrual of income.

17. The supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 has observed that quantification or discharge of a liability of future date is not relevant but what is to be determined for allowing a business liability is to ascertain whether the liability had accrued and that the assessee was certain about incurring the liability. In other words, the liability should be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied, the liability is not contingent. The liability is in praesenti though to be discharged at a future date, even if the future date on which the liability is discharged is not certain. The same principle applies to receipts, which have to be added and brought to tax in mercantile system of accounting. Again in Chief CITv. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC) it has been observed that unilateral action on the part of the assessee by way of writing off liabilities in their accounts does not necessarily mean that the liability has ceased in law. In the said case, the profit tax liability had not ceased finally. In the present case, the liability had not accrued and was not even in contemplation of the appellant till letter dated 4th April, 1988 was issued, which is after the end of the two previous years. Till then, Rs.16 crores was part of the equity share capital and was not regarded and treated as a loan. The two previous years had come to an end on 30th June, 1986 and 30th June, 1987, long before the letter dated 4th April, 1988 was issued.

18. We will be failing, if we do not mention reference made by the appellant to a decision of this Court inAddl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1/18 Taxman 491 (Delhi), which relies uponKedarnath Jute Mfg. Co. Ltd. (supra). The said case again relates to a statutory liability, i.e., sales tax liability. The assessee had received demand notices for earlier years in the period relevant to the Assessment Year 1964-65. Revenue insisted and submitted that the assessee was following mercantile system of accounting and, therefore, the sales tax liability relating to earlier period cannot be allowed in the Assessment Year 1964-65. The contention was rejected observing that the decision in Kedarnath Jute Mfg. Co. Ltd.(supra) was distinguishable and was not an authority for the proposition that the assessee could not have claimed deduction or expenditure in the year in question. It was in the context of the factual matrix of the said case that it was observed that if statutory liability was determined after the end of the relevant assessment year, the assessee could still claim the said liability in the year in which the demand was raised or the order was passed. A Division Bench of the Delhi High Court took pragmatic view of the situation as sometimes statutory liabilities are determined or demand is raised after contest, much later and by that time, return for the earlier assessment year stands filed or assessment proceedings have come to an end. This is not the factual position in the present case. In the present case, the liability itself had arisen much later with the letter dated 4th April, 1988. This is the date on which liability towards loan got created for the first time and the shares issued to the Government of India were treated as either cancelled or null and void and a loan and interest liability came into existence. It is on this date that the appellant became liable to pay interest, though for earlier period also. The letter dated 4th April, 1988 changed the nature of the transaction and relationship completely from that of a shareholder to a creditor and a debtor. Before the said date, the said liability did not exist as there was no relationship of a creditor and debtor between the Government of India and the appellant. The contention of the appellant that letter dated 4th April, 1988 was a unilateral letter, does not appear to be correct and in any case does not affect the outcome or legal position. The appellant accepted the said letter and has acted upon it. Therefore, the contention that it was a unilateral act is ill- founded and would not in any case negate the effect of the said letter.

19. Similarly, reliance on the decision of the Bombay High Court in Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 is equally futile. In the said case, the assessee had made payment of Rs.20,000/-but the liability to pay entire amount of Rs.1 lac had accrued. Once accrual has taken place, there is no difficulty, when an assessee is following mercantile system of accounting. The present case is one where accrual has not taken place in the years in question.

20. In view of the aforesaid legal position and discussion, the questions of law mentioned above are answered in favour of the respondent-Revenue and against the appellant-assessee. The appeals are dismissed. No order as to costs.

POOJA

---

*In favour of revenue.

IT: Where time limit for considering application for registration under section 12A was already complete and matter having been considered by this Court in earlier judgment, writ petition filed by appellant was rightly dismissed

■■■

[2014] 45 taxmann.com 484 (Kerala)

HIGH COURT OF KERALA

Kadakkal Educational Trust

v.

Commissioner of Income-tax*

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

WA NO. 873 OF 2013

JANUARY  8, 2014 

Section 12A, read with section 10(23C), of the Income-tax Act, 1961 - Charitable or religious trust - Registration of (Time limit) - Appellant, an educational trust, applied for registration under section 12A - There were certain defects in application which were directed to be rectified and on resubmission also certain defects were noticed - In meantime, appellant submitted an application under section 10(23C)(vi) which was later on rejected by Commissioner - Appellant contended that even if application under section 10(23C)(vi) was rejected, authority concerned ought to have considered application for registration under section 12A which was resubmitted - It was observed that appellant had taken up this matter in an earlier proceeding and Single Judge of this Court had come to a finding that stand taken by appellant regarding pendency of application for registration under section 12A, was not true and correct, no such application was pending disposal before authority concerned, hence, relief sought for could not be granted - Whether when time limit for considering said application was already complete and matter having been considered by this Court in earlier judgment, Single Judge committed no error of law in dismissing writ petition filed by appellant - Held, yes [Para 9] [In favour of revenue]

FACTS

 

■		The appellant is an educational trust. They applied for registration under section 12A. There were certain defects in the application which were directed to be rectified and on resubmission also certain defects were noticed.
■		In the meantime, the appellant submitted an application under section 10(23C)(vi) which was later on rejected by the Commissioner.
■		The appellant thereafter submitted a fresh application under section 12A which was allowed. Therefore, as far as appellant is concerned, the trust was registered under section 12A for the assessment year 2010-11 onwards.
■		The issue in the instant case was with reference to the financial years starting from 2007-08 for which application was filed. The appellant contended that even if the application under section 10(23C)(vi) was rejected, the authority concerned ought to have considered the application for registration under section 12A which was resubmitted on 20-9-2007.

HELD

 

■		In fact, the appellant had taken up this matter in an earlier proceeding and the Single Judge of this Court had come to a finding that it was evident that the stand taken by the appellant regarding pendency of the application for registration under section 12A, was not true and correct. Since such an application was not pending disposal before the authority concerned, the relief sought for could not be granted.[Para 5]
■		It was clearly indicated that though an application was filed under section 12A dated 28-11-2007 which was received on 30-11-2007, there were certain defects and deficiencies for which the appellant was called upon to cure the same. The case was also posted for hearing on 5-5-2008. The time limit for disposal of application was on 30-5-2009.
■		In the meantime, the applicant had filed an application under section 10(23C)(vi) before the Commissioner on 15-6-2008. Under such circumstances, the official records indicate that the application under section 12A is withdrawn.[Para 8]
■		When the time limit for considering the said application is already complete and the matter has been considered by this Court in the earlier judgment the Single judge committed no error of law in dismissing the writ petition filed by the petitioner.[Para 9]
■		In the result, there was no ground to interfere with the findings of the Single Judge. But if the appellant had preferred any appeal against the application for exemption under section 10(23A) before the Tribunal, the said authority shall consider the same and dispose of it untrammelled by any of the findings or observations made in the instant proceedings.[Para 10]
■		Writ appeal was dismissed.

T.M. Sreedharan, V.P. Narayanan and Smt. Boby M. Sekhar for the Appellant. Jose Joseph for the Respondent.

JUDGMENT

 

A.M. Shaffique, J. - The petitioner in the writ petition is the appellant. The writ petition is filed challenging Exts.P5, P11 and P13 and for a direction to the respondent to consider the application in Form No.10A dated 30/05/2007 produced as Ext.P2 along with the amended documents submitted by the petitioners.

2. The appellant is an educational trust. They applied for registration under Section 12A of the Income tax Act 1961. Ext.P2 is such an application submitted by them. There were certain defects in the application which were directed to be rectified and on resubmission also certain defects were noticed. In the meantime, the appellant submitted an application under Section 10(23C)(vi) of the Income Tax Act which was later on rejected by the Commissioner of Income Tax. The petitioner thereafter submitted a fresh application under Section 12A which was allowed as per Ext.P8 order dated 20/01/2011. Therefore, as far as petitioner is concerned, the Trust is registered under Section 12A for the assessment year 2010-2011 onwards.

3. The issue is with reference to the financial years starting from 2007-2008 for which Ext.P2 application was filed. The learned Single Judge did not interfere with the orders passed by the authorities on the basis that the issue had already been covered by earlier judgments of this Court by which it was found that the application submitted by the petitioner as Ext.P2 was no longer in force.

4. The learned counsel for the appellant however would argue that though it is stated that the earlier application submitted by the petitioner as Ext.P2 was withdrawn, in effect, the appellant did not withdraw the said application. The said application was pending consideration and no final orders were passed. In the meantime, the petitioners had applied under Section 10(23C)(vi) of the Act which was rejected by the respondent authority. Even if the said application is rejected, the authority concerned ought to have considered the application for registration under Section 12A which was resubmitted on 20/09/2007.

5. Heard learned counsel for the appellant as well as the learned Standing counsel appearing for the department. In fact, the petitioner had taken up this matter in an earlier proceedings in W.P.C.No.28008/2009 and the learned Single Judge of this Court had come to a finding at paragraph 5 as under:

"From the contentions as narrated above, it is evident that the stand taken by the petitioner regarding pendency of the application for registration under Section 12A, is not true and correct. Since such an application is not pending disposal before the authority concerned, the relief sought for could not be granted."

6. However, this Court observed that the petitioner can seek appropriate remedy for applying for registration under Section 12A with respect to the period prior to the assessment year 2010-2011. It is also observed that the petitioner could challenge the dismissal of exemption under Section 10(23A) of the Act. Since the appellant was not satisfied with the said judgment, review petition was filed and in the review petition this Court did not interfere with the earlier judgment and it is inter alia observed that the directions contained in judgment dated 28/01/2011 to the extent of permitting the petitioner to file fresh application for registration under Section 12A, need not be interfered. The main question involved in the review petition was whether the observation of the Court that the application is withdrawn should be modified or not. The learned Single Judge did not interfere with the said order.

7. Pursuant to Ext.P9 judgment and the review order at Ext.P10, Ext.P11 order was passed on 24/10/2011 by the Commissioner of Income Tax clearly indicating that Ext.P2 application is not pending. In fact, in the counter affidavit filed by respondent authority also they have relied upon a communication issued by the Assistant Commissioner of Income Tax, Thiruvananthapuram on 02/12/2009 which inter alia reads as under:

"Another application for Registration under Section 12A dated 28/11/2007 was received on 30/11/2007. That also was defective and a deficiency letter was issued to the assessee on 23/1/2008. The case was posted for hearing before Commissioner of Income Tax, Trivandrum on 05/05/2008. The time limit for disposal of the application for 12A registration was on 30/05/2009. The applicant informed that as it was going to apply for approval under Section 10(23C)(vi) before the Chief Commissioner of Income Tax, Trivandrum, it was not pursuing registration u/s 12A. The applicant did file an application for approval u/s 10(23C)(vi) before CCIT on 15/5/2008. Under these circumstances it was presumed that the applicant was not pursuing registration u/s 12A and though no order was passed by the CIT the pendency was considered as disposed with the remarks "Application withdrawn" in the 12A register, in No.116/2008-08."

8. Since it is clearly indicated that though an application was filed under Section 12A dated 28/11/2007 which was received on 30/11/2007, there were certain defects and deficiencies for which the assessee was called upon to cure the same. The case was also posted for hearing on 05/05/2008. The time limit for disposal of application was on 30/05/2009. In the meantime, the applicant had filed an application under Section 10(23C) (vi) before the Commissioner of Income Tax on 15/06/2008. Under such circumstances, the official records indicate that the application under Section 12A is withdrawn.

9. When the time limit for considering the said application is already complete and the matter has been considered by this Court in the earlier judgment which is extracted above, we do not think that the learned Single Judge has committed any error of law in dismissing the writ petition filed by the petitioner.

10. In the result, we do not find any ground to interfere with the findings of the learned Single Judge. But it is made clear that if the appellant had preferred any appeal against the application for exemption under Section 10(23A) before the Appellate Tribunal, the said authority shall consider the same and dispose of it untrammelled by any of the findings or observations made in the present proceedings.

Writ appeal is dismissed.

JYOTI

---

*In favour of revenue.

--

IT/ILT : Where substantial amounts were due to assessee from its AEs as there were delays in receiving payments from AEs, DRP taking strength from safe harbour rule, rightly directed Assessing Officer/TPO that interest was to be computed on basis of SBI base rate as on 30 June of relevant previous year plus 150 basis point

■■■

[2014] 46 taxmann.com 90 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'I'

Cheil India (P.) Ltd.

v.

Deputy Commissioner of Income-tax, Circle-3(1), New Delhi*

R.P. TOLANI, JUDICIAL MEMBER 
AND B.R. JAIN, ACCOUNTANT MEMBER

IT APPEAL NO. 1230 (DELHI) OF 2014
[ASSESSMENT YEAR 2009-10]

MAY  15, 2014 

Section 92C, read with section 92B, of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustments) - Assessment year 2009-10 - During relevant year, assessee entered into international transactions with its AEs - In transfer pricing proceedings, TPO noticed that substantial amounts were due to assessee from its AEs as there were delays in receiving payments from AEs - Accordingly, certain addition was made to assessee's ALP on account of interest to be charged on delayed payments of loan by AEs - DRP taking strength from safe harbour rule, directed Assessing Officer/TPO that interest was to be computed on basis of SBI base rate as on 30 June of relevant previous year plus 150 basis point - In appellate proceedings, assessee did not bring on record any similar uncontrolled transaction to show that no interest had been charged by it for similar delays - Moreover, DRP after considering legal position, as contemplated under Explanation (1)(c) below section 92B, with reference to material and relevant facts on record, had passed a reasoned order - Whether in view of aforesaid, impugned order of DRP was to be upheld - Held, yes [Para 9] [In favour of revenue]

CASES REFERRED TO

 

Logix Micro Systems Ltd. v. Asstt. CIT [2010] 42 SOT 525 (Bang.) (para 9).

Salil Kapoor and Vikas Jain for the Appellant. Peeyush Jain and Yogesh Kr. Verma for the Respondent.

ORDER

 

B.R. Jain, Accountant Member - This appeal by assessee against the order dated 8-2-2014 by DCIT, Circle 3(1), New Delhi, raises the following grounds:

"On the facts and circumstances of the case and in law, the Deputy Commissioner of Income-tax, Circle-3( 1), New Delhi ('learned AO') has erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 ('Act') after considering the following:

Each of the ground is referred to separately, which may kindly be considered independent of each other.

1. That the learned AO has grossly erred both on facts and in law in adding amount paid/payable to its vendors (i.e. Magnum Interiors Private Limited and N. Links) as income of the Appellant as such vendors failed to provide details sought by the learned AO without appreciating the fact that relation of the Appellant with such vendors have become strenuous and ignoring other evidences submitted by the Appellant.

1.1 The learned AO and learned DRP has completely disregarded the details related to vendor payments submitted by the Appellant which included copy of ledger accounts of vendors incorporating the details of invoices received and payments made to the vendors, copy of invoices issued by vendors and extracts of bank statements evidencing the payment to the vendors.

1.2 The learned AO has grossly erred both on facts and in law in not completely following DRP directions wherein learned AO was directed to pursue the matter vigorously and to take action depending upon the outcome of the confirmation and verification/reconciliation thereof

1.3 The learned AO has grossly erred both on facts and in law in holding a huge disallowance which is based on presumptions, assumptions, conjecture and surmises without giving adequate opportunity to Appellant to support its claim and such an assessment violates the principles of natural justice and deserves to be annulled.

2. That the learned AO has grossly erred in disallowing the amount of difference in billing amount confirmed by vender named Thinkpot and the amount claimed by Cheil India without appreciating the fact that such amount could not be reconciled due to difference in accounting policies adopted by the vendor and Cheil India

2.1 The learned AO and learned DRP has completely disregarded the details related to vendor payments submitted by the Appellant which included copy of ledger accounts of vendors incorporating the details of invoices received and payments made to the vendors, copy of invoices issued by vendors and extracts of bank statements evidencing the payment to the vendors.

2.2 The learned AO has grossly erred both on facts and in law in not completely following DRP directions wherein learned AO was directed to make a genuine attempt to resolve the difference to the extent possible

2.3 The learned AO has grossly erred both on facts and in law in holding a huge disallowance which is based on presumptions, assumptions, conjecture and surmises without giving adequate opportunity to Appellant to support its claim and such an assessment violates the principles of natural justice and deserves to be annulled.

3. That the evidences placed and the material available on record has not been properly and judiciously considered and the additions have been made ignoring the material on record and are against the principles of natural justice.

4. That the learned Transfer Pricing Officer/ AO/ DRP have erred in law and on facts and circumstances of the case, by holding inter-company receivables to constitute an international transaction and proceeding to benchmark the same by application of Comparable Uncontrolled Price ('CUP') method.

5. That the additions/disallowances made are illegal and bad in law and have been made in total disregard of principle of natural justice.

6. That the learned AO has erred, in law and facts, in holding that the Appellant has furnished inaccurate particulars and has concealed the particulars of its income and has also erred in initiating the penalty proceedings under section 271 (1)(c) of the Act.

7. That the learned AO, in law and facts has erred in not granting the full credit of tax deducted at source and self assessment tax paid by the Appellant.

8. That the learned AO, in law and facts, has erred in charging excess interest under section 2348 and 234C of the Act."

2. Brief facts are that the company is engaged in the business of advertising, communication, publicity and merchandise, including undertaking market research, planning and providing consultancy services and training in the same field as an agent and derives income as commission on fixed percentage. The assessee filed its return declaring income of Rs. 10,69,50,200/-. During the year under consideration the assessee has also entered into international transactions with its associated enterprises ("AEs" in short). Accordingly, the assessee's case was referred to Transfer Pricing Officer ("TPO" in short) for determination of arm's length price ("ALP" in short) u/s 92CA(1) of the Income-tax Act, 1961 ("Act" for short) in respect of international transactions entered into by the assessee during the year under consideration.

2.1 During the course of assessment proceedings, the assessing officer issued notices u/s 133(6) of the Act to 27 vendors to verify the pass through cost. On the basis of response received to such notices, the assessing officer proposed disallowance of Rs. 264,30,92,022/- for the reason that third party vendors to whom said amounts have been paid or payable remained unverified. The assessee made objections before the Dispute Resolution Panel ("DRP" in short ), who considering assessee's submissions sought remand report from the assessing authority. The assessing officer submitted remand report dated 18-12-2013 and supplementary remand report dated 26-12-2013 and agreed to reduce the addition by Rs. 43,44,89,443/-. The DRP, however, passed an order u/s 144C of the act on 30-12-2013 and took note of the fact that the assessing officer did not undertake the necessary verification in the accounts of the vendors concerned and proposed a huge addition of Rs. 264.30 crores. Since the assessing officer has not taken into account various confirmations as are contained in para 5.6.1 into consideration, it reduced the amount of addition of Rs. 34,61,22,549/-instead of addition of Rs. 264,30,92,022/- proposed in the draft assessment order. The ld. DRP also observed that due exercise for identifying the exact reason for difference in the accounts of vendors has not been undertaken by the assessing officer. It, therefore, directed the assessing officer to make further verification and reconciliation of the amounts between the confirmation received from the vendors and the account submitted by the assessee and make an attempt to resolve the differences to the extent possible and in the event the assessing officer after making genuine attempt is not able to reconcile the difference, the said amount of difference shall be added to the computation of total income with due reasoning thereof.

2.2. The assessing officer issued notices u/s 133(6) of the Act on 28-1-2014 amongst others to M/s Magnum Interior P. Ltd. and M/s N Links. M/s Magnum Interior P. Ltd., the vendor, did not furnish any details with respect to the transactions carried by it except furnishing balance confirmation whereas the notice sent to M/s N Links stood returned unserved with the remark of postal authorities "Left. Address not known". The assessing officer, therefore, proceeded to make disallowance under the head "deemed income" by an amount of Rs. 6,78,09,295/- in respect of M/s Magnum Interior P. Ltd. and Rs. 2,05,57,599/- in respect of M/s N Links. In so far as the third vendor M/s Thinkpot is concerned, he considered assessee's reply that the said vendor maintains its accounts on cash basis and hence it is not possible to reconcile the same with the accounts of the assessee M/s Cheil India Pvt. Ltd., who are maintaining their accounts on mercantile basis. The amount of Rs. 1,1,08,018/- has been taken as a difference and stood added to the deemed income as short receipts. The aggregate addition thus stood made at Rs. 9,85,34,910/- in the order dated 8-2-2014 passed u/s 143(3)/144C of the Act.

3. In respect of ground nos. 1 to 1.13, 2 and 3 in appeal, it is contended that the assessing officer has erred in making the addition by disregarding the directions given by the ld. DRP and did not provide reasonable opportunity to the assessee to reconcile the difference. The assessing officer also did not make honest effort to procure requisite details of transactions from the vendors on whom the assessee had no control.

3.1 M/s Thinkpot was maintaining its accounts on cash basis whereas the appellant maintained its accounts on mercantile basis. In the absence of availability of third party's accounts, the assessee was not able to reconcile the transactions. Merely because the reconciliation has not been carried by the assessee, the same cannot be a reason alone to challenge the genuineness of the transactopms carried out and recorded in the books of a/cs of the assessee.

3.2 In so far as the disallowance in respect of transitions with M/s Magnum Interior P. Ltd. is concerned, the appellant had submitted various details. The parties are genuine. If the notice issued u/s 133(6) of the Act stood served but were not responded by the vendor, the same cannot be a reason to disbelieve the genuineness of transactions and such the disallowance made is unjust and uncalled for.

3.3 In so far as M/s N Links is concerned, the assessing officer issued notices u/s 133(6) of the Act but the same stood returned with the remark "Left. Address not known". The assessee has laid on assessment record complete details to substantiate that the transactions carried by it are genuine. The documents so laid on the record of the assessing officer for which payments were received through banking channels goes to prove that there is no deficiency or incorrectness in the claim made by the assessee. The addition thus made on presumption and assumption basis is unjust and uncalled for, besides being violative of the principles of natural justice.

4. On the other hand, ld. DR contends that the assessee himself has shown inability to reconcile the account of Thinkpot and also did not furnish the correct address of M/s N Link for enabling the assessing authority to make verification of the transactions carried by the assessee. The assessee also did not make any attempt to require M/s Magnum Interior P. Ltd. to furnish details of the transactions carried out during the year under consideration with the assessee for enabling the assessing authority to make verification of the facts and reconciliation of its accounts. Thus, the addition so made needs no interference.

5. We have heard parties with reference to material on record. The perusal of impugned order reveals that the assessing authority issued notice u/s 133(6) to M/s Magnum Interior P. Ltd. on 28-1-2014. Since this party did not furnish any detail except balance confirmation, the assessing officer proceeded to add the entire amount of Rs. 6,78,09,295/- as deemed income on account of short receipt declared in P&L A/c vide his order dated 8-2-2014. The assessing officer is thus found to have made an order within a short span of time on 8-2-2014 after it had required M/s Magnum Interior P. Ltd. to furnish information through its notice dated 28-1-2014. No reasonable time was allowed to the said vendor to furnish details as sought by the assessing authority nor assessee was required to bring such details on record from the said vendors. The assessing officer thus has not made genuine efforts to obtain the details and reconcile the difference. The addition so made, therefore, appears to be a result of lack opportunity to the assessee. We, therefore, set aside the said addition and remit the matter back to the assessing officer for procuring requisite details by exercise of his powers under the Act and make reconciliation thereof with the transactions recorded in assessee's books of account before making any addition for deficiency or otherwise, in accordance with law.

5.1 In so far as the addition of Rs. 2,05,57,559/- on account of transaction with M/s N Links is concerned it is evident hat the assessing authority rested the addition merely because the notice issued on 28-1-2014 u/s 133(6) of the Act stood returned from the given address with the postal remarks "Left. Address not known". The assessment order does not reveal the mode and manner of sending the notice to the vendor. After the notice stood returned, the assessing officer did not confront the assessee about this fact nor required him to give his present address or call for the requisite information and furnish the same to the assessing officer for carrying out the directions given by ld. DRP. Under such circumstances, the assessee could not be expected to have reconciled the difference nor assessing officer can be said to have made bona fide effort to carry out the exercise as directed by the DRP. We therefore set aside the addition and in the interest of justice remit the matter back to the file of assessing officer so that requisite inquiries are made and assessee is confronted with the results thereof to enable it to prove its case.

5.2 So far as the transactions with M/s Thinkpot are concerned, the assessee has pointed out that difference in accounts of the vendor with that of assessee is due to the fact that different method of accounting have been adopted by them. The assessee claims to have furnished copies of invoices issued by M/s Thinkpot and has also furnished bank statement for evidencing the payment made to the vendor through a/c payee cheuqes. The assessing officer, however, did not make any reasonable effort or attempt to verify the genuineness and correctness of the transactions before reaching the conclusion of difference of Rs. 1,01,08,018/- in the accounts. In all fairness we deem it proper to set aside this addition as well to the file of assessing officer so that the assessing officer carries out the fresh exercise for reconciling the said difference by giving due and effective opportunity of being heard to the assessee with reference to invoices and other relevant material that has come on record or any further material that assessee may like to bring on record of the assessing officer to justify its claim.

6. Ground no. 4 in appeal relates to the addition of Rs. 83,814/- for adjustment of amount of interest on outstanding payments from the assessee's AEs. Since reference was made by the assessing authority to the TPO u/s 92CA(1), the TPO noticed that substantial amounts were due to tax payers from its AEs as there were delays in receiving the payments from AEs. The TPO treated the delayed payment as unsecured loan and the same as international transaction u/s 92B Exp. (1)(c) and 92F(v) of the Act. In order to benchmark the international transaction, TPO treated the credit rating of AE to be in "category BB" and using the data procured from CRISIL, he benchmarked using CUP method and taking return earned by investing in the bonds of Indian companies having BB credit rating and arrived at an interest rate of 17.22% to be at arm's length and accordingly made adjustment of Rs. 1,01,281/- in the proposed order.

6.1 The DRP considered assessee's submissions and held a period of 30 days to be allowed for payment of receivables and any delay beyond the said period held to be benchmarked for charging of interest. Since normal business practice required payment of dues beyond a reasonable period, the TPO was found justified to charge interest beyond the arm's length period. Any delay beyond a period of 30 days was held to be subject matter of adjustment. DRP also found that tax payer is operating and raising finance from Indian market, It therefore, found no justification in tax payer's argument that LIBOR rate should be adopted to determine the ALP with regard to loans and advances given to AE without interest. Since it was a commercial transaction it held TPO's action in using the lending rates to benchmark this transaction on the basis of risk assumed by the taxpayer. However, taking strength from the Safe Harbur Rule it directed the AO/TPO that the interest should be computed on the basis of SBI base rate as on 30th June of the relevant previous year plus 150 basis points as the amount outstanding is less than Rs. 50 crores. Accordingly, it gave the following directions as are contained in para 4.5 of the order of DRP:

(i)		The taxpayer will provide date-wise and amount-wise chart containing particulars of invoices raised by it to its AEs, the details of payment made by the AEs, along with copies of such invoices and reconcile the same with the bank passbook. The taxpayer will also include in this cart, the interest worked out on each of such amounts at the rate adjudicated upon by this Panel as above.
(ii)		The TPO will accordingly work out the arm's length interest for the purpose of adjustment.

6.2 The assessing officer, after carrying out the directions issued to it by DRP, made adjustment of Rs. 83,814/- and added the same to the income of the assessee.

7. Assessee's counsel contends that the assessee does not charge interest from non AEs and quantum of transactions are comparable. There is thus no justification to make adjustment in benchmarking the transactions and making adjustment.

8. On the other hand, ld. DR contends that the reasoning given by the assessee before DRP stood duly considered and adjustment had been made on reasonable basis. The order by assessing officer, therefore, does not call for any interference.

9. We have heard parties with reference to material on record. Admittedly there is delay beyond stipulated period in recovery of dues in the international transaction with AE. The appellant did not bring on record any such similar uncontrolled transaction to show that no interest has been charged by it for similar delays nor any exact comparability has been established. Since Ld. DRP after considering the legal position, as contemplated under explanation (1)(c) below sec. 92B of the Act, with reference to material and relevant facts on record, passed reasoned order and having regard to judgment dated 7-10-2010 of ITAT Bangalore Bench in the case of Logix Micro Systems Ltd. v. Asstt. CIT [2010] 42 SOT 525, we find no infirmity in the directions given by ld. DRP and consequent order made by assessing authority. Ground of appeal accordingly stands rejected.

10. Ground nos. 5 and 7 are general in nature, requiring no adjudication. Ground no. 6, pertaining to initiation of penalty proceedings u/s 271(1)(c) is premature, the same stands rejected accordingly.

11. The charging of interest u/s 234B and 234C of the Act, raised in ground no. 8, is consequential in nature. The assessing officer shall calculate the charging of interest, if any, while giving effect to appellate order.

12. In the result, assessee's appeal stands partly allowed for statistical purposes.

SUNIL

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*In favour of revenue.

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Regards,

Pawan Singla , LLB

M. No. 9825829075

No writ against sec. 263 Show Cause notice if CIT had made revision when order was prejudicial to revenue

July 2, 2014[2014] 45 taxmann.com 487 (Madras)

IT: Expression 'resulted into an order prejudicial to interest of revenue', in order of Commissioner was sufficient for invoking power under section 263 and assessee ought not to have approached writ court at stage of show-cause notice

www.cliofindia.com info@cliofindia.com

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GOODS AND SERVICE TAX REPORTS (GSTR) HIGHLIGHTS

ISSUE DATED 30.6.2014 Volume 27 Part 1

SUPREME COURT	HIGH COURTS	ENGLISH CASES	CESTAT ORDER
STATUTES	JOURNAL	NEWS-BRIEFS

HIGH COURT

F No demand under section 28(8), penalty cannot be imposed under under section 114A of 1962 Act : Commissioner of Customs v. Care Foundation (Delhi) p. 1

F Retrospective amendment permitting rebate of duty paid from personal ledger account from March 1, 2002 to December 7, 2006, applicable to all pending proceedings before adjudicating or appellate or revisional authority : Welspun India Ltd. v. Union of India (Guj) p. 11

F Question as whether particular activity is taxable relates to "rate of tax", appeal not maintainable to High Court : Commissioner of Service Tax v. Ernst and Young P. Ltd. (Delhi) p. 22

F "Rate of tax" includes question whether or not activity is exigible to tax under particular or specific provision : Commissioner of Service Tax v. Ernst and Young P. Ltd. (Delhi) p. 22


F Rule treating independent processors of textile fabrics and other manufacturers not covered by it equally and an unreasonable restriction on assessees' right to conduct business, rule 96ZQ5(ii) held ultra vires : Krishna Processors v. Union of India (Guj) p. 42


F Plea of lack of jurisdiction can be raised for first time in writ petition : Krishna Processors v. Union of India (Guj) p. 42

STATUTES AND NOTIFICATIONS

F C. B. E. C. Circulars :
Circular No. 8/2014-Customs, dated 13th June, 2014-Customs Brokers Licensing Regulations, 2013-Regarding p. 1

F Notifications :
Customs Act, 1962 : Notification under section 25(1) : Exemption to specified goods imported from Malaysia under India-Malaysia CECA p. 15

Customs Tariff Act, 1975 : Notification under section 9A(1) and (5) : Anti-dumping duty on import of dichloromethane from European Union, USA and Korea : Amendment p. 11

Anti-dumping duty on import of nylon tyre cord fabric from China : Amendment p. 3

Anti-dumping duty on import of persulphates from Taiwan, Turkey and USA p. 4

Anti-dumping duty on import of phenol from Chinese Taipei and USA p. 8

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Posted by: Dipak Shah <djshah1944@yahoo.com>

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