[aaykarbhavan] Judgments,

CBEC Chief Commissioners Conference - Board seeks Action Taken Reports 

TIOL-DDT 2189
13.09.2013
Friday

CBEC has communicated the Minutes of the All-India Conference of Chief Commissioners and Directors General held on 17 - 18th July, 2013, to the Commissioners and Chief Commissioners to submit Action Taken Report by 30.09.2013.

Important Issues:

Revenue: The Finance Minister stated that the Indian currency has devalued around 13% and, therefore, this factor itself should be enough to achieve the revenue target in Customs. He urged the officers to not only achieve but to exceed the Customs Duty collections target. With reference to Central Excise target, he urged the Chief Commissioners and Commissioners to closely monitor the assessees and forge a close relationship with them. He stressed upon the need for senior officers to have regular interaction with the junior officers as well as the trade to have a close watch on the potential evasion of Central Excise Duty. He stated that the Central Excise growth of 11.9% is achievable provided all steps are taken in that direction. The Finance Minister further noted that Service Tax revenue is bound to increase in future as it has shown steady growth so far. He urged the officers to make the Voluntary Compliance Encouragement Scheme of Service Tax a success by increasing the trade awareness through Chambers of Commerce and other associations. FM directed to carryout a massive media campaign by having a logo like VDIS to educate and encourage maximum non-filers/stop filers & wrong filers to avail the Scheme. He emphasised the need for focusing on eight major cities namely Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmadabad and Pune to sensitize the trade regarding the scheme.

Undervaluation: A reference was made about the undervaluation and mis-declaration of the imported goods due to incomplete description and non-standard Unit Quantity Code (UQC). It has been decided to implement mandatory UQC to obviate potential for undervaluation and mis-declaration and thus ensure correct assessment. It was recommended that Directorate General of System should provide additional fields in B/Es allowing importers to give complete information in standard UQC. At present, benchmark pricing has been done for 23 commodities. It was recommended that benchmark pricing may be introduced for sensitive commodities prone to under-valuation by the Directorate General of Valuation.

Drawback: It was pointed out that in the first quarter of the year, drawback refunds have increased by 47% as compared to last year. It was observed that drawback under All Industry Rate is fixed in terms of 'Indian Currency' and hence, drawback refund outgo will be high despite the decline in the export due to depreciation of Rupee. FM directed that All Industry Rates be re-fixed considering the devaluation of Indian currency and the revised rate should be made effective from 01.04.2013.

Pendency of Adjudication in Service Tax: It was observed that there is a high level of pendency of adjudication in Service Tax in Mumbai and Delhi Service Tax Commissionerates. It was recommended to post Commissioner (Adjudication) at Mumbai and Delhi to liquidate the said pendencies. Recommendations on administrative side include creation of 4 new Service Tax Zones and 15 new Service Tax Commissionerate and also Audit and Appeal Commissionerate.

Huge Pendency in scrutiny of Returns: It was noted that at present about 11 lakh returns, thrown up for Review & Correction in the preliminary scrutiny process, are pending for correction. In this regard, FM directed the DG (Systems) to submit a report on the reasons for the large pendency and measures to be taken for reducing the same, by system-driven scrutiny process of returns, thereby having only a small percentage of cases for detailed manual scrutiny, within a week.

CBEC Minutes of All India Conference of the Chief Commissioners and Directors General of Customs, Central Excise and Service Tax Held on July 17-18, 2013

ST : Department cannot seek condonation of delay in filing appeal merely by stating that delay was caused due to time consumed in administrative procedures, which is too general and unsatisfactory explanation

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[2013] 37 taxmann.com 39 (Gujarat)

HIGH COURT OF GUJARAT

State of Gujarat

v.

Atul Products Ltd.*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

CIVIL APPLICATION NO. 334 OF 2013 
STAMP NO. 1345 OF 2013

JUNE  14, 2013 

Section 83 of the Finance Act, 1994 read with section 35G of the Central Excise Act, 1944 - Application of certain provisions of Excise Act - Appeal to High Court - Department sought condonation of 1371 days in filing appeal citing administrative procedures as reason of delay arguing that there was no intention to flout any legal provision or Act - It was also argued that meritorious case would seriously get prejudiced and public interest would be at jeopardy, if delay was not condoned and assessee would not loose anything as due opportunity will be given to both sides - HELD : Ordinarily Courts liberally condone delay and are also expected to adopt "justice oriented approach" rather than giving any undue importance to technicalities and further, delay is not to be explained by litigant on literal sense on day-to-day basis - However, when there is no justification for delay, substantial law of limitation cannot be marred advancing cause of liberal approach - Test for a sufficient cause is whether party, by exercise of due care and attention, could have avoided delay; sufficient cause would mean presence of legal and adequate reasons - In absence of plausible and acceptable explanation, Court cannot condone delay mechanically only because litigant is a Government Wing - In this case, Department's plea of time consumed in administrative procedures was in general terms; therefore, in absence of any specific details and explanation, it was unsatisfactory - Only because applicant is Government, it cannot be absolved of its responsibility to fulfill mandate of law - Moreover, issue involved was neither going to have any far reaching ramification on exchequer, nor would it result into denying an opportunity in respect of substantial question of law - Hence, appeal was dismissed as time-barred [Paras 5 to 9] [In favour of assessee]

Words and Phrases : 'Sufficient cause' as appearing in section 35G of Central Excise Act, 1944

CASE REVIEW

 

Lanka D. Venkateswarlu v. State of A.P. AIR 2011 SC 1199 (para 6.1), Balwant Singh v. Jagdish Singh AIR 2010 SCW 4848 (para 6.1) andOffice of the Chief Post MasterGeneral. v. Living Media India Ltd. [2012] 348 ITR 7/207 Taxman 163/20 taxmann.com 347 (SC) (para 6.3)relied on.

CASES REFERRED TO

 

G. Ramegowda v. Major Special Land Acquisition Officer, AIR 1988 SC 897 (para 3), N. Balakrishnan v. M. Krishnamurthy AIR 1998 SC 3222 (para 3.1), State of Haryana v. Chandra Mani [1996] 3 SCC 132 (para 3.2), Lanka D. Venkateswarlu v. State of A.P. AIR 2011 SC 1199 (para 6.1) Balwant Singh v. Jagdish Singh AIR 2010 SCW 4848 (para 6.1) and Office of the Chief Post MasterGeneral. v. Living Media India Ltd. [2012] 348 ITR 7/207 Taxman 163/20 taxmann.com 347 (SC) (para 6.3)

Ms. Shruti Pathak for the Appellant.

ORDER

 

Ms. Sonia Gokani, J - This is an application preferred for condonation of delay of 1371 days in filing the present Tax Appeal challenging the order dated 6th May, 2009, in Revision Application No. 129 of 2001 passed by the Gujarat Value Added Tax Tribunal, Ahmedabad ("Tribunal" for short)

2. It is pleaded in the application by the applicant-State, thus :

"The applicant further submits that, to file Tax Appeal before this Court the applicant has to undergo certain administrative procedures mentioned below :-

After receiving the judgment/order from the Tribunal, it is required to study the judgment and then opinions of several officers are sought as whether to file the Tax Appeal. Thereafter, the department sends a proposal to the Finance Department to get the approval of the Government to file the Tax Appeal. After receiving the approval from the Finance Department, all the papers alongwith the judgment/order are to be submitted to the G.P Office to file Tax Appeal. And thereafter, the G.P Office after receiving the papers prepares, gets approved and then files Tax Appeal before this Hon'ble Court.

The applicant further says that, in the present case, the Tribunal passed the Order on 6-05-2009 in Revision Application No. 129 of 2001. The applicant states that, the order dated 6-05-2009 was communicated to the applicant on 30-05-2009. Thereafter, on 15-12-2012, the proposal to file the tax appeal was sent to the Finance Department and on 2-2-2013, Finance Department approved the proposal. After receiving the proposal from the Finance Department on 20-02-2013, relevant papers alongwith judment/order were haned over to the office of the Government Pleader, High Court to file the Tax Appeal. The applicant says that, the tax appeal was required to be filed on or before 3-08-2009. However, the same was filed on 6/5/2013 and thus, there is delay of 1371 days in preferring the Tax Appeal.

The applicant further says that due to Government administrative mechanism, every work passes and comes back to source point, through a route system, hence the tax appeal could not be filed within the statutory time limit. Due to administrative procedures, time was consumed and hence the delay was caused."

2.1 It is further averred by the applicant that meritorious case would seriously get prejudiced, if delay is not condoned and opponent is not to loose anything as due opportunity is likely to be given to both the sides. It is also averred that it is the public interest which is at jeopardy in a case where the Government is the petitioner.

3. Learned AGP appearing for the applicant-State has fervently urged to condone delay as reasonable explanation is already embodied, according to her, in the petition and this must be construed as a sufficient cause. She has sought to rely upon the decision of the Apex Court rendered in case of G. Ramegowda Major v. Special Land Acquisition Officer, AIR 1988 SC 897 wherein the Apex Court has held thus -

"In litigation which Government is a party there is yet another aspect which perhaps cannot be ignored. If appeals brought by Government are lost for such defaults, no person is individually affected; but what, in the ultimate analysis, suffers is public interest. The decisions of the Government are collective and institutional decisions and do not share the characteristics of decisions of private individuals. Therefore, in assessing what, in a particular case, constitutes 'sufficient cause' for the purposes of Section 5 of the Limitation Act, it might, perhaps, be somewhat unrealistic to exclude from the considerations that go into the judicial verdict, these factors which are peculiar to and characteristic of the functioning of the Government. Governmental decisions are proverbially slow encumbered, as they are, by a considerable degree of procedural red-tape in the process of their making. A certain amount of latitude is therefore, not impermissible. It is rightly said that, those who bear responsibility of Government must have a 'little play at the joints'. Due recognition of these limitations on Government functioning - of course, within a reasonable limit is necessary if the judicial approach is not rendered unrealistic. It would, perhaps be unfair and unrealistic to put Government and private parties on the same footing in all respects in such matters Implicit in the very nature of Governmental functioning is procedural delay incidental to the decision making process.."

3.1 Reliance is also placed on the decision of the Apex Court rendered in case of N. Balakrishnan v. M. Krishnamurthy AIR 1998 SC 3222. It is held therein by the Apex Court that the rules of limitation are not to jeopardize the right and interest of the parties. Court is to ensure of course that no dilatory tactics are adopted and if the large amount of tax revenue is at stake, the Court should be slow in dismissing such plea of condonation of delay..

3.2 Judgment rendered in case of State of Haryana v. Chandra Mani [1996] 3 SCC 132 is pressed into service, wherein, the Apex Court has reiterated liberal approach in condoning the delay.

3.3 In short, the submission that has been emphasized is to the effect that in absence of any intention to flout any legal provision or Act, the attempt to deliberately jeopardize the interest of the otherside, an explanation of delay as put forth should be accepted and this being the administrative cause involving revenue for the State, the Court may approach this request with a liberty attitude.

4. On thus having heard the learned AGP and on having consciously considered the materials on record, this application is not being entertained for the reasons to follow hereinafter.

5. We are conscious that ordinarily the Courts have liberally condoned the delay and are also expected to adopt "justice oriented approach" rather than giving any undue importance to the technicalities. We are also not oblivious of the fact that the delay is not to be explained by the litigant on literal sense on day-to-day basis. However, we cannot disregard the vital requirement of law that when there is no justification for delay, the substantial law of limitation cannot be marred advancing the cause of liberal approach."

6. It will not be out of place to refer to the judgment of the Apex Court rendered in case of Lanka D. Venkateswarlu v. State of A.P. AIR 2011 SC 1199 wherein the delay was caused and there was insufficient explanation. The Apex Court set-aside the order of the High Court in condoning the delay, by holding that the concept of liberal approach and justice oriented approach cannot be employed to jettison the substantial law of limitation. In the words of the Apex Court —

'26. We are at a loss to fathom any logic or rationale, which could have impelled the High Court to condone the delay after holding the same to be unjustifiable. The concepts such as "liberal approach", "justice oriented approach", "substantial justice" can not be employed to jettison the substantial law of limitation. Especially, in cases where the Court concludes that there is no justification for the delay. In our opinion, the approach adopted by the High Court tends to show the absence of judicial balance and restraint, which a Judge is required to maintain whilst adjudicating any lis between the parties. We are rather pained to notice that in this case, not being satisfied with the use of mere intemperate language, the High Court resorted to blatant sarcasms. The use of unduly strong intemperate or extravagant language in a judgment has been repeatedly disapproved by this Court in a number of cases. Whilst considering applications for condonation of delay under Section 5 of the Limitation Act, the Courts do not enjoy unlimited and unbridled discretionary powers. All discretionary powers, especially judicial powers, have to be exercised within reasonable bounds, known to the law. The discretion has to be exercised in a systematic manner informed by reason. Whims or fancies; prejudices or predilections can not and should not form the basis of exercising discretionary powers.'

6.1 The Apex Court in a decision, rendered in case of Balwant Singh v. Jagdish Singh AIR 2010 SCW 4848 has given the test for a sufficient cause and what is to be seen is as to whether the party by the exercise of due care and attention could have avoided the delay. It reiterated that sufficient powers and discretion is available with the Courts for applying this law in a meaningful manner but sufficient cause would mean presence of legal and adequate reasons.

6.2 It would be profitable to reproduce the relevant observations of the Apex Court in this case :

"14. In the case of Union of India v. Tata Yodogawa Ltd., [1988 (38) Excise Law Times 739 (SC)], this Court while granting some latitude to the Government in relation to condonation of delay, still held that there must be some way or attempt to explain the cause for such delay and as there was no whisper to explain what legal problems occurred in filing the Special Leave Petition, the application for condonation of delay was dismissed. Similarly, in the case of Collector of Central Excise, Madras v. A.MD. Bilal and Co., [1999 (108) Excise Law Times 331 (SC)] / (1999 AIR SCW 4740), the Supreme Court declined to condone the delay of 502 days in filing the appeal because there was no satisfactory or reasonable explanation rendered for condonation of delay. The provisions of Order 22, Rule 9, CPC has been the subject-matter of judicial scrutiny for considerable time now. Sometimes the Courts have taken a view that delay should be condoned with a liberal attitude, while on certain occasions the Courts have taken a stricter view and wherever the explanation was not satisfactory, have dismissed the application for condonation of delay. Thus, it is evident that it is difficult to state any straight-jacket formula which can uniformly be applied to all cases without reference to the peculiar facts and circumstances of a given case. It must be kept in mind that whenever a law is enacted by the Legislature, it is intended to be enforced in its proper perspective. It is an equally settled principle of law that the provisions of a statute, including every word, have to be given full effect, keeping the legislative intent in mind, in order to ensure that the projected object is achieved. In other words, no provisions can be treated to have been enacted purposelessly. Furthermore, it is also a well-settled canon of interpretative jurisprudence that the Court should not give such an interpretation to provisions which would render the provision ineffective or odious. Once the Legislature has enacted the provisions of Order 22, with particular reference to Rule 9, and the provisions of the Limitation Act are applied to the entertainment of such an application, all these provisions have to be given their true and correct meaning and must be applied wherever called for. If we accept the contention of the Learned Counsel appearing for the applicant that the Court should take a very liberal approach and interpret these provisions (Order 22, Rule 9 of the CPC and Section 5 of the Limitation Act) in such a manner and so liberally, irrespective of the period of delay, it would amount to practically rendering all these provisions redundant and inoperative. Such approach or interpretation would hardly be permissible in law. Liberal construction of the expression 'sufficient cause' is intended to advance substantial justice which itself presupposes no negligence or inaction on the part of the applicant, to whom want of bona fide is imputable. There can be instances where the Court should condone the delay; equally there would be cases where the Court must exercise its discretion against the applicant for want of any of these ingredients or where it does not reflect 'sufficient cause' as understood in law. [Advanced Law Lexicon,P. Ramanatha Aiyar, 2nd Edition, 1997] The expression 'sufficient cause' implies the presence of legal and adequate reasons. The word 'sufficient' means adequate enough, as much as may be necessary to answer the purpose intended. It embraces no more than that which provides a plenitude which, when done, suffices to accomplish the purpose intended in the light of existing circumstances and when viewed from the reasonable standard of practical and cautious men. The sufficient cause should be such as it would persuade the Court, in exercise of its judicial discretion, to treat the delay as an excusable one. These provisions give the Courts enough power and discretion to apply a law in a meaningful manner, while assuring that the purpose of enacting such a law does not stand frustrated. We find it unnecessary to discuss the instances which would fall under either of these classes of cases. The party should show that besides acting bona fide, it had taken all possible steps within its power and control and had approached the Court without any unnecessary delay. The test is whether or not a cause is sufficient to see whether it could have been avoided by the party by the exercise of due care and attention. [Advanced Law Lexicon, P. Ramanatha Aiyar, 3rd Edition, 2005]."

6.3 In yet another recent decision of the Apex Court rendered in case of Office of the Chief Post Master General. v. Living Media India Ltd.[2012] 348 ITR 7/207 Taxman 163/20 taxmann.com 347 (SC), in absence of plausible and acceptable explanation, the Court refused to condone the delay mechanically only because it was a Government Wing, by observing thus —

"27. It is not in dispute that the person(s) concerned were well aware or conversant with the issues involved including the prescribed period of limitation for taking up the matter by way of filing a special leave petition in this Court. They cannot claim that they have a separate period of limitation when the Department was possessed with competent persons familiar with Court proceedings. In the absence of plausible and acceptable explanation, we are posing a question why the delay is to be condoned mechanically merely because the Government or a wing of the Government is a party before us."

7. From the explanation rendered by the applicant, it can be noted that the same is if general terms. The Department appears to have sent a proposal to the Finance Department, which had approved it on 2nd February, 2013 and after the same was received back alongwith necessary papers and orders permitting the Office of the Government Pleader to file Tax Appeal, it appears that the Tax Appeal which was to be filed on or before 3rd August, 2009, came to be filed after huge delay of 1371 days.. What is stated for explaining such delay is that due to Government administrative mechanism, within the statutory time period, tax appeal could not be filed. In absence of any specific details and explanation, this explanation in general terms does not satisfy us. There can be no straight-jacket formula adopted which can be applied uniformly in all matters, without considering the facts and circumstances of the case. In absence of any satisfactory explanation coming forth for condonation of delay, we are of the opinion that no liberal attitude requires to be adopted; particularly considering the inordinate delay in preferring this Application. Only because the applicant is the State, it cannot be absolved of its responsibility to fulfil the mandate of law. Even if day today explanation is not desired, for a long period after the sanction of Finance department also, nothing emerges on record to indicate due care or diligence to satisfy the requirement of explaining sufficiency of cause.

8. As a parting note, we would like to specifically mention that dismissal of the appeal preferred by the applicant consequent to rejection of this application for condonation of delay is neither going to have any far reaching ramification on the exchequer, nor would it result into denying an opportunity in respect of the substantial question of law, which may jeopardize the State's interest in the assessment year in question or beyond the same.

9. Resultantly, this application for condonation of delay fails and consequently, Tax Appeal {Stamp} No. 1345

Gains from sale of land isn't business income if land is held with an intention to carry agricultural operations

IT : Where intention of assessee from inception was to carry on agricultural operation on land in question, gain from its sale could not be taxed as profit arising from adventure in nature of trade, merely because of short period of holding

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[2013] 36 taxmann.com 545 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'B'

Tulla Veerender

v.

Additional Commissioner of Income-tax, Range-6*

SAKTIJIT DEY, JUDICIAL MEMBER
AND CHANDRA POOJARI, ACCOUNTANT MEMBER

IT Appeal Nos. 550 & 551 (Hyd.) of 2012
[ASSESSMENT YEAR 2007-08]

JULY  4, 2013 

Section 2(13), read with section 2(14), of the Income-tax Act, 1961 - Adventure in nature of trade [Land dealings] - Assessment year 2007-08 - Assessee purchased land and leased it for purpose of cultivation - Soon after, lease was cancelled and land was sold - Assessing Officer held that amount received on sale was on account of adventure in nature of trade, and taxed same as business income - Whether, where land in question was classified as agricultural land in revenue records, mere future possibility of non-agricultural use would not change character of such agricultural land at time of sale - Held, yes - Whether, therefore, mere fact that land in question was bought by a developer cannot be a determining factor to say that land was converted into use for non-agricultural purpose - Held, yes - Whether presence of intention to trade at inception is an essential prerequisite in an adventure in nature of trade - Held, yes - Whether, therefore, where intention of assessee from inception was to carry on agricultural operations on land in question, which was later sold due to compelling circumstances, gain from sale of such land could not be taxed as profit arising from adventure in nature of trade, merely because land was sold in a short period of holding - Held, yes [Para 78] [In favour of assessee]

FACTS

 

■		The assessee, along with other co-owners, acquired agricultural land used for cultivating grapes on 8-9-2005. Thereafter, the assessee floated a company, VVT Ltd. for carrying on agricultural operations. The assessees and the co-owners entered into a lease agreement with VVT Ltd., whereby the entire land was to be given on lease for purpose of cultivation. Later, the lease was cancelled on 29-9-2006 and the agricultural property was sold soon thereafter.
■		The Assessing Officer held that the amount received on sale of the agricultural property was on account of adventure in the nature of trade and taxed the same as business income. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer, holding that the assessee was not a regular agriculturist and earned income from business and other sources.
■		On assessee's appeal:

HELD

 

■		In the facts of the present case, the land in question is classified in the revenue records as agricultural land and there is no dispute regarding this issue. Actual cultivation has been carried out on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the assessee had not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land. [Para 66]
■		It is an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon, or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee, does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped, and mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. [Para 68]
■		No material or evidence in support of the fact that the assessees had put the land in use for non-agricultural purposes was brought on record. The nature of the crop and the person who cultivated the land are duly mentioned in the assessment order, which shows that at the relevant point of time the land was used for agricultural purposes only. In view of the decision of the High Court in the case of Gopal C. Sharma v. CIT(209 ITR 946) (Bom), it is also clear that the profit motive of the assessee in selling the land without anything more by itself, can never be decisive to say that the assessee used the land for non-agricultural purposes. The fact that agricultural land in question is included in urban area is not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by a developer, cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes. [Para 68]
■		Gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. [Para 73]
■		It is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii), as the land is outside of any municipality. Clause (b) of section 2(14)(iii) prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette. [Para 76]
■		In the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality. Therefore, assessee's land does not come within the purview of section 2(14)(iii) either under sub-clause (a) or (b), hence, the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. [Para 77]
■		From the facts and circumstances of the case, the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time, is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception which is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later, it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case, it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations, and with this intention assessee entered into lease agreement with VVT Ltd. on 25-10-2005 and even there was no intention to sell the land in future at that point of time. It was due to certain compelling circumstances which came into picture at a later stage that the assessees were forced to sell the land. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade. [Para 78]
■		Further, it is clear that when the land which does not fall under the provisions of section 2(14)(iii), and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land on 'as it is and where it is basis', in such circumstances, such transfer cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, the ground raised by the assessees is allowed. [Para 79]

CASES REFERRED TO

 

G. Venkataswamy Naidu & Co. v. CIT [1959] 35 ITR 594 (SC) (para 34), CIT v. Jawahar Development Association [1981] 127 ITR 431 (MP) (para 35), Smt. Indramani Bai v. Addl. CIT [1990] 200 ITR 594/70 Taxman 67(SC) (para 35), P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) (para 35), Hemachand Hirachand Shah v. CIT [1994] 206 ITR 55/[1995] 83 Taxman 626 (Guj.) (para 35), Mahaveer Enterprises v. UOI [2000] 244 ITR 789/[1997] 95 Taxman 220 (Raj) (para 43), Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631/70 Taxman 301 (SC) (para 45), M.K. Abdul Rehiman v. Dy. CIT [2011] 16 taxmann.com 406/[2012] 49 SOT 267 (Coch) (para 46), Rockman Cycle Industries Ltd. v. CWT [2010] 191 Taxman 399 (Punj. & Har.) (para 46), ITO v. Anthony John Pareira [2008] 24 SOT 459 (Mum) (para 47), Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) (para 48), CIT v. Smt. Debbie Alemao [2011] 331 ITR 59/196 Taxman 230/[2010] 8 taxmann.com 243 (Bom) (para 49), K. Radhika v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 (Hyd.)(para 50), CIT v. Siddharth J. Desai [1983] 139 ITR 628/10 Taxman 1 (Guj) (para 59), CWT v. Officer-in-charge(Court of Wards) [1976] 105 ITR 133 (SC) (para 60), Dr. Motibhai D. Patel (No. 2) v. CIT [1981] 127 ITR 671/5 Taxman 147 (Guj.) (para 61), CWT v. H.V. Mungale [1984] 145 ITR 208/[1983] 12 Taxman 201 (Bom) (para 62), CIT v. Manilal Somnath [1977] 106 ITR 917 (Guj) (para 63), Gopal C. Sharma v. CIT [1994] 209 ITR 946/72 Taxman 353 (Bom) (para 64), CWT v. E. Udayakumar [2006] 284 ITR 511 (Mad.) (para 65), CIT v. Smt. Savita Rani [2004] 270 ITR 40/[2003] 133 Taxman 712 (Punj. & Har.) (para 65), N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 (para 68), CIT v. Madhukumar N. (HUF) [2012] 208 Taxman 394/23 taxmann.com 341 (Kar) (para 69), Dy. CIT v. Arijit Mitra [2011] 48 SOT 544/16 taxmann.com 66 (Kol) (para 70) and M.S. Srinivasa Naicker v. ITO [2007] 292 ITR 481/[2008] 169 Taxman 255 (Mad) (para 77).

S. Rama Rao for the Appellant. D. Sudhakara Rao for the Respondent.

ORDER

 

Chandra Poojari, Accountant Member - The above two appeals by different assessees are directed against different orders of the CIT(A)-IV, Hyderabad dated 31.1.2012 for A.Y. 2007-08.

2. The assessees have raised various grounds of appeal. However, the crux of the grounds is that the CIT(A) erred in treating the income arose out of sale of agricultural land as business income being adventure in the nature of trade though it is an exempted income as capital gain. The facts in both the cases are similar in nature. For convenience purpose, we consider the facts narrated in the case of Sri Tulla Veerender, Hyderabad in ITA No. 550/Hyd/2012.

3. Brief facts of the case are that the assessee in his return of income for A.Y. 2007-08 had declared total income of Rs. 5,51,23,570 which included long term capital gain of Rs. 5,33,41,751. In the note given in the computation of income the assessee had stated as under:

"The assessee owns the agricultural lands admeasuring 25 acres and 34 guntas in survey No. 227, 228, 229 bearing patta No. 562, pass book No. 431863 situated at Mankal village in Maheswaram Mandal of R.R. Distt. whose cost as already reported in the earlier A.Y. 2006-07 is Rs. 5,25,61,860. During the year, i.e., 2007-08, the assessee has sold the entire land on 1.12.2006 to M/s. Prajay Holding Pvt. Ltd. for a total consideration of Rs. 24,81,60,000. A Photocopy of the sale deed is herewith enclosed.

The said lands are situated more than 8 Km from the local limits of any Municipality or Cantonment Board. Mankal village, having less than 10,000 population due to which the agricultural lands in question are outside the definition of the asset within the meaning of sec. 2(14) of the IT Act. The Agricultural lands are actually grape gardens which are assessed to revenue also, as such any gain whether Long term or short term is not gain taxable under the Act. These lands were purchased by the assessee during the A.Y. 2006-07 for a total consideration of Rs. 5,25,61,860 and the same fact had been disclosed in the IT Return filed for the A.Y. 2006-07. The net gain of Rs. 19,55,98,140 is not taxable as such the same is not considered in the computation of income."

4. On verification of facts and records, it was noticed by the Assessing Officer that the assessee, along with his brother Sri Vijayender Tulla, aunt Dr. E. Adilakshmi, and brother-in-law Sri M. Ravindcr, had purchased total area of acres 85.23 guntas agricultural land from Sri B.K. Khosla, his wife Satish Khosla and his two daughters, Vani Kumra and Richha Mahindru of New Delhi vide various registered deeds dated 08-09-2005. The details of the purchase of property by the assessee and the three other relatives were as below:

S.No.	Name of the buyer	Name of the seller	Address	Land (Acres: Guntas)	Consideration
1.	T. Veerender	Vani Kumra	26, Bungalow, Kamala Nagar, New Delhi	25.34	5,25,61,860
2.	T. Vijayender	B.K. Khosla	-do-	13.19	2,42,55,000
3.	T. Vinayender	Satish Khosla	-do-	6.32	1,22,40,000
4.	T. Vijayender	Vani Kumra	-do-	6.23	1,18,35,000
				26.24	5,29,22,580
5.	E. Adilakshmi	Richa Mahindru	-do-	24.07	5,00,00,000 (approx)
6.	M. Ravinder	-do-	-do-	6.10	1,20,00,000 (approx)
				85.32	17,00,00,000 (approx)

5. The Assessing Officer found that on these lands agriculture in the form of cultivating grape gardens was being carried on for past several years. On acquiring these lands, a company by the name, M/s. VVT Agritech Pvt. Ltd., (hereinafter called as M/s. VVT) was incorporated on 26.10.2005, whose promoters and shareholders were the assessee and his brother, Sri Vijayender. The company was incorporated to carry on the business of agriculture and several other related activities, which have been mentioned in detail in the Memorandum of Association of the company. The Assessing Officer noticed that the authorized and the paid up share capital of the company was Rs. 1,00,000, which had been subscribed by the two brothers Sri Veerender and Sri Vijayender in the ratio of 50% each.

6. On 25.10.2005, a lease deed had been entered between all the four owners of freshly purchased land, viz., Dr. E. Adilakshmi, Sri Veerender Tulla, Sri M. Ravinder and Sri Vijayender Tulla, as lessors, with M/s. VVT as lessee, wherein the entire grape orchard admeasuring acres 85 and 22 guntas was given on lease with effect from 25.10.2005 on the following terms:

(a)

Yearly rent for this entire land was fixed at Rs. 12.80 lakhs. Each lessor was to receive following annual lease rent:

	Dr. E. Adilakshmi	- Rs. 3,50,000
	M. Ravinder	- Rs. 1,50,000
	T. Vijayender	- Rs. 3,97,500
	T. Veerender	- Rs. 3,82,500

		These payments were exclusive of all taxes and other maintenance of the premises.
(b)		That the lease is commenced from 26.10.2005 for a period of one year. However, lessee shall be entitled to exercise his option by giving 2 months advance written notice to the lessors to continue the lease for a maximum period of three years, subject to the condition that 10% of the lease shall be increased every year.
(c)		That the lessee shall pay regularly electricity consumption charges, other taxes etc.
(d)		That the lessee will carry on the agricultural activity in the name and style of VVT AGRITECH PVT. LTD.
(e)		That the lessee shall not run any business other than the development of grape garden as specified in this agreement.

7. On further verification, it was found by' the Assessing Officer that M/s. VVT had filed its returns for two years only, i.e., A.Ys. 2007-08 and 2008-09. On calling for information from M/s. VVT, it is seen that all the receipts and expenses for the period from the start of lease in October, 2005 to 31.03.2006 had been included in the return for A.Y. 2007-08. It was noticed that the total sale of grapes had been shown for A.Y. 2007-08 at Rs. 39,15,951, while expenses were claimed at Rs. 65,86,309, thereby declaring the net loss of Rs. 26,67,142. The payment of lease rent of Rs. 12,80,000 had been debited to the expenses of the company. Expenses under the head material and direct expenses had been debited at Rs. 22,59,806, diesel expenses at Rs. 6,13,368, salaries at Rs. 1,65,555 and labour charges at Rs. 16,90,423, various administrative expenses were debited at Rs. 4,90,651. For the A.Y. 2008-09, sale of grapes is shown at Rs. NIL and no expenses under the head material and direct expenses, salaries and wages were shown, except for small administrative expenses of Rs. 22,450.

8. It was further noticed that the four owners of the land, including the assessee and M/s. VVT had later entered into a deed of cancellation on 29.09.2006, wherein it was mentioned that since the lessors proposed to sell the scheduled property and had informed the lessee in this regard and the lessee has accepted the same, the lessors and the lessee had mutually came to an understanding to cancel the said lease deed and reduce the same into writing. Therefore, it was found that the lease deed had been cancelled w.e.f. 29.09.2006, as the assessee and the other three persons intended to sell the land. However, it was noticed that the lease amount of Rs. 12,80,000 was shown as payable to the four persons.

9. The Assessing Officer further noticed that subsequently, a Memorandum of Understanding was signed on 15.9.2006, that is exactly within one year of purchase of the land by assessee, between Sri M. Ravinder, E. Adlakhshmi and Sri T. Vijayender and a private limited company viz., M/s. Prajay Holding Pvt. Ltd., wherein it is mentioned that due to various financial commitments of the party of the first part, the owners have decided to sell the scheduled property. It was also mentioned that the company, being a leading developer in the city and a renowned construction company, anticipating good development opportunity in the said property, have decided to buy the scheduled property from the owners. A second Memorandum of Understanding was entered between Sri T. Vijayender and the same company i.e., M/s. Prajay Holding Pvt. Ltd., expressing the intention to sell and buy the property on the same date. At the time of these MOUs on 15.09.2006, an advance of Rs. 3,00,00,000 was received by Sri Vijayender, besides the advance of Rs. 2.5 crore each by Sri T. Veerender and Dr. E. Adilakshmi and one crore by Sri M. Ravidner.

10. It was noticed that the sale consideration had been fixed at Rs. 96 lakh per acre and the entire amount of Rs. 23,54,40,000 was received by Sri T. Vijayender at the time of final registration of the sale deed in January, 2007. The entire land of Ac. 79. 32 guntas purchased by four persons, including the assessee, had been sold/entered into agreement with M/s. Prajay Holding Pvt. Ltd., for Rs. 76 crores approximately, as below:

S.No.	Purchased from	Address	Type of documents No. & Date	Survey Nos.	Extent (Ac : GTS)
A. Purchase
1.	Dr. A. Adilakshmi	-2-598, Rd. No. 8, Banjara Hills, Hyderabad-34.	SD No. 586/ 2007 dated 10.1.2007	43, 49, 65, 66, 67	23.07
2.	Mr. T. Veerender	8-2-503, Rd. No. 7, Banjara Hills, Hyd-34.	SD No. 990/ 2007 dated 20.01.2007	27, 28, 29, 30, 31 & 32	25.34
3.	Mr. Vijayender	-do-	SD No. 3059/2007 dt.31.3.2007	65, 66, 67, 69, 70 & 71	13.19
4.	Mr. Vijayender	-do-	SD No. 3061/2007 dt.31.1.2007	43, 65, 66, 67, 70, 71, 72	06.32
5.	Mr. Vijayender	-do-	SD No. 3060/2007 dated 31.3.2007	65, 66, 69, 70 & 72	04.10
6.	Mr. M. Ravinder	3-6-100/1, West Marredpally, Secunderabad-26	SD No. 2051/2007 dated 1.2.07	41 & 42	06.10
				Sub Total	79.32
B. Development Agreement
7.	Mr. M. Ravinder	3-6-100/1, West Marredpally, Secunderabad-26	Dev. Agt./ GPA Doc No. 3700/07 dt. 1.2.2007	41 & 42	03.27
8.	Mr. Vijayender	8-2-503, Rd. No. 7, Banjara Hills, Hyd-34.	Doc. No. 3699/07 dt. 31.1.2007		02.13
				Total	85.32

11. On a consideration of the above facts, the Assessing Officer observed that land of about 25 acres had been purchased for more than Rs. 5 crore in September, 2005, given on petty lease to a newly created company, and sold after one year in September, 2006 for about Rs. 24 crore to a real-estate builder. Significantly, she noted that the assessee and Sri M. Ravinder had kept about 2.13 and 3.27 acres of land, respectively, with them and had given it for development purposes to the same company, within the same Integrated Township. They were to get back 30 to 40% of the constructed area from the developer in the said Township. She, therefore, opined that the entire arrangement with the leading real estate developer of the city showed the acumen of the assessee as a seasoned business person to exploit the then over-hyped real-estate economy of Hyderabad and its surrounding areas.

12. During the course of assessment proceedings, the Assessing Officer proceeded to find out the intention of the assessee behind these transactions, whether the same was to hold the land as an investment and earn agricultural income therefrom or it was a venture in the nature of trade wherein the intention was to sell the land from the beginning itself in the ever spiralling real estate market of Hyderabad at the relevant time.

13. On delving into the Agricultural history of the impugned lands, the Assessing Officer noticed that all these agricultural lands were owned by the family of Sri B.K. Khosla, consisting of his wife Smt. Satish Khosla, and daughters Richha Mahindru and Vani Kumra. They were in possession of these lands for close to one and half decade and grape cultivation was being carried out on these lands. There were three farms, by the name M/s. Eastern Farms, M/s. Khosla Farms and M/s. Vani Farms, wherein all these four family members were partners. These farms were showing agricultural income from the sale of grapes. It was significantly noted that for years together grape cultivation was being done on these lands and the sale proceeds from the grapes grown in these farms were shown as under:

Eastern Farm

Financial year	Gross Proceeds (Rs.)	Net Proceeds (Rs.)
2005-06	74,81,086	62,74,518
2004-05		17,39,000
2003-04	52,63,191	26,44,710
2002-03	54,56,338	26,88,602
2001-02	46,97,634	22,05,440

Khosla Farm

Financial year	Gross Proceeds (Rs.)	Net Proceeds (Rs.)
2005-06	64,81,880	49,45,534
2004-05		17,00,000
2003-04	92,78,372	40,04,137
2002-03	96,27,396	43,90,582
2001-02	81,02,480	33,02,827

Vani Farm

Financial year	Gross Proceeds (Rs.)	Net Proceeds (Rs.)
2005-06	52,23,077	45,64,808
2004-05	33,61,610	13,87,509
(It was created during the year)
2003-04	7,16,142	3,18,141

14. The Assessing Officer noted that since entire land was with the said three firms, and on the entire land grape gardens had been grown, the year-wise income from these lands was almost more than Rs. 50 lakhs, consistently for several years. In some years, in fact, it was close to Rs. 70 lakhs to Rs. 80 lakhs also. The Assessing Officer felt that these figures are significant to know the true capacity of the lands to give agricultural revenue and to arrive at the intention of assessee by seeing what treatment was accorded by assessee to land of such productivity.

15. It was further noted by the Assessing Officer that the crop grown was of a high quality and was being exported to Europe by M/s. Eastern Exports, a family concern of the earlier owners. A certificate of quality production had also been issued by EUREPGAP, some European body. The details of income from grape cultivation on these lands for all the above years clearly showed that rich harvests were being received year after year. The land, therefore, was very strongly established for its good quality grape cultivation.

16. However, the Assessing Officer noticed that immediately on purchase of the land, the total land of acres 85.24 guntas, was given on lease rent of merely Rs. 12.8 lakhs per year to M/s. VVT, even though the total cost of purchase of land for all the four persons was Rs. 17 crore. She noted that M/s. VVT shares were wholly owned by Sri Veerender and Sri Vijayender in the ratio of 50% each and, therefore, Sri M. Ravinder and Dr. E. Adilakshmi, the two other owners of the land, were not to get a single penny more than the lease rental income of Rs. 1.5 lakhs and Rs. 3.5 lakhs per year. She particularly noted that this petty income was accepted by these persons from M/s. VVT, even though the actual agricultural income from this land was several times more consistently for past one decade. Even M/s. VVT had reported a net loss of Rs. 26 lakhs out of gross receipts of Rs. 39,15,000 in the A.Y. 2007-08 while nil income/receipts was shown for A.Y. 2008-09 by them. Further, it was seen that the lease deed entered with M/s. VVT was only for one year initially.

17. In view of the above facts, the Assessing Officer observed that the facade of M/s. VVT got fully exposed from the above arrangement. She further noted that as per accounts of M/s. VVT, the said company had incurred various expenditures mentioned below, up to various dates, which are broadly as under:

Labour charges	- up to 03.05.2006
Misc. Expenses	- up to 02.05.2006
Printing and Stationery	- up to April, 2006
Repair and maintenance	- up to April, 2006
Salaries	- up to 02.05.2006

18. From the above, the Assessing Officer noticed that after April, 2006, no activities on the said agricultural land were undertaken. Therefore, she concluded that these facts showed that the assessee did not have the intention to actually carry on agriculture on the said lands since the very beginning. She noted that at the time of purchase of the said land in September, 2005, a new crop started to come. However, after harvesting the same, no agriculture activity was continued with. The Assessing Officer opined that the intention of not carrying out agricultural activities did not come in April, 2006, but existed since the time of purchase of land itself, as otherwise, no prudent agriculturist would have given the land on rent of merely three lakh Rupees per year, even though it was giving income of several more times consistently for past several years.

19. In view of the above findings, the Assessing Officer issued a show-cause letter dated 05-11-2009 to the assessee, requiring him to explain as to why the deal should not be considered as an adventure in the nature of business in the light of facts of the case. The submissions of the assessee vide his letter dated 13-11-2009 have been reproduced in the assessment order as under:

(b) Basically assessee is from agriculture family and the land was purchased as an investment. The main view in purchasing the grape gardens was to export grapes. Since, it is difficult to export grapes individually and also to export grapes in huge quantity the assessee has floated a company with himself and brother as promoters. Further, both the promoters have taken on lease the grape gardens from their auntie (Dr. E. Adilakshmi) and brother-in-law (M. Ravinder). These lands were taken on lease to export more quantity of grapes. The very reason in floating the company shows that the purchase of land is for investment and not for re-sale. Therefore, in appreciating these facts your opinion of taking adverse opinion is not correct. By floating a company it cannot be said or come to the opinion that the assessee has purchased land for business purposes. There is no bar in law that two persons float a company take on lease the land from other persons and it should not be a decisive factor. The land in question is a grape garden, was existing at the time of purchase. Nobody while purchasing the lands ever dreamt that rise in market price will be manifold i.e., four to five times in a short period ...

The Central Board of Direct Taxes in its instruction No. 1827 dated 31.8.1999 had laid down certain test of distinguishing between properties held as stock-in-trade and as an investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader or an investor -

Land is not a commercial commodity. Land alone is also not a trade in itself. Normally the purchase of land represents investment of money in land. A transaction of purchase of land cannot be assumed without more facts to be a venture in the nature of trade. An investment in purchasing a property is also made with a view to earning returns on the same investment. Therefore, the mere fact that a person invested money for the purpose of reselling whenever a suitable opportunity arises does not give a substantive ground to hold that the transaction is in the nature of trade. Deep Chandra & Co. v. CIT 107 ITR page 716 (All), CIT v. Jawahar Development Association, 127 ITR 431 (MP), Bhageerath Prasad Pilgaiya v. CIT 139 ITR 916 (MP.)

And lastly your observation is of no use in citing the case laws is in correct and it appears only that you have predetermined mind in the case.

20. The assessee made the following further submissions vide his letter dated 11-12-2009:

"If a person invests money in land with an intention to hold it enjoys its income for some time and then sells it at profit, it would be a clear case of capital accretion and net profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale though profitable, are clearly outside the domain of adventure in the nature of trade. In deciding the character of such transactions several factors are treated as relevant—

The following case laws have been quoted;

(a)		Venkata Swamy Naidu & Co. v. CIT, 35 ITR 594 (SC)
(b)		Michael A. Kallivayalil v. CIT, 102 ITR 202 (Ker)
(c)		Saroj Kumar Mazumdar v. CIT, 37 ITR 594 (SC)
(d)		Janaki Ram Bahadur Ram v. CIT 57 ITR 21 (SC)
(e)		CT v. Dhable, Bobde, Parose, Kale, Lute and Choudary, 202 ITR 98 (Bom)
(f)		Fort Properties Pvt. Ltd. v. CIT 208, ITR 232 (Bom)
(g)		CIT v. Kasturi Estates Pvt. Ltd., 62 ITR 578 (Mad)
(h)		CIT v. Mohanuned Mohiddeen, 176 ITR 393 (Mad)
(i)		ACIT v. Ashok Motilal Kataria, 308 ITR (AT) 298 (Pune)

7. To sum up ordinarily whether a person acquired land with a view to selling it later after developing it and actually divided the land into plots and sold the same in parcels the activity could only be described as a business adventure. Generally, speaking the original intention of the party in purchasing the property, the magnitude of the purchase of the property, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transaction afforded valuable guides in determining whether the assessee was carrying on trading activity and whether a particular transaction should be stamped with the character of a trading adventure. CIT v. V.A. Trivedi, 172 ITR 95 (Bom) ...

12. Actually the intention of the assessee at the time of purchase of agricultural land with grape garden was to export grapes as the grape garden is of seedless grapes and high quality. With that view only in order to have export benefit on the export of huge quantity of grapes the assessee along with his brother have formed a private limited company by taking also on lease the agricultural lands which were adjacent to the assessee's lands with grape garden as already submitted after exporting the seedless grape for 7 days it caught the viral mealy bug resulting thereby the grapes were not fit for export. Meanwhile the market price of the lands has gone up to such an extent that in order to make good profit the assessee has sold the lands in question and by selling the very character or nature of the lands has not changed and as was in the case of Deepchandra & Co. v. CIT, 107 ITR 716 (All) and CIT v. Jawahar Development Association, 127 ITR 431 (MP) land is not a commercial commodity. Land alone is not a trade and itself. Normally the purchase of land represents investment of money in land. The transaction of purchase of land cannot be assumed without more facts to be a venture in the nature of trade ...

14. As already submitted in the computation of income the agricultural lands in question are 16 Km. away from the local limits of Greater Hyderabad Municipal Corporation at Mankhal (v) of Maheswaram Mandal of R.R. District. These lands are not an asset within the meaning of capital asset u/s. 2(14)(iii)(a) or (b). As such they are not capital assets under the Income-tax Act, and on sale of agricultural lands the capital gains whether Long/ Short are not taxable"

21. The assessee made further submissions vide his letter dated 24.12.2009 as under:

"2. The assessee claimed the said gain as 'revenue derived from land' exempt from income tax under section 10(1) in terms of Explanation 1 under clause (1A) of section 2, since the said lands are agricultural lands upon which agriculture has been carried on and these lands are not situated in any of the areas specified in sub-clause (iii) of clause 14 of section 2.

5. The lands are classified as agricultural lands in the revenue records. The land has not been subjected to any plotting or development by way of roads and other facilities. In fact the lands have farm buildings comprising of workers' quarters and office besides machinery to grade and process the grapes for export. The lands are used exclusively for agricultural operations for growing grapes and processing them for export. No other activities are permitted on the said lands by the assessee or the lessee (VVT Agritech).

6. On the basis of the above facts it is submitted that the land is agricultural land and the gain sale. thereof is characterized as agricultural income in terms of section 2(1A) and exempt under section 10(1) of tile Act. In this connection, the assessee draw support from the decision of Bombay High Court in the case of CIT v. Minguel Chandra Pais (282 ITR 618) (2006) wherein the court laid certain criteria for deciding whether a land constitutes agricultural land on the basis of Supreme Court decision in the case of Sarifabibi Mohmed Ibrahim v. CIT (204 ITR 631) [1993). The agricultural lands owned by the assessee fulfil all the conditions in this regard. The court also cited the decisions of Gujarat High Court in the case of CIT v. Manilal Somnath. (106 ITR 917) and held that merely because a purchaser may be prepared to pay a large price for the potential non-agricultural value of the land, it would not detract from the character as agricultural land on the date of sale.

8. Once the land is held to be agricultural land, the gain on sale of the same would be classified as agricultural income falling under section 10(1) of the Act. The Supreme Court in the case of CIT v. Williamson Financial Services (297 ITR 17) (2008) held that once an income is treated as agricultural income, the same is not only exempt but is also to be excluded from computation of total income and therefore, does not fall under section 14 and under the various computation sections, sections 15 to 59. it is, therefore, submitted that on the gain being classified as agricultural income, the contention that it is an adventure in the nature of trade and taxable under the head 'income from business' is not correct.

11. As the yield from the crop has been drastically affected due to 'mealy buy' disease, the assessee could not continue the business and instead proposed to sell the lands together with the standing crop to others to mitigate future losses. The sale is made with an intent to mitigate the losses arising from grape plantation. The gain is incidental to the intent of disposing the property and is a capital accretion which cannot be termed us 'adventure in the nature of trade'. The sales are mode in the measure of acreage and not yardage. The assessee has sold the grape garden: along with the appurtenant farm buildings and equipment."

22. On a consideration of the submissions of the assessee, a final show-cause notice letter was issued to the assessee on 24.12.2009. In response, the assessee made further submissions vide letter dated 29.12.2009 as under:

"(1)		In your above reference letter in para-02 your observation that the assessee not taken any steps either preventive or treatment of Mealy bug is not correct. Mealy bug is a common pest and once affected it will destroy the grape within two weeks. The assessee who has started exporting grapes to U.K. and the container of grapes for export from India to U. K. will normally take two to three weeks to reach its destination and by the time they reached the grapes are unfit for human consumption. Mealy bug which has affected the assessee farm severely and in spite of treatment could not be eradicated completely. The assessee has taken preventive medicines like Methomyl 40 SP (Trade name Lannate 40 SP), Dichlorvos (Trade name Nuvan) other medicines and predators (Useful insects). Though all the records relating to VVT Agritech are with you out of remembrance we are able to furnish the above information. The above medicines have been purchased by the assessee adequately from M/s. Vanasri Seeds (P) Ltd., Hyderguda, and Rekha Corporation Pvt. Ltd., Basheerbagh, Hyderabad for the prevention and eradication of Mealy bug. In spite of his efforts the assessee could not totally eradicate the pest mealy bug and it is only on the advice of Grape Consultant Mr. A. Appa Rao, MSc. (Agri), Banjara Hills, Hyderabad was seriously contemplating to destroy the entire plantation. This was happened in the later part of April-2006.
(2)		Due to the mealy bug the assessee could not supply the grapes for exports to its capacity. It is only the supply for export was affected for only 7 days due to which the revenue from sale was minimum which could not even meet the expenditure and finally VVT Agritech ending up in losses.
(3)		It is at this stage the land prices in and around area where the farms are located risen to maximum and the assessee and co-owners of farmland have received good offers for the sale of land which was under the active consideration of the assessee and other co-owners. Ultimately the assessee and others co-owners have agreed to sell the farmland to M/s. Prajay Holding Pvt. Ltd. and others. Due to this reason only no significant activity was undertaken by the assessee from May, 2006. Due to this reason only no adequate labour payments or other payment were made from May, 2006. It must also be noted that the assessee and others have received advance money for sale in September, 2006.
(4)		What we submit that due to sudden rise in the market prices of the lands in that area the assessee and other co-owners like many others in that area have sold the properties.
(5)		It was never the intention of assessee and other co-owners at the time of purchase of lands to make profit out of it by selling but they wanted to have income earning by exporting the grapes as the lands were with the grape gardens. If at all the assessee and other co-owners could visualize increase in the market price at the time of purchase, so also original sellers of the farmland whose lands were there from long time could have visualised the same and in that case why should they sell the same particularly when they are financially well placed,
(6)		The assessee and other co-owners have purchased the properties with an intention to enjoy the income by making efforts to export the grapes. It is only on the favourable conditions the assessee has sold the properties. It is only a chance sale for the assessee.
(7)		We once again bring to your kind notice to para (17) of our letter dated 13.11.2009 wherein we submitted that land is no commercial commodity. Land alone is also not a trade in itself. Normally the purchase of land represents investment of money in land and it cannot be ventured in the nature of trade.
(8)		Lastly the claim of the assessee that the land in question is not an asset within the meaning of section 2(14) of the IT Act is correct and justified. There is no justification to hold the profit from the sale of land as business profit instead of capital profit."

23. The Assessing Officer has summarised the assessee's contentions in the above submissions as under:

"(a)		Intention of the assessee in the beginning was to do agriculture.
(b)		Low income from sale of grape in Assessment Year 2007-08 was due to Mealy Bug disease.
(c)		Due to the disease the crop was destroyed and assessee decided to sell the land.
(d)		At this time assessee started getting good price for the land and therefore decided to sell it.
(e)		Assessee is an agriculturist and he is from an agricultural family.
(f)		He is not a dealer in real estate business.
(g)		Assessee is basically an investor.
(h)		Since it is difficult to export grapes individually a company was floated with brother and had taken grape gardens from Aunt and Brother-in-law.
(i)		The reason for floating company shows that land was for investment and not for sale.
(j)		Agriculture land was shown as investment in the balance sheet.
(k)		CBDT's instruction No. 1827 dated 31-08-99 was quoted in his defence.
(l)		Commodities sold in short time itself will not indicate nature of trade.
(m)		Land is not an asset within section 2(14)(iii)(a & b).
(n)		They have purchased agricultural land in the subsequent years.
(o)		If assessee and co-owners could visualize increase in market price, at the time of purchase, so also earlier owners could have visualized this increase. Then why did they sell it.
(p)		Various case laws have been quoted in defence of assessee's arguments."

24. On a consideration of the above contentions, however, the Assessing Officer opined that those were not sufficient to dispel the presumption that the assessee's intention since the beginning was to sell the land on profits and not to hold as an investment and derive agricultural income from this. She opined that from the written words but by the chain of his actions, from the time of purchase of the property.

25. The Assessing Officer opined that for an agricultural land purchased for around Rs. 5 crore and having consistent healthy agricultural income for over a decade, the annual lease rent deed of Rs. 3.5 lakh could not be considered as genuine. She held that such a low value deed exposed the hollowness and falseness of the arrangement. She felt that the lease rent of as low as an amount as Rs. 12.8 lakh, exposed the fact that assessee never actually wanted to do agriculture on this land which in the past was producing high quality grapes which was being exported abroad. Besides, she noted that the lease deed was only for one year, which again highlighted the nature of the stopgap arrangement which was created till the land was sold. The Assessing Officer agreed that the investment in the land will be of higher value than the income received from it, but in the assessee's case the actual income being earned in the earlier years was several times more than Rs. 12.80 lakh of rentals fixed in the lease deed. She, therefore, held that this one act at the time of purchase of property singly brought out that from the day one the true intention was not to do the agriculture on this land.

26. The Assessing Officer opined that if the assessee did not know the real income being received from this land at the time of its purchase, it could only lead to the conclusion that the intention was never to do agriculture on this land. She observed that any agriculturist, who buys land with an intention to do agriculture, will invest in the land only after knowing what returns it will give to him as return. In the instant case, however, considering the agreed lease rentals of Rs. 12.8 lakh it was clear that the assessee was not even aware of potential of income from the land, or, in fact, he was not bothered about it. She, therefore, concluded that if the assessee knew the real income being generated from this land, a low rental of Rs. 12.8 lakh could not be justified. She held that the ignorance or carelessness on account of assessee to know the extent of income being generated clearly showed that his intention was never to earn agriculture income from this land. He actually wanted to sell it from the beginning and earn profit from the sale. That is why extent of agricultural income was immaterial to him.

27. The Assessing Officer further observed that even if a disease hits the crop, a genuine agriculturist will not immediately sell away the land, especially in the light of consistent agricultural income being drawn from it. She noted that the National Research Centre for Grapes (NRCG), Pune, which is an arm of Indian Council of Agriculture and Research, in its official site on the internet have enumerated various fungal diseases like Downy Mildew, Powdery Mildew, Anthracnose, various fungal diseases and pest based diseases like mealy bug, flea beetle, Thrips and hoppers etc., which regularly hit the grape crop in the country throughout the year and there are established treatments for them. Therefore, the attack of mealy bug disease in the assessee's case could not be said to be an exceptional feature, but a regular thing which has to be dealt with by any agriculturist of grape gardens. She, therefore, concluded that the argument of mealy bug disease is only an afterthought for explaining the sale of land. In fact, NRCG has stated that mealy bug is a disease which occurs throughout the year and since grape is a perennial crop, one has to look after full one year cycle of crop both in the vegetative growth period and fruit development period.

28. She further noted that the agricultural activity in this case was stopped in April, 2006, i.e. almost within 6 to 7 months of its purchase. Even though the agreement to sell land was entered in September, 2006 and the lease deed was cancelled in September, 2006. She felt that this showed that the assessee was never interested in the agriculture on this land. Therefore, after harvesting the crop in March/April 2006, for which the fruit had appeared at the time of purchase of the land, all the agricultural activities were abandoned.

29. It was further noted by the Assessing Officer that even though the assessee had stated in his reply that he is an agriculturist and is from an agricultural family, the facts of the case were totally different. She observed that the assessee himself had admitted that he is a businessman, as was apparent from all the sale/purchase deeds of the land, wherein the occupation of the assessee was mentioned as business. She noted that such a reference was not causal or by default, but a true indicator of the assessee's own version about himself. She noted that in an agricultural economy like India, a link with some agricultural family in some village alone cannot make a person an agriculturist.

30. In addition to the above observations, the Assessing Officer opined that even though ups and downs in agriculture is an accepted fact, the floating of a company by itself cannot prove the intention of doing agriculture. Similarly, the treatment of land as 'investment' in the balance sheet is also immaterial, particularly when the assessee's conduct speaks otherwise. She felt that even in view of the CBDT Circular dated 31.8.2009, the real conduct of the assessee is to be seen and in the assessee's case, it was clear that the real and true intention at the time of purchase of land was to sell it to earn profit from it. Similarly, she opined that purchase of land in subsequent year is also inconsequential

31. As regards, the argument of the assessee that the earlier owners also could have anticipated the price rise. The Assessing Officer opined that the same is only an attempt to put various facts of the case in a distorted way. She felt that there cannot be any comparison between status of earlier owners and the assessee, because there are crucial differences between them. She noted that the earlier owners were all residents of Delhi and Sri Khosla was doing his business from far-off Delhi in all the three years. Since they were not residents of Hyderabad, and their knowledge of the city and the economic boom could not be compared with first hand knowledge of the assessee in this regard. Besides, she noted that the earlier owners had purchased the land way back in mid-nineties and had been regularly doing grape cultivation in it. They had purchased it for very small amount, and the subsequent sale for several crore, had definitely fetched them multiple times of the value.

32. As regards the assessee's argument that the land under consideration was an agricultural land, and the same was situated in areas specified in sub-clause (iii) of clause 14 of section 2, and therefore, its income will be exempt u/s. 10(1), the Assessing Officer opined that such argument was of no significance. She noted that in this case neither the agricultural produce was being assessed as taxable income nor the transaction was being assessed as capital gains. She observed that in the instant case, purchase and sale of property, by its specific nature, was being assessed as an adventure in the nature of trade as per section 2(13) of the IT Act. The fact that the land is agricultural land is of no significance for being treated as adventure in the nature of trade.

33. The Assessing Officer also felt that the conduct of assessee was to be interpreted in the entire economic context of city of Hyderabad during the relevant period. She noted that the period when there was real estate boom in Hyderabad and its surrounding areas and the Urban Development Authorities had notified various villages including the Maheswaram village for special development meant for various in and around international Airport and Shamshabad. There were various specific notifications in this regard, which have been placed by her in the file. However, without going into the details, she considered it fit to mention that the overall conduct and intention of the assessee was to be examined in the overall economic context of that time and his intention to enter into this adventure to make quick profit.

34. Examining the facts of the case in the light of various legal pronouncements on this issue, the Assessing Officer noted that one basic principle which flows from each one of the case law, including those not quoted by assessee in his submission, is that the specific facts, considered in totality alone, will determine the conduct of assessee and will prove whether a particular transaction was in the nature of adventure of trade or not. She observed that even though the courts have laid down certain principles, those have to be interpreted in the light of particular facts and it is only with the conjunction of facts with the principles that a particular decision can be arrived at in a particular case. She particularly noted the decision of the Hon'ble Supreme Court in the case of G. Venkataswamy Naidu & Co. v. CIT[1959] 35 ITR 594, wherein it was opined that ".... The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive, and it is conceivable that, on considering all the facts and circumstances in the case, the court may despite the said initial intention, be inclined to hold that the transaction was an adventure in the nature of trade. We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances." She, therefore, opined that in view of such judicial pronouncements, a single transaction of purchase and sale outside assessee's line of business may constitute an adventure in the nature of trade. It is not essential for assessee to be in business in the line of real estate. She felt that the assessee's case falls in the category of adventure in the nature of trade, precisely because real estate transactions are not his regular business and assessee's conduct and intentions in the purchase and sale of this particular property puts him in the category of adventure in the nature of business.

35. The Assessing Officer noted that in various cases, such as CIT v. Jawahar Development Association [1981] 127 ITR 431 (MP) , Smt. Indramani Bai v. Addl. CIT [1990] 200 ITR 594/70 Taxman 67(SC), P.M. Mohammed Meerakhan v. CIT [1994] 73 ITR 735 (SC) and Hemchand Hirachand Shah v. CIT [1994] 206 ITR 55/[1995] 83 Taxman 626 (Guj.), on the specific conduct of assessee, it was held to be adventure in the nature of trade.

36. Lastly, the Assessing Officer referred to the Plato's Theory of 'Knowledge' and opined that one should not go by the 'appearance of reality', but comprehend the 'substance of reality'. She also took note of the maxim that "whole" is more than merely the mathematical sum total of the "parts" that constitute it. On a complete analysis of all the facts of the case and the conduct of the assessee since from the time of purchase of land to its sale, besides in the light of the economic scenario of the Hyderabad city during the period and the principles laid by Apex court for analyzing such a case, she concluded that the assessee had not purchased the land with an intention to do agriculture on it. Instead, the land had been purchased with the only intention of selling it at profit in the booming economy of Hyderabad. She had, therefore, summarised her finding in the assessment order as under:

"(a)		Assessee is not an agriculturist. He is a 'Businessman' by his own admission.
(b)		He purchased the agricultural land with sole motive of selling it on profit in view of, the then, real-estate boom in and around Hyderabad.
(c)		Actually no intention to do agriculture done; the floating of company VVT Agritech was a facade.
(d)		Claim of sale due to destruction of crop by mealy bug is contrary to his stated intention of doing agriculture. Any person doing agriculture of grapes would be dealing with this disease in a routine way.
(e)		Sale within a year to real-estate company for huge profit reflects the true state of entire adventure.
(f)		Keeping of a small part of land by Shri Vijayender & Shri M. Ravinder and giving it on development of Hi-end villas to same real estate company proves the point that it was adventure in trade and, therefore, the profits earned in this transaction are treated as adventure in the nature of trade and held as business income."

37. In the light of the above, the profit on sale of the impugned land of Rs. 19,55,98,140 was assessed as business income, being adventure in the nature of trade by the Assessing Officer. Similar is the position in the case of Sri T. Vijayender except change in figures.

38. On appeal to the CIT(A), it was observed by the CIT(A) that the assessee is not a regular "agriculturist" and assessee is earning income from business, capital gains and other sources. He has also observed that the assessee mentioned his status and occupation as business in the registered sale deed as business. It is also observed that mere assessees' family background being agriculture cannot lead to the conclusion that the assessees is 'agriculturist'. As in the present case the assessee sold the land in a short time after purchasing the same to M/s. Prajay Holding Pvt. Ltd., which is a construction company, for non-agricultural purposes after cancelling the lease agreement with M/s. VVT for huge consideration which leads to the conclusion that the assessees carried on the business in the land. According to the CIT(A), the intention of the assessee in acquiring the land is not for the purpose of carrying on agricultural activities on his own on the said land and with sole intention of selling the land for profit. According to the CIT(A), the assessees entered into lease agreement with M/s. VVT just to create a facade with a view to give semblance of doing of agricultural operations. Even after taking the land on lease by M/s. VVT there was no agricultural operation on the said land after payment of lease rent. The real intention of the assessee is not to carry on agricultural operations. He further observed that the company, VVT, was floated as it was difficult to export grape individually, it is clear that while the said company did not have any experience therein, the Directors thereof were also inexperienced in this area. As stated earlier, no expert had been employed to handle the agricultural operations or the export thereof. Therefore, floating of such a company itself could not have solved the problems likely to be faced in exporting grapes individually. Rather, the facts of the case clearly go to show that the said company was created as a facade only and not for any real agricultural operations.

39. The CIT(A) observed that one of the reasons cited by the assessee for dis-continuation of agricultural operations and sale of lands is that the grape crop caught the mealy bug virus, which rendered the grapes unfit for export. From the literature available on the internet on this issue, however, it is seen that diseases of this nature are common in grape cropping and effective treatment is available for them. Under the circumstances, mere affliction of the crop by such a disease could not have resulted in discarding of the so-called intention of carrying out agricultural operations altogether, and selling the land acquired at a huge cost. This strengthens the view that the initial intent in purchase of the land was not to pursue agriculture but to earn quick profits from sale of land in view of the emerging market conditions.

40. The CIT(A) observed that the entire scheme of the assessee, therefore, proves that while the basic intention was to earn huge profits by undertaking the above transactions, the assessee arranged the events in a manner to give it the colour of an intention of carrying out agricultural operations on the land acquired as an investment. However, the facts of the case clearly show that in substance the transaction only an adventure in the nature of trade.

41. He further observed that as regards the contention that the land so purchased had been treated as an 'investment' in balance sheet, it is a trite law that the treatment or nomenclature given by the assessee to any transaction in his books of account is not conclusive and is not the sole test to decide the real character of that account / transaction. Similarly, the argument that the assessee is not a dealer in real estate business is of no avail, as in the light of several judicial pronouncements, such as G. Venkataswamy Naidu (supra), even a single transaction can constitute a business. Likewise, the intention of the assessee regarding agricultural operations on the impugned land does not get substantiated from his subsequent purchases of land, as the issue to be determined is whether the impugned land had been purchased as an investment for carrying out agriculture.

42. The CIT(A) observed as regards the contention that the appreciation in the value of land could have been visualized by the earlier owners also, the Assessing Officer has rightly brought out that the assessee and his other co-owners, who hailed from Hyderabad itself, had a better knowledge of the economic boom, while the earlier owners from Delhi might not be having the real life knowledge of the economic scenario. Besides, their expectation of appreciation might also have been achieved, as they had already earned substantial return on their investments, both in the form of substantial agricultural produce over the years and the huge consideration received by them on sale thereof.

43. He observed that so far as the contention that the land under consideration was an agricultural land, sale whereof was to be exempt u/s. 10(1), it is seen that the land was in Maheswaram village, which had been notified, along with other villages by the Urban Development Authorities. Under the circumstances, the true nature of the land sold by the assessee is to be determined by applying the tests laid down by the Hon'ble Courts in this regard. It is seen that the Hon'ble Rajasthan High Court in the case of Mahaveer Enterprises v. UOI [2000] 244 ITR 789/[1997] 95 Taxman 220 have considered the following as the relevant tests, which can act as guidelines in determining the nature or the character of land as agricultural or otherwise:

(1)		The proximity of the land to building and building sites;
(2)		Sale of land for non-agricultural purposes.
(3)		Sale of land by a measure with reference to square yards and not acres.
(4)		Price being such as to be non-viable, if the land is put to agricultural use by the purchaser, while it is more consistent with the price fetched for urban plots than for agricultural land.
(5)		Character of the land.
(6)		The purpose for which the land was held by the present owner. A firm which holds it may well be presumed to have held it as stock-in-trade and not for carrying out agricultural operations.
(7)		As regards use of the land for agricultural purposes prior to sale, more use in remote past though land revenue is paid, would not make it agricultural.
(8)		Mere capability of being used as agricultural land is not enough.

44. The CIT(A) observed that applying the tests mentioned above, it can be seen that the land was sold at a time when there was a real estate boom in land around the city of Hyderabad and the Government was issuing various notifications for urban development, which included the Maheswaram village for Special Development meant for in and around the International Airport at Shamshabad. It was for this reason only that it was sold to a construction or Real Estate company, who purchased it not for agricultural operations, but obviously for developing the same. The criteria regarding 'measure of sale of land' in the instant case is not of much importance, as in this case the land was acquired in its entirety in terms of acre for the purpose of massive construction activities by a big construction company. Further, it is also clear that the price of Rs. 96 lakh per acre was non-viable, if the land was to be put to agricultural use by the purchaser. In view of these factors, as held by several judicial pronouncements, the 'character of land' mentioned in the revenue records also fades into insignificance. Even if any agricultural operations were at all carried on the impugned land during the intervening period, it is clear that the assessee was only waiting for an opportune movement for earning the best price in respect of the land, whose very use and status had changed after the notifications. Obviously, the mere capability of the land for being used as agricultural land cannot be considered as a decisive factor.

45. The CIT(A) opined that the Hon'ble Apex court in the case of Smt.Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631/70 Taxman 301 have clearly opined that whether a particular land is agricultural or not is essentially a matter of fact. In this regard their observation is that several tests evolving in the decisions on this issue are "more in the nature of guidelines". The question, therefore, has to be answered in each case, having regard to the facts and circumstances of that case. They had observed that there may be factors both for and against a particular point of view, and therefore, the question has to be answered on a consideration and evaluation of all of them. The inference, accordingly, has to be drawn on a "cumulative consideration" of all of the relevant factors. On a consideration of the relevant facts in the case of the present assessee, it becomes abundantly clearly that almost all of the tests laid down lead to the conclusive inference that the agricultural land sold by the assessee was not an agricultural land at the time of sale.

46. The CIT(A) observed that under similar facts even the Cochin Bench of the ITAT have taken a similar view in the case of M.K. Abdul Rehiman v. Dy. CIT [2011] 16 taxmann.com 406/[2012] 49 SOT 267 (Coch) by relying on the decisions discussed above. Besides, the decision of the Hon'ble P & H High Court in the case of Rockman Cycle Industries Ltd. v. CWT (Appeals)(central) [2010] 191 Taxman 399 also supports the view that the change in the land use is indeed the determining factor. In the case of the present assessee, the Government notifications and the imminent development of the area indeed establish that the land sold by the assessee in the said area was not agricultural land at the time of sale.

47. The CIT(A) observed that the case laws relied upon by the representative of the assessee, it is seen that the Assessing Officer has duly distinguished those from the facts of the assessee case. So far as the decision in the case of ITO v. Anthony John Pareira [2008] 24 SOT 459 (Mum) is concerned, it is seen that in the said case 450 acres of agricultural land had been purchased by that assessee between 1986 to 1992 and a part thereof was sold during the year. The land in question was away from the developed area and was in a green zone, surrounding whereof had not been developed. Besides, the assessee had been earning agricultural income therefrom, which was being shown in the returns of income. There was no other activity on the land for the last 9 years, and hence, there was found no intention to do any business. It was under these facts that the Mumbai of ITAT held that the entries in Revenue records gave a presumption in favour of the assessee, which could not be rebutted. Since there was no evidence that the assessee intended to trade, it was held as not been an adventure in the nature of trade. In the case of the present assessee, however, the facts, as discussed in foregoing paragraphs are entirely different and such facts do show that the assessee intended to undertake an adventure in the nature of trade.

48. So far as the reliance of assessee's representative on the decision of the Hon'ble Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 is concerned, in the said case also the assessee had agreed to purchase the Jute Press, subject to litigation pending in the High Court of Calcutta. The Hon'ble Apex Court opined that the nature of transactions must be determined on a consideration of all the facts and circumstances. They noted that there was nothing to show that the assessee desired to convert the property to some other use. He did not employ any brokers for sale, rather the purchaser himself had approached the company from whom the assessee had purchased the Press. He contacted the assessee thereafter, who agreed to sell the Press. The Hon'ble Apex court opined that the Jute Press could have been purchased for own business or for being let out also, and therefore, it could not be said that there was a venture intended. Therefore, it is clear that considering the nature of Jute Press, which was already subject to litigation, the Hon'ble Court opined that the property purchased was not such that an inference that a venture in the nature of trade must have been intended could be raised. In the case of the present assessee, however, the facts are entirely different and these go to show that the assessee only want to make quick profits from the transaction in a land which was very much in demand in the rising real estate market.

49. So far as the decision of the Hon'ble Bombay High Court in the case of CIT v. Smt. Debbie Alemao [2011] 331 ITR 59/196 Taxman 230/[2010] 8 taxmann.com 243 (Bom) is concerned, the Hon'ble High Court noted that Sec. 30 of the Goa, Daman and Diu Land Revenue Code, 1968 provides that no land used for agriculture shall be used for any non-agricultural purpose and no land assessed for one non-agricultural purpose shall be used for any other Non-agricultural purpose, except with the permission of the Collector. They noted that the permission for non-agricultural use of the said land was obtained for the first time by the Verca Holiday Beach Resort P. Ltd., the purchaser, only after the purchase of land. Accordingly, they held that prior to such permission, the land was agricultural only. In the case of the present assessee, however, the facts are totally different, as there was no such restriction regarding exclusive agricultural user of the land. On the other hand, the lands of the area had been notified by the Government for development.

50. Similarly, the reliance of the representative of the assessee on the recent decision of the Jurisdictional ITAT, Hyderabad in the case of K. Radhika & Ors. v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 is misplaced. From the order of the ITAT, it can be seen that the assessee therein had been purchasing lands right from the year 1995, which were sold in subsequent years. The ITAT opined that had the assessee being in real estate business, she would not have kept the land for such a long period. With regard to the lands sold within short time, it was found that sales were made under compelling such circumstances, as those were falling under Bio Conservation Zone/Green Belt, of which the assessee was not aware. Therefore, such lands were sold under compelling circumstances to realize the investments only and avoid any future disputes. It is clear that the above facts are not at all existing in the case of the present assessee. Rather, in this case, the assessee has entered into the land deal and invested a huge sum therein only after analyzing the business prospects with a profit motive in a manner which indeed matches with the conduct of a businessman.

51. In the light of the above discussion, the CIT(A) was of the considered view that the various factors discussed above, including the background of the assessee, commercial potential of the impugned land after Government notifications regarding development, huge investments by the assessee in hitherto unexplored areas, as followed by post-purchase operations of the assessee thereon, indeed establish that the profit of Rs. 19,55,98,140 from the sale of the impugned land was assessable as 'Business income', being an adventure in the nature of trade. Thus, the CIT(A) decided the grounds against the assessees. Against these findings the assessees are in appeal before us.

52. The learned AR submitted that the impugned land is an agricultural land and not covered by the definition of capital assets u/s. 2(14) of the Act. He submitted that the land is situated in an area outside any municipality or cantonment board having a population of not less than 10,000 and also beyond the distance notified by the Central Government from the limit of any such municipality or cantonment board. According to the AR, the said land was purchased by the assessee's along with other co-owners for the purpose of carrying on agricultural activities on 8.9.2005 with the sole intention of carrying on the agricultural activities. According to the AR sale of agricultural land cannot be treated as transfer u/s. 45 to attract capital gain tax and also it cannot be treated as an adventure in the nature of trade treating the income arising out of that transaction as business income. He submitted that the land sold by the assessee was never converted into non-agricultural land. The character of the land remains as agricultural land till the date of sale, unless the character of the land changed, it cannot be treated as non-agricultural land.

53. The learned AR submitted that the lands are classified as agricultural land in the Revenue records, even as on the date of sale and they were sold on acreage basis. In fact, there was actual cultivation at the relevant point of time, not only by the assessees but also by M/s. VVT and the assessee derived agricultural income from such land. Mere selling of land by the assessees for non-agricultural purposes, cannot be a reason for treating the sale of land by the assessee as adventure in the nature of trade. The AR further submitted that the impugned land was sold, in fact, not voluntarily but was made under compelling circumstances. There was a boom in the real estate market and at the same time the yield from the grape garden has been drastically affected due to mealy bug disease. The assessee could not continue agricultural activities instead proposed to sell the land to avoid future loss and to get advantage of higher rising prices. If the assessee misses this opportunity they would have suffered huge financial losses. In view of this he submitted that the assessee used the opportunity and sold the land for better price and mere capability of land being used for other than agricultural purposes cannot be a reason to hold that the assessee is engaged in buying and selling of land. He submitted that the assessees are not dealers in real estate business and they invested in agricultural land. The AR relied on the following case-laws.

54. On the other hand, the learned DR relied on the orders of lower authorities and also on the judgment of Sarifabibi Mohmed Ibrahim's case (supra) wherein their Lordships held as under:

"Whether a piece of land is agricultural land or not is essentially a question of fact. Several tests have been evolved in decisions of the Supreme Court and the High Courts, but all of them are more in the nature of guidelines. The question has to be answered in each case, having regard to the facts and circumstances of that case. There may be factors both for or against a particular point of view. The court has to answer the question on a consideration of all of them - a process of evaluation. The inference has to be drawn on a cumulative consideration of all the relevant facts.

The appellants were co-owners of a plot of land inherited from an ancestor through their father. On March 15, 1967 they agreed to sell the land to a housing co-operative society and, to enable them to complete the transaction, they applied in June, 1968, and March, 1969, for permission to transfer the land for a non-agricultural purpose and the permission was granted in April, 1969. A number of sale deeds were executed in May, 1969 and the purchasing society applied for conversion of the land to non-agricultural purposes, viz., construction of buildings. The question was whether the profit from the sale of the land was assessable to capital gains tax. The facts in favour of the appellants were: the land was registered as agricultural land in the revenue records and land revenue had been paid in respect thereof till the year 1968-69; there was no evidence that the land was put to non-agricultural use and the land was actually cultivated till and including the agricultural year 1964-65; there were agricultural lands abutting the land; and the appellants had no other source of income except the income from those lands. The facts against the appellant were the land was situated within the municipal limits of the Surat Municipality and at a distance of one kilometre from the railway station: the land was not cultivated from 1965-66 until it was sold in 1969; the appellants had entered into an agreement with a housing co-operative society to sell the land for construction of houses, they had applied in June, 1968, and March, 1969, for permission to sell the land for non-agricultural purposes and soon after obtaining permission they executed the sale deeds in May, 1969: and the land was sold at a rate of Rs. 23 per sq. yard and the purchasing society commenced construction operations within three days of purchase. On a consideration of the contending factors the High Court held that the land was non-agricultural land and tax was leviable on the capital gains arising from the transfer. On appeal to the Supreme Court:

"Held, affirming the decision of the High Court, that the entering into the agreement to sell the land for housing purposes, the applying for and obtaining permission to sell the land for non-agricultural purposes, and its sale soon thereafter and the fact that the land was not cultivated for a period of four years prior to its sale, coupled with its location and the price at which it was sold outweighed the circumstances appearing in favour of the appellants' case and established that the land was not agricultural land when it was sold. The appellants had no intention to bring it under cultivation at any time after 1965-66 and certainly not after they entered into the agreement to sell the land to the housing co-operative society. The High Court was right in holding that the land was not agricultural land at the time of its sale and the profit arising from its sale was liable to capital gains tax."

55. We have heard both the parties and perused the material on record. In the present case there is no dispute that the assessees along with other co-owners acquired landed property of 85 acres 23 guntas of agricultural land on 8.9.2005. There is also no dispute that there was cultivation of grape in this land before sale of this land and there is no dispute regarding the fact that the assessee herein floated a company by name of VVT Agritech Pvt. Ltd. on 26.10.2005. The main object of that company was to carry on agricultural operations. Later, the assessees and the other co-owners entered into a lease agreement on 25.10.2005 with M/s. VVT wherein the entire grape orchard measuring 85 acres 23 guntas was given on lease that company with effect from 25.10.2005 on rental basis for the purpose of cultivation.

56. M/s. VVT has filed return of incomes for A.Ys. 2007-08 and 2008-09 declaring nil income. Later there was cancellation of lease deed dated 29.9.2006 wherein the lease of the agricultural property was cancelled as the lessor intend to sell the agricultural property. Accordingly, this agricultural property was sold to one M/s. Prajay Holding Pvt. Ltd. The Revenue authority are of the opinion that the amount received on sale of this agricultural property is nothing but on account of adventure in the nature of trade and the same was brought into income from business. In these cases, the assessee held the land always as investment and not at all converted into stock-in-trade. The character of the land in the hands of the assessee has not changed. There is no material on record to show that the assessee carried on activities of buying and selling of land in a systematic manner so as to justify the action of the Revenue authorities in treating the activities of the assessee as adventure in the nature of trade. The land was sold by the assessees in acreage and not by making plots.

57. Now the question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.

58. The expression 'agricultural land' is not defined in the Act, and now, whether it is agricultural land or not has got to be determined by using the tests or methods laid down by the Courts from time to time.

59. The Hon'ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim (supra) has approved the decision of a Division Bench of the Hon'ble Gujarat High Court in the case of CIT v. Siddharth J. Desai [1983] 139 ITR 628/10 Taxman 1 (Guj) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has got to be decided or answered. We reproduce the said 13 tests as follows :

"1.		Whether the land was classified in the Revenue records as agricultural and whether it was subject to the payment of land revenue?
2.		Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?
3.		Whether such user of the land was for a long period or whether it was of a temporary character or by any of a stopgap arrangement?
4.		Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?
5.		Whether, the permission under S. 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date?
6.		Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cesser and/or alternative user was of a permanent or temporary nature?
7.		Whether the land, though entered in Revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?
8.		Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural?
9.		Whether the land itself was developed by plotting and providing roads and other facilities?
10.		Whether there were any previous sales of portions of the land for non-agricultural use?
11.		Whether permission under s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale or intended sale to such non-agriculturists was for non-agricultural or agricultural user?
12.		Whether the land was sold on yardage or on acreage basis?
13.		Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?"

60. A reference could be made to the case of CWT v. Officer-in-charge(Court of Wards) [1976] 105 ITR 133 (SC) wherein the Constitution Bench of the Hon'ble Supreme Court stated that the term 'agriculture' and 'agricultural purpose' was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance. The Hon'ble Supreme Court has observed that the term 'agriculture' is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term 'agriculture' receives a wider interpretation both in regard to its operation as well as the result of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon'ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.

61. The Hon'ble Gujarat High Court in the case of Dr. Motibhai D. Patel (No. 2) v. CIT [1981] 127 ITR 671/5 Taxman 147 referring to the Constitution Bench of the Hon'ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon'ble Gujarat High Court further held that there was nothing on record to show that the presumption rose from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.

62. The Hon'ble Bombay High Court in the case of CWT v. H.V. Mungale [1984] 145 ITR 208/[1983] 12 Taxman 201 (Bom) held that the Hon'ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue. The Hon'ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.

63. We may also refer to the case of CIT v. Manilal Somnath [1977] 106 ITR 917 (Guj), wherein the Division Bench of the Hon'ble Gujarat High Court observed that the potential non- agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.

64. We may also refer to the case of Gopal C. Sharma v. CIT [1994] 209 ITR 946/72 Taxman 353 (Bom), in which, the case of Smt. Sarifabibi Mohamed Ibrahim (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.

65. We may refer to a judgment of the Hon'ble Madras High Court in the case of CWT v. E. Udayakumar [2006] 284 ITR 511 where the Hon'ble Madras High Court has referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Smt. Savita Rani [2004] 270 ITR 40/[2008] 133 Taxman 712 and has observed and held as under :

"8. It is well settled in the case of CIT v. Smt. Savita Rani [2004] 186 CTR (P&H) 240 : [2004] 270 ITR 40 (Punj. & Har.), wherein it is held that the land being located in a commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

9. In the abovesaid case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years. The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim. Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant."

66. Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the assessee has not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land.

67. The provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. If by a Government Notification, the nature and character of land changes from agriculture into non-agriculture then there is no question of conversion of this land for non-agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by any State Government notification and the landowners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by State Government Notification.

68. It is also an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also an admitted position that the assessee had not applied for conversion of the land in question into non-agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessee herein to put the same for non-agricultural purposes at time of their ownership that land. No such finding has been given by the Department. No material or evidence in support of the fact that the assessee have put the land in use for non-agricultural purposes has been brought on record. The nature of the crop and the person who cultivated the land are duly mentioned in the assessment order shows that at the relevant point of time the land was used for agricultural purposes only and nothing is brought on record to show that the land was put in use for non-agricultural purposes by the assessee. In view of the decision of the Hon'ble High Court in the case of Gopal C. Sharma (supra), it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non-agricultural purposes. We may also refer to a decision of the Hon'ble Supreme Court in the case of N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by Developer cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.

69. Recently the Karnataka High Court in the case of CIT v. Madhukumar N. (HUF) [2012] 208 Taxman 394/23 taxmann.com 341 (Kar) held as follows:

"9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a Notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a "Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any Notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion."

70. Further the Kolkata Bench of the Tribunal in the case of Dy. CIT v. Arijit Mitra [2011] 48 SOT 544/16 taxmann.com 66 (Kol) held as follows:

"7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of 'capital asset', if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above Notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross-objection of the assessee is allowed."

71. It was held in the case of Manilal Somnath (supra) as follows:

'Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of " capital asset" and any gain from the sale thereof was not to be included in the total income of an assessee under the head "capital gains". In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land. If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non-agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.

The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:

Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.'

72. Further the word "Capital Asset" is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(iii) agricultural land in India, not being land situate—

(a)		in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or
(b)		in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by Notification in the Official Gazette;

73. It is very clear from the above that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words 'whether known as' clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.

74. We also perused the meaning of the term local authority as referred in section 10(20) of the Act.

'(20) the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.

Explanation. - For the purposes of this clause, the expression "local authority" means —

(i)		Panchayat as referred to in clause (d) of article 243 of the Constitution; or
(ii)		Municipality as referred to in clause (e) of article 243P of the Constitution; or
(iii)		Municipal Committee and District Board,
		legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or
(iv)		Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);'

75. It is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural lands located within the jurisdiction of a municipality in the definition of the expression 'Capital Asset'. The relevant portion of the said memorandum is reproduced hereunder:

'30. ... The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term "capital asset" in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such Notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term "capital asset". Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term "capital asset".

76. Further it is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

77. We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by Notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions. In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from the Notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of 'capital asset'. Central Government in exercise of such powers has issued the above Notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (supra), Harish V. Milani (supra) and M.S. Srinivasa Naicker v. ITO [2007] 292 ITR 481/[2008] 169 Taxman 255 (Mad). By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (supra).

78. From the facts and circumstances of the case, as narrated before us, it is important to note that what was the intention of the assessee at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and with this intention assessee entered into lease agreement with M/s. VVT Agritech on 25th October, 2005 and even there was no intention to sell the land in future at that point of time. It was due to certain compelling circumstances came into picture at a later stages, the assessees were forced to sell the land. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade.

79. Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, the ground raised by the assessee is allowed.

80. In the result, assessees' appeals in ITA No. 550 and 551/Hyd/12 are allowed.

IT: Sitting fees paid to directors do not amount to fees paid for any professional services as per Explanation to section 194J(1)

IT: Payments made by assessee towards testing and inspection charges could not be construed as payments towards professional service as per provisions of section 194J and assessee had rightly deducted tax under section 194C

IT: Where cranes were provided by parties along with driver/operator and all expenses were borne by owners only, provisions of section 194C were only applicable for such payment and not provisions of section 194-I

IT: Payment towards windmill operation and maintenance attracts provisions of section 194C

IT: Payment towards annual maintenance charges for software maintenance attracts provisions of section 194C and not provisions of section 194J

IT: Training and seminar expenses do not fall under definition of professional services and, accordingly, tax to be deducted under section 194C

■■■

[2013] 36 taxmann.com 574 (Pune - Trib.)

IN THE ITAT PUNE BENCH 'A'

Bharat Forge Ltd.

v.

Additional Commissioner of Income-tax*

SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER

IT Appeal Nos. 1326, 1327, 1357 & 1358 (Pune) of 2010
[ASSESSMENT YEARS 2007-08 AND 2008-09]

JANUARY  31, 2013 

I. Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Technical services fee [Sitting fees to directors] - Assessment years 2007-08 and 2008-09 - Whether sitting fees paid to directors do not amount to fees paid for any professional services as per Explanation to section 194J(1) and, accordingly no tax is required to be deducted under section 194J out of such director's sitting fees - Held, yes [Para 8.1][In favour of assessee]

II. Section 194J, read with section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services [Testing and inspection charges] - Assessment years 2007-08 and 2008-09 - Assessee had paid an amount to various entities for testing and inspection of material on which assessee had deducted tax under section 194C - Assessing Officer held that services provided by parties were in nature of technical or professional services and, therefore, TDS should have been made under section 194J instead of section 194C - Whether payments made by assessee towards testing and inspection charges could not be construed as payments towards professional service as per provisions of section 194J and assessee had rightly deducted tax under section 194C - Held, yes [Para 13.1][In favour of assessee]

III. Section 194C, read with section 194-I, of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [Hiring of cranes with driver] - Assessment years 2007-08 and 2008-09 - Assessee had made payment for hiring of cranes and loading and unloading of material at factory and had deducted tax under section 194C - According to Assessing Officer, assessee should have deducted tax under section 194-I - Whether since cranes were provided by parties along with driver/operator and all expenses were borne by owners only, provisions of section 194C were only applicable for such payment and not provisions of section 194-I - Held, yes [Para 18.2][In favour of assessee]

IV. Section 194C, read with section 194J, of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [Windmill operation and maintenance] - Assessment years 2007-08 and 2008-09 - Whether payment towards windmill operation and maintenance attracts provisions of section 194C and not provisions of section 194J - Held, yes [Para 25][In favour of assessee]

V. Section 194C, read with section 194J, of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [AMC] - Assessment years 2007-08 and 2008-09 - Whether payment towards annual maintenance charges for software maintenance attracts provisions of section 194C and not provisions of section 194J - Held, yes [Para 31.1 and 42] [In favour of assessee]

VI. Section 194J, read with section 194C, of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services [Training and seminar expenses] - Assessment years 2007-08 and 2008-09 - Assessee paid certain sum towards training programmes and seminars organized by various entities including CII towards attending training and seminars by its employees - Assessing Officer held that such payment attracted provisions of section 194J - Whether training and seminar expenses of nature under consideration did not fall under category of services rendered under section 194J and assessee had rightly deducted tax under section 194C - Held, yes [Para 36][In favour of assessee]

Circulars & Notifications : Circular No. 558, dated 28-3-1990, Circular No. 715, dated 8-8-1995

CASE REVIEW-III

 

CIT (TDS) v. Swayam Shipping Services (P) Ltd. [201l] 339 ITR 647/199 Taxman 249/11 taxmann.com 137 (Guj.) and CIT v. Shree Mahakuani Transport Co. [2011] 339 ITR 484/211 Taxman 232/19 taxmann.com 144 (Guj.) (para 18.2) followed.

CASE REVIEW-IV

 

Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) and Gujarat State Electricity Corpn. Ltd, v. ITO [2004] 3 SOT 468 (Ahd.) (para 25) followed.

CASE REVIEW-V

 

Nuclear Corpn. of India Ltd. v. ITO [IT Appeal No. 3081 (Ahd.) of 2009, dated 30-9-2011] (para 31.1) followed.

CASES REFERRED TO

 

Jahangir Biri Factory (P.) Ltd. v. Dy. CIT [2009] 126 TTJ 567 (Kol.) (para 6), Glaxosmithkline Pharmaceuticals Ltd. v. ITO [2011] 48 SOT 643/15 taxmann.com 163 (Pune) (para 12), Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) (para 12), Dy. CIT v. Pararrampuria Synthetics Ltd. [2008] 20 SOT 248 (Delhi) (para 12), CIT (TDS) v. Swayam Shipping Services (P) Ltd. [201l] 339 ITR 647/199 Taxman 249/11 taxmann.com 137 (Guj.) (para 17), CIT v. Shree Mahalaxmi Transport Co. [2011] 339 ITR 484/211 Taxman 232/19 taxmann.com 144 (Guj.) (para 17), ITO v. Indian Oil Corpn. (Marketing Division) [2011] 15 taxmann.com 210 (Delhi) (para 17), Gujarat State Electricity Corpn. Ltd. v. ITO [2004] 3 SOT 468 (Ahd.) (para 24), Nuclear Corpn. of India Ltd. v. ITO [IT Appeal No. 3081 (Ahd.) of 2009, dated 30-9-2011] (para 29) and Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC) (para 45).

Nikhil Pathak for the Appellant. Ms. Ann Kapthuama for the Respondent.

ORDER

 

R.K. Panda, Accountant Member - These are cross-appeals filed by the assessee and the Revenue and are directed against the separate orders dt. 9th Aug., 2010 and 10th Aug., 2010 of the CIT(A)-V, Pune relating to asst. yrs. 2007-08 and 2008-09 respectively. Since common issues are involved in the above cross-appeals, therefore, these were heard together and are being disposed of by this common order for the sake of convenience.

ITA No. 1357/Pn/2010 (by assessee-asst yr. 2007-08) :

2. The grounds raised by the assessee are as under :

"1.

On the facts of the case and in law, the learned CIT(A)-V, Pune erred in confirming that:

(a)		payment of sitting fees aggregating to Rs. 3,50,000 to resident non-executive directors is covered under s. 194J of the IT Act, 1961 as against the appellant company's contention that no tax was deductible at source on above payments and thus there was shortfall of deduction of tax to the extent of Rs. 17,850 thereon.
(b)		payments of testing charges and inspection charges aggregating to Rs. 16,96,774 are covered under s. 194J as against under s. 194C as per the appellant company's contention and thus there was shortfall of deduction of tax of Rs. 55,368 thereon.
(c)		payment of hiring of cranes (with driver/operator) for loading and/or unloading of material at factory of Rs. 24,35,285 is in the nature of 'rent' as defined in the Explanation to s. 194-1 as against covered under s. 194C as per the appellant company's contention and thus there was shortfall of deduction of tax of Rs. 3,16,419 thereon.

2.		The learned CIT(A)-V, Pune erred in confirming that the appellant company was to be treated as assessee in default for non-deduction/short deduction to tax within the meaning of ss. 201 and 201(1A) in respect of amounts mentioned in ground Nos. 1 (a) to (d) above.
3.		The appellant company craves leave to add to, alter, amend, modify and/or delete any or all of the above grounds of appeal."

3. The learned counsel for the assessee while arguing the first issue in the grounds of appeal submitted that the assessee has paid an amount of Rs. 3,50,000 as directors sitting fees to resident directors on which no TDS was made. According to the AO the provisions of s. 194J are applicable for such payments since director is also a manager under the provisions of Companies Act, 1956 and therefore a technical personnel. Since the assessee had not deducted the tax out of such payments the AO held that there is short deduction of tax to the tune of Rs. 17,850.

4. Before the CIT(A) it was submitted that s. 194J was inserted by the Finance Act, 1995 w.e.f. 1st July, 1995 and that the Department has all along accepted the position that sitting fees paid to non-executive resident directors are not covered under S.194J. The dispute arose only for the asst. yrs. 2007-08 and 2008-09. It was submitted that the assessee has deducted tax from salary and commission paid to such non-executive resident directors and the provisions of s. 194J are not applicable to the sitting fees paid to the directors.

5. However, the learned CIT(A) was not convinced with the arguments advanced by the assessee and upheld the action of the AO in holding that there is short deduction of tax from the sitting fees paid to the directors. According to him, director is also a manager under the provisions of the Companies Act, 1956 and therefore, a technical personnel. Merely because the Department has not taken any action in the past cannot act as an estoppel against taking the correct legal position for the current year.

6. The learned counsel for the assessee reiterated the same arguments as made before the AO and the CIT(A). Referring, to the provisions of s. 194J he submitted that as per the Explanation professional service means service rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. Therefore, director's sitting fees do not fit into any of the categories. Further, s. 194J(l)(ba) which was introduced by the Finance Act, 2012 w.e.f. 1st July, 2012 has amended the provisions of s. 194J according to which TDS should be deducted on any remuneration or fee or commission paid to a director. This amendment is applicable from 1st July, 2012. Referring to the copy of the Memorandum Explaining the Provisions of Finance Bill, 2012, he drew the attention of the Bench to the following :

"TDS on remuneration to a director:

Under the existing provisions of the IT Act, a company, being an employer, is required to deduct tax at the time of payment to its employees including managing director/whole-time director. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary.

It is proposed to amend s. 194J to provide that tax is required to be deducted on the remuneration paid to a director, which is not in the nature of salary, @ 10 per cent of such remuneration.

This amendment will take effect from 1st July, 2012."

He accordingly submitted that TDS is required to be deducted out of the director sitting fees. He also relied on the decision of the Kolkata Bench of the Tribunal in the case of Jahangir Bin Factory (P.) Ltd. v. Dy. CIT [2009] 126 TTJ 567 (Kol.).

7. The learned Departmental Representative, on the other hand, heavily relied on the orders of the AO and the CIT(A).

8. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by the learned counsel for the assessee. The only dispute in this ground is regarding deduction of tax at source from the sitting fees paid to the directors. According to the learned counsel for the assessee the provision of s. 194J is not applicable to such sitting fees since fees do not fall in any of the categories of professional service as per Explanation to s. 194J. Further, no such objection was taken in the past by the Department for such non-deduction and in view of insertion of sub-s. (ba) to s. 194J(1) TDS is required to be made out of such director sitting fees w.e.f. 1st July, 2012. Therefore, for non-deduction of tax at source from the sitting fees for the impugned assessment year, there is no default on the part of the assessee. According to the Revenue the director is also a manager under the provisions of the Companies Act and therefore, a technical personnel and therefore the company is liable to deduct tax at source under the provisions of s. 194J.

8.1 As per the Explanation to provisions of s. 194J, professional services mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. We, therefore, find force in the submission of the learned counsel for the assessee that sitting fees paid to the directors do not amount to fees paid for any professional services as has been mentioned in the Explanation to s. 194J(1). We further find from the Memorandum Explaining the Provisions of the Finance Bill, 2012 that as per cl. No. 71, it was specifically mentioned that there was no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. We find the provisions of s. 194J(1)(ba) speak of any remuneration or fees or commission by whatever name called other than those on which tax is deductible under s. 192 to a director of a company on which tax has to be deducted at the applicable rate and the above provision has been inserted by the Finance Act, 2012 w.e.f., 1st July, 2012. We, therefore, find force in the submission of the learned counsel for the assessee that no tax is required to be deducted under s. 194J out of such director's sitting fees for the asst. yr. 2007-08. In this view of the matter, the order of the CIT(A) is set aside and the ground raised by the assessee on the issue of TDS on sitting fees paid to directors is allowed.

9. The second issue raised by the assessee relates to deduction of tax under s. 194C from testing charges and inspection charges as against deduction of tax under s. 194J as held by the AO and upheld by the CIT(A).

10. The learned counsel for the assessee submitted that the assessee had paid an amount of Rs. 69,25,844 to various entities for testing and inspection of material on which the assessee had deducted tax under s. 194C. According to the AO the assessee should have deducted TDS under s. 194J since the services rendered by the said parties are in the nature of technical/professional service. The AO accordingly calculated short deduction of tax at Rs. 55,586.

11. Before the CIT(A) it was submitted that the charges were paid for getting jobs done like testing, inspection of materials etc. and were of the nature of material and labour contract. Although technical expertise may be used, the charges paid cannot be construed to be fees for professional service or technical service. It was further argued that merely because the payee used technical knowledge or installs sophisticated equipments, it does not result into the above services to be professional or technical services. It was further submitted that the Department in the past had never objected to such deduction under s. 194C. However, the learned CIT(A) was not convinced with the arguments advanced by the assessee and upheld the action of the AO. While doing so, he held that the payments made by the assessee in the instant case for testing/inspection of materials can be described as technical consultancy and therefore provisions of s. 194J are applicable.

12. The learned counsel for the assessee drew the attention of the Bench to some sample copies of the bills. Referring to page No. 31 of the paper book, he submitted that the bill issued by Engineers and Testing Instruments (P) Ltd. for Rs. 24,850 gives the description as servicing and calibration of impact machine. Similarly the bill issued by Datta Company, copy of which is placed at paper book p. 33, is towards stamping, verification and repair of various weighing seals and weights. Referring to the bill issued by Krupa Engineering he submitted that the same is for impact machining, grinding and notching, micro cutting and macro cutting, machining and grinding etc. He submitted that none of the items is coming under the category of professional service as defined in the Explanation to s. 194J. Referring to the following decisions he submitted that payment for technical services in order to cover under s. 194J should be a consideration for acquiring or using technical know-how simpliciter provided or made available by human element. There should be direct and live link between payment and receipt/use of technical services/information :

1.		Tribunal, Pune decision in the case of Glaxosmithkline Pharmaceuticals Ltd. v. ITO [2011] 48 SOT 643/15 taxmann.com 163;
2.		Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.);
3.		Dy. CIT v. Parasrampuria Synthetics Ltd. [2008] 20 SOT 248 (Delhi)

12.1 The learned Departmental Representative, on the other hand heavily relied on the order of the CIT(A).

13. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by the learned counsel for the assessee. We find in the instant case the AO applying the provisions of s. 194J on account of payments made to various entities for testing and inspection of material held that there is short deduction/lower deduction since the assessee has deducted the tax under the provisions of s. 194C. According to the AO the services provided by the parties are in the nature of technical or professional services, therefore, TDS should have been made under s. 194J instead of s. 194C. According to the CIT(A) the payments made by the assessee for testing and inspection of material can be described as technical consultancy and therefore provisions of s. 194J are attracted.

13.1 In the preceding paras we have already noted that the Explanation to s. 194J(1) defines professional service to mean the service rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. The nature of expenditure made by the assessee towards payments made to various persons as mentioned in the bills, in our opinion, cannot be considered as payment for technical consultancy. The Pune Bench of the Tribunal in the case of Glaxosmithkline Pharmaceuticals Ltd. (supra) has held that any payment technical services in order to cover under s. 194J should be a consideration for acquiring or using technical know-how simpliciter provided or made available by human element. There should be direct and live link between the payment and receipt/use of technical services/information. If the conditions of s. 194J r/w s. 9(1), Expln. 2 cl. (vii) are not fulfilled, the liability under this section is ruled out. We, therefore, hold that the payments made by the assessee in the instant case towards testing and inspection charges cannot be consumed as payments towards professional service as per the provisions of s. 194J and the assessee has rightly deducted the tax under s. 194C. In this view of the matter, we set aside the order of the CIT(A) and hold that there is no short deduction of tax. The ground raised by the assessee on this issue is accordingly allowed.

14. The third issue in the grounds raised by the assessee relates to deduction of tax under s. 194C from the payment of hiring of cranes (with driver/operator) for loading and unloading of the material at factory.

15. Facts of the case, in brief, are that during the impugned financial year the assessee has made payment for hiring of cranes and loading and unloading of material at the factory and has deducted the tax under s. 194C. According to the AO the assessee should have deducted tax under s. 194-I. In response to the show-cause notice it was explained by the assessee that the contract for hiring is a composite contract for hiring of crane with driver who shall follow the instructions of the assessee company. The petrol, repairs and maintenance expenses are also on account of the contractor. Therefore, the charges are paid in terms of a service contract and do not amount to rent contract. The CBDT Circular No. 558, dt. 28th March, 1990 [(1990) 82 CTR (St) 404] was also brought to the notice of the AO.

16. However, the AO was not satisfied with the arguments advanced by the assessee. According to him the definition of rent under s. 194-I means' any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any machinery, plant, equipment, fittings whether or not any or all of the above are owned by the payee. Since the assessee company has taken cranes on hire being plant and not bus for carrying passengers as per Circular No. 558, IDS should have been deducted under s. 194-I instead of. s. 194C. He accordingly held that there is short deduction of tax. In appeal, the learned CIT (A) upheld the action of the AO.

17. The learned counsel for the assessee reiterated the same arguments as made before the AO and the CIT(A). He submitted that it is not a case of simple hiring of crane. The crane owner provides the operator and is also responsible for the day-to-day maintenance and its operational costs. Relying on the following decisions he submitted that payment made for the use of cranes or for hiring of tankers is covered under s. 194C and not under s. 194-I:

1.		CIT (TDS) v. Swayam Shipping Services (P.) Ltd. [201l] 339 ITR 647/199 Taxman 249/11 taxmann.com 137;
2.		CIT v. Shree Mahalaxmi Transport Co. [2011] 339 ITR 484/211 Taxman 232/19 taxmann.com 144 (Guj.)
3.		ITO v. Indian Oil Corpn. (Marketing Division) [2011] 15 taxmann.com 210 (Delhi).

17.1 The learned Department Representative on the other hand heavily relied on the orders of the AO and CIT(A).

18. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by the learned counsel for the assessee. The only dispute to be decided in the instant ground is regarding the applicability of provisions of s. 194C or 194-I on account of payments for hiring of cranes for loading and unloading of material at its factory when the cranes are provided by the parties along with driver/operator and all expenses are borne by the owners only. We find the Hon'ble Gujarat High Court in the case of Shree Mahalaxmi Transport Co. (supra) has discussed an identical issue and has observed as under :

"Chapter XVII of the IT Act, 1961, makes provision for collection and recovery of tax. Part B thereof makes provision for deduction at source and is comprised of ss. 192 to 206AA. Sec. 194C bears the heading 'Payments to contractors' and lays down that any person responsible for paying any sum to any resident for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash of by issue of cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to the percentage specified thereunder of such sum as income-tax on income comprised therein.

Sec. 194-I of the Act which bears the heading 'Rent' provides that any person, not being an individual or an HUF, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or by draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate specified thereunder.

Thus, s. 194C of the Act makes provision for deduction of tax at source in respect of payments made to contractors whereas s. 194-I makes provision for deduction of tax at source in respect of income by way of rent.

Examining the facts of the present case in the light of the aforesaid statutory provisions, from the findings of fact recorded by the CIT(A), it is apparent that the assessee has not taken the dumpers on hire/rent from the parties in question. The assessee has given contracts to the said parties for the transportation of goods and has not taken machineries and equipment on rent. In the circumstances, the CIT(A) was justified in holding that the transactions in question being in the nature of contracts for shifting of goods from one place to another would be covered as works contracts, thereby attracting the provisions of s. 194C of the Act. That since the assessee had given sub-contracts for transportation of goods and not for the renting out of machineries or equipment, such payments could not be termed as rent paid for the use of machinery and the provisions of s. 194-I of the Act would not be applicable. The Tribunal was, therefore, justified in upholding the order passed by the CIT(A).

In view of the above discussion, it is not possible to state that the Tribunal has committed any legal error so as to warrant interference. No question of law, much less, a substantial question of law can be stated to arise out of the impugned order of the Tribunal. The appeal is, accordingly, dismissed."

18.1 We find the Hon'ble Gujarat High Court in the case of Swayam Shipping Services (P.) Ltd. (supra) has held as under (short notes) :

"Held, dismissing the appeal, that there was nothing to indicate that the assessee had taken trailers/cranes on rent so as to attract the provisions of s. 194-I of the Act. The assessee had given sub-contracts for transportation of goods. Therefore, the transactions would fall within the purview of s. 194C of the Act as the assessee was responsible for paying the amount in question for carrying out work in pursuance of contracts between the assessee and the transporters and as such the assessee was required to deduct tax at source at the rate prescribed under that section. The CIT(A) was, therefore, justified in holding that the assessee was not an assessee in default within the meaning of the expression as contemplated under s. 201 of the Act and, consequently, the Tribunal was justified in confirming the order passed by the CIT(A)."

18.2 Since the facts in the instant case are identical to the cases decided by Hon'ble Gujarat High Court, therefore, respectfully following the same we hold that provisions of s. 194C are only applicable for such payments and not provisions of s. 194-I. The order of the CIT(A) on this issue is accordingly set aside and the ground raised by the assessee is allowed.

18.3 Since the assessee succeeds on all the issues, therefore, the assessee cannot be held as an assessee in default. Accordingly, ground No. 2 of the assessee's appeal is allowed.

ITA No. 1358/Pn/2010 (by assessee- asst yr. 2008-09) :

19. The grounds raised by the assessee are as under :

"I On the facts of the case and in law, the learned CIT(A)-V, Pune erred in confirming that:

(a)		payment of sitting fees aggregating to Rs. 4,15,000 to resident non-executive directors is covered under s. 194J of the IT Act, 1961 as against the appellant company's contention that no tax was deductible at source on above payments and thus there was shortfall of deduction of tax to the extent of Rs. 35,022 thereon.
(b)		payments of testing charges and inspection charges aggregating to Rs. 18,45,719 are covered under s. 194J as against under s. 194C as per the appellant company's contention and thus there was shortfall of deduction of tax of Rs. 1,48,550 thereon.
(c)		payment of hiring of cranes (with driver/operator) for loading and/or unloading of material at factory of Rs. 70,52,375 is in the nature of 'rent as defined in the Explanation to s. 194-I as against covered under s. 194C as per the appellant company's contention and thus there was shortfall of deduction of tax of Rs. 4,29,131 thereon.

2. The learned CIT(A)-V, Pune erred in confirming that the appellant company was to be treated as assessee in default for non-deduction/short deduction to tax within the meaning of ss. 201 and 201(1A) in respect of amounts mentioned in ground No. 1 (a) to (d) above.

3. The appellant company craves leave to add to, alter, amend, modify Vaild/or delete any or all of the above grounds of appeal."

20. After hearing both the sides, we find the grounds raised by the assessee in the impugned appeal are identical to grounds in ITA No. 1357/Pn/2010. We have already decided the issues and the grounds raised by the assessee have been allowed. Following the same ratio, the grounds in the instant appeal are allowed.

ITA No. 1326/Pn/2010 (by Revenue-asst yr. 2007-08) ;

21. Ground of appeal No. 1.1 by the Revenue reads as under :

"The learned CIT(A) erred in holding that the payments of Rs. 27,84,766 made by the assessee to Enercon India Ltd. for windmill operation and maintenance were rightly covered by the assessee under s. 194C and hot under s. 194J. The learned CIT(A) erred in placing reliance on the decision of Madras High Court in the case of Skyceil Communications Ltd. v. Dy. CIT [2001] 170 CTR (Mad) 238 : [2001] 251 ITR 53 (Mad.), the facts of which are not applicable in the instant assessee's case."

22. Facts of the case, in brief, are that the assessee company has installed windmill near Satara, manufactured by Enercon India Ltd. During the relevant financial year, the assessee company made payments amounting to Rs. 27,84,790 to the said company. The assessee explained that the payment was made to the company towards maintenance of windmill, replacement of parts and spares at no cost to the assessee company, assistance in complying with statutory duty of reporting periodically to Governmental agencies, implementing safety norms, and conduct of training programmes, prevention of damage, injury or loss in the event of an emergency, provision of round the clock security at windmills site. The assessee, therefore, contended before the AO that the contract was a comprehensive contract for material and labour services required. The AO, however, held that the operation and maintenance of windmill, repair and replacement of parts, and other work carried out by M/s Enercon India Ltd. requires technical skills and knowledge and is covered under s. 194J of the Act and therefore, tax should have been deducted under s. 194J instead of s. 194C of the Act. He thus worked out the short deduction on this count at Rs. 93,735.

23. Before CIT(A) it was submitted that the company has correctly deducted tax at source under s. 194C. A copy of the contract entered into between the company M/s Enercon India Ltd. was furnished by the assessee. It was further submitted that the position that the said payment is covered under S.194C has been accepted in one of the cases of Enereon's customers by CIT(A), Mumbai.

24. Based on the arguments advanced by the assessee, the learned CIT(A) allowed the ground by holding as under :

"I have given careful consideration to the matter. On perusal of the order passed by the learned CIT(A), Mumbai, it is seen that the same is regarding operations performed in connection with installation of the windmill and the facts of that case cannot directly be compared to the present case. As already stated, the main contention of the learned AO is that the functions performed by M/s Enercon for which payment was to be made by the assessee company required technical skill and knowledge, and, therefore, was covered under s. 194J. In Skycell Communications Ltd. (supra), however, the Madras High Court observed as follows:

'When a person hires a taxi to move from one place to another, he uses the product of science and technology, namely, an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering the technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railways to the airline for having used it for travelling from one destination to another.... The electricity supplies to a consumer cannot on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on payment made for the power consumed and remit the same to the Revenue.

Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee'............

When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes so, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable to fixed telephone service. Neither service can be regarded as 'technical service' for the purpose of s. 194J of the Act.'

Considering the above decision of the Hon'ble Madras High Court, I am of the view that the mere fact that technical skill and knowledge was required for rendering the type of services which were rendered by M/s Enercon to the assessee company did not render the amount paid by the assessee company for a comprehensive contract covering annual maintenance, replacement, security, emergency services etc. 'fees for technical services'. The said payment was of the nature of payment for a comprehensive contract covering all these functions and others, on which the appellant company had rightly deducted tax under s. 194C and not s. 194J. This view is also supported by the decision of Tribunal, Ahmedabad in Gujarat State Electricity Corpn. Ltd. v. ITO [2004] 3 SOT 468 (Ahd.) wherein it was held that a composite contract for operation and maintenance would come within the ambit of s. 194C and not s. 194J. This issue is therefore decided in the appellant's favour."

24.1 Aggrieved with the order of the CIT (A), the Revenue is in appeal before us.

25. We have considered the rival arguments made by both the sides. We find in the instant case, the learned CIT(A) while holding that provisions of s. 194C are applicable for payments towards windmill operation and maintenance has followed the decision of Hon'ble Madras High Court and the decision of Tribunal, Ahmedabad Bench in the case of Gujarat State Electricity Corporation Ltd.(supra). The learned Departmental Representative could not distinguish the decisions relied on by the learned CIT(A). In absence of any contrary material brought to our notice against the order of the CIT(A) and since the learned CIT(A) while deciding the issue has relied on the decision of Hon'ble Madras High Court and the Tribunal, Ahmedabad Bench, therefore, we find no infirmity in the same and uphold the order of the learned CIT(A) on this issue. The ground raised by the Revenue is therefore dismissed.

26. Ground of appeal No. 1.2 by the Revenue reads as under :

"The CIT(A) erred in coming to the conclusion that the payments of Rs. 1,21,61,895 made by the assessee to various parties were contractual payments requiring deduction of tax under s. 194C and not under s. 194J by placing reliance on the Madras High Court decision, supra, the facts of which are not applicable to the instant assessee's case. While coming to the conclusion, the CIT(A) erred in not appreciating the true import of the answer to question No. 29 of the Board's Circular No. 715, dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13)."

27. Facts of the case, in brief, are that for the impugned financial year the assessee made payments amounting to Rs. 1,21,61,895 to various parties including Reliance Communications, Bharti Airtel, Blue Star Ltd., Aircool Services, Avery India Ltd. and various other parties. The assessee has deducted tax as per provisions of s. 194C. According to the AO, these payments were towards technical, managerial and professional services rendered by these parties and therefore the assessee should have deducted tax under the provisions of s. 194J. The AO accordingly determined the short deduction at Rs. 2,49,005.

28. Before CIT(A) it was submitted that these payments were made towards annual maintenance contract. The CBDT Circular No. 715, dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13] was also brought to the notice of the CIT(A) according to which routine/normal maintenance contract including supply of spares are covered under s. 194C. Further, the decision of Hon'ble Madras High Court in Skycell Communications Ltd. (supra) was also cited. Based on the arguments advanced by the assessee, the learned CIT(A) decided the issue in favour of the assessee and held that provisions of s. 194C are applicable for such AMC charges Daid and credited.

28.1 Aggrieved with such order of the CIT(A), the Revenue is in appeal before us.

28.2 The learned Departmental Representative heavily relied on the order of the AO.

29. The learned counsel for the assessee, on the other hand, while relying on the order of the CIT(A) also relied on the following decisions :

(a)		Tribunal, Pune decision in the case of Fluent India (P) Ltd.;
(b)		Skycell Communications Ltd. (supra);
(c)		Parasrampuria Synthetics Ltd. (supra)
(d)		Nuclear Corpn. of India Ltd. v. ITO [IT Appeal No. 3081 (Ahd.) of 2009, dated 30-09-2011]
(e)		Tribunal, Pune decision in the case of Glaxosmithkline Pharmaceuticals Ltd. (supra).

30. After hearing both the sides, we find the Ahmedabad Bench of the Tribunal in the case of Nuclear Corporation of India Ltd. (supra) has held that payments made for AMC of telephone exchange and computer cannot be considered as fees for technical services within the meaning of s. 194J. The relevant observation of the Tribunal at para 19 of the order reads as under :

"19. After hearing both the sides, we have carefully gone through the orders of the authorities below. The Hon'ble Madras High Court, in the case of Skycell Communication Ltd. (supra), held that installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. Keeping in view the ratio of this decision, in the instant case, there might be use of services of technically qualified persons to render for maintenance of telephone exchange, annual maintenance contract for VHF wireless set, repairs and annual maintenance of computers, etc., but that itself did not bring the amount paid as 'fees for technical services' within the meaning of Expln. 2 to s. 9(l)(vii). Therefore, the amount paid towards annual maintenance contract of telephone exchange and computers by the assessee, in the present case, could not be considered as fee for technical services within the meaning of s. 194J. We, therefore, following the decision of the Hon'ble Madras High Court in the case of Skycell Communications Ltd. (supra), which is followed by the Tribunal, Delhi Bench 'H' in the case of Parasrampuria Synthetics Ltd. (supra), held that the assessee was i required to deduct TDS under s. 194C and not under s. 194J of the IT Act. Consequently, it is held that the assessee cannot be deemed to be 'assessee in default' within the meaning of s. 201(1) in respect of such tax. Accordingly, it is held that the assessee rightly deducted the IDS under s. 194C of the IT Act, 1961. Consequently, no interest under s. 201(1A) of the IT Act is leviable. Hence, ground No. 4 of the assessee's appeals for all the three assessment years is allowed. The ground Nos. 5 and 6 in respect of all the assessment years need no separate adjudication, in view of our decision in respect of each and every item of shortfall (supra)".

31. We find the CBDT vide Circular No. 715 dt. 8th Aug., 1995 [1995] 127 CTR (St) 13] has replied to question No. 29 which reads as under :

"Question No. 29 : Whether a maintenance contract including supply of spares would be covered under s. 194C or 194J of the Act ?

Answer : Routine, normal maintenance contracts including supply of spares will be covered under s. 194C. However, where technical services are rendered, the provision of s. 194J will apply in regard to TDS."

31.1 Since in the instant case the assessee has made payments to various parties for AMC, therefore, respectfully following the decision of the Ahmedabad Bench of the Tribunal cited (supra) and in view of answer to question No. 29 in CBDT Circular No. 715 dt 8th Aug., 1995 we hold that the assessee has rightly deducted tax at source under s. 194C on account of payments for annual maintenance charges. We accordingly uphold the order of the CIT(A) on this issue and the ground raised by the Revenue is dismissed.

32. Ground of appeal No. 1.3 by the Revenue reads as under :

"The learned CIT(A) erred in holding that the payments of Rs. 81,53,188 by the assessee towards training programmes and seminars organised by various entities would be covered under s. 194C and not under s. 194J. The learned CIT(A) erred in holding that the training and seminars do not fall in the list of activities of professional services enumerated in s. 194J."

33. Facts of the case, in brief, are that an amount of Rs. 81,53,188 was paid by the assessee towards training programmes and seminars organised by various entities including CII towards attending training and seminars by its employees. The AO noted that the assessee had made short deduction of tax on the payments made to the above concerns. In response to the show-cause notice issued by the AO, the assessee replied that the company has deducted tax at source under s. 194J in most of the cases except in a few cases where the fees are on delegate basis for employees attending the seminars. Further, no TDS has been made in respect of lunch and banquet expenses, reimbursed or contributed at the request of CII or other charitable/mutual associations etc. The AO noted that the payments made on this account are covered under s. 194J of the IT Act. The employees are getting training from experts in various fields having professional knowledge to give training and lectures to the employees for the benefit of the company. Therefore, tax should have been deducted under s. 194J in respect of such payments and not under s. 194C. He accordingly calculated such short deduction at Rs. 1,06,364.

34. In appeal the learned CIT(A) held that training and seminar expenses do not fall under the definition of professional services and accordingly decided the issue in favour of the assessee.

34.1 Aggrieved with such order of the CIT(A), the Revenue is in appeal before us. The learned Departmental Representative heavily relied on the order of the AO.

35. The learned counsel for the assessee, on the other hand, while supporting the order of the CIT(A) submitted that most of the payments are for attending seminars organised by CII and other reputed institutes and such payments are basically reimbursement of the lunch, banquet expenses and other expenses. He submitted that by attending the seminars the employees of the assessee company come to know about the latest developments in various fields. There is no technical or professional services rendered by anybody and therefore the payments made are not covered under s. 194J.

36. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. In our opinion, the payments made to various organisations towards attending seminars by the employees of the assessee company cannot be considered as towards rendering of professional services by those training institutes as per the provisions of s. 194J. We, therefore, agree with the findings given by the learned CIT(A) that training and seminar expenses of the nature under consideration in the instant case do not fall under the category of services rendered under s. 194J and the assessee has rightly deducted tax under s. 194C and there is no snort deduction of tax. The ground raised by the Revenue is accordingly dismissed.

37. Ground of appeal No. 1.4 by the Revenue reads as under :

"The learned CIT(A) erred in holding that the amount of Rs. 38,58,905 paid by assessee to TLC, Zenith Infotech and Wipro Ltd. was covered under s. 194C and not under s. 194J. The learned CIT(A) once again failed to appreciate the true import of answer to question 29 of Board's Circular No. 715, dt. 8th Aug., 1995, supra."

38. After hearing both the sides, we find the assessee company made payment of Rs. 38,58,905 to M/s Tata Consultancy Service, Zenith Infotech Ltd., Wipro Ltd. during the year towards EDP expenses for professional, technical and managerial services rendered by the above parties. The assessee has deducted tax under the provisions of s. 194C. However, the AO held that provisions of s. 194J are applicable for such payments and that the assessee has made short deduction of tax at Rs. 1,19,217, the details of which are as under:

S.No.	Name of the company	Amount paid	Short deduction
1	Tata Consultancy Services	18,50,000	57,100
2	Zenith Infotech Ltd.	14,83,905	45,877
3	Wipro Ltd.	5,25,000	16,230
	Total	38,58,905	1,19,297

39. Before the CIT(A) it was submitted that the above payments are in the nature of routine AMC contracts for software maintenance. The answer to question No. 29 of the CBDT Circular No. 715, dt. 8th Aug., 1995 was brought to the notice of the CIT(A).

40. Based on the arguments advanced by the assessee the learned CIT(A) field that since the payments made are in the nature of AMC, therefore, provisions of s. 194C are applicable. Aggrieved with such order of the learned CIT(A), the Revenue is in appeal before us.

40.1 The learned Departmental Representative heavily relied on the order of the AO.

41. The learned counsel for the assessee, on the other hand while Supporting the order of the CIT(A) also relied on the following decisions :

1.		Swayam Shipping Services (P) Ltd. (supra);
2.		Shree Mahalaxmi Transport Co. (supra);
3.		Indian Oil Corpn. (Marketing Division) (supra).

42. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the learned CIT{A) has given a finding that the AO has not discussed the nature of these payments but has simply stated that the payments were for professional, technical and managerial services on which tax was deductible under s. 194J. The finding given by the learned CIT(A) that the payments are in fact in the nature of AMC could not be controverted by the learned Departmental Representative. We have already held in ground of appeal No. 1.2 of the Revenue that payments made for AMC are covered under s. 194C and not under s. 194J. Following the same ratio, we hold that the payments made to the parties mentioned above are covered under s. 194C and not under s. 194J. Accordingly, the order of the CIT(A) on this issue is upheld and the ground raised by the Revenue is dismissed.

43. Ground of appeal No. 2 by the Revenue reads as under :

"The learned CIT(A) erred in directing the AO to admit fresh evidence in respect of payment of taxes by deductee assessee. The CIT(A) failed to appreciate that no such evidence was adduced by the assessee at the time of proceeding under ss. 201(1) and 201(1A). The CIT(A) also failed to appreciate the correct import of two decisions and Board's circular dt. 29th Jan., 1997 cited by him in his order. The CIT{A) has failed to appreciate that by issuing such a direction, he is rendering the proceedings under s. 201(1) redundant."

44. The learned Departmental Representative submitted that the CIT(A) was not justified in directing the AO that if the payees have ultimately paid the tax, the tax which is not deducted by the assessee should not be collected from the assessee.

45. The learned counsel for the assessee on the other hand submitted that in view of decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC) the learned CIT(A) was justified in directing the AO for non-collection of short deduction of tax in case the payees have ultimately paid the tax.

46. In the preceding paras we have already allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue. Therefore, there is no short deduction of tax by the assessee. Therefore, this ground raised by the Revenue becomes infructuous and therefore is dismissed.

ITA No. 1327/Pn/2010 (by Revenue) (asst yr. 2008-09) :

47. Grounds raised by the Revenue are as under :

"The learned CIT(A) erred in holding that the payment of Rs. 22,96,845 made by the assessee to Enercon India Ltd. for windmill operation and maintenance was rightly covered by the assessee under s. 194C and not under s. 194J. The learned CIT(A) erred in placing reliance on the decision of Madras High Court in the case of Skycell Communications Ltd. [2001] 251 ITR 53 (Mad.), the facts of which are not applicable in the instant assessee's case.

The CIT(A) erred in coming to the conclusion that the payments of Rs. 53,43,163 made by the assessee to various parties were contractual payments requiring deduction of tax under s. 194C and not under s. 194J by placing reliance on the Madras High Court decision, supra, the facts of which are not applicable to the instant assessee's case. While coming to the conclusion, the CIT{A) erred in not appreciating the true import of the answer to question No. 29 of the Board's Circular No. 715, dt. 8th Aug., 1995.

The learned CIT(A) erred in holding that the payments of Rs. 52,74,226 by the assessee towards training programmes and seminars organised by various entities would be covered under s. 194C and not under s. 194J. The learned CIT(A) erred in holding that the training and seminars do not fall in the list of activities of professional services enumerated in s. 194J.

The learned CIT(A) erred in holding that the amount of Rs. 8,75,431 paid by assessee to TLC, Faxon Imaging Technology, GEM Integrators, RAC, IT Solutions and Synise Technology Ltd. were covered under s. 194C and not under s. 194J. The learned CIT(A) once again failed to appreciate the true import of answer to question 29 of Board's Circular No. 715 dt. 8th Aug., 1995, supra.

The learned CIT(A) erred in directing the AO to admit fresh evidence in respect of payment of taxes by deductee assessee. The CIT(A) failed to appreciate that no such evidence was adduced by the assessee at the time of proceeding under ss. 201(1) and 201(1A). The CIT(A) also failed to appreciate the correct import of two decisions and Board's circular dt. 29th Jan., 1997 cited by him in his order. The CIT(A) has failed to appreciate that by issuing such a direction, he is rendering the proceedings under s. 201(1) redundant.

The appellant prays that the order of the CIT(A) be vacated and that of .the AO be restored."

48. After hearing both the sides, we find the above grounds by the Revenue are identical to grounds in ITA No. 1326/Pn/2010 filed by the Revenue. We have already decided the issues and the grounds raised by the Revenue have been dismissed. Following the same ratio, the above grounds by the Revenue are dismissed.

49. In the result, both the appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.

IT : Right of revenue to initiate reassessment proceeding within time-limit prescribed under unamended section 149 cannot be curtailed by subsequent amendment

IT : Reopening of assessment was justified where Assessing Officer, while making assessment, had not examined question whether assessee-trust fulfilled condition laid down in section 13 read with section 11

■■■

[2013] 36 taxmann.com 553 (Punjab & Haryana)

HIGH COURT OF PUNJAB AND HARYANA

Sadhu Singh Hamdard Trust

v.

Assistant Commissioner of Income-tax, Jalandhar*

HEMANT GUPTA AND MS. RITU BAHRI, JJ.

C.W.P. NOS. 16890, 16891 AND 16893 TO 16899 OF 1995

JULY  4, 2013 

Section 149 of the Income-tax Act, 1961 - Income escaping assessment - Time-Limit for issuance of notice [Effect of amendment] - Assessment years 1984-85 to 1992-93 - Whether Amending Act 1989 making amendments to section 149 changing period of limitation for issuance of notice for reassessment has not made provision of amending Act applicable retrospectively - Held, yes - Whether therefore, where revenue had right to initiate proceedings for reassessment within time limit prescribed under unamended section 149, such right could not be curtailed by subsequent amendment, when no specific provision was made to curtail period of limitation for initiating such proceedings - Held, yes [Para 21] [In favour of revenue]

Section 11, read with section 147, of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Reassessment] - Assessment years 1984-85 to 1991-92 - Assessee was a public charitable trust - Its assessments had been completed allowing exemption under section 11 - Subsequently, it was found that Assessing Officer, while passing order under section 143(3), had not examined question whether trust fulfilled conditions laid down in section 13, read with section 11, and assessability of income earned from business carried on; and that assessee did not fulfil conditions laid down in clause (b) of sub-section (4A) of section 11, i.e., there was no named beneficiaries of trust and income was wrongly allowed exemption under section 11 - Whether subsequent Assessing Officer was justified in issuing notices for reopening assessment - Held, yes [Paras 26,27 and 28] [In favour of revenue]

FACTS

 

■		The assessee was public charitable trust registered under section 12A and derived income by running daily newspaper and other. The principle object was general public utility, namely, promotion of interest of Punjabi and Punjabiat.
■		In respect of assessment years 1984-85, 1985-86, 1986-87 and 1990-91, the returns filed by the assessee had been finalized in terms of section 143(3); in respect of assessment years 1987-88 and 1988-89, the returns were accepted finalized under the then existing provisions of section 143(1); whereas in respect of assessment years 1989-90, 1991-92 & 1992-93, the assessee was intimated about the acceptance of returns in terms of section 143(1)(a).
■		Subsequently, the reassessment notices were issued to the assessee for all the assessment years on the grounds that the Assessing Officer failed to examine question whether trust fulfilled conditions laid down in section 13, read with section 11, and assessability of income earned from business carried on; and that the assessee did not fulfil the conditions laid down in clause (b) of sub-section (4A) of section 11, i.e., there was no named beneficiary of the trust and the income was wrongly allowed exemption under section 11.
■		The assessee challenged the said notices contending that:

-		notices were based on mere change of opinion as assessments were framed under section 143(3).
-		The show-cause notice was issued beyond the period of limitation as per amended provision of Finance Act No. 2 of 1991.

HELD

 

■		In respect of subsequent assessment years when more beneficial sub-section (4A) was in force, the Court in assessee's own case has remanded the matter to the Tribunal to re-adjudicate the issue relating to exemption claimed under section 11 with reference to provisions of section 11(1)(a). The issue in respect of originally inserted sub-section 4(A), which is restricted in language, is required to be examined by the authorities under the Act in respect of application of its income for stated purpose of general public utility. [Para 15]
■		As regards time-limit for reopening assessment, issue is required to be examined keeping in view section 6 of the General Clauses Act, 1897. As per section 6 of the said Act, the repeal of any enactment shall not affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed, as also affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid. [Para 18]
■		In the instant case, the reassessment proceedings could be initiated within the time-limit prescribed under the unamended section 149 subject to the fulfilment of certain conditions. If such conditions are satisfied, the revenue has right to initiate proceedings for reassessment. Such right cannot be curtailed by subsequent amendment, when no specific provision was made to curtail the period of limitation for initiating such proceedings. The right to reassess the income is vested with revenue after following the procedure prescribed. The amending Act changing the period of limitation for issuance of notice for assessment has not made provision of the amending act applicable retrospectively. Though the limitation is a provision dealing with procedure and all amendments in respect of procedure are retrospective but where the amendment has the effect to curtail a right vested, then the amended provisions cannot be applicable to the vested rights. [Para 21]
■		It is well-settled that each of the assessment year is independent proceeding. Reference may be made to Radhasoami Satsang v. CIT[1992] 193 ITR 321/60 Taxman 248 (SC), wherein it has been held that strictly speaking res judicata does not apply to income tax proceedings. Each assessment year being a unit, what is decided in one year may not apply to the following year. Therefore, the right to initiate re-assessment in terms of the unamended provisions of section 149 cannot be curtailed by an amendment. Such right to reassessment is protected in favour of the revenue in terms of section 6 of the General Clauses Act, 1897, as vested rights cannot be taken away by amendment. [Para 23]
■		The assessee has vehemently argued that it has disclosed all material facts in its return filed and, therefore, assessment finalized by the Assessing Officer cannot be reopened only on the basis of change of opinion by a subsequent Assessing Officer. Such argument is primarily restricted to the assessments framed under section 143(3) in respect of the assessment years 1984-85, 1985-86, 1986-87 and 1990-91. The assessment in respect of other assessment years was finalized either under section 143(1) prior to its amendment with effect from 1-4-1989 or thereafter in terms of section 143(1)(a) accepting the return filed subject to correction of the mistakes. Since the intimation of the assessment was given to the assessee, it cannot be said that the Assessing Officer has examined the return which may bar the Assessing Officer to reopen the assessment. [Para 24]
■		In relation to assessment year 1984-85, there is a communication addressed by the assessee to the Income-tax Officer on 15-3-1984, wherein it is asserted that the assessee was a trust wholly for charitable purposes; the business was in furtherance of the objects of the trust and was wholly for charitable purposes; the work in connection with the business was mainly carried on by the beneficiaries of the trust and not by the trustees and the separate books of account were maintained by the trust in respect of such business. In the revised returns filed pursuant to the show-cause notice served, the assessee has asserted that total amount of income was applied to charitable purposes. In part IV of the return, it was asserted that the business of the trust was incidental to the attainment of the objective of the institution and separate books of account were maintained in respect of business and such is not hit by section 11(4A). [Para 25]
■		However, it may be observed that in the communication dated 15-3-1984, it is asserted that the work in connection with the business is mainly carried on by the beneficiaries of the trust. The trustees are running the newspaper and cannot be the beneficiaries of the trust. The trustee and the beneficiary have the conflicting interest and, thus, one person cannot be a trustee and a beneficiary. Though there is assertion that separate books of account are maintained, but the balance sheets produced by the assessee do not show that separate books of account were maintained in respect of charitable activities undertaken by it. The income and the expenditure account in the balance sheet does not reflect the separate books in respect of charitable activities, which is the requirement of sub-section (4A). [Para 26]
■		Even in respect of assessment years 1984-85, 1985-86, 1986-87 & 1990-91, the returns were finalized in terms of section 143(3). The Assessing Officer was within its jurisdiction to issue a show-cause notice for re-assessment. The order of assessment shows that the Assessing Officer has returned a finding that income has been applied for the purpose of the trust in view of the noting of the assessee in the return filed. The reason for re-assessment is that the Assessing Officer has not examined the question whether the trust fulfilled the condition laid down in section 13, read with section 11, and whether the income earned from the business is exempt from tax as it has been utilized for the beneficiaries and by keeping separate accounts. These are the requirements for claiming exemption in view of the judgment of the Supreme Court in Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 as also the Division Bench of this Court in the assessee's own case for the subsequent assessment years. Since the question was not examined by the Assessing Officer while framing assessment under section 143(3) and the assessment framed was in ignorance of the statutory provisions, the test that the income has escaped assessment on the basis of return filed stands satisfied. A perusal of the record produced by the assessee does not show that separate books of account were maintained in respect of income for charitable purposes, the test categorically laid down in Thanthi Trust'scase (supra). [Para 27]
■		Since the question is one of a fact, it is left open to the Assessing Officer to examine the question of fact, but it cannot be accepted that the assessment is sought to be reopened only on account of change of opinion. In fact, the return is sought to be reopened on account of non-disclosure of material facts relating to application of the income for charitable purposes. [Para 28]
■		Consequently, there is no merit in the writ petitions. The same are accordingly dismissed.

CASE REVIEW

 

Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 (SC) (para 27) followed.

CASES REFERRED TO

 

Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 7), Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) (para 7), CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 7), Vipan Khanna v. CIT[2002] 255 ITR 220/122 Taxman 1 (Punj. & Har.) (para 7), Chandi Ram v. ITO [1997] 225 ITR 611/[1996] 87 Taxman 418 (Raj.) (para 8),CIT v. Sandhu Singh Hamdard Trust [IT Appeal No. 75 of 2004, dated 26-7-2012] (para 10), Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 (SC) (para 11), Vinod Gurudas Raikar v. National Insurance Co. Ltd. [1991] 4 SCC 333 (para 20), T. Kaliamusthi v.Five Gori Thaikkal Wakf [2008] 9 SCC 306 (para 22), Radhasomi Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 23).

Sanjay Bansal, Rajiv Sharma and Gurjeet Singh for the Petitioner. Vivek Sethi for the Respondent.

ORDER

 

Hemant Gupta, J. - Challenge in the afore-mentioned writ petitions is to the show cause notices served upon the petitioners under Sections 147 & 148 of the Income Tax Act, 1961 for re-assessment of the income. Before invoking the jurisdiction of this Court, the petitioner has filed returns in pursuance of the show cause notices served for re-assessment. The details of the assessment years; the dates of issuance of show cause notices and the dates on which the revised returns were filed in pursuance of such notices are as under:

Sr.No.	CWP Numbers	Assessment Years	Dates of issuance of show cause notices	Dates on which revised returns were filed
1.	CWP No. 16897 of 1995	1984-85 04	08.1994	02.09.1994
2.	CWP No. 16894 of 1995	1985-86	30.03.1995	11.08.1995
3.	CWP No. 16899 of 1995	1986-87	04.08.1994	02.09.1994
4.	CWP No. 16890 of 1995	1987-88	30.05.1995	11.08.1995
5.	CWP No. 16896 of 1995	1988-89	30.05.1995	11.08.1995
6.	CWP No. 16898 of 1995	1989-90	30.05.1995	11.08.1995
7.	CWP No. 16895 of 1995	1990-91	19.08.1994	30.11.1990
8.	CWP No. 16893 of 1995	1991-92	19.08.1994	30.09.1994

2. In respect of Assessment Years 1984-85, 1985-86, 1986-87 & 1990-91, the returns filed by the petitioner have been finalized in terms of Section 143(3) of the Act; in respect of Assessment Years 1987-88 & 1988-89, the returns were accepted finalized under the then existing provisions of Section 143(1) of the Act; whereas in respect of Assessment Years 1989-90, 1991-92 & 1992-93, the assessee was intimated about the acceptance of returns in terms of Section 143(l)(a) of the Act.

3. The petitioner - Sadhu Singh Hamdard Trust, was registered as a Public Charitable Trust under Section 12A of the Act. The Trust was created by Deed of Trust executed on 17.08.1977 by S. Sadhu Singh Hamdard, the sole owner of the properties i.e. assets of 'Ajit' Newspaper including good will & l/3rd share of 'Gobind Farm' situated at Village Bal, District Roop Nagar. The said two properties including the business undertaking of 'Ajit' Newspaper were conveyed and transferred to the petitioner - Trust. The principal object of the Trust was general public utility namely promotion of the interest of Punjab, Punjabi and Punjabiat. The author of the Trust by Supplementary Deed of Trust dated 22.11.1977 conveyed and transferred the property of Daily Ajit Printers including its machinery, goodwill, stock etc. to the Trust. The Assessment Years in question are Assessment Years 1984-85 to 1992-93.

4. The basis of the notices issued to the petitioner is insertion of sub-section (4A) in Section 11 of the Act by Finance Act, 1983 w.e.f. 01.04.1984. Sub-section (4A) has been again substituted by Finance (No. 2) Act, 1991 w.e.f. 01.04.1992. The relevant statutory provisions before insertion/substitution and after insertion/substitution, for the Assessment Years in question, read as under:

Section 11. Income from property held for charitable or religious purposes

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Inserted by Finance Act, 1983 w.e.f. 01.04.1984

Substituted by Finance (No.2) Act, 1991 w.e.f. 01.04.1992

(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income, being profits and gains of business, unless – (a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette; or (b) the business is carried on by an institution wholly for charitable purpose and the work in connection with the business is mainly carried on by the beneficiaries of the institution, And separate books of account are maintained by the Trust or institution in respect of such business.

(4A) Sub-section (1) or sub-section (2) or subsection (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.

Section 147 - Income escaping assessment

As it existed in the year 1984

As substituted by the Direct Tax Laws (Amendment) Act w.e.f. 1.4.1989

147. If – (a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Assessing Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recomputed the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)

147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) Provided that where an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year

Section 148 - Issue of notice where income has escaped assessment

As it existed in the year 1984

As Substituted by the Direct Tax Laws (Amendment) Act w.e.f. 1.4.1989

148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be apply accordingly as if the notice were a notice issued under that sub-section. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.

148. (1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.

Section 149 - Time limit for notice

As it existed in the year 1984

As substituted by the Direct Tax Laws (Amendment) Act w.e.f. 1.4.1989

149. (1) No notice under section 148 shall be issued, (a) in cases falling under clause (a) of section 147 – (i) for the relevant assessment year, if eight years have elapsed from the end of that year, unless the case falls under sub-clause (ii); (ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year; (b) in cases falling under clause (b) of section 147, at any time after the expiry of four years from the end of the relevant assessment year. (2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151. (3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.

149. (1) No notice under section 148 shall be issued for the relevant assessment year – (a) in a case where an assessment under sub-section (3) of Section 143 or section 147 has been made for such assessment year – (i) if four years have elapsed from the end of the relevant assessment year, unless the case falls under sub-clause (ii) or sub-clause (iii); (ii) if four years, but not more than seven years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year;  (iii) if seven years, but not more than ten years, have elapsed from the end of the relevant assessment year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees one lakh or more for that year; (b) in any other case –  (i) if four years have elapsed from the end of the relevant assessment year, unless the case falls under sub-clause (ii) or sub-clause (iii); (ii) if four years, but not more than seven years, have elapsed from the end of the relevant assessment year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees twenty-five thousand or more for that year; (iii) if seven years, but not more than ten years, have elapsed from the end of the relevant assessment year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year. (2) no change (3) no change

5. Learned counsel for the petitioner vehemently argued that the returns for the Assessment Years 1984-85, 1985-86, 1986-87 & 1990-91 were finalized in terms of Section 143(3) of the Act. The petitioner has truly and completely disclosed all the facts and the assessment was completed thereafter. Learned counsel for the petitioner referred to the order of assessment dated 18.09.1986 respect of assessment for the year 1984-85, which reads as under:

"Return declaring Nil income has been filed on 30.03.1985. The return is supported by Statement of Income and Expenditure statements, Balance Sheet, Audit Report in Form No. 10B. In response to notice u/s 143(2), Shri Partap Singh, Accountant appeared alongwith Sh. J.K. Sood, Advocate. The case has been discussed with them. On examination of the account, I find that the income has been applied for the purpose of trust. It is a case of public Charitable trust. The registration has been granted to the trust u/s 12A(a) of the Income Tax Act by the Commissioner of Income Tax, Jull vide order dated 12.11.1979. The object of the trust for this year is the same as in the earlier years. Keeping in view the past history of the case, income declared at Nil figure is accepted.

Requisite documents are issued."

6. Learned counsel for the petitioner referred to the identical reasons recorded for re-assessment in respect of all the assessment years in question, which are as under:

'The assessee M/s Sadhu Singh Hamdard Trust filed return of income on 30.03.1985 for the Financial Year ending 31.12.1983 relevant to assessment year 1984-85. The assessee derived income from business activities by running Daily Ajit newspaper and others. After adjusting the loss from Ajit English weekly, depreciation and unabsorbed loss of earlier year net income was shown at Rs. 737153/-. However, the same was claimed exempt u/s 11 with the noting:

"Total amount applied to charitable purposes"

The exemption claimed was allowed on the basis that registration u/s 12A(a) has already been granted by the CIT.

Since Section 12A(a) is only one of the conditions for registration of so called Trust and registration does not mean confirmation of exemption u/s 11, 12 or u/s 80G(v) of the Act. As is apparent that the then AO while passing order u/s 143(3) on 18.09.1986 had not examined the question; whether the trust fulfilled conditions laid down in Section 13 read with section 11 and assessability of income earned from the business carried on. The then AO allowed exemption as claimed u/s 11 on the basis of registration allowed u/s 12A(a).

I have examined the records and found that the assessee did not fulfill the conditions laid down in Cl. (b) of sub-sec. (4A) of Section 11 i.e. there was no named beneficiaries of the Trust and the income wrongly allowed exempt u/s 11 of the Income Tax Act, 1961.

I have, therefore, reasons to believe that by allowing exemption u/s 11 wrongly at Rs. 737153/- the income chargeable to tax has escaped assessment for the assessment year 1984-85.

In view of the above facts, necessary sanction to issue notice u/s 148 may kindly be accorded.'

7. It is, therefore, contended that the show cause notice for re-assessment is based upon mere change of opinion in respect of four assessment years as mentioned above as the assessment was framed under Section 143(3) of the Act, thus, the notice for re-assessment is without jurisdiction of the Assessing Authority. It is contended that since the Assessing Officer has returned a finding that income has been applied for the purposes of Trust, therefore, the reasons recorded that the Assessing Officer has not examined the question; whether the Trust fulfilled the conditions laid down in Section 13 read with Section 11 and that income earned from the business has escaped assessment is merely a change of opinion of the Assessing Officer. Reliance is, inter alia, placed upon Supreme Court judgments reported as Calcutta Discount Co. Ltd. v.ITO [1961] 41 ITR 191; Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) & CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) apart from the judgment of this Court in Vipan Khanna v. CIT [2002] 255 ITR 220/122 Taxman 1 (Punj. & Har.).

8. Learned counsel for the petitioner has also argued that the provisions including the provisions in respect of time limits as are existed on the date of issuance of show cause notices of re-assessment have to be examined to determine the legality and validity of the show cause notices and not the provisions as were in existence during the Assessment Years in question. In support of such argument, reliance is placed upon Circular No.549 dated 31.10.1989 issued by the Central Board of Direct Taxes and the judgment of Chandi Ram v. ITO [1997] 225 ITR 611/[1996] 87 Taxman 418 (Raj.).

9. On the other hand, Mr. Sethi, learned counsel for the Revenue, vehemently argued that the assessment under Section 143(3) of the Act has been framed by the Assessing Officer without taking into consideration the statutory provisions contained in substituted sub-section (4A) of Section 11 of the Act. The assessment has been framed merely on the basis of the fact that the petitioner is a registered Charitable Trust under Section 12A of the Act. The Assessing Officer has failed to examine the application of income in terms of the amended provisions of the Statute. Therefore, the notices of re-assessment are within the jurisdiction to examine; whether the income of the petitioner has been applied for general public utility, so as to seek exemption from the provisions of the Act. It is contended that it is not change of opinion, but on account of provisions of the Statute having escaped the notice of the Assessing Officer either intentionally or negligently, which is the basis of the show cause notices, therefore, the Revenue is entitled to re-assess the income of the assessee.

10. It is also contended that after substitution of sub-section (4A) of Section 11 of the Act w.e.f. 01.04.1992, this Court in IT Appeal No.75 of 2004 titled 'CIT v. Sadhu Singh Hamdard Trust' and other 9 connected appeals decided on 26.07.2012 has remanded the case to the Tribunal to re-adjudicate the issues relating to the exemption claimed under Section 11 with reference to Section 11A of the Act. Therefore, the question of re-assessment in respect of assessments prior to 01.04.1992 is also required to be re-determined in view of the statutory provisions.

11. The issue in respect of subsequent assessment years in the assessee's own case has been examined by a Division Bench of this Court in ITA No. 75 of 2004 titled Sadhu Singh Hamdard Trust' (supra) decided on 26.07.2012. One of the arguments raised by the assessee was that for 15 years i.e. for the assessment years 1978-79 to 1992-93, the assessee was accepted to be charitable institution and income was held to be non-taxable for all these years, therefore, the revenue was not entitled to adopt different approach from the assessment years 1993-94. The said argument raised in the aforesaid case was misleading inasmuch as the present writ petitions challenging the re-assessment proceedings pertaining to assessment years 1984-85 to 1992-93 were pending before this Court at the time of hearing of the said appeals. Be as it may, the fact remains that the Division Bench of this Court in the aforesaid order has examined the provisions of Section 11(4A) of the Act as substituted on 01.04.1992. The Court upheld the findings recorded by Tribunal that the assessee was entitled to exemption under Section 11 of the Act, but in respect of exemption of income, the Court referred to the Supreme Court judgment in Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 and returned the following finding:

"30. Under Section 11(1)(a) of the Act, the income derived from property held under trust only for charitable or religious purpose is exempt of its utilization for that purpose. However, wherever there is accumulation or setting aside for application to such purposes in India, the accumulation or setting apart is not to be in excess of twenty five per cent of the income from such property. However, this has been reduced to fifteen per cent by Finance Act, 2002 with effect from 01.04.2003. According to Section 11 (4A) of the Act, an exemption is permissible where the activities are incidental to the attainment of the objectives of the trust and separate books of account are maintained by the trust or the institution in respect of such business. The Tribunal recorded that the only activity of the assessee was running newspaper to attain the main object of promoting Punjab, Punjabi and Punjabiat and the conditions of Section 11(4A), thus, automatically stood satisfied. However, the CIT(A) had recorded that there was net income of Rs. 22,99,905/- from publication of newspaper and there was nothing to show that this amount had been utilized for charitable purpose for claiming exemption under Section 11 of the Act. The Tribunal while allowing the appeal of the assessee had not adverted to this aspect with reference to any material on record."

12. The Supreme Court in Thanthi Trust's case (supra), was examining a case of publication of newspaper by a Trust registered as a charitable trust. The argument of the revenue before the Supreme Court in respect of the provisions of sub-section (4A) as inserted vide Finance Act, 1983 and also the substituted sub-section (4A) inserted by Finance Act No.2 of 1991 was as under:

"20. This brings us to the second controversy, relevant to Assessment Years 1984-85 to 1991-92 during which period of time sub-section (4A) of Section 11, as originally enacted, was in operation. It was contended by the learned Solicitor General that by reason of sub-section (4A) the income derived from a business held under trust wholly for charitable or religious purposes would not be included in the total income of the previous year in the case only of (a) a trust for public religious purposes, if the business was of printing and publishing books or of a notified kind; or (b) an institution wholly for charitable purposes, if the work in connection with the business was mainly carried on by the beneficiaries of the institution, provided that separate books of accounts had been maintained in respect of such business."

13. The Court held that sub-section (4A) restricts the benefit under Section 11 so that it is not available for income derived from business unless (a) the business is carried on by a trust only for public religious purposes and it is of printing and publishing books or any other notified kind, or (b) it is carried on by an institution wholly for charitable purposes and the work in connection with the business in mainly carried on by the beneficiaries off the institution, provided, in both cases, separate books of accounts are maintained by the trust or the institution in respect of such business. It was held that the Trust was not entitled to the exemption contained in Section 11 in respect of the income of its newspaper.

14. The Supreme Court further noticed that substituted sub-section (4A) as substituted vide Finance Act No. 2 of 1991 is couched in wide language and a trust is entitled to the benefit of Section 11 if it utilized the income of its business for the purposes of achieving its objects. The Court observed that the scope of substituted sub-section (4A) is more beneficial to a Trust or institution than was the scope of sub-section (4A) as originally enacted. The Court observed as under:

"25. The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution if 'the business is incidental to the attainment of the objective of the trust or, as the case may be, institution' and separate books of accounts are maintained in respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a trust or institution than was the scope of sub-section (4A) as originally enacted. ..."

15. Thus, in respect of subsequent assessment years, when more beneficial sub-section (4A) was in force, this Court in assessee's own case has remanded the matter to the Tribunal to re-adjudicate the issue relating to exemption claimed under Section 11 with reference to provisions of Section 11(1)(a) of the Act. We find that issue in respect of originally inserted sub-section (4A), which is restricted in language, is required to be examined by the Authorities under the Act in respect of application of its income for stated purpose of general public utility.

16. Since the learned counsel for the petitioner has challenged the issuance of the show cause notices for re-assessment on other grounds, we will examine each ground of challenge hereinafter.

17. Firstly, we shall examine the question as to whether the show cause notices are beyond the period of limitation as per the amended provisions of the Act vide Finance Act No. 2 of 1991. The argument of learned counsel for the petitioner is based upon the circular dated 31.10.1989 issued by the Board, wherein in paras 7.13 and 7.14, it has been laid down that since the provisions of Sections 147 to 152 lay down procedural law, these have retrospective effect. The relevant clauses from the said Circular read as under:

"7.13 These amendments come into force w.e.f. the 1st April, 1989. However, it may be clarified that since the provisions of ss. 147 to 152 lay down procedural law, these have retrospective effect, unless the amending statute provides otherwise. Therefore, the amendments made to these sections by the Amending Acts, 1987 and 1989, discussed in the preceding paragraphs, which came into force w.e.f. 1st April, 1989, will be retrospective in the sense that these will apply to all matters which were pending on 1st April, 1989, and had not become closed or dead on this date.

7.14 Thus, from 1st April, 1989 onwards, any action for opening or reopening an assessment for the asst. yr. 1988-89, and earlier assessment years will have to be taken in accordance with the amended provisions. The following examples will clarify the position:—

(i)		No notice under s. 148 can now be issued for the asst. yrs. 1973-74 to 1978-79, even if the escaped income is Rs. 50,000 or more in each year, although under the old provisions this could have been done with the Board's approval.
(ii)		Notice under s. 148 can now be issued for any of the asst. yrs. 1979-80 to 1981-82, if the following conditions are fulfilled:-

(a)		In a scrutiny case (i.e. where an assessment order had been passed under s. 143(3) or 147), if the escaped income is Rs. 1 lakh or more in each year and approval of the Chief CIT or CIT has been obtained.
(b)		In a non-scrutiny case, if the escaped income is Rs. 50,000/- or more in each year, and approval of the Dy. CIT has been obtained.

		(Under the old provisions, there was no distinction between a scrutiny and a non-scrutiny case. Action could have been taken in respect of both types of cases for the asst. yr. 1981-82, with the approval of the Chief CIT or CIT, whatever be the amount of escaped income, while for the asst. yrs. 1979-80 and 1980-81, action could have been taken with the Board's approval if the escaped income was Rs. 50,000 or more in each year. These old provisions, however, have no application now from 1st April, 1989 onwards).
(iii)		Notice under s. 148 can now be issued for any of the asst. yrs. 1982-83 to 1984-85, if the following conditions are fulfilled:-

(a)		In a scrutiny case, if the escaped income is Rs. 50,000 or more in each year and approval off the Chief CIT or CIT has been obtained.
(b)		In a non-scrutiny case, if the escaped income is Rs.25,000 or more in each year and approval of the Dy. CIT has been obtained.

		(Under the old provisions, action could have been taken for these assessment years, in respect of both types of cases, with the approval of the Chief CIT or CIT, whatever be the amount of escaped income. These old provisions, however, have no application now from 1st April, 1989, onwards).
(iv)		Notice under s. 148 can now be issued for any of the asst. yrs. 1985-86 to 1988-89, whatever be the amount of income which has escaped assessment, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment.
		(Under the old provisions action could have been taken for these assessment years, if the circumstances mentioned in cl. (a) or (b) of the old s. 147 were satisfied. These old provisions, however, have no application now from 1stApril, 1989, onwards).
(v)		A scrutiny assessment for any assessment year cannot be reopened now by an Assessing Officer below the rank of an Asstt. CIT. Under the old provisions, there was no such restriction."

18. The arguments raised by learned counsel for the petitioners is required to be examined keeping in view Section 6 of the General Clauses Act, 1897. As per Section 6 of the said Act, the repeal of any enactment shall not affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed, as also affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid. Section 6 of the said Act reads as under:

"6. Effect of repeal - Where this Act, or any Central Act or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not—

(a)		Revive anything not in force or existing at the time at which the repeal takes effect; or
(b)		affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or
(c)		affect any right, privilege, obligation or liability acquired, accrued or incurrent under any enactment so repealed; or
(d)		affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or
(e)		affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid,
		and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed."

19. The above said circular issued by the Board has been referred to by Rajasthan High Court in a judgment reported as Chandi Ram's case (supra), wherein the Court has held that the provisions of amended Act would be applicable only in those cases where the limitation in respect of old law has not expired. The Court held to the following effect:

"19. It is an established law that no one has vested right in procedural law and whenever a change is made with regard to procedure, it is retrospective in nature. In a matter of reassessment proceedings under the IT Act the change has been brought with regard to circumstances and limitation as well. If the limitation has already expired, then the amended law would not revive the matters where the limitation is already expired by taking into consideration the amended provisions of law on the ground that the limitation is extended. The provisions of amended Act, therefore, would be applicable only in those cases where the limitation under the old law has not expired. So far as the question as to whether the phraseology used in the repealed section and in the amended section is concerned, I am of the view that there was no vested right in an assessee not to pay the correct tax. The provisions of assessment are meant for determination of the correct liability of tax in accordance with law which should be on the basis of correct income and if there is any escapement, then the ITO has power to reopen the matter. The repealed section refers to the 'information' on the basis of which the reassessment proceedings could have been initiated. The information with regard to correct state of law by way of judgment of the apex court is also an information on the basis of which the action could have been taken under the repealed section. Now, the ITO can reassess for any reason, therefore, the amended section cannot be considered to be effecting any right of the assessee. .....

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20. In the case of the assessee, the power could have been exercised under the repealed section as well as the amended section. The matter with regard to the applicability of the repealed section is merely an academic argument, however, in view of the fact that the power of reopening was existing in respect of escaped assessment prior to 1st April, 1989, therefore, it cannot be said that any new right has been acquired by the ITO or the said amendment has effected any vested right of the assessee. The object of reassessment is to assess the correct income and is a matter of procedure. The provisions of Section 148, therefore, have to be considered as procedural in nature. A change in the procedure may be by way of limitation or otherwise does not effect the vested right and as such I am of the opinion that the ITO was competent to invoke the provisions after 1st April, 1989 in accordance with the amended law, in respect of previous year which have not become time barred."

20. Hon'ble Supreme Court in a judgment reported as Vinod Gurudas Raikar v. National Insurance Co. Ltd. [1991] 4 SCC 333, examined the provisions of the Motor Vehicle Act, 1988 in respect of filing of claim petitions with an application for condonation of delay. The argument raised was that the right to seek condonation of delay under the un-amended statute is vested right and cannot be curtailed. The Court observed as under:

"7. It is true that the appellant earlier could file an application even more than six months after the expiry of the period of limitation, but can this be treated to be a right which the appellant had acquired. The answer is in the negative. The claim to compensation which the appellant was entitled to, by reason of the accident was certainly enforceable as a right. So far the period of limitation for commencing a legal proceeding is concerned, it is adjectival in nature, and has to be governed by the new Act - subject to two conditions. If under the repealing Act the remedy suddenly stands barred as a result of a shorter period of limitation, the same cannot be held to govern the case, otherwise the result will be to deprive the suitor of an accrued right. The second exception is where the new enactment leaves the claimant with such a short period for commencing the legal proceeding so as to make it unpractical for him to avail of the remedy. (Emphasis supplied)

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8. The learned counsel strenuously contended that the present case must be considered as one where an accrued right has been affected, because the option to move an application for condonation of delay belatedly filed should be treated as a right. This cannot be accepted. There is a vital difference between an application claiming compensation and a prayer to condone the delay in filing such an application. Liberty to apply for a right is not in itself an accrued right or privilege. To illustrate the point, we may refer to some cases ..... "

21. In the present case, the re-assessment proceedings could be initiated within the time limits prescribed under the un-amended Section 149 of the Act subject to the fulfilment of certain conditions. If such conditions are satisfied, the revenue has right to initiate proceedings for reassessment. Such right cannot be curtailed by subsequent amendment, when no specific provision was made to curtail the period of limitation for initiating such proceedings. The right to reassess the income is vested with revenue after following the procedure prescribed. The amending Act changing the period of limitation for issuance of notice for reassessment has not made provision of the amending Act applicable retrospectively. Though the limitation is a provision dealing with procedure and all amendments in respect of procedure are retrospective but where the amendment has the effect to curtail a right vested, then the amended provisions cannot be applicable to the vested rights.

22. The Supreme Court in the case of T. Kaliamurthi v. Five Gori Thaikkal Wakf [2008] 9 SCC 306, examined the argument that in terms of the amended provisions, the suitor has a right to initiate proceedings though under the un-amended law, the remedy has become time barred. The Court observed:

"37. Such being the view, we have already expressed on the question of limitation, let us now examine whether Section 107 of the Wakf Act can have the effect of reviving a barred claim.

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39. Section 107 lays down that nothing contained in the Limitation Act, 1963 shall apply to any suit for possession of immovable property comprised in any wakf or for possession of any interest in such property. Thus, it can be said that this section virtually repeals the Limitation Act, 1963 so far as the wakf properties are concerned. Therefore, it can be concluded without any hesitation in mind that there is now no bar of limitation for recovery of possession of any immovable property comprised in a wakf or any interest therein.

40. In this background, let us now see whether this section has any retrospective effect. It is well settled that no statute shall be construed to have a retrospective operation until its language is such that would require such conclusion. The exception to this rule is enactments dealing with procedure. This would mean that the law of limitation, being a procedural law, is retrospective in operation in the sense that it will also apply to proceedings pending at the time of the enactment as also to proceedings commenced thereafter, notwithstanding that the cause of action may have arisen before the new provisions came into force. However, it must be noted that there is an important exception to this rule also. Where the right of suit is barred under the law of limitation in force before the new provision came into operation and a vested right has accrued to another, the new provision cannot revive the barred right or take away the accrued vested right.

41. At this juncture, we may again note Section 6 of the General Clauses Act, as reproduced hereinearlier. Section 6 of the General Clauses Act clearly provides that unless a different intention appears, the repeal shall not revive anything not in force or existing at the time at which the repeal takes effect, or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder, or affect any right, privilege, obligation or liability acquired, accrued, or incurred under any enactment so repealed.

**

**

**

47. Let us now look at the other ground taken by the High Court to hold that Section 107 has a retrospective effect. The High Court has held that it is a settled proposition of law that in procedural matters, there is no vested right and hence any amendment to the procedural matters would apply to pending proceedings also.

**

**

**

53. In view of the above authorities, we are of the view that in the present case, once it is held that the suit for possession of the suit properties filed at the instance of the Wakf were barred under the Limitation Act, 1908, the necessary corollary would be to hold that the right of the Wakf to the suit properties stood extinguished in view of Section 27 of the Limitation Act, 1963 and, therefore, when Section 107 came into force, it could not revive the extinguished rights. The authorities relied upon by the learned counsel for the respondents in this regard in Sree Bank Ltd. v. Sarkar Dutt Roy & Co. AIR 1966 SC 1953, Dhannalal v. D.P. Vijayvargiya [1996] 4 SCC 652, New India Assurance Co. Ltd. v. C Padma [2003] 7 SCC 713and S. Gopal Reddy v. State of A.P. [1996] 4 SCC 596have no application to the facts of the case because in these cases, unlike the present case, there was no extinguishment of the rights.

54. Let us now answer the submissions on behalf of the learned counsel for the respondents. The learned counsel for the respondents relied on a decision of this Court in Dayawati v. Inderjit AIR 1966 SC 1423to suggest that the law affecting procedure is always retrospective and, therefore, Section 107 should be given retrospective effect.

**

**

**

57. After considering this submission of the learned counsel for the respondents, it may appear that the controversy has narrowed down to the point whether Section 6 of the General Clauses Act would apply in this case or not. That is to say, it may appear that if we answer this question in the negative thereby holding that Section 112 is self-contained, the appeal would fail because then the question of reviving a barred claim would not arise at all because Section 112 does not contemplate or provide for any such provision. However, if we answer this question in the affirmative, the inevitable result would be that the appeal would have to be allowed because on all other points discussed hereinearlier, the arguments of the learned counsel for the appellants have been accepted. However, in our view, the authorities relied upon by the respondents deal only with the question of repeal and savings but do not answer the question raised by the learned counsel for the appellants, i.e. whether Section 107 can revive an extinguished right.

58. We may note that the authority relied upon by the learned counsel for the appellant in Yeshwantrao Laxmanrao Ghatge v. Baburao Bala Yadav [1978] 1 SCC 669cannot be ignored. That decision was not a case of repeal and accordingly, there was no reference to Section 6 at all in that Act. Nevertheless, it was held in that case that a right extinguished under Section 28 of the Limitation Act, 1908 cannot be revived by Section 52-A. Similarly, in the present case, we are of the opinion that applicability of Section 6 is inconsequential because admittedly, there was an extinguishment of rights under Section 28, and Section 107 of the Wakf Act cannot revive those extinguished rights.

59. In view of the above discussions, we are, therefore, of the view that Section 107 cannot revive a barred claim or extinguished rights."

23. It is well settled that each of the assessment year is independent proceeding. Reference may be made to Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC), wherein it has been held that strictly speaking res judicata does not apply to income tax proceedings. Each assessment year being a unit what is decided in one year may not apply to the following year. Therefore, the right to initiate re-assessment in terms of the un-amended provisions of Section 149 of the Act cannot be curtailed by an amendment. Such right to reassessment is protected in favour of the Revenue in terms of Section 6 of the General Clauses Act, 1897, as vested rights cannot be taken away by amendment.

24. Learned counsel for the petitioner has vehemently argued that the petitioner has disclosed all material facts in its return filed, therefore, assessment finalized by the Assessing Officer cannot be reopened only on the basis of change of opinion of a subsequent Assessing Officer. Such argument is primarily restricted to the assessments framed under Section 143(3) of the Act in respect of the assessment years 1984-85, 1985-86, 1986-87 & 1990-91. The assessment in respect of other assessment years was finalized either under Section 143(1) of the Act prior to its amendment w.e.f. 01.04.1989 or thereafter in terms of Section 143(1)(a) of the Act accepting the return filed subject to correction of the mistakes. Since the intimation of the assessment was given to the assessee, it cannot be said that the Assessing Officer has examined the return which may bar the Assessing Officer to reopen the assessment.

25. In relation to assessment year 1984-85, the record of which was produced by learned counsel for the petitioner, there is a communication addressed by the petitioner to the Income Tax Officer on 15.03.1984, wherein it is asserted by the petitioner that the petitioner is a Trust wholly for charitable purposes; the business is in furtherance of the objects of the Trust and is wholly for charitable purposes; the work in connection with the business in mainly carried on by the beneficiaries of the Trust and not the Trustees and the separate books of account are maintained by the Trust in respect of such business. In the revised returns filed pursuant to the show cause notice served, the petitioner has asserted that total amount of income applied to charitable purposes. In part IV of the return, it is asserted that the business of the Trust is incidental to the attainment of the objective of the institution and separate books of accounts are maintained in respect of business and such is not hit by Section 11(4A) of the Income Tax Act.

26. However, we may observe that in the communication dated 15.03.1984, it is asserted that the work in connection with the business is mainly carried on by the beneficiaries of the Trust. The trustees are running the newspaper and cannot be the beneficiaries of the Trust. The trustee and the beneficiary have the conflicting interest and thus, one person cannot be a trustee and a beneficiary. Though there is assertion that separate books of account are maintained, but the balance-sheets produced by the petitioner do not show that separate books of account were maintained in respect of charitable activities undertaken by the petitioner. The income and the expenditure account in the balance sheet does not reflect the separate books in respect of charitable activities, which is the requirement of sub-section (4A) of the Act.

27. However, we find that even in respect of assessment years 1984-85, 1985-86, 1986-87 & 1990-91, the return was finalized in terms of Section 143(3) of the Act. The Assessing Officer was within its jurisdiction to issue a show cause notice for re-assessment. The order of assessment, as reproduced above, shows that the Assessing Officer has returned a finding that income has been applied for the purpose of the Trust in view of the noting of the assessee in the return filed. The reason for re-assessment is that the Assessing Officer has not examined; the question whether the Trust fulfilled the condition laid down in Section 13 read with Section 11 of the Act and whether the income earned from the business is exempt from Tax as it has been utilized for the beneficiaries and by keeping separate accounts. These are the requirements for claiming exemption in view of the judgment of the Supreme Court in Thanthi Trust's case (supra) as also the Division Bench of this Court in the assessee's own case for the subsequent assessment years. Since the question was not examined by the Assessing Officer while framing assessment under Section 143(3) of the Act, and that the assessment framed was in ignorance of the statutory provisions and thus, the test that the income has escaped assessment on the basis of return filed stands satisfied. A perusal of the record produced by the assessee does not show that separate books of account were maintained in respect of income for charitable purposes, the test categorically laid down in Thanthi Trust'scase (supra).

28. Since the question is one of a fact, we leave it open to the Assessing Officer to examine the questions of fact, but we are unable to agree with the argument raised that the assessment is sought to be reopened only on account of change of opinion. In fact the return is sought to be reopened on account of non-disclosure of material facts relating to application of the income for charitable purposes.

Consequently, we do not find any merit in the present set of writ petitions. The same are accordingly dismissed.

VARSHA

---

*In favour of revenue.

ST : If service provider has imparted training or coaching for a consideration, then, such consideration per sedetermines commercial character of activity and it would be regarded as 'commercial training or coaching'; absence of profit motive or constitution of service provider are irrelevant.

ST : Where no final judgment in support of assessee's views exists during period of dispute, there cannot be any "bona fide belief based on decisions" so as to avoid invocation of extended period of limitation; accordingly, extended period of 5 years is invocable and it can be reckoned from date of acquisition of knowledge by department.

■■■

[2013] 37 taxmann.com 42 (Bangalore - CESTAT)

CESTAT, BANGALORE BENCH

I.C. Financial Analysts of India

v.

Commissioner of Customs & Central Excise, Hyderabad-II*

P.G. CHACKO, JUDICIAL MEMBER 
AND M. VEERAIYAN, TECHNICAL MEMBER

FINAL ORDER NOS. 514 - 520 OF 2012 
APPEAL NOS. ST/ 32, 39, 40, 46, 365 & 392 OF 2007 & 194 OF 2008

JULY  31, 2012 

I. Section 65(27) of the Finance Act, 1994 - Commercial Training or Coaching Services - Period from July, 2003 to March, 2007 - In view of explanation to section 65(105)(zzc) inserted retrospectively with effect from 1-7-2003, absence of profit motive or constitution of service provider are irrelevant; if service provider has imparted training or coaching for a consideration, then, such consideration per se determines commercial character of activity and it would be regarded as 'commercial training or coaching' - A line cannot be drawn to separate "education" from "training or coaching"; hence, even 'education' is covered by section 65(27) and institutes/establishments which : (a) do not issue certificate or diploma or degree or any "educational qualification" recognized by Indian law; or (b) issue certificates/diplomas/degrees/educational qualifications not recognized by Indian law, are covered in taxable service - Therefore, in case of Institute of Chartered Financial Analysts of India issuing certificate/diploma/degree in name of "ICFAI UNIVERSITY", which is not a legally constituted body authorized by law, such courses are liable to service tax - Further, courses run by Badruka Institute of Foreign Trade (BIFT), Institute of Insurance and Risk Management (IIRM) and Indian School of Business (ISB), which may be recognized by foreign bodies but not recognized by Indian law were liable to service tax - Plea as to benefit of exemption under Notification No. 9/2003-S.T. as vocational training institute was raised for first time and was, therefore, remanded [Paras 12 to 19] [In favour of revenue]

II. Section 73, read with sections 76, 77 and 78, of the Finance Act, 1994 - Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded - Invocation of extended period of limitation - Where assessee did not disclose relevant facts and materials to department and did not take steps to obtain registration/file returns/pay tax and disclosed facts only during investigations by department and, that too, under compulsion and in a piecemeal manner, assessee is guilty of suppression of facts - Moreover, where no final decision of appellate authorities/Court in support of assessee's views existed during period of dispute, there was no substance in plea of "bona fide belief based on decisions" so as to avoid invocation of extended period of limitation - Accordingly, extended period of 5 years was invocable and period of 5 years could be reckoned from date of acquisition of knowledge by department - Penalty under section 78 was upheld but penalties under sections 76 and 77 were set aside [Para 20] [Partly in favour of Assessee]

Circulars and Notifications : Notification No. 9/2003-S.T. dated 20-6-2003, Notification No. 10/2003-S.T. dated 20-6-2003,Circular No. 59/8/2003-S.T., dated 20-6-2003, Circular No. 107/1/2009-S.T. dated 28-1-2009, Circular No. 334/3/2011, dated 28-2-2011

Words and Phrases : 'Education', 'Educational Institutions', as used in section 65(27) of the Finance Act, 1994

FACTS

 

Facts

■		Assessee 1 :
■		The assessee The Institute of Chartered Financial Analysts of India (ICFAI), Hyderabad, was a society registered under the Andhra Pradesh (Telengana Area) Public Societies Registration Act. The ICFAIAN Foundation was also a society registered under the same Act.
■		The ICFAI University, Dehradun was established under the ICFAI University Act, 2003 of the State of Uttaranchal.
■		The ICFAI University, Tripura was established in 2004, under the ICFAI University Tripura Act, of the State of Tripura.
■		Other assessees :
■		Institute of Foreign Trade (BIFT,), Hyderabad was an institution belonging to an Educational Society registered under the aforesaid Public Societies Registration Act.
■		The Institute of Insurance and Risk Management (IIRM), Hyderabad and the Indian School of Business (ISB) are companies incorporated in 2002 and 1997, respectively under Section 25 of the Companies Act, 1956 as per the Certificates of Incorporation.
■		In case of ICFAI entities, Department demanded service tax on the fees collected from students in the name of 'ICFAI UNIVERSITY' and accounted for in the books of account of the various ICFAI entities during July, 2003 to March, 2005. Demand was raised on ground that assessee was carrying "commercial training or coaching" in a variety of areas such as finance, banking, insurance, accounting, law, management, commerce, information technology etc. but not issuing any certificate or diploma or degree recognized by any law for the time being in force. Exemption under Notification No. 10/2003-S.T. dated 20-6-2003 was also denied.
■		In case of BIFT, service tax was demanded on tuition fees from students for imparting training/coaching on a commercial basis in the field of management and international business during the period July, 2003 to September, 2005.
■		In case of IIRM, service tax was demanded on fees collected from PGDI (Postgraduate Diploma in Insurance) students from July, 2004 to March, 2006.
■		In case of ISB, demand was raised for the periods July, 2003 to March, 2007 on the fees collected by ISB from students of Postgraduate Programme (PGP) in Management and Executive Education Programme (EEP).
■		The Tribunal's judgment in favour of assessees holding them not liable to service tax under Commercial Training or Coaching Services on account of being a non-profit entity was challenged before the Supreme Court, who remanded the matter back to Tribunal for fresh consideration in light of Explanation to section 65(105)(zzc) inserted by the Finance Act, 2010 retrospectively w.e.f. 1-7-2003.

Assessee's arguments

■		The assessees were all educational bodies/societies and not commercial training or coaching centres; they existed solely for imparting education and "not-for-profit".
■		The ICFAI was recognized as private universities under University Grants Commission (UGC) Act, 1956 and various courses conducted by these universities were recognized by other universities like Indira Gandhi National Open University (IGNOU).
■		Educational institutions/bodies are different from commercial training or coaching centres, as is clear from provisions of section 65(20) (definition of 'cab'), section 65(90a) (definition of 'renting of immovable property') and section 65(115) (definition of 'tour operator'), which contain references to "educational body" and "commercial training or coaching centre" separately. The legislative intent is to treat an educational institution/body imparting skill or knowledge or lessons on any subject or field, differently from a commercial training or coaching centre. Hence, the assessees being educational institutions are not liable to pay service tax under Section 65(105)(zzc).
■		Only the act of coaching or training provided to the students for preparing them for entrance examinations is taxable.
■		The ISB, the IIRM and the BIFT were, in any case, eligible for the benefit of Notification No. 9/2003-S.T., dated 20-6-2003 as they would satisfy the definition of "vocational training institute".
■		The extended period of limitation was not invocable as the decisions prior to insertion of retrospective explanation were in favour of assessees and there was no intention to evade payment of tax on part of assessee.
■		The practical application of knowledge and skills is part of the curriculum and does not take away the basic character of the activity of providing education. The conduct of specialized courses cannot be considered as 'training or coaching'.
■		Degrees/certificates were conferred in the name of 'ICFAI University'. Had such conferment of degrees/certificates been in violation of any notification issued by the Government, the UGC would have taken action against 'ICFAI University'. There was no such action by the UGC. Hence, degree was recognized by law.
■		The centralized collection of fees and transfer of the same to the accounts of the different universities or about maintenance of common facilities for the benefit of all the universities was common.

Revenue's Arguments

■		The so-called "ICFAI University" was an informal consortium of the ICFAI Society, the ICFAIAN Foundation and the ICFAI Universities, Dehradun and Tripura. This consortium was not a legally recognized entity. All the degrees and certificates were conferred by the above consortium called "ICFAI University" which was not a body recognized by law. Therefore, the degrees/certificates issued in the name of "ICFAI University" which was not a legally recognized university cannot be considered to be degrees/certificates recognized by law.
■		As per ICFAI's websites their object was "to impart training in management, science & technology, law and education to students, working executives and professionals in India". Therefore, it fell within the meaning of 'commercial training or coaching centre' appearing in section 65(26) and (27) and retrospectively explained in explanation to section 65(105)(zzc).
■		In case of ISB, the PG courses in management, the Executive Educational programmes and the short term courses were nothing but courses that imparted skills, knowledge or lessons in the field of management and other specialized areas. That the diplomas or certificates issued by the ISB were accepted by institutions abroad does not alter ISB's tax liability. As the diplomas/certificates issued by the ISB were not recognized by law, this assessee cannot claim exclusion from section 65(27) even as it stood prior to the addition of explanation to section 65(105)(zzc).
■		The assessees cannot escape tax liability on the premise that they are educational institutions conducting purely educational courses or programmes. Any institute or establishment which issues any certificate or diploma or degree or any educational qualification not recognized by law for the time being in force would get covered by the definition of 'commercial training or coaching centre'. Thus, certain educational institutions can fall under the definition.
■		The degrees/certificates/diplomas issued by the ISB or by the consortium of the ICFAI institutions were not recognized by statutory authorities such as the UGC, AICTE etc. and hence cannot be said to be recognized by law for the time being in force.
■		The plea for exemption under Notification No. 9/2003-S.T. was never raised by the ISB. The benefit cannot be granted at this stage.
■		The assessees (ICFAI institutions and ISB) did not supply relevant information to the department even for a long period after the investigations commenced. The details were submitted very late and show-cause notices were issue immediately thereafter. During the period of dispute, there was no judgment in favour of assessee that could have driven the assessees to 'bona fide belief that they were not liable to pay service tax under the head "commercial training or coaching service" on the fees collected from students. Therefore, their plea of bona fide belief was untenable. There was suppression of facts with intent to evade payment of tax and, accordingly, extended period of limitation was invocable and penalties were leviable. Further, the period of 5 years for raising demand will start from date of acquisition of knowledge of about suppression.

Issue Involved

■

Whether assessees in question were liable to pay service tax in light of retrospective amendment ?

HELD

 

Remand order setting aside final order - All issues open for consideration

■

As per the direction of the Supreme Court in remand orders, it was stated that "all issues that could arise could be urged and the same shall be decided by the Tribunal afresh." Therefore, Tribunal has to decide afresh on all the issues on merits. The substantive issue has to be decided by taking into account the aforesaid explanation to section 65(105)(zzc) of the Finance Act, 1994. The scope of remand cannot be restricted in any matter only to application of Explanation to section 65(105)(zzc). [Para 6]

Jurisdiction - Centralized billing/collection of fees by unregistered entities - Authorities having jurisdiction over centralized office may adjudicate :

■

Though, in the appeals of the ICFAI institutions, the territorial jurisdiction of the Department was challenged. Since all the fees were centrally collected in the name of 'ICFAI University' and deposited in the accounts of ICFAI Society, Hyderabad or ICFAIAN Foundation, Hyderabad, hence, in view of this method of centralized billing and collection of fees, adopted by the ICFAI institutions which were not registered for service tax purposes, the jurisdiction of the Commissioner of Central Excise, Hyderabad was to be upheld. [Para 7]

Effect of retrospective amendment - Profit motive or Constitution of assessee irrelevant for determining tax-liability - Charging consideration itself renders coaching or training commercial :

■		In view of Explanation added by the Finance Act, 2010 to section 65(105)(zzc) of the Finance Act, 1994 with retrospective effect from 1-7-2003, certain aspects which, before the above amendment, were material to consideration of the question whether a given centre or institute would fit in the definition of 'commercial training or coaching centre' under section 65(27) and whether its activities would fit in the definition of 'commercial training or coaching' under section 65(26) have been rendered immaterial by the amendment.
■		Whether or not the centre or institute is registered as a trust or a society or a similar organization under any law is immaterial now. The name of the centre or institute is immaterial. Whether the activity of the centre or institute is with or without profit motive is also immaterial.
■		Upon the above amendment, what matters is whether the centre or institute has imparted training or coaching for a consideration. If it has done so, it will get covered by the definition of 'commercial training or coaching centre' and its activity will get covered by the definition of 'commercial training or coaching'.
■		The consideration for training or coaching per se determines the commercial character of the activity. What is reflected in the amendment seems to be a conceptual change with regard to the term "commercial" used in section 65(26) and (27). The change of law, which is substantial, has come about with retrospective effect from 1-7-2003. [Para 13]

Educational Qualification not recognized by law - Such 'education' also taxable - No difference between 'education' and 'training or coaching' :

■		The act of imparting skill or knowledge or lessons on any subject or field (other than sports) is the stated purpose of "commercial training or coaching" vide Section 65(27) of the Act.
■		According to law lexicons, "education" means the act or process of imparting or acquiring particular knowledge or skills and it is the result produced by instruction, training or study. As per Swamy Vivekananda, "The end of all education, all training, should be man-making. The end and aim of all training is to make the man grow. The training by which the current and expression of will are brought under control and become fruitful is called education". Thus, education can be seen as the result of study, instruction, training, coaching etc. and the websites of at least two 'ICFAI' varsities have been shown to acknowledge this. Therefore a line cannot be drawn to separate "education" from "training or coaching".
■		Section 65(27) excludes institutes/establishments which issue any certificate or diploma or degree or any "educational qualification" recognized by law for the time being in force. The converse of this would be that institutes/establishments which do not issue any certificate or diploma or degree or any "educational qualification" recognized by law for the time being in force as well as institutes/establishments which issue certificates/diplomas/degrees/ educational qualifications not recognized by law stand included in the definition of "commercial training or coaching centre" under Section 65(27) of the Act.
■		Institutions which -
		are established by, or under, or in accordance with, any law to impart education;
		offer one or more courses of study with specific curriculum for each course and specific syllabus for each subject;
		conduct examinations periodically and evaluate them;
		organize extracurricular activities to develop skills in arts, sports etc.;
		create various fora to help the students imbibe social and democratic values;
		issue certificates or diplomas or degrees recognized by law, to the successful students;
		are generally perceived as 'educational institutions'. Only such institutions were covered by the exclusion clause of the definition of "commercial training or coaching centre" under section 65(27) of the Finance Act, 1994 as this provision stood during the period of dispute. [Para 14]

Degrees issued were not recognized by Indian law - Taxable :

■		Institutes and establishments issuing educational qualifications can certainly be called educational institutions. But the ICFAI entities were imparting lessons or skills or knowledge in various subjects to students by collecting fees and other charges but they did not issue to them any certificate, diploma, degree or other educational qualification recognized by law for the time being in force on account of which they were not covered by the exclusion clause of section 65(27) and remained within the definition of "commercial training or coaching centre". [Para 14]
■		Any certificate/diploma/degree issued in the name of "ICFAI UNIVERSITY" as a consortium or conglomerate of the ICFAI institutions cannot be held to have been issued by any of these institutions and also cannot be considered to be a "certificate/diploma/degree recognized by law" inasmuch as the so-called "ICFAI UNIVERSITY" has not been shown to be a legally constituted body authorized by law to issue the same. [Para 15]
■		As regards other assessees, it has not been established that the degrees/certificates/diplomas issued by them to their students during the relevant period were recognized by law. Acceptance of any such degree/certificate/diploma by any varsity or other institution abroad cannot mean recognition thereof by Indian law. Thus, the real character of the assessees' activity was training or coaching for a consideration. [Para 15]
■		Though ICFAI was, by UGC's notification, included in the list of private/self-financed universities under section 2(f) of the UGC Act, there was no evidence of any of them having issued any certificate, diploma, degree or other educational qualification to the students from whom they collected fees and other charges during the period of dispute. It was not even shown that these so-called universities were authorized, by or under the State Acts, to issue certificates/diplomas/degrees/other educational qualifications to the students. Further, what was called ICFAI UNIVERSITY was a legally unrecognized consortium or conglomerate of the ICFAI societies and universities, with no legal sanction to issue such certificates, degrees etc. Therefore, the ICFAI was not covered by the exclusion clause of the definition of "commercial training or coaching centre" under Section 65(27) of the Act. [Para 16]
■		Therefore, the assessees were providing to their students "training or coaching" for a consideration and ipso facto fell within the ambit of "commercial training or coaching centre" envisaged in the Explanation to section 65(105)(zzc) of the Finance Act, 1994. In other words, the Explanation to Section 65(105)(zzc) of the Act has very wide scope to encompass the activities of the assessees and render them exigible to service tax under section 65(105)(zzc) of the Act. [Para 17]

Issue of exemption under Not. No. 9/2003-ST remanded :

■

The plea as to benefit of exemption under Notification No. 9/2003-S.T. dated 20-6-2003 to a "vocational training institute" was, admittedly, not raised at any stage before, even though the case of the assessees travelled upto the Apex Court. As it is a virgin plea which has got to be substantiated by the parties concerned, the same will have to be examined by the adjudicating authorities concerned in remand proceedings. [Para 19]

Extended period of limitation was invocable - Penalty under Section 78 leviable but penalties under sections 76 and 77 set aside :

■		The assessees had not disclosed the relevant facts and materials to the department during the periods of dispute. They had not taken steps to obtain registration with the department, nor to file ST-3 returns of the fees/charges collected from the students, nor to pay service tax. It was only during the course of investigations by the department that these assessees disclosed the relevant facts and, that too, under compulsion and in a piecemeal manner. The show-cause notices and the relied-upon documents loudly disclose the suppression of the facts by these parties whose intent to evade payment of service tax is evident from the records. The extended period of 5 years prescribed under section 73(1) of the Finance Act, 1994 can be reckoned from the date of acquisition of knowledge by the department. [Para 20]
■		No final decision of this Tribunal or any High Court or the Supreme Court in support of the assessee's views with regard to "commercial training or coaching service" defined under section 65(105)(zzc) of the Finance Act, 1994 was shown to have existed during the period of dispute. Therefore there was no substance in plea of "bona fide belief based on decisions". Accordingly, extended period of limitation was invocable. [Para 20]
■		Section 78 of the Finance Act, 1994 was also rightly invoked to impose penalties on the assessees. However, the penalties imposed under Sections 76 and 77 are liable to be set aside in the facts and circumstances of these cases. [Para 21]

EDITOR'S NOTE

 

A. The landmark points are -

View Held in this judgment	Comments
1. After retrospective amendment, presence of consideration makes activity of coaching or training 'commercial'.	Therefore, the use of the word 'commercial' is redundant. A contrary, prima facie, view has been expressed in N.I.B.S. & Corporate Management v. CCE [Stay Order No. ST/S/1217/2012-Cus. (PB), dated 25-10-2012] . It has been held therein that word "commercial" in definition of 'commercial Training or Coaching Services' is not superfluous; prima facie, therefore, a professional training cannot be considered as "commercial training" even after retrospective addition of Explanation to section 65(105)(zzc) by Finance Act, 2010.
2. Where no final judgment in support of assessee's views exists during period of dispute, there cannot be any "bona fide belief based on decisions" so as to avoid invocation of extended period of limitation.	Though this view may be correct, but, assessee may claim bona fides based on views expressed by its counsels. Moreover, when law has to be amended retrospectively for removal of doubts, bona fides of assessee cannot be questioned. The matter was to be looked into from that angle.
3. Extended period of 5 years could be reckoned from date of acquisition of knowledge by department.	This view is based on judgment in CCE v. Mehta & Co. 2011 (264) ELT 481 (SC), which appears to be per incuriam for the reason that period of 5 years under Section 11A of Central Excise Act, 1944 or section 73 of the Finance Act, 1994 is to be reckoned from "relevant date" as defined in those sections. Hence, reference to 'date of knowledge of department' is clearly per incuriam.

B. For the reasons aforesaid, this judgment may require review.

CASE REVIEW

 

Nokia (I)(P.) Ltd. v. CC [2006] 3 STT 209 (New Delhi-Cestat) (para 7), Administrative Staff College of India v. CC & CE [2009] 18 STT 78 (Bang.-Cestat] (para 18) and Great Lakes Institute of Management Ltd. v. CST [2008] 12 STT 296 (Chennai-Cestat) (para 18) and Institute of Management Ltd. v. CST [2008] 12 STT 296 (Chennai-Cestat) (para 18) - distinguished

CCE v. Mehta & Co. 2011 (264) ELT 481 (SC) (para 20)

CASES REFERRED TO

 

CST v. Great Lakes Institute of Management Ltd. , [2010] 29 STT 11 (para 2), Commissioner v. ICFAI Institutions [Civil Appeal Nos. 4820-4823 of 2009, dated 14-2-2011] (para 2), Prof. Yashpal v. State of Chhattisgarh [2005] 5 SCC 420 (para 4.1), Nokia (I)(P.) Ltd. v. CC [2006] 3 STT 209 (New Delhi-Cestat) (para 7), Administrative Staff College of India v. CC & CE [2009] 18 STT 78 (Bang.-Cestat] (para 8), Great Lakes Institute of Management Ltd. v. CST [2008] 12 STT 296 (Chennai-Cestat) (para 8), CCE v. Mehta & Co. 2011 (264) ELT 481 (SC) (para 9), Neelam Devi v. Haryana Nurses Registration Council). [CWP No. 4021 of 2009, dated 19-2-2010] and Padmanav Dehury v. State of Orissa AIR 1999 Orissa 97 (para 14).

V. Sridharan and G. Shivadass for the Appellant. P.R.V. Ramanan and R.K. Singla for the Respondent.

ORDER

 

P.G. Chacko, Judicial Member - The first four appeals were filed by the respective assessees against a common order passed by the Commissioner of Central Excise, Hyderabad-Il. These appeals are directed against demands of service tax and education cess (with interest) confirmed against the assessees and penalties imposed on them by the adjudicating authority. The demands of service tax are under the head "commercial training or coaching service" and for the periods shown below :

Appeal No.	Appellant	Period	Service tax + education cess demanded	Penalties
S.T./32/2007	The ICFAI Society, Hyderabad	7/2003 to 3/2005	Rs. 18.92 crores	Rs. 18.92 crores u/s 78 Rs. 1000/- u/s 77 Rs. 150 per day u/s 76 .
S.T./39/2007	The ICFAI University, Dehradun	12/2003 to 3/2005	Rs. 8,69,716/-	Rs. 8,69,716 u/s 78 Rs. 1000/- u/s 77 Rs. 150 per day u/s 76
S.T./40/2007	The ICFAIAN Foundation, Hyderabad	7/2003 to 3/2005	Rs. 9.44 cr.	Rs. 9.44 cr. u/s 78 Rs. 1000/- u/s 77 Rs. 150 per day u/s 76
ST./46/2007	The ICFAI University, Tripura	8/2004 to 3/2005	Rs. 1,62,205/-	Rs. 1,62,205/- u/s78 Rs. 1000/- u/s 77 Rs. 150 per day u/s 76

The two appeals of the Department are directed against different orders passed by the Commissioner (Appeals), Hyderabad setting aside the demands of service tax confirmed under the same head against the respondents by the original authorities. The particulars of these appeals are given below :

Appeal No.	Appellant	Respondent	Period	Service tax + education cess	Penalties
S.T./365/20 07	CST, Hyderabad-II	Badruka Institute of Foreign Trade, Hyderabad	7/2003 to 9/2005	Rs. 22,77,288/-	Rs. 22,77,288/-u/s 78 Rs. 1000/- u/s 77 Rs. 150 per day u/s 76
S.T./392/2007	CST, Hyderabad-II	Institute of Insurance & Risk Management, Hyderabad	3/2003 to 3/2006	Rs. 4,76,013/-	Rs. 4,76,013/- u/s 78 Rs. 1000/- u/s 77 Rs. 100 per day u/s 76

The remaining appeal of another assessee is against an order of the Commissioner demanding service tax under the same head, imposing penalties etc. as shown below :-

Appeal No.	Appellant	Period	Service tax + education cess demanded	Penalties
S.T./194/2008	Indian School of Business, Hyderabad	7/2003 to 3/2007	Rs. 21.82 cr.	Rs. 12.25 cr. u/s 78 Rs. 1.05 cr. u/s 76

2. The earlier Final Orders passed by this Bench in all these appeals were set aside by the Hon'ble Supreme Court vide Order dated 14-5-2010 in Civil Appeal No. 579 of 2010 (CST v. Great Lakes Institute of Management Ltd., Order dated 25-10-2010 in Civil Appeal No. 9539 of 2010 (Commissioner v. BIFT)[2011 (21) STR J9 (SC)], Order dated 4-2-2011 in Civil Appeal No. 5453 of 2010 (Commissioner v. IIRM)[2011 (22) STR J198 (SC)] and Order dated 14-2-2011 in Civil Appeals Nos. 4820-4823 of 2009 (Commissioner v. ICFA1 Institutions)and all the cases were remanded for fresh decision. As per these remand orders, the Tribunal has to reconsider the substantive issue in the light of theexplanation added (with retrospective effect from 1-7-2003) to clause (zzc) of Section 65(105) of the Finance Act, 1994 by the Finance Act, 2010. One of the remand orders (Order dated 14-2-2011 in the cases of the ICFAI institutions(supra) reads as follows :

"Delay condoned.

Counsel appearing for the appellant has drawn our attention to the judgment passed by Three Judges Bench of this Court in Commissioner of S.T. v. Great Lakes Institute of Management Ltd., 2010 (19) STR 481 (SC). The issues that arise for consideration in the present appeals are similar with that of the aforesaid appeals which was decided by Three Judges Bench of this Court. While allowing the appeal filed by the Commissioner of Sales Tax, Chennai, the Three Judges referred to the newly inserted Explanation in Section 65(105)(zzc) of Finance Act, 1994 by Finance Act, 2010 which was made effective from 1st of July, 2003.

In view of the fact that the aforesaid Explanation has been inserted in the Act, this Court set aside the order of the Tribunal and remitted the matter back to the Tribunal to consider the case de novo in the light of the Explanation inserted in the Act.

Since we are also concerned with the same issues in these appeals, we also pass a similar order allowing the present appeals and directing the Tribunal to examine the case de novo in the light of the aforesaid Explanation inserted in the Act. It is made clear that all issues that could arise could be urged and the same shall be decided by the Tribunal afresh."[Emphasis supplied]

The other remand orders of the Apex Court are also to the same effect. The scope of remand is clear from the remand orders and accordingly the Tribunal is required to reconsider the substantive issue in the light of the explanation added, with retrospective effect, to Section 65(105)(zzc) of the Finance Act, 1994 as also to decide afresh on all other issues. Accordingly we have examined the records of all the cases.

3. The Institute of Chartered Financial Analysts of India (ICFAI, for short), Hyderabad, is a society registered under the Andhra Pradesh (Telengana Area) Public Societies Registration Act, 1350 Fasli as per the Registration Certificate No. 1602/1984 issued by the Registrar of Societies, Hyderabad. The ICFAIAN Foundation is also a society registered under the same Act as per the Registration Certificate No. 1800/1998 issued by the Registrar of Societies, Hyderabad. The ICFAI University, Dehradun was established in 2003 under the ICFAI University Act, 2003 of the State of Uttaranchal and the same was sponsored by the ICFAI Society, Hyderabad. The ICFAI University, Tripura was established in 2004 under the ICFAI University Tripura Act of the State of Tripura and the same was also sponsored by the ICFAI Society, Hyderabad. M/s. Bad-ruka Institute of Foreign Trade (BIFT, for short), Hyderabad is an institution belonging to the Seth Ghasiram Gopikishen Badruka Educational Society registered under the aforesaid Public Societies Registration Act of 1350 Fasli as per the Registration Certification No. 10 of 1966 issued by the Registrar of Societies, Hyderabad. The Institute of Insurance and Risk Management (IIRM, for short), Hyderabad and the Indian School of Business (ISB, for short) are companies incorporated in 2002 and 1997 respectively under Section 25 of the Companies Act, 1956 as per the Certificates of Incorporation.

4.1 In a common show-cause notice dated 19-5-2005 issued to the 4 ICFAI entities and a 5th one called the ICFAI University, Raipur, the Department demanded various amounts of service tax with education cess on the fees collected from students in the name of 'ICFAI UNIVERSITY' and accounted for in the books of account of the various ICFAI entities during the period from 7/2003 to 3/2005. This show-cause notice which invoked the proviso to Section 73(1) of the Finance Act, 1994 on the alleged ground of suppression and misrepresentation of facts by the ICFAI entities also proposed penalties on them under Sections 76 to 78 of the Act besides demanding interest on service tax under Section 75 of the Act. The show-cause notice alleged that the ICFAI entities were undertaking "commercial training or coaching" in a variety of areas such as finance, banking, insurance, accounting, law, management, commerce, information technology etc. but not issuing to the students any certificate or diploma or degree recognized by any law for the time being in force. It alleged that the ICFAI entities were not eligible for exemption from payment of service tax under Notification No. 10/2003-S.T. dated 20-6-2003 and hence liable to pay service tax under Section 65(105)(zzc) of the Finance Act, 1994 read with Section 65(27) of the Act, According to the show-cause notice, a total amount of Rs. 35,269.88 lakhs as fees was collected from the students by the "informal consortium" of ICFAI entities from 7/2003 to 3/2005 and a total amount of Rs. 30,84,62,460/- was payable towards service tax and a total amount of Rs. 26,30,342/- towards education cess. In the proportion in which the above amount of fees was apportioned and accounted for in the books of account of the five ICFAI entities, the above amount of service tax was also apportioned and demanded from them. The demands were contested by the noticees but eventually came to be confirmed against them in Order-in-Original No. 8/2006 dt. 29-9-2006. We have not seen any appeal from the ICFAI University, Raipur but the other 4 ICFAI entities are in appeal before us. In this context, it may also be mentioned that the ICFAI University, Raipur ceased to exist with the judgment of the Hon'ble Supreme Court, dated 11-2-2005, in the case of Prof. Yashpal v. State of Chhattisgarh [2005] 5 SCC 420 wherein Section 5 (which empowered the State Government to incorporate and establish, by Notification in the Gazette, self-financed private universities for higher education) and Section 6 (which permitted such universities to affiliate colleges or other institutions or to set up more campuses than one with prior approval of the State Government) of the Chhattisgarh Niji Kshetra Viswavidyalaya (Sthapana aur Vinyaman) Adhiniyam, 2002 were struck down as unconstitutional and all Notifications issued by the State Government in the Gazette in the purported exercise of power under Section 5 ibid notifying private universities including the ICFAI University, Raipur were also quashed.

4.2 A show-cause notice dated 19-1-2006 was issued to BIFT demanding service tax with education cess on the gross amount of Rs. 2,70,08,524/- collected by them as tuition fees from students for allegedly imparting training/coaching on a commercial basis in the field of management and international business during the period 7/2003 to 9/2005. It also proposed penalties etc. The demand and other proposals were contested by the party. In adjudication of the dispute, the original authority confirmed the demand of service tax and education cess against the assessee, also demanded interest thereon, and imposed penalties. The Order-in-Original was set aside by the Commissioner (Appeals) in an appeal filed by the assessee. Hence the Department's appeal No. S.T./365/2007.

4.3 A show-cause notice dated 20-6-2006 was issued to IIRM for recovery of service tax with education cess under the head 'commercial training or coaching service' on a gross amount of Rs. 46,66,900/- collected as fees from PGDI (Postgraduate Diploma in Insurance) students from 7/2004 to 3/2006 and under the head 'convention service' on a gross amount of Rs. 55,05,244/- collected for organizing conferences, lectures, seminars etc. during the period from 3/2003 to 3/2006, and for imposing penalties. This show-cause notice was contested by the party. The adjudicating authority set aside the demand raised under 'convention service' but confirmed the demand of service tax with education cess raised under 'commercial training or coaching service'. It also imposed proportionate penalties on IIRM. Aggrieved by the adverse part of the Order-in-Original, the assessee preferred an appeal to the Commissioner (Appeals) and the latter allowed the appeal. Hence the Revenue's appeal No. ST/392/2007.

4.4 The appeal of ISB is directed against the order passed by the Commissioner in adjudication of two show-cause notices dated 27-9-2006 and 17-9-2007 for the periods 7/2003 - 3/2006 and 4/2006 - 3/2007 respectively for recovery of service tax with education cess on the fees collected by ISB from students of Postgraduate Programme (PGP) in Management and Executive Education Programme (EEP) during the respective periods, and for imposing penalties. The Commissioner confirmed the demands and imposed penalties.

5. Before proceeding to record the submissions of the parties to the dispute, we would reproduce the relevant provisions of the Finance Act, 1994, which are focal to the dispute.

'Section 65(26) "commercial training or coaching" means any training or coaching provided by a commercial training or coaching centre.

Section 65(27) "commercial training or coaching centre" means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include pre-school coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for the time being in force.

Section 65(105)(zzc) -"taxable service" means any service provided or to be provided, to any person, by a commercial training or coaching centre in relation to commercial training or coaching;

Explanation. - For the removal of doubts, it is hereby declared that the expression "commercial training or coaching centre" occurring in this sub-clause and in clauses (26), (27) and (90a) shall include any centre or institute, by whatever name called, where training or coaching is imparted for consideration, whether or not such centre or institute is registered as a trust or a society or similar other organization under any law for the time being in force and carrying on its activity with or without profit motive and the expression "commercial training or coaching" shall be construed accordingly.

The Finance Act, 2010 added the above explanation with retrospective effect from 1-7-2003. The purpose of this amendment is discernible from the relevant Budget Instructions on 'commercial training or coaching service', which read thus : " The Finance Bill, 2010 seeks to clarify the legislative intent by rede-fining the scope of commercial training and coaching service by way of insertion of an explanation. The word "commercial" means any training or coaching that is provided for a consideration irrespective of the presence or absence of any profit motive. The amendment also seeks to explain liability of coaching centres, irrespective of their registration as trust or society. This amendment will have retrospective effect from July, 2003....."

It was the above retrospective amendment to Section 65(105)(zzc) of the Finance Act, 1994 that was noted by the Hon'ble Supreme Court in its remand orders. The Apex Court has required the Tribunal to take fresh decision on the substantive issue (whether the assessees were liable to pay service tax under the head "commercial training or coaching service" on the fees collected by them from students during the respective periods) and allied issues in the light of the above retrospective amendment of the law.

6. Before us, the learned counsel for the assessees made an attempt, at the bar, to restrict the scope of the Apex Court's remand orders by submitting that the explanation added to Section 65(105)(zzc) of the Finance Act, 1994 had a bearing only on the expression "commercial" appearing in clauses 26 and 27 of Section 65 of the Act and therefore the findings recorded on other issues by the Tribunal in its earlier Final Orders in these cases should be treated as final. This argument was vehemently opposed by the learned Special Consultant for the department who pointed out that the remand orders of the Apex Court had made it clear that "all issues that could arise could be urged and the same shall be decided by the Tribunal afresh." He further submitted that the final orders passed by this Bench were set aside by the Apex Court and therefore nothing contained in those orders survived to be treated as conclusive findings. After considering the rival arguments, we are in full agreement with the view expressed by the learned Special Consultant for the Revenue. As per the directives of the Hon'ble Supreme Court, we have to decide afresh on all the issues on merits. The substantive issue has to be decided by taking into account the aforesaid explanation to Section 65(105)(zzc) of the Finance Act, 1994.

7. Heard both sides. Though, in the appeals of the ICFAI institutions, the territorial jurisdiction of the respondent was challenged, this objection has not been pressed before us. It is not in dispute that all the fees were centrally collected in the name of TCFAI University' and deposited in the accounts of ICFAI Society, Hyderabad or ICFAIAN Foundation, Hyderabad. In view of this method of centralized billing and collection of fees, adopted by the ICFAI institutions which were not registered for service tax purposes, we uphold the jurisdiction of the Commissioner of Central Excise, Hyderabad who passed the impugned order. This view is also supported by the Tribunal's decision in the case of Nokia (I)(P.) Ltd. v. CC [2006] 3 STT 209 (New Delhi-Cestat).

8. Other submissions/arguments made by the learned counsel for the assessees are summarized below :

(a)		The ICFAI institutions, the ISB, the BIFT and the IIRM are all educational bodies and not commercial training or coaching centres. The ICFAI University, Raipur, the ICFAI University, Dehradun and the ICFAI University, Tripura were established under the respective State Acts solely for the purpose of imparting education. These universities, duly recognized as private universities under the University Grants Commission Act, 1956, offered various academic courses with their own curricula, prescribed syllabi, prepared study materials for the various courses and also published books and other materials which were required to be used by the students as text or reference books. The various courses conducted by these universities were recognized by other universities like the Indira Gandhi National Open University (IGNOU). The degrees awarded by these universities were recognized by the University Grants Commission (UGC) under the UGC Act, 1956. The ICFAI universities also had their own evaluation systems. A student undergoing any course has to secure the minimum percentage of marks in the examinations conducted by these universities, to get a certificate/pass in the examinations. The ICFAI Society, Hyderabad and the ICFAIAN Foundation, Hyderabad are non-profit societies established under the Andhra Pradesh (Telengana Area) Public Societies Registration Act for the purpose of imparting education. The memorandum of association of each of the societies expressly provides so. The ISB, the BIFR and the IIRM were established as "not-for-profit" companies under Section 25 of the Companies Act. They are exempt under Section 10 of the Income-tax Act, 1961 also. The memorandum and articles of association of each of these companies include establishment & running of educational institutions as the main objective. The ISB has affiliation with the world's leading business schools viz. Kellog School of Management, Warton School and London Business School. The ISB offered postgraduate programmes in management (PGPs) and also short term programmes for working executives (EEPs). Thus all the assessees are educational bodies solely imparting education to students and hence their activities cannot be brought to levy under the head "commercial training or coaching service".
(b)		The Legislature treats educational institutions/bodies as different from commercial training or coaching centres. This is clear from clause (20) (definition of 'cab'), clause (90a) (definition of 'renting of immovable property') and clause (115) (definition of 'tour operator') of Section 65 of the Finance Act, 1994. These definitions, which contain references to "educational body" and "commercial training or coaching centre", bring out a clear distinction between the two, indicating that the legislative intent is to treat an educational institution/body imparting skill or knowledge or lessons on any subject or field, differently from a commercial training or coaching centre. [Wharton's Law Lexicon, Oxford/Chambers Dictionaries etc. referred to for distinguishing between education and training]. The assessees being educational institutions are not liable to pay service tax under Section 65(105)(zzc). Educational bodies are exempt from the levy.
(c)		What is sought to be taxed under the above provision is only the act of coaching or training provided to the students for preparing them for entrance examinations. [Reliance placed on the Tribunal's decision in the case of Administrative Staff College of India v.CC & CE [2009] 18 STT 78 (Bang.-Cestat] upheld by the Supreme Court in the case Commissioner v. Administrative Staff College of India [2010 (20) STR J117]. Reliance also placed on paragraphs 2.2.2. and 2.2.3. of C.B.E. & C.'s Circular No. 59/8/2003-S.T., dated 20-6-2003.]
(d)		The Finance Act, 2010 only expanded the scope of Section 65(105)(zzc) by including all activities of coaching and training not recognized by law (irrespective of whether the institution is providing any other course recognized by law) within the tax net. Prior to that, any unrecognized training or coaching given by a commercial training or coaching centre which also offered other courses recognized by law were not subject to levy of service tax under Section 65(105)(zzc). Therefore, the assessees' activities of the old period did not attract the levy. [Reliance placed on para 3.3. of C.B.E. & C.'s Circular No. 334/3/2011, dated 28-2-2011.]
(e)		The question whether the assessees were liable to pay service tax on the fees collected by them should be considered with reference to their core activity which was in the nature of imparting education to the students and not in the nature of commercial training or coaching. The explanation to Section 65(105)(zzc) cannot have any bearing on this question.
(f)		It is true that the ICFAI University, Raipur ceased to exist on 11-2-2005 with the judgment of the Hon'ble Supreme Court striking down Sections 5 & 6 of the Chhattisgarh Act. But the students of this university were transferred to the ICFAI University, Dehradun and were considered as students of that university. This step was taken as enabled by the Hon'ble Supreme Court through its judgment dated 11-2-2005 and its clarificatory order dated 7-9-2005. Therefore, the department cannot claim any benefit on the strength of the fact that the ICFAI University, Raipur ceased to exist on 11-2-2005.
(g)		The ISB, the IIRM and the BIFT are, in any case, eligible for the benefit of Notification No. 9/2003-S.T., dated 20-6-2003 as they would satisfy the definition of "vocational training institute". They could not claim this benefit in the earlier proceedings because the emphasis at that time was on their plea that they were outside the levy on account of not being "commercial" centres.
(h)		The demands of service tax and education cess are hit by limitation. The assessees have always maintained the bona fide belief that they were not liable to pay service tax under Section 65(105)(zzc) on their educational activities and therefore they cannot be held to have suppressed or misrepresented any facts or contravened any provision of law with intent to evade payment of tax. Moreover, whenever the assessees were required to furnish any information to the department, they promptly did so. The above bona fidebelief of the assessees was also strengthened by certain decisions rendered by this Tribunal in favour of similar institutions, for instance, Great Lakes Institute of Management Ltd. v. CST [2008] 12 STT 296 (Chennai-Cestat)]. The decisions rendered on the issue by the Tribunal prior to the insertion of the explanation ibid were in favour of the assessees. In these circumstances, the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 was not invocable in these cases. For the same reason, Section 78 of the Act was not to be invoked to impose penalties on the assessees.

9. The submissions/arguments made by the learned Special Consultant for the Revenue are summarized below:

(a)		The so-called "ICFAI University", in the name of which fees were collected, courses conducted and certificates issued, was an informal consortium of the ICFAI Society, the ICFAIAN Foundation and the three ICFAI Universities, Raipur, Dehradun and Tripura. This consortium was not a legally recognized entity. The off-campus courses were conducted by the ICFAI Society, Hyderabad and the ICFAIAN Foundation, Hyderabad. The numbers of students who took the off-campus courses was 24,308 in 2003-04 and 33,512 in 2004-05 whereas the numbers of students who took 'in-campus' and 'distance learning' courses at the three universities were as small as 25 (2003-04) and 17 (2004-05) at Raipur; 15 (2003-04) and 175 (2004-05) at Dehradun; 10 at Tripura. The courses were not in the nature of general or basic education but specialized courses where the focus was on practical application of the knowledge and skills acquired. No degrees or certificates were conferred by any of these universities. Though the ICFAI University, Raipur was authorized to confer degrees/certificates, no degree or certificate was ever conferred by it before it ceased to exist in February, 2005. All the degrees and certificates were conferred by the above consortium called "ICFAI University" which was not a body recognized by law. When the three year courses for which the certificates were issued by the consortium commenced, none of the constituent universities existed. Indeed, even if any degree or certificate had been issued by the ICFAI University, Raipur at any time prior to 11-2-2005 (the date of the Apex Court's judgment in Prof. Yashpal's case (supra), the same would have been rendered ab initio null and void by the judgment of the Apex Court. The degrees/certificates issued in the name of "ICFAI University" which was not a legally recognized university cannot be considered to be degrees/certificates recognized by law. But the fact remains that the ICFAI institutions (appellants) were "imparting skill or knowledge or lessons on any subject or field other than sports" and collecting fees from the students. Their websites also clearly indicate this factual position. For instance, the website of the ICFAI University, Tripura says that it was established in 2004 "to impart training in management, science & technology, law and education to students, working executives and professionals in India". The website of the ICFAI University, Dehradun says that it was formed on 8-7-2003 "to impart training in management, science & technology, law and education to students, working executives and professionals in India". Therefore, the appellants squarely fall within the meaning of 'commercial training or coaching centre' appearing in Section 65(26) and (27) and retrospectively explained in explanation to Section 65(105)(zzc).
(b)		The ISB was also working in the same manner and they are also covered by the definition of "commercial training or coaching centre". The PG courses in management, the Executive Educational programmes and the short term courses conducted by ISB were nothing but courses that imparted skills, knowledge or lessons in the field of management and other specialized areas. Fees were collected from the students as consideration for these services. Therefore, these activities would also qualify to be 'commercial training or coaching service' for the levy of service tax in terms of the explanation to Section 65(105)(zzc) ibid. That the diplomas or certificates issued by the ISB were accepted by institutions abroad does not alter ISB's tax liability. As the diplomas/certificates issued by the ISB were not recognized by law, this assessee cannot claim exclusion from Section 65(27) even as it stood prior to the addition of explanation to Section 65(105)(zzc).
(c)		The assessees cannot escape tax liability on the premise that they are educational institutions conducting purely educational courses or programmes. The exclusion part of the definition of 'commercial training or coaching centre' under Section 65(27) contains a reference to "educational qualification". Any institute or establishment which issues any certificate or diploma or degree or any "educational qualification" recognized by law for the time being in force could claim to be outside the ambit of the said definition. This would imply that any institute or establishment which issues any certificate or diploma or degree or any educational qualification not recognized by law for the time being in force would get covered by the definition of 'commercial training or coaching centre'. It would follow that certain educational institutions can fall under the definition.
(d)		The degrees/certificates/diplomas issued by the ISB or by the consortium of the ICFAI institutions were not recognized by statutory authorities such as the UGC, AICTE etc. and hence cannot be said to be recognized by law for the time being in force. [Reliance placed on C. B. E. & C.'s Circular No. 107/1/2009-S.T. dated 28-1-2009].
(e)		The ISB cannot claim support from the Tribunal's decision in Great Lakes Institute of Managementcase (supra) as the cited decision was set aside by the Apex Court.
(f)		The plea for exemption under Notification No. 9/2003-S.T. was never raised by the ISB. The benefit cannot be granted at this stage.
(g)		The ICFAI institutions never came forward to supply relevant information to the department even for a long period after the investigations commenced in November, 2003. It was only in April-May, 2005 that they submitted full details of the amounts collected by them as fees and other charges from students from 7/2003 to 3/2005. The show-cause notice was issued without delay in 5/2005 itself. In their correspondence with the department, they misrepresented facts by submitting that 'ICFAI University' was conducting various courses while it was not an entity established under, or recognized by, law. During the period of dispute, there was no decision of the CESTAT that could have driven the ICFAI institutions to 'bona fide belief that they were not liable to pay service tax under the head "commercial training or coaching service" on the fees collected from students. Therefore, their plea ofbona fide belief is untenable and they should be held to have suppressed/misrepresented material facts with intent to evade payment of service tax. The extended period of limitation was rightly invoked in the ICFAI cases inasmuch as they did not get registered, did not file ST-3 returns and did not pay service tax and suppressed/misrepresented material facts for evading this tax liability.
(h)		The ISB also behaved more or less in the same manner. A major part of the demand raised on them is within the normal period of limitation. The rest of the demand is also enforceable as the extended period of limitation has been rightly invoked on the basis of suppression of facts found against them.
(i)		In the case of CCE v. Mehta & Co. 2011 (264) ELT 481 (SC)] the Hon'ble Supreme Court held that, where the assessee suppressed material facts with intent to evade payment of duty, the department was entitled to issue show-cause notice to them within five years from the date of acquisition of knowledge of such facts by the department. In terms of this ruling of the Apex Court, the show-cause notices issued in the ICFAI and ISB cases are not hit by limitation. In respect of the ISB, in any case, the demand for the period from 28-9-2005 to 31-3-2006 covered by the first show-cause notice and the demand for the period from 18-9-2006 to 31-3-2007 covered by the second show-cause notice are within the normal period of limitation.

10. The Commissioner (AR) appearing for the appellant in ST/365 & 392/2007 reiterated the grounds of the appeals and also adopted (mutatis mutandis)the above arguments of the learned Special Consultant.

11. The learned counsel for the assessees, in his rejoinder, made the following submissions :

(a)		The practical application of knowledge and skills is part of the curriculum and does not take away the basic character of the activity of providing education. In any case, the conduct of specialized courses cannot be considered as 'training or coaching'.
(b)		'ICFAI University' represents the multi-State network of universities established in different States. The degrees/certificates clearly indicated this fact through a footnote. Each University is a separate and independent legal entity. The ICFAI University, Dehradun and the ICFAI University, Tripura jointly named themselves as 'ICFAI University' and never took up any activity on their own.
(c)		The submission of the learned Special Consultant that no degrees/certificates were conferred by any of the universities is factually incorrect. Degrees/certificates were conferred in the name of 'ICFAI University'. Had such conferment of degrees/certificates been in violation of any notification issued by the Chhattisgarh Government, the UGC would have taken action against 'ICFAI University'. There was no such action by the UGC. In any case, the validity of the degrees/certificates issued by 'ICFAI University' is protected on the principle of de facto recognition. [Reliance placed on the judgment dated 19-2-2010 passed by the Punjab & Haryana High Court in CWP No. 4021 of 2009 [Ms Neelam Devi v. Haryana Nurses Registration Council).]
(d)		As the students of the ICFAI University, Raipur were absorbed as students of the ICFAI University, Dehradun, in terms of the Apex Court's judgment dated 11-2-2005 as clarified by Order dated 7-9-2005, in any case, the core activity of imparting education remained unaffected.
(e)		There is nothing exceptional about the centralized collection of fees and transfer of the same to the accounts of the different universities or about maintenance of common facilities for the benefit of all the universities.

12. We have given careful consideration to the submissions. The substantive issue which has arisen before us in these de novo proceedings is whether the assessees can claim exemption from service tax liability under Section 65(105)(zzc) read with the definition of 'commercial training or coaching' under Section 65(26) and the definition of 'commercial training or coaching centre' under Section 65(27) of the Finance Act, 1994 (as this provision stood during the period of dispute) in respect of the fees/charges collected by them from the students who underwent various courses offered by the assessees during the period of dispute.

13. The above issue has got to be examined on the facts of these cases in the light of the explanation added by the Finance Act, 2010 to Section 65(105)(zzc) of the Finance Act, 1994 with retrospective effect from 1-7-2003. As per this explanation, the expression 'commercial training or coaching centre' appearing in Section 65(26) and (27) of the Finance Act, 1994 shall include —

♦		any centre or institute, by whatever name called,
♦		where training or coaching is imparted for consideration, with or without profit motive,
♦		whether or not such centre or institute is registered as a trust or a society or similar other organization under any law for the time being in force.

Certain aspects which, before the above amendment, were material to consideration of the question whether a given centre or institute would fit in the definition of 'commercial training or coaching centre' under Section 65(27) and whether its activities would fit in the definition of 'commercial training or coaching' under Section 65(26) have been rendered immaterial by the amendment. Whether or not the centre or institute is registered as a trust or a society or a similar organization under any law is immaterial now. The name of the centre or institute is immaterial. Whether the activity of the centre or institute is with or without profit motive is also immaterial. Upon the above amendment, what matters is whether the centre or institute has imparted training or coaching for a consideration. If it has done so, it will get covered by the definition of 'commercial training or coaching centre' and its activity will get covered by the definition of 'commercial training or coaching'. The consideration for training or coaching per se determines the commercial character of the activity. To the same effect is the Budget instruction noted in para (5) of this order. What is reflected in the amendment seems to be a conceptual change with regard to the term "commercial" used in Section 65(26) and (27). The change of law, which is substantial, has come about with retrospective effect from 1-7-2003. We must now proceed to determine whether the ICFAI entities, the ISB, the BIFT and the IIRM had been imparting training or coaching to their students for a consideration during the respective periods of dispute.

14. It has been argued on behalf of the assessees that they are educational institutions and were imparting education, and not training or coaching, to the students. Per contra, it has been argued on behalf of the Revenue that "education" necessarily includes the process of imparting knowledge or lessons on any subject and hence the same would get covered within the ambit of the expression "training or coaching" appearing under clauses (26), (27) and (105)(zzc) of Section 65 of the Finance Act, 1994. In this connection, the learned Special Consultant has relied on P. Ramanatha Aiyer's "THE MAJOR LAW LEXICON" wherein some connotations of the word "education" have been provided. The learned counsel has referred to "WHARTON'S LAW LEXICON". It cannot be disputed that the act of imparting skill or knowledge or lessons on any subject or field (other than sports) is the stated purpose of "commercial training or coaching" vide Section 65(27) of the Act. Both the law lexicons cited before us present various shades of meaning of "education". According to one meaning appearing in MAJOR LAW LEXICON, "education" means the act or process of imparting or acquiring particular knowledge or skills and it is the result produced by instruction, training or study. (This meaning is seen culled out from Padmanav Dehury v. State of Orissa AIR 1999 Orissa 97.) WHARTON'S LAW LEXICON quotes Swamy Vivekananda : "The end of all education, all training, should be man-making. The end and aim of all training is to make the man grow. The training by which the current and expression of will are brought under control and become fruitful is called education". As rightly submitted by the learned Special Consultant, education can be seen as the result of study, instruction, training, coaching etc. and the websites of at least two TCFAI' varsities have been shown to acknowledge this. Therefore a line cannot be drawn to separate "education" from "training or coaching". It is also pertinent to note that Section 65(27) as it stood during the period of dispute excludes institutes/establishments which issue any certificate or diploma or degree or any "educational qualification" recognized by law for the time being in force. The converse of this would be that institutes/establishments which do not issue any certificate or diploma or degree or any "educational qualification" recognized by law for the time being in force as well as institutes/establishments which issue certificates/diplomas/degrees/ educational qualifications not recognized by law stand included in the definition of "commercial training or coaching centre" under Section 65(27) of the Act. Institutes and establishments issuing educational qualifications can certainly be called educational institutions. But the ICFAI entities before us were imparting lessons or skills or knowledge in various subjects to students by collecting fees and other charges but they did not issue to them any certificate, diploma, degree or other educational qualification recognized by law for the time being in force on account of which they were not covered by the exclusion clause of Section 65(27) and remained within the definition of "commercial training or coaching centre". Institutions which -

♦		are established by, or under, or in accordance with, any law to impart education;
♦		offer one or more courses of study with specific curriculum for each course and specific syllabus for each subject;
♦		conduct examinations periodically and evaluate them;
♦		organize extracurricular activities to develop skills in arts, sports etc.;
♦		create various fora to help the students imbibe social and democratic values;
♦		issue certificates or diplomas or degrees recognized by law, to the successful students;

are generally perceived as 'educational institutions'. In our view, only such institutions were covered by the exclusion clause of the definition of "commercial training or coaching centre" under Section 65(27) of the Finance Act, 1994 as this provision stood during the period of dispute.

15. Any certificate/diploma/degree issued in the name of "ICFAI UNIVERSITY" as a consortium or conglomerate of the ICFAI institutions cannot be held to have been issued by any of these institutions and also cannot be considered to be a "certificate/diploma/degree recognized by law" inasmuch as the so-called "ICFAI UNIVERSITY" has not been shown to be a legally constituted body authorized by law to issue the same. We have, thus, found great force in the submissions made by the learned Special Consultant. As regards other assessees, it has not been established that the degrees/certificates/diplomas issued by them to their students during the relevant period were recognized by law. Acceptance of any such degree/certificate/diploma by any varsity or other institution abroad cannot mean recognition thereof by Indian law. Thus a conspectus of facts presented to us would clearly disclose the real character of the assessees' activity-training or coaching for a consideration.

16. It was argued by the learned counsel that the ICFAI Universities, Dehradun and Tripura, were established under the respective State Acts and recognized by the UGC and should ipso facto be considered to be establishments authorized to issue certificates, degrees etc. Though it is true that these universities were, by UGC's notification, included in the list of private/self-financed universities under Section 2(f) of the UGC Act, there is no evidence of any of them having issued any certificate, diploma, degree or other educational qualification to the students from whom they collected fees and other charges during the period of dispute. It was not even shown that these so-called universities were authorized, by or under the State Acts, to issue certificates/diplomas/degrees/other educational qualifications to the students. It was claimed that the certificates, degrees, etc. were issued to the students by these universities in the name of 'ICFAI UNIVERSITY'. We have already rejected this claim as untenable, given the fact that what was called ICFAI UNIVERSITY was a legally unrecognized consortium or conglomerate of the ICFAI societies and universities, with no legal sanction to issue such certificates, degrees etc. Therefore, none of the so-called universities can claim immunity to levy of service tax under Section 65(105)(zzc) of the Finance Act, 1994 on the ground of being covered by the exclusion clause of the definition of "commercial training or coaching centre" under Section 65(27) of the Act.

17. For the reasons already stated, we hold that the assessees were providing to their students "training or coaching" for a consideration and would ipso facto fall within the ambit of "commercial training or coaching centre" envisaged in the explanation to Section 65(105)(zzc) of the Finance Act, 1994. As this explanation has retrospective effect from 1-7-2003, the activities undertaken by all the assessees during the periods of dispute would get covered within the meaning of the phrase "training or coaching imparted for consideration" occurring in the text of the explanation. In other words, the explanation to Section 65(105)(zzc) of the Act has very wide scope to encompass the activities of the assessees and render them exigible to service tax under Section 65(105)(zzc) of the Act. In the result, the assessees have no case on merits.

18. We have also considered the decisions cited by the learned counsel, such as Administrative Staff College of India (supra). All those decisions were rendered before the crucial retrospective amendment of Section 65(105)(zzc) of the Finance Act, 1994 and, hence, are of no precedential value. The same is the situation with regard to the various circulars relied on by the counsel.

19. The learned counsel representing ISB, BIFT and IIRM has (without prejudice to his submissions on the substantive issue) raised an alternative plea by claiming the benefit of exemption under Notification No. 9/2003-S.T. dated 20-6-2003 which benefit is available to a "vocational training institute" as defined in the Notification. This plea was, admittedly, not raised at any stage before, even though the case of the assessees travelled upto the Apex Court. It is interesting to note that the learned counsel who sought to narrow down the scope of the Apex Court's remand orders, nevertheless, wanted us to consider the above plea also. Tine dichotomy of arguments notwithstanding, we are of the view that the alternative plea can be considered in these proceedings in terms of the remand orders. As it is a virgin plea which has got to be substantiated by the parties concerned, the same will have to be examined by the adjudicating authorities concerned.

20. We have also examined the plea of limitation raised by the assessees/appellants. These appellants had not disclosed the relevant facts and materials to the department during the periods of dispute. They had not taken steps to obtain registration with the department, nor to file ST-3 returns of the fees/charges collected from the students, nor to pay service tax. It was only during the course of investigations by the department that these appellants disclosed the relevant facts and, that too, under compulsion and in a piecemeal manner. This state of affairs has been clearly brought out through the learned Special Consultant's submissions recorded in para 9(f) of this order in respect of the ICFAI cases. We have seen more or less the same state of affairs in respect of other assessees also. The show-cause notices and the relied-upon documents loudly disclose the suppression of the facts by these parties whose intent to evade payment of service tax is evident from the records. In the case of Mehta & Co. (supra), the Hon'ble Supreme Court held that the extended period of 5 years prescribed under the proviso to Section 11A(1) of the Central Excise Act (which provision is pari materia with the proviso to Section 73(1) of the Finance Act, 1994) could be reckoned from the date of acquisition of knowledge by the department. The ratio of the decision is squarely applicable to the present cases.

No final decision of this Tribunal or any High Court or the Supreme Court in support of the assessee's views with regard to "commercial training or coaching service" defined under Section 65(105)(zzc) of the Finance Act, 1994 has been shown to have existed during the period of dispute. Therefore there is no substance in their plea of "bona fide belief based on decisions".

Therefore, we hold that the proviso to Section 73(1) of the Finance Act, 1994 was rightly invoked in these cases. In any case, a major part of the demand on ISB is within the normal period and, in the case of other assessees also, a considerable part of the demand is within the normal period.

21. On the very grounds sustained in support of invocation of the extended period of limitation in these cases, it has to be held that Section 78 of the Finance Act, 1994 was also rightly invoked to impose penalties on the assessees. However, in our view, the penalties imposed under Sections 76 and 77 are liable to be set aside in the facts and circumstances of these cases.

22. To summarize our findings-

(i)		The liability of the assessees to pay service tax under Section 65(105)(zzc) (read with its explanation) of the Finance Act, 1994 on the fees/charges collected from their students during the respective periods of dispute is affirmed;
(ii)		The extended period of limitation was rightly invoked in these cases and, therefore, no part of the demand of service tax on any of the assessees can be held to be time-barred;
(iii)		Section 78 of the Finance Act, 1994 was rightly invoked in these cases, but the penalties imposed on the assessees under Sections 76 and 77 of the Act are liable to be set aside;
(iv)		The alternative claim of the ISB, the BIFT and the IIRM for exemption under Notification No. 9/2003-S.T. dated 20-6-2003 is liable to be considered on merits by the adjudicating authorities concerned. Each of these assessees should be given a reasonable opportunity of being heard on this issue. Needless to say that, in the event of the issue being held against the assessees, they would be liable to pay the service tax (with education cess) as already quantified by the adjudicating authorities as also to pay interest thereon under Section 75 of the Act besides the penalties under Section 78 of the Act. No penalty shall be imposed on these assessees under Sections 76 and 77 of the Act.

23. In the result, it is ordered as follows :-

(a)		Appeals, S.T./32, 39, 40 & 46/2007 are disposed of by sustaining the demand of service tax with education cess raised under Section 73(1), sustaining the demand of interest raised under Section 75, sustaining the penalties imposed under Section 78 and setting aside the penalties imposed under Sections 76 & 77 of the Finance Act, 1994.
(b)		Appeals, S.T./365 & 392/2007 and ST/194/2008 are disposed of by way of remand in terms of para 22(iv) of this order.

VINEET

---

*Partly in favour of assessee.

The Madras High cpout has decided the issue in favpur of the department. However , mumbai tribunal deicded the issue in favour of the assessee.As per submission of the learned AR of the assessee before Madras High court , department has not even filed appeal before the high court against the order of tribunal. This pratically means that department has accepted the judgement of the Hon,ble Mumbai tribunal. This acceptance has led to a very serious situation very huge amount of revnue may have been lost due to not filing of appeal.

One must scrutinise the files and see what can be done to protect the interest of revenue.

IT: Exemption under section 10B could not be allowed on training fees received from professionals, who were neither employees nor associated with business of manufacture or production of any article or thing of assessee

■■■

[2013] 35 taxmann.com 442 (Madras)

HIGH COURT OF MADRAS

Penta Media Graphica Ltd.

v.

Assistant Commissioner of Income-tax, Co. Ward V (2)*

MRS. CHITRA VENKATARAMAN AND MS. K.B.K. VASUKI, JJ.

TAX CASE (APPEAL) NOS. 34 OF 2010 AND 
332 & 333 OF 2011 
M.P. NO. 1 OF 2011

JUNE  5, 2013 

Section 10B of the Income-tax Act, 1961 - Export oriented undertaking [Computation of deduction] - Assessment year 1996-97 - Assessee claimed exemption under section 10B on income received by it by way of training fees - Assessing Officer disallowed claim on ground that training was given to outsiders - Whether exemption under section 10B is available in respect of profit and gains derived by an undertaking which is engaged in manufacture or production of an article or thing - Held, yes - Whether, since training was given to professionals who were not employees and were not associated with business of assessee in any way in production or manufacture of any article or thing, exemption under section 10B could not be allowed on training fees not being profits or gains derived by assessee from manufacture or production of any article or thing - Held, yes [Para 18] [In favour of revenue]

She also placed before us the order of the Income Tax Appellate Tribunal, Mumbai 'D' Bench in Sovika Infotek Ltd. v. ITO [2008] 19 SOT 412, wherein, a similar claim was allowed and the Department had also accepted the order of the Tribunal.

[2008] 19 SOT 412 (MUM.)

IN THE ITAT MUMBAI BENCH 'B'

Sovika Infotek Ltd.*

v.

Income-tax Officer, 8(3)(2), Mumbai

R.K. GUPTA, JUDICIAL MEMBER AND J. SUDHAKAR REDDY, ACCOUNTANT MEMBER

IT APPEAL NOS. 3007 AND 3008 (MUM.) OF 2004 [ASSESSMENT YEARS 1998-99 AND 2000-01]

JULY 26, 2007

Section 10B of the Income-tax Act, 1961 - Export oriented undertaking - Assessment year 2000-01 - Assessee, a public limited company, was engaged in business of computer software development and sale of software - Assessee claimed exemption under section 10B in respect of profits and gains derived from business, which included interest income received from bank deposits and advances made, income from professional fees, and income from training - Whether since interest income was not derived from export oriented undertaking, assessee would not be entitled to exemption under section 10B on same - Held, yes - Whether since income from professional fees was a business receipt and had arisen from export undertaking, assessee would be entitled to exemption under section 10B on same - Held, yes - Whether since training activity of assessee was intrinsically connected with software development, sale, maintenance, etc., assessee would be entitled to exemption under section 10B on income from training - Held, yes

IT: Since Explanation to section 132B is applicable from 1-6-2013, cash seized would be adjusted against advance tax for assessment year 2007-08

■■■

[2013] 34 taxmann.com 307 (Ahmedabad - Trib.)

IN THE ITAT AHMEDABAD BENCH 'C'

Kanishka Prints (P.) Ltd.

v.

Assistant Commissioner of Income-tax, Central Circle - 2, Surat*

MUKUL KR. SHRAWAT, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER

IT APPEAL NO. 2698 (AHD.) OF 2011
[ASSESSMENT YEAR 2007-08]

JUNE  21, 2013 

Section 132B of the Income-tax Act, 1961 - Search and Seizure - Retained assets, application of [Prospective amendment] - Assessment year 2007-08 - Whether amendment to section 132B as per which existing liability does not include advance tax payable, is applicable prospectively from 1-6-2013 - Held, yes - Whether, where Assessing Officer applied explanation retrospectively in case of assessee and adjusted cash seized towards self assessment tax instead of towards advance tax payable as claimed by assessee, it was not sustainable - Held, yes - Whether, therefore, cash seized was to be adjusted against advance tax payable for assessment year 2007-08 - Held, yes [Paras 12,14 &15] [In favour of assessee]

FACTS

 

■		During the course of search conducted at the residential premises of the assessee, aggregate cash of Rs. 43 lacs was seized. The assessee submitted that out of Rs. 43 lacs seized, Rs. 10 lacs be treated as towards payment of advance tax in its case.
■		However, the Assessing Officer applied Explanation to section 132B according to which the existing liability did not include advance tax payable. He, thus adjusted the cash seized towards self assessment tax and levied interest under sections 234B and 234C.
■		On first appeal, the Commissioner (Appeals) confirmed the action of Assessing Officer.
■		On second appeal:

HELD

 

■		The revenue has relied on the amendment made to section 132B vide finance bill of 2013, it is found that as per the amendment the existing liability will not include advance tax payable and the Explanation has been made applicable with effect from 1-6-2013. [Para 12]
■		In Taxmann's publication 'Interpretation of Statutes' it has been stated that the effect to be given to an explanatory amendment depends upon several factors, including its language. When the legislature has made the explanation operative prospectively by words expressed therein, its operation shall have to be confined to the future date. The same reasoning governs the case when parliament limits the restrospectivity of the Explanation with effect from a particular date. In such a situation, giving future retrospectivity to the Explanation would be hijacking the intention of the Legislature into an impermissible area-CIT v. Rajasthan Mercantile Co. Ltd.[1995] 211 ITR 400 (Delhi). Thus, there is no doubt that ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date, should be construed prospectively and not retrospectively. [Para 13]
■		Thus considering the totality of the aforesaid, interpretation of applicability of explanation, and amendment made by finance bill 2013, and the facts it is viewed that the amended Explanation cannot be applied in present case. Therefore the appeal of the assessee is allowed and the Assessing Officer is directed to give credit of Rs. 10 lacs as advance tax. Thus the appeal of the assessee is allowed. [Para 14]

CASES REFERRED TO

 

Sudhakar Shetty v. Asstt. CIT [2008] 10 DTR 173 (Mum. - Trib.) (para 9), CIT v. K.K. Marketing[2005] 278 ITR 596 (Delhi) (para 9) and Shreeji Prints (P.) Ltd. v. Asstt. CIT [IT Appeal No. 359 (AHD) of 2012, dated 20-4-2012] (para 11).

Mehul Shah for the Appellant. D.K. Singh for the Respondent.

ORDER

 

Anil Chaturvedi, Accountant Member - This appeal is filed by the Assessee against the order of CIT(A)-II, Ahmedabad dated 19.08.2011 for assessment year 2007-08.

2. The facts as culled out from the order of lower authorities are as under.

3. In this case a search and seizure action was conducted on 8.2.2007 wherein documents and loose papers were found and seized and the statement was also recorded u/s 132(4) and the Assessee disclosed unaccounted income of Rs 1,50,00,000/. Thereafter Assessee filed return of income on 24.9.2007 declaring total income of Rs Nil after the adjustment of carry forward depreciation. Assessment was framed u/s 143(3) vide order dated 30.6.2008 and the total income was determined at Rs Nil and Book profit u/s 115JB was determined at Rs. 1,52,12,920/-.

4. During the course of search proceedings, cash of Rs 43 lacs was seized. Assessee vide his letter dated 13.3.2007 submitted that out of the total cash seized, Rs 10 lacs be treated towards payment of advance tax in the case of assessee and similarly balance of Rs.33 lacs be treated towards payment of advance tax in case of family members/group companies.

5. AO passed rectification order u/s 154 on 12.2.2009 for the reason that while working out the tax liability pursuant to order passed u/s 143(3), Assessee was granted credit of Rs 10 lacs (being the seized cash). According to the AO "this was not permissible unless and until it is adjusted". He accordingly disallowed the credit for Rs. 10 lacs. Against the aforesaid order passed by Assessing Officer, Assessee filed application dated 26.3.2010 u/s 154 wherein inter alia it was submitted that the amount of Rs 10 lacs be treated as tax paid from the date on which the application has been made for adjustment against the advance tax liability and no interest u/s 234B and 234C be levied. The contention of the Assessee was not found acceptable to the AO. He vide order dated 19.10.2010 rejected the application of Assessee by holding as under:-

"5. From the plain reading of the provisions of section 132B of the Act quoted above it can be construed that the seized amounts not being voluntary payment cannot be adjusted against the advance tax payable and are to adjusted against the existing demands and the demands raised after the completion of the assessments and the under section 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period. In the instant case the demand is in respect of the assessment of the year relevant to the previous year in which search is initiated. Therefore, there is no ambiguity as regards to application/adjustment of seized cash against the demand raised on completion of assessment and charging of interest under section 234B & 234C is concerned.

6. In view of the above, the adjustment of seized cash made against the demand raised after assessment is perfectly in order and the demand raised comprising of the interest under section 234B & 234C of the Act as per provisions of section are legally correct and does not required any modification as there is no mistake apparent from records.

7. The assessee has also relied upon the decisions in the case of M/s Kesar Kimam Karyalaya[2005] 278 ITR 596 (Del) stating that the ratio of the decision is squarely applicable in the case of the assessee. Also, reliance is placed on the decision in the case of the Sudhakar M Shetty v. ACIT [2008] 10 DTR (Mumbai)(Trib) 173 stating that in this case the facts are similar and the court has held that the department has to adjust the seized amount towards advance tax, etc. from the date when it was seized. However, this respect, here it is relevant to mention that the Hon'ble MP High Court, in the case of Shri Ramjilal Jaoannath v. ACIT[2000] 241 ITR 758 (MP), has held that the amount seized under section 132 cannot be dealt with unless an order is made by the ITO either under section 132(5) or the money is applied or appropriated in accordance with section 132B. Therefore, the petitioner's submission that the amount could be adjusted towards the existing liability of the advance tax that the petitioners submission that the assessee were not liable to pay interest under section 234B or 234C also could not be accepted and the amount/assets seized could not be appropriated towards the advance tax and the assessee could not escape his liability either under 234B or 234C. Irrespective of the seizure of the amount, the assessee was obliged to pay the advance tax in accordance with law and if he had not paid the advance tax in accordance with the provisions of the Act, he could not avoid the liability either under section 234B or section 234C.

8. Considering the above facts of the case and the conflicting decisions given by the Hon'ble courts in favour and against the assessee as enumerated above, the request made by the assessee for rectification cannot be entertained as the mistake cannot be termed as mistake apparent from records and therefore, stands rejected".

6. Aggrieved by the aforesaid order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) vide-order dated 19.8.2011 dismissed the appeal of the Assessee by holding as under:-

"3. During the appellate proceedings the director of the company Shri Balesh Mehta attended and filed the written submissions. I have considered the submissions made by the appellant and considered the reasons for rejection of application under section 154. I have gone through the rectification-order under section 154 passed on 12-02-2009 and found that speaking order was passed by' the: assessing officer. The rectification order was passed with the application of mind and quoting the relevant provisions of the Act. There is no mistake apparent from the record in the order passed under section 154 on 12-02-2009. The appellant was requested to clarify whether any appeal was filed against the earlier order passed under section 154 or not. The appellant has not furnished any detail in this regard. Since there was no apparent mistake in the order passed under section 154 on 12.02.2009, the rectification-application dated 18-10-2010 was therefore, rightly rejected by passing speaking order on 19-10-2010."

7. Aggrieved by the order of CIT(A), the Assessee is now in appeal before us and has raised the following effective grounds.

"(1)		On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in rejecting the rectification application u/s 154 and charging interest u/s 234B and 234C by treating amount of Rs. 10 lacs which has been adjusted against the cash seized as self assessment tax instead of advance tax.
(2)		It is therefore prayed that the above interest charged by Assessing Officer u/s 234B and 234C and confirmed by Commissioner of Income Tax (Appeals) may please be deleted."

8. Before us, the Ld. A.R. submitted that during the course of search at the residence of the director of the company on 8.2.2007 and from locker on 7.3.2007 total cash of Rs 43 lacs was found and seized and in this regard Assessee vide letter dated 12.3.2007 requested that out of the total cash seized, cash of Rs 10 lacs be adjusted as an advance tax against the tax liability of the assessee and the balance Rs.33 lacs be treated towards payment of advance tax in case of family members/group companies. He placed on record the copy of the aforesaid letter. He further submitted that in case of one of the group company, (Shreeji Prints) the amount was directed to be treated as payment of advance by the Hon. Tribunal and thus the issue is also covered in its favour by the decision of Ahmedabad tribunal in the case of its sister concern, Shreeji Prints (P.) Ltd. v.Asstt. CIT (ITA No. 359 (Ahd.) of 2012, dated 20-4-2012). He also placed reliance on the decision of Mumbai Tribunal in the case of Sudhakar Shetty v. Asstt. CIT [2008] 10 DTR (Mum)(Trib) 173 and in the case of CIT v. K.K. Marketing [2005] 278 ITR 596 (Delhi).

9. The Ld D.R. on the other hand submitted that Finance Act 2013 has inserted an Explanation to s. 132B according to which the existing liability does not include advance tax payable. He thus supported the order of AO and CIT(A).

10. We have heard the rival submissions and perused the material on record. It is an undisputed fact that during the course of search at the residence of directors on 8.2.2007 and locker on 7.3.2007 aggregate cash of Rs 43 lacs was seized. It is also an undisputed fact that Assessee vide his letter dated 13.3.2007 submitted that out of the cash seized, Rs 10 lacs be treated towards payment of advance tax in the case of assessee and similarly balance of Rs. 33 lacs be treated towards payment of advance tax in case of family members/group companies. It is also a fact that vide aforesaid letter, the Assessee had requested that cash of Rs 8 lacs be considered as advance tax in the case of Shreeji Prints P. Ltd. (supra). The co-ordinate Bench of Tribunal in the case ofShreeji Prints (P.) Ltd. (supra) decided in favour of Assessee by holding as under:

"It is evident from a bare reading of the aforesaid provisions that the existing liability under the Income-tax can be discharged from the assets or money seized. In the present case, the search operation was conducted on 22-9-2005 and the assessee filed return on 31-5-2006 declaring the seized money as income. In our opinion, if the assessee has declared income, during the year under consideration in that eventuality he is liable to pay advance tax as per law therefore the A.O. is required to find out whether such liability was existing on the date of seizure. If such liability is existing then he is empowered to apply/adjust the money seized in discharge of the existing liability even without any written representation from the assessee. Now coming to the fact of the present case, it is not disputed that the money seized from the premises of Shri Lalit Patel and same was subsequently declared in the return of income filed on 31-5-2006. Hence, it can very well be inferred from the return so filed that the respondent/assessee was required to pay advance tax on such income as mandated u/s.208 of the I. T. Act. Therefore, in view of the fact that there is no ambiguity in the provision so far application/adjustment of the seized money is concerned. Further, the judgments as relied upon by the Ld. D.R would not apply on the facts and circumstances of the present case since this is not a case where application u/s. 132(5) is made. Moreover, Section 132(5) is no more on statute book, even otherwise there is divergence in opinion between the Hon'ble High Court of Madhya Pradesh and Hon'ble Delhi High Court as fairly pointed by the Ld. D.R. The order of the ITAT Delhi Bench in ITA No.ll51/Del/2008 as relied by the Ld. D.R. is on different set of facts therefore, is not applicable on the facts of the present case. The issue whether the seized money should be applied towards advance tax liability of assessee and credit should be given credit there-from the date of seizure of money has been decided in favour of the assessee by the decision of ITAT Rajkot Bench in ITA No. 1172/RJT/2010 in the case of Shri Ram S. Sarda v. DCITand the decision of ITAT Mumbai Bench in the case of Sudhakar M. Shetty v. ACIT in ITA No.4238 & 423 9/MUM/2007. Respectfully following the ratio laid therein we do not find any infirmity into the impugned order."

11. Before us, Ld. D.R. has relied on the amendment made to s. 132A vide Finance Bill of 2013, We find that the amendment has been made by insertion of Explanation and the Explanation has been made applicable with effect from 1st June, 2013,. For ready reference, the amendment made by Finance Bill 2013 and the memorandum is reproduced hereunder:-

12. The amendment made by Finance Bill 2013 reads as under:- Amendment of section 132B.

"34. In section 132B of the Income–tax Act, the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered the following explanation shall be inserted with effect from the 1st day of June, 2013, (emphasis supplied) namely:-

Explanation 2.—For the removal of doubts it is hereby declared that the "existing liability" does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.'

The explanatory memorandum to the Finance Bill reads as under :-

The existing provisions contained in section 132B of the Income-tax Act, inter alia, provide that seized assets may be adjusted against any existing liability under the Income Tax Act. Wealth tax Act, the Expenditure-tax Act, the Gift-tax Act and the Interest tax Act and the amount of liability determined on completion of assessments pursuant to search, including penalty levied or interest payable and in respect of which such person is in default or deemed to be in default.

Various courts have taken a view that the term "existing liability" includes advance tax liability of the assessee, which is not in consonance with the intention of the legislature. The legislative intent behind this provision is to ensure the recovery of outstanding tax/interest/penalty and also to provide for recovery of taxes/ interest /penalty, which may arise subsequent to the assessment pursuant to search.

Accordingly, it is proposed to amend the aforesaid section so as to clarify that the existing liability does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII of the Act.

This amendment will take effect from 1st June, 2013." (Emphasis supplied)

13. In Taxmann's publication "Interpretation of Statutes" 2nd Edition by Shri D.P. Mittal at page 807 it has been stated as under:-

"The effect to be given to an explanatory amendment depends upon several factors, including its language. When the legislature has made the explanation operative prospectively by words expressed therein, its operation shall have to be confined to the future date. The same reasoning governs the case when Parliament limits the retrospectivity of the Explanation with effect from a particular date. In such a situation, giving future retrospectivity to the Explanation would be hijacking the intention of the Legislature into an impermissible area-CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 (Delhi). Thus, there is no doubt that ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date, should be construed prospectively and not retrospectively".

14. Thus considering the totality of the aforesaid, interpretation of applicability of explanation, and amendment made by Finance Bill 2013, facts and respectfully following the decision of the co-ordinate Bench, we are of the view that the amended Explanation cannot be applied in present case. We therefore allow the appeal of the Assessee and direct the AO to give credit of Rs 10 lacs as advance tax. Thus the appeal of the Assessee is allowed.

IT: For disallowance under section 40A(2) guiding factor as per scheme of Act is that whether such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facility for which payment has been made

■■■

[2013] 35 taxmann.com 195 (Rajkot - Trib.) (TM)

IN THE ITAT RAJKOT BENCH (THIRD MEMBER)

Assistant Commissioner of Income-tax, Cir. 3, Jamnagar

v.

Shirish Maganlal Ravani*

G.C. GUPTA, VICE-PRESIDENT (AZ) (AS A THIRD MEMBER) 
T. K. SHARMA, JUDICIAL MEMBER 
AND D. K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NO. 342 ( RJT.) OF 2012
[ASSESSMENT YEAR 2008-09]

MAY  13, 2013 

Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments [Interest Payments] - Assessment year 2008-09 - Whether for disallowance under section 40A(2) guiding factor as per scheme of Act is that whether such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facility for which payment has been made - Held, yes - Assessee had taken loans from his wife, sons and his own HUF and paid interest at rate of 18 per cent on same - Assessing Officer considered rate of interest at 12 per cent as reasonable and disallowed 6 per cent of remaining interest by invoking provisions contained in section 40A(2) - Assessing Officer could not cite any instance, wherein assessee on unsecured loan account, other than his relatives account, had paid interest at less than 18 per cent per annum - Whether interest paid by assessee at rate of 18 per cent per annum on unsecured loans during relevant period could not said to be excessive or unreasonable - Held, yes - Whether in facts of case Commissioner (Appeals) was justified in deleting impugned disallowance made by Assessing Officer under section 40A(2) - Held, yes [Para 6] [In favour of assessee]

FACTS

 

■		The assessee had taken loans from his wife, sons and his own HUF in the earlier years. He was paying interest at the rate of 18 per cent on the same. In the return of income for the assessment year 2008-09, he claimed deduction of the interest paid on such loans at the rate of 18 per cent.
■		The Assessing Officer held that the assessee was making excessive payment of interest in respect of the loans taken by him and was diverting his income to his family members, who were liable to tax at lower rate. He relying on the decision of the Rajkot Bench of the Tribunal rendered in the case of ACIT v. Girdharsingh Rathore [IT Appeal No. 1139 (RJT) of 2009, dated 19-3-2010], wherein the interest paid at the rate of 12 per cent was held as reasonable as per the prevailing market rate, considered the rate of interest at 12 per cent as reasonable and disallowed 6 per cent of the remaining interest by invoking the provisions contained in section 40A(2).
■		On appeal, the Commissioner (Appeals) relying upon an earlier order passed by the Rajkot Bench of Tribunal in the case of Haren T. Davda v. ACIT [IT Appeal Nos. 33 & 34 (Rjt) of 2007, dated 30-11-2009] deleted the impugned disallowance made by the Assessing Officer.
■		On second appeal, there was difference of opinion between the members of the Tribunal with regard to the disallowance of interest under section 40A(2).
■		On reference to Third Member:

HELD (THIRD MEMBER ORDER)

 

■		In the instant case, the only issue in dispute is regarding the disallowance of interest paid on loans to family members of the assessee under section 40A(2). The assessee has taken the loans from his wife, sons and from his own HUF and is paying interest at the rate of 18 per cent on the same. The loans were taken in the earlier years and no similar disallowance was made by the Assessing Officer. The observation of the Assessing Officer that the prevailing deposit rates with the bank during the relevant period were in the range of 7 per cent to 8 per cent is not a relevant factor to decide the allowability of rate of interest on the amount of loans to the relatives of the assessee under the provisions of section 40A(2). The submission of the revenue that on bank loans the average rate of interest paid by the assessee comes to 10.73 per cent is unsustainable. This average rate of interest has been calculated on the amount of loan as on the last date of accounting period and not on day-to-day basis. The argument of the revenue that the interest paid to unsecured creditors is more than the return on capital of the assessee and, therefore, excessive is devoid of any merit. The return on capital of the assessee depends on variety of factors and in business there may even be 'loss' to the assessee, but still the assessee is obliged to pay the interest at agreed rate of interest to its depositors. The other argument of the revenue that the assessee is paying lesser amount of tax by giving interest to its family members at higher rate of interest and family members of the assessee being assessed to tax at the rate of 0 per cent to 10 per cent, whereas the assessee is liable to pay tax at an average rate of nearly 20 per cent and, therefore, there is a diversion of taxable income by the assessee in the hands of the family members, is also without any merit.
■		For the disallowance under section 40A(2) the guiding factor as per the scheme of the Act is that whether such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facility for which the payment has been made. Merely because the assessee by incurring legitimate and reasonable expense is liable to pay a lesser amount of income tax, it cannot be said that the provision of the section 40A(2) can be invoked in order to maximum the coffer of the revenue. The assessee has filed copy of the bank statement from ICICI Bank to establish that it has paid interest at the effective rate of 18.44 per cent per annum during the period for the secured loan. The bank rate suggested by the revenue at the rate of 10.73 per cent is patently wrong, since the same has been worked out on the basis of the balance in the account as on the last date of accounting period. It is a matter of common knowledge that the interests on unsecured loans are normally higher than the interest payable on the secured loans.
■		The decisive factor for the applicability of section 40A(2) is whether the payment made by the assessee is excessive or unreasonable considering the prevailing market conditions during the relevant period. The interest paid at the rate of 18 per cent per annum on unsecured loans during the relevant period cannot be said to be excessive or unreasonable. The Rajkot Bench of Tribunal in the case of Haren T. Davda (supra) has held that the interest rate paid at 18 per cent was reasonable. The decision of the Rajkot Bench of the Tribunal in the case ofGirdharisingh Rathore (supra) is distinguishable on facts. The assessee has made the payment of interest in that case ranging between 9 per cent to 13.50 per cent and, therefore, in facts and circumstances of the case the Tribunal has held that the interest rate of 12 per cent is fair and reasonable. In the instant case, the revenue could not cite any instance, wherein the assessee on unsecured loan account, other than his relatives account, has paid interest at less than 18 per cent per annum.
■		In these facts of the case, the Commissioner (Appeals) was justified in deleting the impugned disallowance made by the Assessing Officer under section 40A(2). [Para 6]

CASE REVIEW

 

ACIT v. Girdharsingh Rathore [IT Appeal No. 1139 (RJT) of 2009, dated 19-3-2010] (para 6)distinguished.

CASES REFERRED TO

 

Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 105/5 Taxman 253 (Guj.), Haren T. Davdav. ACIT [IT Appeal Nos. 33 & 34 (Raj.) of 2007, dated 30-11-2009], CIT v. Surya Herbal Ltd.[2011] 202 Taxman 462/14 taxmann.com 142 (SC), ACIT v. Girdharsingh Rathore [IT Appeal No. 1139 (RJT) of 2009, dated 19-3-2010] and S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC).

Ankur Garg for the Appellant. G.B. Parikh for the Respondent.

ORDER

 

T. K. Sharma, Judicial Member - This appeal by the revenue is against the order dated 26-03-2012 of CIT (A), Jamnagar for the assessment year 2008-09.

2. Briefly stated, the facts are that the assessee is an individual derives income as a manufacturer and trading in engine valves and engineering automobiles items as a proprietor in the firm name of M/s. Suzuki Engineers. For the assessment year under appeal, he filed the return of income declaring total income of Rs.7,07,743/- on 27-10-2008. The accounts of the assessee are audited as required u/s.44AB of the Act. Complete quantitative details are maintained. The AO observed that during the year under consideration the assessee has credited interest @ 18% on the loans taken from family members. The AO issued notice to the assessee calling upon him to show cause as to why the interest credited at the rate of 18% on the borrowings from the family be not restricted to 12%. In reply, the assessee contended that these are unsecured loans without any guarantee and taken for long period and earlier this type of interest have been allowed by the department and hence the rate of 18% is allowable expenditure. In support of his claim, he placed reliance on the decision of the Hon'ble Gujarat High Court in the case of Voltamp Transformers (P.) Ltd. v. CIT[1981] 129 ITR 105/5 Taxman 253 and submitted that interest rate @18% has already been allowed even on the bank loans. In addition to this the assessee also relied upon the order of the Rajkot Bench of the Tribunal in the case of Haren T. Davda v. ACIT [IT Appeal Nos. 33 & 34 (Raj.) of 2007, dated 30-11-2009]. The contentions of the assessee did not find favour of the AO and he framed the assessment u/s.143 (3) of the I. T. Act, wherein he disallowed interest of Rs.3,22,091/- @ 6% u/s.40A(2) (b) of the I.T. Act as excessive as under:-

No.	Name	Relation	Interest paid at 18% in Rs.	Interest disallowed at 6% in Rs.
1.	Bhavik Shirish Ravani	Son	3,95,413	1,31,804/-
2.	Mitaben Shirish Ravani	Wife	3,64,131	1,21,377/-
3.	Shirish Maganlal Ravani (HUF)	HUF status of Appellant	2,06,608	68,869/-
	Total		9,66,152	3,22,091/-

3. On appeal before the ld. CIT (A), assessee explained that interest paid @ 18% is not excessive. These loans are unsecured and obtained without any securities. It was also submitted that in the assessment year under appeal, on secured loan, bank charged interest 17.04% on monthly rests i.e. effective rate of interest comes to 18.44% on yearly basis. Apart from this, assessee has taken a bank loan on car from ICICI Bank on 05-07-2006. On this loan, ICICI Bank charged interest at a rate of 17.04% which assessee is paying on monthly basis. Further, on purchases, if there is a late payment then suppliers are charging interest @ 24% on late payment of purchase price. In support of this, photo-copies of purchase bill were produced before the ld. CIT (A). After considering the various submissions, in the impugned order, the ld. CIT(A) deleted the disallowance of interest of Rs.3,22,091/- u/s.40A(2)(b) of the Act for the detailed reason given in para-4.2 which reads as under:-

"4.2. I have duly considered the submission of the appellant and the discussion made by the AO in the assessment order. It was explained by the appellant that the interest paid @ 18% is not excessive and these loans are unsecured and obtained without any securities. Also various evidences have been submitted during the course of assessment proceedings. Appellant further submitted that in the case of Shri Haren T. Davda the hon'ble ITAT, Rankot bench in ITA No.33 and 34/Rjt/2007 vide order dtd. 30-10-2009 held that interest paid to relatives at the rate of 18% is reasonable and has filed a copy of the said order alongwith the written submission. I have also gone through the said order of the hon'ble ITAT, Rajkot bench. I find that there is no case of disallowance u/s.40A(2)(b) of the Act. Payment of interest @ 18% is not high comparing to the market rate which is around 18%. AO has mechanically made this disallowance without bringing any adverse thing on record or any comparable case to indicate excessiveness. In view of the above and also following the above order of hon'ble ITAT, Rajkot bench in the case of Shri Haren T. Dave for A.Ys. 2002-03 & 2003-04, the disallowance of Rs.3,22,091 made by the AO out of interest payment is deleted."

4. In respect of fall in GP, the AO observed that in the previous two assessment years i.e. AY 2006-07 and 2007-08, the assessee has declared GP at the rate of 25.20% and 40.23% respectively. But for the year under consideration the assessee declared GP at the rate of 20.81%. The AO issued show cause notice to the assessee for such decline in the GP rate. In reply, the assessee contended that fall in GP is due to increase in direct export expenses and trade commission in addition to this the assessee also contended that cost for local sales and export sales have been increased comparable to the last two years sales and turnover. The AO rejected the explanation of the assessee and made addition of Rs.12,07,079/- being 5% of total turnover monthly on the ground that G.P. declared in the assessment year under appeal is lower by 7.93% of average profit of last three years.

5. In respect of G.P. addition before ld. CIT(A), assessee contended that details of turnover for the year under consideration and earlier three years are as under:-

A. Y.	Total Turnover	Gross Profit	In Percentage
2005-06	13753921	2911937	21.17%
2006-07	13307207	3353657	25.20%
2007-08	14130445	5685229	40.23%
2008-09	24141592	5022984	20.81%

6. It was also submitted that books of account were audited, full quantitative details are maintained. No defect in the books of accounts has been pointed out by the AO. Books of account are audited. After considering these submissions, in the impugned order, the ld. CIT(A) deleted the addition of Rs.12,07,079/-which was made by AO on account of low G.P. for the detailed reason given in para-5.2 which reads as under:-

"5.2 I have duly considered the submission of the appellant and the discussion made by the AO in the assessment order. I find that the AO has not rejected the books of the appellant and has not pointed out any defects in the books of account. AO has made addition merely on the ground of low gross profit, without rejecting books. AO has not brought on record anything to show that the GP rate of the appellant was low. Appellant has given elaborate charts to show that sales realization is less this year whereas the cost has increased to a great extent. Thus in my opinion the appellant has been able to satisfactorily explain the reasons for fall in GP during the year. There are no contrary evidences to show any sales outside books or suppression of profit etc. Therefore, I hold that the AO was not justified in making addition by taking the GP rate at 5% of total turnover and the same is hereby ordered to be deleted."

Aggrieved with the order of ld. CIT(A) deleting both additions, the revenue is in appeal before this Tribunal on the following grounds:-

"1.		The CIT(A) erred in law and in facts in holding that disallowance of interest of Rs.3,22,091/- paid on loans taken from family members u/s.40A(2) of the IT Act is wrong.
2.		The CIT(A) erred in law and in facts in deleting the addition of Rs.12,07,079/- by taking the GP rate at 5% of total turnover."

7. At the time of hearing before us, on behalf of revenue, Shri Avinash Kumar, D. R. appeared and with regard to disallowance of interest u/s.40A(2)(b) of the Act contended that as per the provisions of sec.40A(2) of the Act, "ïf the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." He submitted that cost of loan from the bank is from the higher side whereas, loans from the private parties is available at lower rate of interest. The assessee took the loan at higher rate of interest from family members therefore, AO rightly invoked the provision contained in section 40A(2) of the I.T. Act, 1961 and disallowed excessive interest @6%.

8. With regard to G.P. addition, the ld. D.R. pointed out that there is a sharp fall in G.P. ratio from the previous year. AO asked the assessee to justify the fall in G.P. ratio. Initially, assessee submitted that fall in G.P. ratio was due to increase in direct export where packing expenses and trade commission had increased. When the assessee was confronted that expenditure on these two factors is very comparable to last year figures, then the assessee changed his line of argument and presented a break-up of total sales between exports and local sales and contended that there has been increase in the cost price while sales price with respect to exports has been declined. Before the AO, assessee has also stated that there was global slowdown and during the period, the assessee focused on increasing exports through competitive pricing and submitted several charts to prove his point. However, the increase in cost price and decrease in sales price were not substantial. For these reasons, the AO was of the view that there was minor increase and decrease in cost price and sales prices as per normal business cycle, the average method has to be taken. Accordingly, the contention of the assessee was rightly rejected and addition @ 5% of total sales was rightly made which comes to Rs.12,07,079/-.

9. On the other hand, Shri G. B. Parikh, Advocate appeared on behalf of the assessee vehemently supported the order of ld. CIT (A). The counsel of the assessee filed a paper-book which was submitted before the ld. CIT (A) and contended that interest paid @ 18% was fair and reasonable therefore, the ld. CIT (A) rightly deleted the addition of Rs.3,22,091/- made by AO u/s.40A(2) of the I. T. Act, 1961. He also contended that to get funds for the business purpose from the Banks and Financial Institutions at lower rates are very difficult and even if it gets it takes long time which defeat the purpose. On the contrary, funds from the local persons, family members is easily available for which rate of interest is to be paid little bit more and hence rate of interest at the rate of 18% is reasonable in favour of business which is normal practice in the commercial premises and hence the ld. CIT(A) is correct in allowing the same.

10. With regard to G.P. addition, the counsel of the assessee pointed out that full quantitative details are maintained, books of account are audited, nowhere in the assessment order AO rejected the books of account, no single defect for maintaining books of account was found, therefore, ld. CIT (A) is legally and factually correct in deleting the G.P. addition of Rs.12,07,079/- made by AO in the assessment order.

11. Having heard both sides, we have carefully gone through the orders of authorities below. It is well settled law that section 40A(2)(a) cannot have any application unless it is first held that expenditure was excessive and unreasonable looking to the interest paid by the assessee to bank and to supplier, interest @18% paid by the assessee on unsecured loan is neither excessive nor unreasonable. We also find force in the contention of the ld. Counsel for the assessee that it is easy to get funds from the market than from the Banks or Financial Institutions for which if some rate of interest is paid is nothing wrong to satisfy the expediency of funds. In view of the above discussion, we are therefore of the view that ld. CIT (A) is legally and factually correct in deleting the disallowance of interest which was made by AO by invoking the provisions contained in sec.40A(2)(a) of the I.T. Act. We therefore, declined to interfere in the well-reasoned order of the ld. CIT(A). The ground No.1 is rejected.

12. With regard to G.P. addition, from the perusal of para-4 of the assessment order, it can be seen that AO made comparison to figures of last three assessment years and made addition by taking the G.P. rate at 5% of total turnover. The books of account are audited. No defect in the books of account is pointed out by the AO in the assessment order. It is well settled law that no addition can be made merely on the ground of low G.P. unless the books of account are rejected. Further, there is no evidence to show that the assessee has made any sale outside the books or suppressed the profit etc. The AO has made the addition on the basis of surmises and conjecture which cannot be upheld under the garb of law. Keeping in view all these factors into consideration, we are of the considered opinion, that the ld. CIT (A) is legally and factually correct in deleting G.P. addition of Rs.12,07,079/- which was made by AO without rejecting the books of account. We therefore, declined to interfere in the order of the ld.CIT(A) on this count. The ground No.2 is also rejected.

13. In the result, the appeal of the revenue is dismissed.

NOTE OF DISSENT

 

D K Srivastava, Accountant Member - The issue under consideration, in brief, is whether the AO is justified in restricting the rate of interest to 12% as against 18% claimed to have been paid by the assessee on the amounts deposited by the assessee's own HUF, son and wife or, to put it alternatively, on the amounts claimed by the assessee to have been lent by them. Total amount of disallowance made by the AO and deleted by the CIT(A), which is proposed to be upheld by my learned Brother is Rs.3,22,091/-. Though the amount of tax involved in the matter is not substantial yet the view taken in this order is bound to be cited as precedent in other cases and therefore would have cascading effect in several other cases. As held by the Hon'ble Supreme Court in its judgment in CIT v. Surya Herbal Ltd. [2011] 202 Taxman 462/14 taxmann.com 142, tax implication in one case should not be considered in isolation when the principle involved therein would have cascading effect on a large number of cases. It is therefore necessary that the issue involved in the matter under consideration receives careful consideration before it is cited in other cases as precedent. Keeping this aspect in view, the matter was discussed with my learned Brother. We have however not been able to reach a consensus. I therefore proceed to record my Note of Dissent.

2. I have carefully gone through the order proposed by my Learned Brother confirming the order of CIT(A) deleting the addition of Rs.12,07,079/- made by the AO on account of low rate of gross profit and also deleting the disallowance made by the AO on account of excessive rate of interest paid by the assessee on deposits/loans accepted by the assessee from his own HUF, son and wife. While I concur with the order proposed by my Learned Brother confirming the order of the CIT(A) deleting the addition of Rs.12.07,079/-, I am unable to agree with his order endorsing the decision of the CIT(A) deleting the disallowance of part of interest made by the AO.

3. Perusal of the assessment order shows that the assessee claimed to have taken deposits/loans from his own HUF, wife and son for which he claims to have paid interest to them @18%. It is further seen from the assessment order that the said amounts have been appearing in the books of the assessee for last several years. Keeping in view the prevalent rate of interest in the market, the Assessing Officer held that payment of interest @ 18% was excessive, unreasonable and not guided by business considerations. According to him, the assessee's own HUF, wife and son would not have been able to get interest @ 18% from any source if they had deposited/lent the impugned sums elsewhere. Relying upon the order dated 19-03-2010 passed by this Tribunal in ACIT v.Girdharisingh Rathore ITA No.1139/Rjt/2009, the Assessing Officer considered the rate of interest at 12% as reasonable and accordingly disallowed 6% of the remaining interest.

4. On appeal, the ld. CIT (A) deleted the disallowance made by the AO.

5. On careful consideration of the facts placed on record, I am unable to agree with the view taken by the ld. CIT(A). Interest on capital borrowed for the purposes of business is admissible deduction u/s 36(1)(iii). As held by the Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74, the expression "for the purpose of business" in section 36(1)(iii) means expenditure incurred voluntarily for commercial expediency. Any interest paid on account of personal relationship of the assessee with the depositors/lenders cannot be said to be guided by commercial consideration. This view is further supported from the provisions of section 40A(2) which enables the AO to disallow expenditure to the extent it is unreasonable or excessive having regard to the fair market value of the goods, services or facilities for which the payment is made to a relative defined u/s 40A(2)(b). The assessee has received the impugned sums from his own HUF, son and wife. They would not have received interest @ 18% if they had given this sum to any other person. Even the rate of interest being paid by the Banks on long term deposits was not more than 10%. These amounts are being carried by the assessee's HUF, his wife and son from year to year as the rate of interest being received by them from the assessee is significantly higher than what is prevailing in the market. The entire transaction is basically in the nature of an arrangement by which the funds of the family remain in the family fetching a significantly higher rate of interest than what these funds would fetch if deposited in banks or elsewhere. Apart from the aforesaid factual aspects of the case, the AO also took note of the order dated 19th March 2010 passed by this Bench in Girdharisingh Rathore (supra) in which it has been held that the AO was justified in disallowing interest paid by the assessee over and 12% u/s 40A(2). Following the aforesaid order of this Tribunal, the AO disallowed interest paid over and above 12%. In my considered view, the AO has committed no error on the facts of the case in following the aforesaid order of this Tribunal.

6. The ld. CIT(A), however, relied upon an earlier order passed by this Tribunal on 30.10.2009 relating to an earlier assessment year in Haren T Davda (supra) for AY 2002-03 in which this Tribunal has held as under:

"37. We have considered the rival submissions. We hold that the assessing officer has not brought out how rate of interest at 18% is excessive or unreasonable. Section 40A(2)(b) cannot be invoked to make disallowance without establishing that the rate at which interest is paid is excessive or unreasonable. The assessee has brought out factors which influence the rate of interest in unsecured loans arranged from relatives. Further considering the fact that no disallowance was made in earlier year, we do not find any justification for the disallowance…"

7. In a later order involving later assessment year, the same Bench with same quorum has held in its order dated 19.3.2010 in Girdharisingh Rathore (supra) for AY 2006-07 as under:

"5. We have carefully considered the finding given by the Assessing Officer and the submission of the AR of the appellant. We find that the assessee has made payment of interest ranging between 9% to 13.50%. As per the provisions of section 40A(2)(b) the excessive or unreasonable interst rate as per the market prevailing value of the goods and services for which the payment is made. In this case, the Assessing Officer has considered 13.50% rate of interest as being excessive. The bank interest rate is varying up to 12%. Therefore, in the interest of justice and fair play, we reverse the findings of the CIT(A) and direct the Assessing Officer to charge paid at the rate of 12%, which is fair and reasonable as per the prevailing market rate. Therefore, we reverse the findings of the CIT(A) and direct the Assessing Officer to consider the interest rate at 12% and it is to be disallowed the balance amount of interest being excessive."

8. Decision of this Tribunal in Girdharisingh Rathore is later in point of time and also relates to a later assessment year. Both the orders have been passed by the same Bench and the same quorum. It is obviously the later judgment that will prevail and the earlier one will stand impliedly modified to that extent. In its later decision relating to a later assessment year, this Tribunal has held that rate of interest of 12% was reasonable and any interest paid over and above 12% was unreasonable and excessive having regard to the prevailing market rate and therefore liable to be disallowed u/s 40A(2)(b). The AO has rightly followed the later order of this Tribunal in making the impugned disallowance. The ld. CIT (A) ought to have followed the later order of this Tribunal relating to a later assessment year. Keeping in view the materials brought on record by the AO and the latest order of this Tribunal dated 19-03-2010 in Girdharisingh Rathore (supra), I would consider appropriate to confirm the order of the AO restricting the reasonableness of payment of interest to 12%. In this view of the matter, the order passed by the CIT (A) in this behalf deserves to be reversed. I hold accordingly.

THIRD MEMBER ORDER

 

G.C. Gupta, Vice-President (As a Third Member)

On account of difference in opinion between the learned Judicial Member and learned Accountant Member of ITAT, Rajkot Bench, this matter has been referred to me by the Hon'ble President, ITAT for consideration and disposal under Section 255(4) of the Income Tax Act, 1961. The Hon'ble President, ITAT has referred the following question:

"Whether on the facts and circumstances of the case, the ld. CIT(A) is justified in deleting the disallowance of interest of Rs.3,22,091/- which was paid on loans taken from family members under Section 40A(2) of the Income Tax Act, 1961 ?"

2. I have carefully considered the above question drawn by the learned Members of the Rajkot Bench and have perused the proposed orders of the learned JM and the learned AM. I have heard the learned CIT-DR and the learned counsel of the assessee.

3. The contentions of learned CIT-DR and the assessee were mainly similar, as advanced by them before the regular Bench and recorded in the proposed orders of the learned JM and the learned AM.

4. The learned CIT-DR submitted that the only issue in dispute in this case is regarding disallowance of interest paid on loans to relatives of the assessee-proprietor under Section 40A(2) of the IT Act. He submitted that the assessee has taken loan of Rs.57.92 lakhs from his wife, son and his own HUF, and the assessee is paying interest at the rate of 18% on the same. He submitted that the AO has observed that prevailing deposit rate with the bank were in the range of 7% to 8%. The AO concluded that the assessee was making excessive payment in respect of the loans taken by him, and was diverting his income to his family members, who were liable to tax at lower rate. He relied on the decision of the ITAT, Rajkot Bench in the case of Girdharisingh Rathore, (supra) for the assessment year 2006-2007 wherein the interest paid at the rate of 12% was held as reasonable, as per the prevailing market rate, and the balance amount of interest was disallowed by holding the same as excessive. He submitted that the average rate of interest paid on the bank loans comes to around 10.73% in this case, whereas the average rate of interest on unsecured loans is around 16.68%, and therefore the interest paid on loan was indeed excessive. He submitted that the return on assessee's capital was merely 15.80% whereas the assessee was paying interest on unsecured loans at 16.68%. The learned CIT-DR submitted that the assessee is paying lesser amount of tax by giving interest at higher rate to its family members and relatives, as only income of the family members is the interest paid by the assessee, and they are assessed to tax at the rate of 0% to 10%. He submitted that on the other hand, the assessee was liable to tax at an average rate of nearly 20%, and therefore the assessee has diverted its taxable income in the hands of its family members. He submitted that the decision of the Rajkot Bench of the ITAT in Haren T Davda (supra) cited by the learned JM was distinguishable on facts, since pertains to the assessment year 2001-2002, whereas the decision of the Rajkot Bench in Girdharisingh Rathore(supra) pertains to the assessment year 2006-2007, which is much closure to the period to which the present case of the assessee relates.

5. The learned counsel for the assessee has opposed the submissions of the learned CIT-DR. He submitted that yield of 15.80% on the capital of the assessee is not relevant to the issue since, it has been calculated on the balance capital as on the last date of the accounting period. He submitted that the assessee was paying more than 18% on secured loans and submissions of the learned CIT-DR that the average rate of interest paid to the bank loans was around 10.73% was not correct, since has been calculated on the balance as on the last date of accounting period. He submitted that the bank was charging 17.04% interest on the monthly basis, and therefore the effective rate of interest comes to more than 18% per annum. He referred to the statement of accounts of the ICICI bank at page no.20 and 21 of the compilation filed before the Tribunal in support of the submission that the effective rate of bank interest was 18.44%per annum. He submitted that no similar addition was made in the earlier years, and the loans from the relatives of the assessee were unsecured loans and therefore carries higher rate of interest. He submitted that under the provisions of the Income Tax Act, the government itself is charging 18% interest per annum under Section 201(1A) of the Act.

6. The learned CIT-DR in his rejoinder submitted that charging of interest at 18% under the provisions of the I.T. Act, being penal in nature, is not comparable with the prevailing market rate of interest. He submitted that the ICICI Bank is financing the vehicle loans, which always carries higher rate of interest due to higher risk factor of the bank.

7. I have considered rival submissions and have perused the proposed orders of the learned JM and the learned AM on this issue, and also written note filed by the Revenue. I find that basic facts of the case are not in dispute. The only issue in dispute before me in this case is regarding the disallowance of interest paid on loans to family members of the assessee-proprietor under section 40A(2) of the IT. Act, 1961. The assessee has taken the loans amounting to Rs.57.92 lakhs from his wife, sons and from his own HUF and is paying interest at the rate of 18% on the same. The loans were taken in the earlier years and no similar disallowance was made by the department. The observation of the AO that the prevailing deposit rates with the bank during the relevant period were in the range of 7% to 8%, in my view, is not a relevant factor to decide the allowability of rate of interest on the amount of loans to the relatives of the assessee under the provisions of Section 40A(2) of the Act. I find that the submission of the Revenue that on bank loans, the average rate of interest paid by the assessee comes to 10.73% is unsustainable, since this average rate of interest has been calculated on the amount of loan as on the last date of accounting period, and not on day-to-day basis. The argument of the learned CIT-DR that the return on capital of the assessee comes to 15.80%, and the interest paid to unsecured creditors being more than the return on capital of the assessee, and therefore excessive, is devoid of any merit. The return on capital of the assessee-proprietor depends on variety of factors and in business there may even be "loss" to the assessee, but still the assessee is obliged to pay the interest at agreed rate of interest to its depositors. The other argument of the learned CIT-DR that the assessee is paying lesser amount of tax by giving interest to its family members at higher rate of interest, and family members of the assessee being assessed to tax at the rate of 0% to 10%, whereas the assessee is liable to pay tax at an average rate of nearly 20%, and therefore there is a diversion of taxable income by the assessee in the hands of the family members, is also, in my view, without any merit. For the disallowance under section 40A(2) of the Act, the guiding factor as per the scheme of the Act is that whether such expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facility for which the payment has been made etc. I find that merely because the assessee by incurring legitimate and reasonable expense, is liable to pay a lesser amount of income-tax, it cannot be said that the provision of the Section 40A(2) of the Act can be invoked in order to maximum the coffers of the Revenue. I find that the assessee has filed copy of the bank statement from ICICI Bank to establish that it has paid interest at the effective rate of 18.44% per annum during the period for the secured loan. The bank rate suggested by the learned CIT-DR at the rate of 10.73% is patently wrong since has been worked out on the basis of the balance in the account as on the last date of accounting period. It is a matter of common knowledge that the interests on unsecured loans are normally higher than the interest payable on the secured loans. In order to get a secured loan from the bank, assessee has to undergo a number of formalities and to give security and collateral securities to the satisfaction of the bank, whereas this impediment do not normally exists in the case of unsecured loans obtained by the assessee. The learned CIT-DR's submission that the interest charged under Section 201(A) of the Act at 18% by the Government is not relevant, since is of penal in nature, is also not relevant to the issue before the Tribunal. The decisive factor for the applicability of section 40A(2) of the Act is whether the payment made by the assessee is excessive or unreasonable considering the prevailing market conditions during the relevant period. In my considered view, interest paid at the rate of 18% per annum on unsecured loans during the relevant period cannot be said to be excessive or unreasonable. The ITAT, Rajkot Bench in Haren T. Davda (supra) has held that the interest rate paid at 18% was reasonable. The decision of the Rajkot Bench of the ITAT in Girdharisingh Rathore (supra) dated 19.3.2010 cited by the learned CIT-DR is distinguishable on facts, since the assessee has made the payment of interest in that case ranging between 9% to 13.50%, and therefore in facts and circumstances of the case, the Tribunal has held that the interest rate of 12% is fair and reasonable. In the case before me, the Revenue could not cite any instance wherein the assessee on unsecured loan account, other than his relatives account, has paid interest at less than 18% per annum. In these facts of the case, I have no hesitation in agreeing with the view of the learned JM that the learned CIT(A) is justified in deleting the disallowance of interest of Rs.3,22,091/- which was paid on loans taken from family members under section 40A(2) of the Act, 1961, and the point of difference is decided in favour of the assessee and against the Revenue.

8. The matter will now go back to the Division Bench for passing order in accordance with majority view.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

 

T. K. Sharma, Judicial Member - On account of difference of opinion between the member constituting the regular bench, following question was referred for consideration of Third Member :-

"Whether on the facts and circumstances of the case, the ld. CIT (A) is justified in deleting the disallowance of interest of Rs.3,22,091/- which was paid on loans take from family members u/s.40A(2) of the I.T. Act, 1961 ?

2. The Hon'ble Zonal Vice President sitting as Third Member vide his order dated 2nd May, 2013 expressed his opinion that the ld. CIT(A) is justified in deleting the disallowance of Rs.3,22,091/- which was paid on loans taken from family members u/s.40A(2) of the Income Tax Act, 1961. Therefore, as per majority view, the ground No.1 of Revenue is dismissed.

3. In respect of other ground of appeal, both the members agreed that ld. CIT (A) has rightly deleted the G. P. addition of Rs. 12,07,079/-. This ground of appeal is also dismissed.

4. In the result, the appeal of the Revenue is dismissed.

5. This Order pronounced in Open Court on the date mentioned hereinabove.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

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