IT : Provision made for leave encashment cannot be disallowed on basis of clause (f) of section 43B
IT : Where own funds of assessee were many times more than amount invested in shares and there was no nexus between investment and interest bearing borrowed funds, no disallowance under section 14A was warranted
IT : Where software in question only increased organizational efficiency of assessee, expenditure incurred for such software should be treated as revenue expenditure
■■■
[2013] 33 taxmann.com 476 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'D'
Eimco Elecon (India) Ltd.
v.
Additional Commissioner of Income-tax*
A.K. Garodia, ACCOUNTANT MEMBER
AND Kul Bharat, JUDICIAL MEMBER
AND Kul Bharat, JUDICIAL MEMBER
IT Appeal No. 931 (Ahd.) of 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 21, 2012
I. Section 43B, read with section 37(1), of the Income-tax Act, 1961 - Business disallowance - Certain deduction to be allowed only on actual payment [Provision for leave encashment] - Assessment year 2007-08 - Assessing Officer disallowed provision made for leave encashment on basis of clause (f) of section 43B - Calcutta High Court in Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 held that clause (f) of section 43B is arbitrary and de hors of Supreme Court decision -Whether following above decision, disallowance made by Assessing Officer on basis of clause (f) of section 43B could not be sustained - Held, yes [Para 5] [In favour of assessee]
II. Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Dividend] - Assessment year 2007-08 - Assessing Officer having found that assessee had made investment in shares and earned dividend therefrom, disallowed part of interest expenditure - Whether no disallowance was called for under section 14A out of interest expenditure because own funds of assessee were many times more than amount invested in shares and no direct nexus was established by Assessing Officer between investment and interest bearing borrowed funds - Held, yes [Para 9] [In favour of assessee]
III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software licence fees] - Assessment year 2007-08 - Assessee engaged in manufacturing mining machineries had paid software licences fees for Oracle product licences for finance, purchase order, management and manufacturing - Assessing Officer treated expenditure on license fees as capital expenditure - Whether software in question would help assessee in increasing efficiency but same could not be treated as forming part of profit making apparatus of assessee-company and, therefore, expenditure on this software could not be treated as capital expenditure - Held, yes [Para 14] [In favour of assessee]
CASE REVIEW - I
Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 (para 5) followed.
CASE REVIEW - III
Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) (SB) (para 14) followed.
CASES REFERRED TO
Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) (para 4), Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 (para 4), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (para 9), Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) (SB) (para 13), Satender Jhunjhunwala [IT Appeal. No. 1088 (Cal.) of 2009, dated 11-11-2011] (para 18), Utility Powertech Ltd. v. Asstt. CIT [IT Appeal No. 2561(Mum.) of 2009, dated 19-4-2010] (para 18) and Om Satya Axim (P.) Ltd. v. ITO [IT Appeal No. 1335 (Ahd.) of 2010, dated 13-5-2011] (para 18).
Sunil Talati for the Appellant. B.L. Yadav for the Respondent.
ORDER
A.K. Garodia, Judicial Member. -This is the assessee's appeal directed against the order of the learned Commissioner of Income-tax (Appeals)-IV, Baroda, dated February 26, 2010.
2. Ground No. 1 is general.
3. Ground No. 2 reads as under :
"2. The hon'ble Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 8,58,452 being provision made for leave encashment. It is submitted your appellant is following the mercantile system of accounting and the provision for leave encashment was made on actuarial basis. The same be allowed on actual payment basis paid during the year."
4. It was submitted by the learned authorised representative that the disallowance was made by the Assessing Officer by invoking the provisions of clause (f) of section 43B. He submitted that as per the decision of the hon'ble apex court rendered in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 and also as per the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1, disallowance of leave encashment is not justified. He submitted that in the first case, it was held by the hon'ble apex court that leave encashment is not a contingent liability if the provision is made on some scientific basis. He also submitted that in the second case, the hon'ble Calcutta High Court has duly considered the provisions of clause (f) of section 43B and it was held that the amendment as per which this clause (f) was inserted by the Finance Act, 2001 with effect from April 1, 2002 is held to be as arbitrary by the hon'ble Calcutta High Court and, therefore, the same was struck down by the hon'ble Calcutta High Court being arbitrary, unconscionable and de hors the hon'ble Supreme Court decision. He submitted that in view of this judgment of the hon'ble Calcutta High Court, disallowance made by the Assessing Officer is not justified. The learned Departmental representative supported the orders of the authorities below.
5. We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below and the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra). We find that the Assessing Officer has made disallowance by invoking the provisions of clause (f) of section 43B and the same was confirmed by the learned Commissioner of Income-tax (Appeals) also on the basis of section 43B. As per the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra), it was held that clause (f) of section 43B is arbitrary, unconscionable and de hors of the hon'ble Supreme Court decision and, therefore, not valid. In view of this, clause (f) of section 43B is not valid and, therefore, disallowance made by the Assessing Officer on the basis of clause (f) of section 43B cannot be sustained. We, therefore, delete the same. Understanding Specified Domestic Transaction Provisions
1.0 INTRODUCTION:
Transfer pricing regulations introduced in India in 2001, but till very recently covered only cross border related party transactions. Honoring the Supreme Court ruling in case of CIT vs. M/s Glaxo Smithkline Asia (P) Limited, CBDT expanded the ambit of transfer pricing to Specified Domestic Transactions w.e.f. 1st April, 2013.
Thus, The Finance Act, 2012 extended its scope to cover certain domestic transactions with related parties within India, defined as 'Specified Domestic Transactions' (SDT). This will principally have impact in two ways. To begin with, the pricing of the domestic transactions will need to comply with the arm's length principle by application of one of the prescribed methods. In addition, there will be compliance and documentation obligations for such specified domestic transactions.
The provisions apply from the financial year 2012–13 onwards if the aggregate value of the transactions exceeds Rs. 5 crores in the relevant financial year.
SDT includes payments to related parties, inter-unit transfer of goods or services of profit linked tax holiday-eligible units, transactions of profit-linked tax holiday-eligible units with other parties and any other transaction that may be notified by the Central Board of Direct Taxes.
2.0 PURPOSE OF INTRODUCING DOMESTIC TRANSFER PRICING
It was realized by the government that:
- Presently, there is no method prescribed to determine reasonableness of expenditure to re-compute the income in related party transactions
- There is need to provide objectivity in determination of income and determination of reasonableness of expenditure in domestic related party transactions
- There is need to create legally enforceable obligation on assessee to maintain proper documentation
3.0 RELEVANT SECTIONS OF INCOME TAX ACT, 1961 PERTAINING TO DOMESTIC TRANSFER PRICING REGULATIONS:
3.1 Section 92(2): Where in an international transaction [or specified domestic transaction], two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.
3.2 Section 92(2A): Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price.
3.3 SECTION 92BA: MEANING OF SPECIFIED DOMESTIC TRANSACTION.
For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:—
(i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;
(ii) any transaction referred to in section 80A;
(iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA;
(iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
(vi) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees.
3.4 PENALTIES APPLICABLE ON NON-COMPLIANCE:
- Section 271(1)(c): If adjustment is treated as concealment of income: Penalty will be 100% to 300% of the tax on adjustment
- Section 271AA: Failure to maintain required set of documents: 2% of value of transactions
- Section 271BA: Failure to furnish report by due date: Rs. 1,00,000
- Section 271G: Failure to furnish documentation: 2% of value of transactions
4.0 DEFINITION
4.1 TAX HOLIDAY BENEFICIARIES IMPACTED BY DOMESTIC TRANSFER PRICING
| Section | Nature of Undertakings covered |
| 80IA | Undertakings engaged in
|
| 80IAB | Undertakings engaged in development of SEZ's |
| 80IB | Undertakings located/ engaged in
|
| 80IC | Industrial Undertakings or enterprises established in special categories state |
| 80ID | Industrial Undertakings engaged in development of hotels and convention centres in specified areas |
| 80IE | Undertakings in North-eastern States |
| 80JJA | Undertakings engaged in collection and processing of bio-degradable wastes |
| 80JJAA | Undertakings engaged in employment of new workmen |
| 80LA | Offshore Banking Units and International Financial Service Centres |
| 80P | Co-operative Societies |
4.2 MEANING OF RELATED PARTIES UNDER DOMESTIC TRANSFER PRICING REGULATIONS
| Tax Payer | Section | Related Party |
| Individual | 40A(2)(b)(i) | Any Relative |
| Company | 40A(2)(b)(ii) | Any Director or his / her Relative |
| Firm | 40A(2)(b)(ii) | Any Partner or his / her Relative |
| AOP | 40A(2)(b)(ii) | Any Member or his / her Relative |
| HUF | 40A(2)(b)(ii) | Any Member or his / her Relative |
| Any Tax Payer* | 40A(2)(b)(iii) | Any individual having substantial interest in the taxpayer's business or his / her relative |
| Any Tax Payer* | 40A(2)(b)(iv) | A Company, firm, AOP, HUF having substantial interest in the taxpayer or any director, partner, member of such company, firm, AOP, HUF or Relative of such director, partner or member |
| Any Tax Payer* | 40A(2)(b)(v) | A Company, firm, AOP, HUF of which director, partner, member having substantial interest in the taxpayer or any director, partner, member of such company, firm, AOP, HUF or Relative of such director, partner or member |
| Any Tax Payer* | 40A(2)(b)(vi) | A person in which taxpayer / any director, partner, member of taxpayer / relative of such individual, director, partner or member has substantial interest |
* Substantial Interest means beneficial ownership of shares with at least 20% voting right or beneficial entitlement of at least 20% of the profits
COMPLIANCE REQUIREMENTS FOR DOMESTIC TRANSFER PRICING
Current Compliance Requirements
} Section 10AA: For claiming tax deduction, CA Certificate in Form 56F needs to be filed transactions are at ALP by selecting the most appropriate method
} Section 40A: Transactions to be reported in Tax Audit Report in Form 3CD
} Section 40A(2) read with Section 92(2); Section 92(2A) and Section 92BA: Expenditure paid or to be paid to related parties will require to be at arm's length
} Section 80IA: Declaration of Additional Compliance Requirements & Declaration of profit to be made in CA Certificate in Form 10CCB
} Section 92D: read with Rule 10D: Maintaining Contemporaneous Documentation prove that transactions are at ALP
} Section 92E: Filing audit report in Form 3CEB / any other Form may be prescribed
5.0 DUE DATE FOR FILING RETURNS
Section 92F (iv) states that specified date for filing form 3CEB shall have the same meaning as assigned to Explanation 2 below section 139(1):
Explanation 2 (aa) below Section 139, states that due date for filing return of income of the assessee who is required to furnish accountant report under section 92E is 30th November of the assessment year.
6.0 OUR ANALYSIS:
With introduction of "Specified domestic transaction provisions", the finance ministry is now moving towards:
} Shift of focus from generic 'Fair Market Value' concept to 'Arm's Length Price'
} Fair Market Value can established using basic market evidence
Thus, transfer pricing regulations will now applicable to all taxpayers including Individuals, Hindu Undivided Families (HUFs). Assesses will need to evaluate intra-group transactions with greater detail and will in turn also increase the administrative and compliance burden for the taxpayer in respect of such transactions. Further, if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of recipient of income. Hence, it may lead to double taxation in India. Following points also needs to be kept in mind:
} Arm's Length Price can be determined by use of six prescribed methods
} Advance Pricing Agreements NOT applicable to specified domestic transactions
} Assessing officer's powers shifted to Transfer Pricing Officer ('TPO')
Since the due date for filing of the income tax return is extended to 30th November of the assessment year, the professionals can file the income tax return as well as tax audit return by 30th November.
NOTIFICATION NO.41/2013 [F.NO.142/42/2012-TPL]/SO 1491(E), DATED 10-6-2013 has made it mandatory for e-filing of Form 3CEB for all the assessee to whom the provisions of Transfer Pricing is applicable. The common utility file is available for download from the following website: https://incometaxindiaefiling.gov.in/e-Filing/
SDT: COMMON TRANSACTIONS BETWEEN THE RELATED PARTIES
} Purchase/lease of movable and immovable property
} Centralized Corporate Services – Strategy, Marketing, Design & Engineering, HR, accounting, finance
} Common management personnel expenses like common MD, CEO
} Use of common facilities and Infrastructure – space, equipment, etc.
} Use of brand name or trademarks (if payments are involved)
} Reimbursement of expenses
} Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its subsidiaries (if payment of guarantee commission / fees are involved);
} Intra-group purchase / sell / service transactions;
} Payment made to key personnel of the group companies;
} Payment of interest on loans within the group companies
} Payment made to relatives of key personnel of the group companies
} Partition of HUF properties if value exceeds Rs. 5 crores;
} Payment of Salary, Remuneration, Interest on Partners Capital if value exceeds Rs. 5 crores;
DISCLAIMER
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
(Author, Jinesh Bhagdev, Practicing Chartered Accountant, Mumbai can be contacted at jinesh@jbhagdev.com and Co- author Mr. P D Sarang can be contacted as pdsarang@gmail.com)WT : Where assessee claimed his agricultural land to be exempt under Wealth Tax Act, same was to be examined in view of amendment in Explanation 1 to section 2(ea), which defines urban land
■■■
[2013] 36 taxmann.com 547 (Amritsar - Trib.)
IN THE ITAT AMRITSAR BENCH
Bawa Yadwinder Singh
v.
Wealth Tax Officer, Ward-2(2), Muktsar*
H.S. SIDHU, JUDICIAL MEMBER
AND B.P. Jain, ACCOUNTANT MEMBER
AND B.P. Jain, ACCOUNTANT MEMBER
WT Appeal Nos. 11 to 52 ( Asr.) of 2013
[ASSESSMENT YEARS 2002-03 TO 2007-08]
[ASSESSMENT YEARS 2002-03 TO 2007-08]
JULY 23, 2013
Section 2(ea) of the Wealth-tax Act, 1957 - Definition - Urban Land [Exemption to agricultural land] - Assessment years 2002-03 to 2005-06 - Whether, where assessee claimed his agricultural land to be exempt under Wealth Tax Act, same was to be examined in view of retrospective amendment made by Finance Act, 2013 in Explanation 1 to section 2(ea) - Held, yes [Para 7] [Matter remanded]
Ashwani Jadeja for the Appellant. Amrik Chand for the Respondent.
ORDER
Per Bench - These 42 appeals of 12 different assessees arise from the orders of the CWT(A), Bathinda each dated 21.03.2013 for different assessment years, as mentioned hereinbelow are having identical facts and therefore, we take up all the 42 appeals of 12 different assessees for different assessment years by this consolidated order for the sake of convenience:
| S.No. | W.T.A. No. | A.Y. | Name of the party | CWT (A) | Date of order |
| 1 to 4 | 15 to 18(Asr)/13 | 2002-03 to 05-06 | Bawa Yadwinder Singh | Bathinda | 21.03.2013 |
| 4 to 8 | 11 to 14(Asr)/13 | -do- | -do- | -do- | -do- |
| 9 to 11 | 19 to 21(Asr)/13 | 2002-03 to 04-05 | Smt. Poonam Bawa | -do- | -do- |
| 12 to 14 | 22 to 24(Asr)/13 | -do- | Sh. Amandeep Singh | -do- | -do- |
| 15,16 | 25 & 26(Asr)/13 | 2002-03 to 03-04 | Gagandeep Singh | -do- | -do- |
| 17 to 22 | 27 to 32(Asr)/13 | 2002-03 to 07-08 | Gurdial Singh | -do- | -do- |
| 23 to 28 | 33 to 38(Asr)/13 | 2002-03 to 07-08 | Paramjit Singh | -do- | -do- |
| 29 to 34 | 39 to 44(Asr)/13 | -do- | Smt. Gurmit Kaur | -do- | -do- |
| 35 & 36 | 45 & 46(Asr)/13 | 2006-07 & 07-08 | Gurcharan Singh | -do- | -do- |
| 37 & 38 | 47 & 48(Asr)/13 | -do- | Smt. Parkash Kaur | -do- | -do- |
| 39 & 40 | 49 & 50(Asr)/13 | -do- | Mandeep Singh | -do- | -do- |
| 41 & 42 | 51 & 52(Asr)/13 | -do- | Sirbeerinder Singh | -do- | -do- |
2. The identical grounds taken in all the 42 appeals are reproduced as under:
| "1. | The Ld. CWT (Appeals) erred on facts and law in dismissing the appeal and confirming the order of the Wealth Tax Officer, treating the agricultural land as urban land liable to wealth tax. | |
| 2. | The Ld. CWT (Appeals) erred on facts and law in upholding the action of the AO of treating the land used for agricultural purposes and classified as agriculture land in the records of the govt., as Urban Land as defined u/s 2(ea) while disallowing the exemption claimed by the assessee. The law on this issue has been amended with retrospective effect from 1st day of April, 1993 and the land which has been classified as agricultural land in the records of the govt. and used for agricultural purposes has been excluded from the definition of urban land. | |
| 3. | The appellant craves leave to raise any other ground of appeal at the time of hearing." |
3. First of all, we take up appeal of the assessee in the case of Bawa Yadwinder Singh, Muktsar, in WTA No.15(Asr)/2013 for the assessment year 2002-03 and our decision hereinbelow shall be applicable identically in all other appeals mentioned hereinabove.
4. The facts of the case in the case of Bawa Yadwinder Singh, Muktsar, in WTA No.15(Asr)/2013 for the assessment year 2002-03 as arising from the order of the W.T.O. are reproduced for the sake of convenience as under:
'The assessee filed his return of net wealth on 02.12.2009 declaring the following immovable properties as exempt:-
| Description of assets | Reasons for the claim | |
| Agricultural land at Vill. Bir Sarkar | Not being urban land | |
| Residential house at Vill. Bir Sarkar | One house is exempt | |
| Cash in hand(as per books) Rs. 172923 | Claim exempt |
Statutory notices were issued, served and complied with. Sh. Yadwinder Singh Bawa alongwith Sh. Ashwani Juneja, ITP, attended the assessment proceedings and furnished the requisite details and information. From the details, it is seen that the properties shown in the return are asset of the assessee liable for wealth tax because these lands are within the municipal limits of Muktsar town. Therefore, the assessee was required to state the reasons for claiming these assets as exempt and also to state as to why the value of these assets be not assessed on the basis of value as mentioned above. The assessee in his written reply submitted as under:-
| "1. | That w.e.f. 1993-94 the wealth tax has been levied on non-productive assets only by excluding productive assets from the ambit of levy of wealth tax and the Hon'ble Punjab & Haryana High Court has held that in the case of CWT v. Hari Singh that agricultural is a business meaning thereby that the agriculture land is a productive assets not liable for wealth tax. | |
| 2. | That as far as land at Vill. Bir Sarkar the same is not liable to wealth tax because village Bir Sarkar has not been mentioned in the notification dated 06.01.1994. Thus the same is not an urban land as notified u/s 2(14) and as defined u/s 2(ea) of the Wealth Tax Act. The reliance is also placed on the judgment of Hon'ble I.T.A.T., Chandigarh Bench, Chandigarh, in the case of ITO v. Khazan Singh in which it has been held that the agri. Land which is located within the jurisdiction of village which has not been notified in the notification dated 06.01.1994 is not a capital asset meaning thereby the same is not urban land as defined u/s 2(ea) of the Wealth Tax Act. | |
| 3. | The levy of Wealth tax on agri. land is unconstitutional. | |
| 4. | That the cash in hand is exempt because the same has been recorded in the books of account and reflected in the balance-sheet. " |
3. Keeping in view of the above facts, the value of lands have been adopted on the basis of collector's rate as against the market rates. The contentions of the assessee in regard to claiming these assets as exempt are not acceptable because in the definition of assets liable for wealth tax, urban land has been included for the assessment year commencing on the first day of April, 1993 and in subsequent assessment years under the provisions of section 2(ea) of the Wealth Tax Act, 1957. The urban land has been defined in the Act itself which is reproduced hereunder:-
'(b) "urban land" means land situated:-
| (i) | in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town areas 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 valuation of date; or | |
| (ii) | in any area within such distance, not being more than eight kilometers from the local limits of any municipality or cantonment board referred to in sub-clause (i), 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.' |
4. There is no dispute that the lands in question are either within the limits of Muktsar town or within one km. away from municipal limit of Muktsar town and hence value of these assets is assessable under the provisions of W.T. Act. The contentions raised are devoid of any merit because the lands are within the municipal limits or within the specified limit and hence are liable for wealth tax. Further the facts of the case of decision quoted by the assessee relates to the assessment years 1973 to 1975 and the same is not applicable to the facts of the assessee's case. The Hon'ble I.T.A.T., Cochin Bench in the case of Meera Jacob v. WTO [2007] 14 SOT 486 held as under:-
"Urban land is an assets whether it is agriculture land or non-agriculture land"
The Hon'ble I.T.A.T. further held as under :-
"From the asstt. Year 1993-94, the WT Act has undergone substantial change. The definition of assets in S. 2(e) was replaced by S. 2(ea). In view of the newly inserted definition of 'asset' i.e., s. 2(ea), certain specific assets are brought within the definition of 'asset' and urban land is one of them. The definition of "Urban Land" is given in clause to Expln. 1 to S. 2(ea) and as per the said Explanation any land situation in any area which is comprised within the jurisdiction of a municipality and which has a population of not less than 10,000/- is an urban land. In our opinion, no distinction is made in respect of agricultural and non-agricultural land. Though the legislature has excluded some of the lands though they are otherwise urban land, but agricultural land is not excluded. In our opinion, the A.O. has taken a correct view and the same is rightly confirmed by the CWT(A). Therefore, no interference is called for. Ground no. 2 taken by the assessee stands rejected'.
5. The Ld. CWT (Appeals) confirmed the action of the W.T.O. and his findings for the sake of convenience are reproduced as under:
'I find that all the issues raised in the grounds of appeal are covered by the appellate order of my predecessor in the case of Sh. Gurcharan Singh S/o Kehar Singh Muktsar in appeal no. 136 to 140 -IT-CIT(A)/BTI/09-10 vide order dated 10/08/2009, which was confirmed by the Hon'ble I.T.A.T., Amritsar Bench, Amritsar, in WTA No. 28-32(ASR)/2009 vide order dated 26/11/2009. The findings of the Hon'ble Bench in para 7 of the order are as under:-
"7. We have heard both the parties and have perused the relevant records available with us. We are of the considered opinion that the learned first appellate authority had decided the issue in dispute on the basis of the decision rendered by the I.T.A.T., Amritsar Bench as well as on the basis of the decision rendered by the Hon'ble jurisdictional High Court. For the sake of convenience, the relevant portion of the order passed by the learned first appellate authority.
The A/R of the appellant has raised the issue that the agriculture land owned by the appellant is located within the jurisdiction of Chak Bir Sarkar which has not been mentioned in notification dated 06.01.1994 by which distance of 1 km. from Municipal Limits of Muktsar in all directions has been notified u/s 2(14)(iii)(b). The A/R of the appellant has relief on the decision of I.T.A.T. Bench, Chandigarh in the case of ITO v. Khazan Singh in I.T. Act, 1961 No. 53 (Chd)/2005 for A.Y. 2002-03. The copy of the order of the I.T.A.T., Chandigarh and copy of the relevant extracts from the notification has been placed on record. The Hon'ble I.T.A.T. in para 4 of the order that the agriculture land which is located within the jurisdiction of a village which has not been notified in the notification is not a capital asset and no capital gains can be levied on the sale of the same. I have gone through the findings of the Hon'ble I.T.A.T. in para 4 of the order but I find that the following words has been used in the notification dated.1994:-
"29. Muktsar ..... Area upto a distance of 1 Km. from municipal limits in all direction.
There is no dispute that the agriculture land in question which is located within the jurisdiction of village Chak Bir Sarkar is situated at a distance of within 1 Km. from the municipal limit of Muktsar. I find that since the language used in the Notification is very simple, clear and unambiguous, literal rule of interpretation has to be applied. Even the principles of liberal interpretation cannot be applied where the language is clear, simple and the meaning of the word is apparent. In the case of CIT v. N.C. Budharaja & Co.& Anr. (1993) 114 CTR (Supreme Court) 420 : (1993) 204 ITR 412 (SC), the Hon'ble Supreme Court has held as under:-
"The principle of adopting a liberal interpretation which advances the purpose and object of beneficent cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the legislature in the name of giving effect of the supposed underlying object. After all, the underlying object of any provision has to be gathered on a reasonable interpretation of the language employed by the legislature."
I find that the intention of the Central Government legislature in notifying the area beyond the municipal limits to put the same in the definition of capital asset for levying capital gain tax and treating the same as urban land to levy wealth tax was on account of the urbanization of the area concerned and the simple and plain language has been used in the notification dated 06.01.1994. The notification provides that any area upto a distance of 1 km. from the municipal limits of Muktsar in all directions shall fall within the definition of urban land as defined in section 2(ea) and I find that the agriculture land owned by the appellant is within 1 km. from the municipal limits of Muktsar. It does not matter that the same is located within the jurisdiction of village Chak Bir Sarkar which is Gram Panchayat. In view of the facts and law discussed above, I hold that the agricultural land owned by the appellant is an urban land liable to wealth tax and the A.O. has rightly levied the wealth tax on the same. Hence the ground of appeal is dismissed."
In view of the findings of the Hon'ble I.T.A.T., Amritsar Bench, Amritsar, discussed (supra), I am of the view that the land owned by the appellant is an urban land as defined u/s 2(ea) of the Wealth Tax Act, 1957 and the A.O. is justified in treating the same as taxable asset. Hence, the ground of appeal is dismissed.'
6. We have heard the rival contentions and perused the facts of the case. It was brought to our notice by both the parties present before us that there is an amendment in section 2(ea) of the Wealth Tax Act, 1957 where clause (b) to Explanation (1) has been substituted by the Finance Act, 2013 with effect from 01.04.2014 but the words in bold letters below have been substituted with retrospective effect i.e. from 01.04.1993. The same is reproduced, for the sake of convenience as under:
'(b) "urban land" means land situate—
| (i) | 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 more than ten thousand; or | |
| (ii) | in any area within the distance, measured aerially,— |
| (I) | not being more than two kilometers, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten thousand but not exceeding one lakh; or | |
| (II) | not being more than six kilometers, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than one lakh but not exceeding ten lakh; or | |
| (III) | not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten lakh, |
But does not include land classified as agricultural land in the records of the government and used for agricultural purposes or land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated or the land occupied by any building which has been constructed with the approval of the appropriate authority or any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or any land held by the assessee as stock-in-trade for a period of ten years from the date of its acquisition by him.
Explanation- For the purposes of clause (b) of Explanation-1, "population' means the population according to the last preceding census of which the relevant figures have been published before the date of valuation.'
7. From the perusal of the said substitution of the explanation by the Finance Act, 2013, as mentioned hereinabove, it is evident that the Urban Land for the purposes of definition of section 2(ea)(v) of Wealth Tax Act, 1957 does not include for the Wealth Tax purposes - firstly, the land classified as agricultural land in the records of the Govt. and the land which is used for agricultural purposes, secondly the land on which construction of a building is not permissible under any law for the time being in force in the year in which such land is situated, thirdly the land occupied by any building which has been constructed with the approval of the appropriate authority, fourthly any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him and fifthly any land held by the assessee as stock-in-trade for a period of 10 years from the date of its acquisition by him. Therefore, in view of the amended provisions with retrospective effect from 01.04.1993 in the Wealth Tax Act, as reproduced hereinabove, whether the said land which has been claimed as exempt by the assessee in the return of wealth has complied with all the amended provisions or not has to be examined. Therefore, in pursuance of amendment through Finance Act, 2013, as mentioned hereinabove, which amendment is clarificatory in nature, we find it appropriate to set aside the matter to the file of the W.T.O. to examine the documents lead by the assessee as required in the amended provisions mentioned hereinabove and decide the issue accordingly afresh in view of the said amendment in Explanation-1 to section 2(ea) with retrospective effect 01.04.1993. The A.O. is directed to provide reasonable opportunity of being heard to the assessee in this regard. Thus, the appeal of the assessee in WTA No.15(Asr)/2013 for the assessment year 2002-03 is allowed for statistical purposes.
8. Since the facts in all other appeals mentioned hereinabove are identical to the facts in the case of Bawa Yadwinder Singh, in WTA No.15(Asr)/2013 for the A.Y. 2002-03, therefore, our decision hereinabove in the case of Bawa Yadwinder Singh in WTA No.15(Asr)/2013 is identically applicable in all the present appeals mentioned hereinabove. Accordingly, all the appeals of Wealth Tax are allowed for statistical purposes.
9. In the result, the appeals of all the assessees in WTA Nos. 11 to 52(Asr)/2013 are allowed for statistical purposes.
IT: In given fact situation, if provisions of Act on penalty are attracted, Assessing Officer has to go by dictates of law rather than by order of Commissioner
■■■
[2013] 37 taxmann.com 51 (Madras)
HIGH COURT OF MADRAS
Sharma Alloys (India) Ltd.
v.
Income-tax Officer (OSD), Company Circle -VI (2)*
MRS. CHITRA VENKATARAMAN AND MS. K.B.K. VASUKI, JJ.
Tax Case (Appeal) Nos. 26 and 27 of 2010†
JUNE 5, 2013
Section 271(1)(c), read with section 37(1), of the Income-tax Act, 1961 - Penalty - For concealment of income [Wrong claim, effect of] - Assessment years 2002-03 and 2003-04 - Whether where Commissioner in his revision order directed Assessing Officer to assess income offered by assessee and merely pointed out that non-initiation of penalty proceedings by Assessing Officer did not warrant any interference that did not mean that hands of Assessing Officer were tied on invoking provisions under Act, which otherwise would be applicable to facts of case - Held, yes - Whether, thus, in given fact situation, if provisions of Act on penalty are attracted, Assessing Officer has to go by dictates of law rather than by order of Commissioner - Held, yes - Whether where claim of assessee towards bill discounting charges and depreciation was found to be totally untrue, penalty levied under section 271(1)(c) was justified - Held, yes - Whether where claim of assessee for deduction towards fine and penalty could not be sustained in terms of section 37(1), assessee could not escape levy of penalty - Held, yes [Paras 19 to 21] [In favour of revenue]
FACTS
Facts
| ■ | The assessee-company was a dealer in iron and steel. | |
| ■ | The Commissioner proposed to revise the assessment for the assessment year 2002-03 on account of unreliability of the accounts as regards the gross profit as well as on bill discounting charges. The assessee offered an estimated addition of Rs. 4 lakhs towards deficiencies in gross profit and Rs. 10 lakhs towards discounting charges. | |
| ■ | The Commissioner accepted the assessee's offer and directed the Assessing Officer to assess the additional estimate of income. He further viewed that the Assessing Officer's decision in not initiating penalty proceedings did not need any interference. In the circumstances, the assessment was set aside for the limited purpose of fresh consideration for further examination and decision as per the provisions of the Act. | |
| ■ | Consequently, the Assessing Officer passed fresh assessment order. He viewed that the assessee had concealed income within the meaning of section 271(1)(c) hence, proposed penalty. | |
| ■ | For the assessment year 2003-04, the addition arose on account of disallowance of the assessee's claim on depreciation and the claim of deduction on question of penalty and fine under the Customs Act, 1962 apart from additions on disallowing the claim towards LC discounting charges. The penalty was levied under section 271(1)(c) by the Assessing Officer. | |
| ■ | The Commissioner (Appeals) cancelled the penalty levied for both the assessment years. | |
| ■ | The Tribunal confirmed the penalty levied by the Assessing Officer. |
Issue involved
| ■ | Whether where in proceedings under section 263, the Commissioner specifically pointed out that there was no case for levy of penalty and the Assessing Officer was directed only to assess the additional estimated income offered, the Assessing Officer could impose penalty under section 271(1)(c) ? |
HELD
| ■ | Contrary to the assertion of the assessee, all that the Commissioner did in the revisional order was that while accepting the plea of the assessee for restricting the addition, he merely pointed out that non-initiation of penalty proceedings did not warrant any interference. This, however, does not mean that the hands of the Assessing Officer is tied on invoking the provisions under the Act, which, otherwise, would be applicable to the facts of the case. | |
| ■ | Thus, in the given fact situation, if the provisions of the Act on penalty are attracted, the Assessing Officer has to go by the dictates of the law rather than by the order of the Commissioner. In fact, one may even say that the Commissioner did not comment anything at all on this. In the circumstances, the plea of the assessee that based on the order under section 263, there could not be any penalty is to be rejected. [Para 19] | |
| ■ | As far as levy of penalty is concerned, the claim for bill discounting for both assessment years was found to be totally untrue, as there was no physical movement of goods. The bills were found to be bogus one. Apart from that, the addition was made towards gross profit for the assessment year 2002-03 only on account of non-reliability of the books of account. [Para 20] | |
| ■ | As far as assessment year 2003-04 is concerned, the claim for depreciation was also found as a bogus claim. As far as the claim for depreciation on machinery is concerned, admittedly, the machinery was not at all put to use during the said year. | |
| ■ | As far as the claim for deduction towards fine and penalty is concerned, evidently, the assessee cannot legally sustain this claim in terms of section 37. Thus, in the garb of the bona fide claim, the assessee cannot escape levy of penalty. [Para 21] | |
| ■ | In the circumstances, the plea of the assessee that additions were not substantial additions and, hence, there could be no penalty is to be rejected. [Para 22] | |
| ■ | Penalty is leviable for deliberate deception of the claim. Thus, levy of penalty would depend on the existence or otherwise of the conditions calling for levy of penalty. | |
| ■ | The object behind the enactment of section 271(1)(c), read with the Explanations, indicates that the section has been enacted to provide for a remedy for loss of revenue, by reason of concealment of particulars of income. Thus, being a civil liability and that the explanation offered by the assessee not being a bona fide one, particularly on the facts of the case, the order of the Tribunal is to be confirmed. [Para 28] | |
| ■ | In the circumstances, appeal filed by the assessee is to be dismissed. [Para 29] |
CASE REVIEW
CIT v. P. Rojes [2013] 31 taxmann.com 253 (Mad.); CIT v. Shriram Properties & Constructions (Chennai) Ltd. [T.C. A No. 273 of 2012, dated 12-9-2012] and CIT v. Balaji Distilleries Ltd. [2013] 214 Taxman 96/31 taxmann.com 55 (Mad.) (para 25) distinguished.
CASES REFERRED TO
CIT v. B.A. Balasubramaniam and Bros Co. [1985] 152 ITR 529/20 Taxman 215 (Mad.) (para 12), B.A. Balasubramaniam and Bros. Co. v. CIT [2001] 116 Taxman 842 (SC) (para 12), Union of India v. Dharmendra Textiles Processors [2008] 306 ITR 277/174 Taxman 571 (SC) (para 12), CIT v. P. Rojes [2013] 31 taxmann.com 253 (Mad.) (para 15), CIT v. Shriram Properties & Constructions (Chennai) Ltd. [T.C. A No. 273 of 2012, dated 12-9-2012] (para 15), CIT v. Balaji Distilleries Ltd. [2013] 214 Taxman 96/31 taxmann.com 55 (Mad.) (Para 15), Union of India v. Rajasthan Spg. & Wvg. Mills [2009] 180 Taxman 609 (SC) (para 16), CIT v. Zoom Communication P. Ltd. [2010] 327 ITR 510/191 Taxman 179 (Delhi) (para 16) and CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC) (para 23).
R. Sivaraman for the Appellant. N.V. Balaji for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The assessee is on appeal as against the common order of the Income Tax Appellate Tribunal, Madras 'D' Bench dated 25.05.2009 in ITA.Nos.802 and 803/Mds/2008 relating to the assessment years 2002-03 and 2003-04 raising the following questions of law:—
T.C.(A).No.26 of 2010:—
| "1. | Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the levy of penalty of Rs.4,99,800/- under Section 271(1)(c) of the Act for the assessment year 2002-03 ? | |
| 2. | Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in imposing the penalty under Section 271(1)(c) even though there is no finding in the penalty order that there exists concealment of income ? | |
| 3. | Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that the assessing officer can levy penalty in a case where the assessee himself has offered additional income on estimated basis in order to purchase peace with the Department? | |
| 4. | Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in confirming the action of the assessing officer in levying penalty even though the Commissioner of Income Tax under Section 263 had directed the Assessing Officer not to initiate penalty proceedings ?" |
T.C. (A).No.27 of 2010:-
| "1. | Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in confirming the levy of penalty of Rs.6,28,001/- under Section 271(1)(c) of the Act ? | |
| 2. | Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in imposing the penalty under Section 271(1)(c) even though there is no finding in the penalty order that there exists concealment of income ?" |
2. The assessee is a private limited company. The assessment order made originally for the assessment year 2002-03 was subjected to revisional proceedings under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). A reading of the order of the Commissioner of Income Tax dated 08.12.2004 passed under Section 263 of the Act reveals that on account of unreliability of the accounts as regards the gross profit as well as on Bill discounting charges, the proposal to revise the assessment was made.
3. The assessee is a dealer in Iron and Steel. The assessee submitted that considering the recession in the Iron and Steel market and the resultant crisis thereon, they could not pay attention on accounting ; in the circumstances, to buy peace with the department, the assessee offered an estimated addition of Rupees Four lakhs towards deficiencies in Gross Profit and Rupees Ten Lakhs towards discounting charges.
4. The Commissioner of Income Tax held that in the peculiar circumstances of the case, the assessee's offer be accepted and the Assessing Officer was accordingly directed to assess the additional estimate of income of Rupees four lakhs towards Gross Profit and Rupees Ten lakhs towards non business related discounting charges. He further viewed that in view of the submissions of the assessee and the facts of the case, the Assessing Officer's decision in not initiating penalty proceedings did not need any interference, in the circumstances, the assessment was set aside for the limited purpose of fresh consideration for further examination and decision as per the provisions of the Act.
5. Consequent on the revisional order, the Assessing Officer passed fresh assessment order for the year 2002-03. During the course of assessment proceedings, the Assessing Officer viewed that the assessee had concealed income within the meaning of Section 271(1)(c) of the Act, hence, proposed penalty for both the years.
6. As far as the assessment year 2003-04 is concerned, it is an assessment passed under Section 143(3) of the Act. It is seen from the order of the assessment for the year 2003-2004 that the addition in this year arose on account of disallowance of the assessee's claim on depreciation and the claim of deduction on question of payment of penalty and fine under the Customs Act apart from additions on disallowing the claim towards LC discounting charges rejected.
7. It is seen from the order of assessment that as regards the claim on depreciation, in the course of Survey under Section 133A of the Act, a sworn statement was recorded from the assessee's Company Director. The assessee stated that the machineries were sent for repair to SIPCOT Commercial Complex, Gummidipoondi. However, no supporting documents were produced in respect of the machineries alleged to have been sent for servicing. In the course of the assessment proceedings, the assessee further stated that they received the machineries after repair from their stock yard in April 2003. Thus as on 31.03.2003, there was no machinery received after service for the purpose of using it in the business; consequently, the claim on depreciation was disallowed.
8. As far as fine and penalty payment under the Customs Act was concerned, the said levy were made under the Customs Act on account of price variation. Rejecting the plea of the assessee to take a lenient view, the Assessing Officer made addition of Rs.8,00,000/- under this head.
9. As far as LC discounting is concerned, the Assessing Officer found that there was no physical movement of goods and sale invoices were prepared only to help the group companies, when they required money and thereafter, bogus bills prepared were discounted, in the circumstances, a sum of Rupees Five lakhs was disallowed. Based on the above said materials, in the penalty orders passed, the Assessing Officer levied minimum penalty under Section 271(1)(c) of the Act.
10. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals) in respect of both the assessment years.
11. The Commissioner of Income Tax (Appeals) accepted the plea of the assessee that there was no concealment within the meaning of Section 271(1)(c) of the Act. Thus he cancelled the penalty levied for both years. Aggrieved by this, the Revenue went on appeal for these years before the Income Tax Appellate Tribunal.
12. In considering the claim of the Revenue and the assessee, the Income Tax Appellate Tribunal pointed out to the decisions of this Court in the case of CIT v. B.A. Balasubramaniam and Bros. Co. [1985] 152 ITR 529/20 Taxman 215 (Mad.), the decision of the Apex Court in the above said case B.A. Balasubramaniam and Bros. Co. v. CIT [2001] 116 Taxman 842 (SC) as well as the decision of the Apex Court in the case of Union of India v. Dharmendra Textiles Processors [2008] 306 ITR 277/174 Taxman 571 (SC) and held that being a civil liability, wilful concealment is not an essential ingredient for attracting penalty under Section 271(1)(c). In the circumstances, keeping in view the entire facts and circumstances of the case, penalty levied by the Assessing Officer was confirmed and the order of Commissioner of Income Tax (Appeals) was set aside. Aggrieved by this, the present Tax Case Appeals by the assessee.
13. Learned counsel for the assessee submitted that when in the Section 263 proceedings, particularly for the year 2002-03, the Commissioner of Income Tax had specifically pointed out that there was no case for levy of penalty and the Assessing Officer was directed only to assess the additional estimated income offered, the Department could not initiate again, penal proceedings under Section 271(1)(c) of the Act. He further pointed out that the additions were offered only to purchase peace with the Department, consequently, there is no case of concealment in this case.
14. As far as assessment year 2003-04 is concerned, learned counsel submitted that disallowance, per se, would not lead to an inference of concealment, consequently, on the facts of the case, the Income Tax Appellate Tribunal committed serious error in holding that circumstances warrant levy of penalty in this case.
15. Learned counsel for the assessee relied on unreported decision of this Court in CIT v. P. Rojes [2013] 31 taxmann.com 253 (Mad.) as well as to the decisions of this Court, to which one of us was a party (Chitra Venkataraman, J.) viz., in CIT v. Shriram Properties & Constructions (Chennai) Ltd. [T.C. A No. 273 of 2012, dated 12-9-2012], CIT v. Balaji Distilleries Ltd. [2013] 214 Taxman 96/31 taxmann.com 55 (Mad.) and contended that in the absence of any concealment, per se, any addition made, per se, will not lead to levy of penalty.
16. The claim of the assessee was countered by the learned Standing Counsel for the Revenue by placing reliance on the decision in the case of Union of India v. Rajasthan Spg. & Wvg. Mills [2009] 180 Taxman 609 (SC), the decision of the Apex Court in the case of Dharmendra Textiles Processors (supra) as well as the decision of the Delhi High Court in the case of CIT v. Zoom Communication (P.) Ltd. [2010] 327 ITR 510/191 Taxman 179 and submitted that even going by the decisions of this Court relied on by the learned counsel for the assessee, penalty is leviable in this case. He submitted that the claim of the assessee that the additions made were not on account of concealment is totally incorrect. As far as assessment year 2002-03 is concerned, the claim of the assessee for bill discounting itself was found to be false since bogus invoices were made only to accommodate the group companies. As far as addition on account of Gross Profit is concerned, the books of accounts were not properly maintained. Thus, the defects in the accounts warranted addition under the head of gross profit. Thus, unreliability of the accounts and false claims are clearly instances of concealment, which warranted levy of penalty.
17. As far as assessment year 2003-04 is concerned, learned Standing counsel for the Revenue submitted that when the machinery itself was not available, the assessee made false claim for depreciation. So too, the question of payment of customs duty cannot be allowed as deductions under the provision of the Act. As far as bill discounting was concerned, the same was also a false claim, as there were no physical movement of goods and the bogus bills claimed as in the earlier year were for giving financial accommodation to its group companies. In the circumstances, no interference is called for in the order of the Income Tax Appellate Tribunal.
18. Heard the learned counsel on either side and perused the documents available on record.
19. We agree with the contentions of the learned Standing counsel appearing for the Revenue. It is no doubt true that in the order passed under Section 263 of the Act dated 08.12.2004, the Commissioner of Income Tax pointed out to the offer made by the assessee for addition and ultimately held that in view of the submissions of the assessee and the facts of the case, the decision of the Assessing Officer in not initiating penalty proceedings did not need interference. Having said so, while remanding the matter for fresh consideration for Assessing Officer for further examination and decision, the Assessing Officer was directed to consider the claim of the assessee as per the provisions of the Act. Thus, contrary to the assertion of the assessee, all that the Commissioner of Income Tax did in the revisional Order was that while accepting the plea of the assessee for restricting the addition, he merely pointed out that a non initiation of penalty proceedings did not warrant any interference. This, however, does not mean that the hands of the Assessing Officer is tied on invoking the provisions under the Act, which, otherwise, would be applicable to the facts of the case. Thus, in the given fact situation, if the provisions of the Act on penalty are attracted, the Assessing Officer has to go by the dictates of the law rather than by the order of the Commissioner of Income Tax. In fact, we may even say that the Commissioner did not comment anything at all on this. In the circumstances, we reject the plea of the assessee that based on the order under Section 263 of the Act, there could not be any penalty.
20. As far as levy of penalty is concerned, as rightly pointed out by the learned Standing counsel for the Income Tax Department, the claim for bill discounting for both assessment years was found to be totally untrue, as there was no physical movement of goods. The bills were found to be bogus one. Apart from that, the addition was made towards gross profit for the assessment year 2002-2003 only on account of non-reliability of the books of accounts.
21. As far as assessment year 2003-04 is concerned, the claim for depreciation was also found as a bogus claim. As far as the claim on depreciation on machinery is concerned, admittedly, the machinery was not at all put to use during the said year. As far as the claim for deduction towards fine and penalty is concerned, evidently, the assessee cannot legally sustain this claim in terms of Section 37 of the Act. Thus, in the garb of the bona fide claim, the assessee cannot escape levy of penalty.
22. In the circumstances, we have no hesitation in rejecting the plea of the assessee that additions were not substantial additions and hence there could be no penalty. The reliance made by the learned counsel for the assessee on the unreported decisions of this Court in P. Rojes (supra) does not, in any manner, support the case of the assessee.
23. As far as T.C.(A).No.341 of 2010 is concerned, it follows the decision of this Court in Shriram Properties & Constructions (Chennai) Ltd. (supra) and other decisions of this Court as well as Apex Court. The issue in the said unreported decision of this Court in T.C.(A).No.341 of 2010 related to cash deposit. On the allegation that cash deposit of Rs.47,36,000/- was made out of sales and also recovery from the sundry debtors, penalty was imposed by the Assessing Officer. On appeal by the assessee, the Appellate Authority pointed out that the reasons for increase in the profit percentage from 5% to 8% was not clear. Taking into consideration the merits of the case on a factual finding given by the Income Tax Appellate Tribunal, this Court found that it was not a fit case for levy of penalty. Further, on these facts, this Court applied the decision of the Apex Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 as well as the decision of this Court in Shriram Properties & Constructions (Chennai) Ltd. (supra) to delete the levy of penalty, thereby, confirming the order of Income Tax Appellate Tribunal.
24. As far as the other two unreported decisions are concerned, confirming the deletion of penalty, they were based on the facts found, particularly with reference to a claim made, but not allowed under the provisions of the Act.
25. In the circumstances, we find that the unreported decisions of this Court relied on by the learned counsel for the assessee stand on factual findings and are distinguishable. The plea made by the learned counsel for the assessee, hence, stands rejected on the facts of the case on hand.
26. On the other hand, the reliance placed by the Revenue on the decisions of the Apex Court in Rajasthan Spg. & Wvg. Mills (supra) and in the case of Zoom Communication (P.) Ltd. (supra) merits acceptance. In the decision Zoom Communication (P.) Ltd. (supra) the Delhi High Court viewed that so long as the assessee had not concealed any material fact or the factual information given by him has not been found to be incorrect, even if the claim made by him is unsustainable in law, he will not be liable to imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961, provided that he either substantiates that the explanation offered by him or the explanation, even if not substantiated, is found to be bona fide. If the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to Section 271(1)(c) of the Act would come into play and the assessee will be liable for the prescribed penalty.
27. We are in entire agreement with the view expressed by the Delhi High Court in the decision Zoom Communcation (P.) Ltd. (cited supra). The Delhi High Court observed that it is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to Section 271(1)(c) would come into play and work to the disadvantage of the assessee.
28. The decision of the Apex Court in the case of Dharmendra Textiles Processors (supra), which is referred to by the Income Tax Appellate Tribunal and the subsequent decision in the Rajasthan Spg. & Wvg. Mills (supra) clearly point out that the penalty is leviable for deliberate deception of the claim. Thus levy of penalty would depend on the existence or otherwise of the conditions calling for levy of penalty. The object behind the enactment of Section 271(1)(c), read with the Explanations, indicates that the Section has been enacted to provide for a remedy for loss of revenue, by reason of concealment of particulars of income. Thus, being a civil liability and that the explanation offered by the assessee not being a bona fide one, particularly on the facts of the case, we have no hesitation in confirming the order of the Income Tax Appellate Tribunal.
29. In the circumstances, we have no hesitation in dismissing the Tax Case Appeal filed by the assessee. Accordingly, the Tax Case Appeal stands dismissed. No costs.IT: Reference under section 55A(b) can be made even when registered valuer's report has been filed by assessee, if Assessing Officer is of opinion that value as per registered valuer was higher than market value
■■■
[2013] 37 taxmann.com 48 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Vijay P. Karnik
v.
Income-tax Officer, Ward -19 (2)(2)
Rajendra Singh, ACCOUNTANT MEMBER
AND Sanjay Garg, JUDICIAL MEMBER
AND Sanjay Garg, JUDICIAL MEMBER
IT Appeal No. 261 (Mum.) of 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JUNE 21, 2013
Section 55A of the Income-tax Act, 1961 - Capital gains - Reference to Valuation Officer [In case of registered valuer's report] - Assessment year 2007-08 - Whether there is nothing in section 55A which debars Assessing Officer for making reference to DVO under clause (b) even when registered valuer's report has been filed - Held, yes - Whether in case Assessing Officer is of opinion that value as per registered valuer is higher than market value, he can make reference under section 55A(b)(ii) - Held, yes - Whether however, valuation of property is required to be made after allowing proper opportunity of hearing to assessee by DVO - Held, yes [Matter remanded]
FACTS
Facts
| ■ | During the relevant year the assessee had sold a plot for certain consideration. Since the plot had been acquired prior to 1-4-1981, the assessee had adopted the cost of acquisition as the market value of the property as on 1-4-1981 on the basis of report of registered valuer and computed long-term capital gains. | |
| ■ | The Assessing Officer referred the valuation of property as on 1-4-1981 to the District Valuation Officer (DVO) who valued the property at lesser amount. The Assessing Officer, adopting that value of the property, computed capital gains at higher figure. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | The assessee filed appeal before the Tribunal. |
Assessee's submissions
| ■ | When the value as per the registered valuer's report was more than the market value considered by the Assessing Officer, reference was not justified under section 55A(a) and, further since the assessee had filed the report of the registered valuer, clause (b) of section 55A was not applicable and, therefore, the reference made by Assessing Officer to the DVO was illegal. | |
| ■ | The assessee had not been given proper opportunity of hearing by the DVO. | |
| ■ | The Assessing Officer had not recorded satisfaction regarding the market value of the property before making the reference. |
Issue involved
| ■ | Whether reference can be made to the DVO under section 55A(b) when assessee had filed report of registered valuer? |
HELD
| ■ | There is nothing in section 55A which debars the Assessing Officer from making reference under clause (b) even when registered valuer's report has been filed. In cases where registered valuer's report has been filed, reference under clause (a) of section 55A can be made if the Assessing Officer finds the valuation lower than the market value. In any other case, clause (b) is applicable. Therefore, it is clear that clause (b) applies in situations where either no registered valuer report has been filed or where the registered valuer report has been filed, the value determined is higher than the market value. Thus, in case the Assessing Officer is of the opinion that the value as per the registered valuer was higher than the market value, he could make reference under section 55A (b) (ii). Therefore, following the judgment of the High Court of Gujarat in case of ACC Ltd. v. DVO [2012] 21 taxmann.com 488/208 Taxman 397 (Delhi) it is to be held that the reference made by the Assessing Officer to the DVO on the facts of the case is justified and order of the Commissioner (Appeals) on this point is, therefore, upheld. [Para 6] | |
| ■ | Even if the reference made by the Assessing Officer to the DVO was not in accordance with law or illegal, the valuation report obtained in pursuance of such a reference will be relevant and admissible evidence which can be used by the revenue authorities in the income tax proceedings. [Para 7] | |
| ■ | The assessee has also raised an additional ground for the first time before the Tribunal in which it has been submitted that reference made by the Assessing Officer was also not valid on the ground that he had not recorded satisfaction regarding the market value of the property before making the reference. No doubt, it is true that the question raised can always be raised by the assessee first time before the Tribunal, provided the facts are already on record. In this case, nothing has been placed on record to show that the Assessing Officer had not recorded the satisfaction nor any finding has been given by the authorities below on this point. Therefore, the facts being not on record and there being no finding of facts by the lower authorities, the question raised by assessee at this stage cannot be admitted. [Para 8] | |
| ■ | However, there is substance in the ground raised by assessee regarding lack of opportunity being provided by the valuation officer to assessee at the time of preparing the valuation report. The DVO had prepared the draft report on 18-12-2009 and vide notice dated 18-12-2009 had fixed the hearing of the case on 28-12-2009. Assessee has submitted that notice had been received by him on 26-12-2009 which was Saturday followed by two public holidays, i.e., Sunday on 27-12-2009 and Muharram on 28-12-2009. It is, thus, clear that the DVO had fixed the hearing of the appeal on a public holiday. There is nothing on record to show that assessee had been provided any further opportunity by the DVO as the order had been passed on 30-12-2009. The assessee wanted to raise objections about the valuation on the ground that the building, which had already been demolished had not been inspected by the DVO. The DVO had also not considered the value of terrace admeasuring about 600 sq. ft. The assessee could also provide further material in support of the higher market value if the opportunity would have been provided to it which had not been done by the DVO. The Assessing Officer had completed the assessment only on the basis of draft valuation report, as on the date of order the formal valuation report had not been received by Assessing Officer. Therefore, the valuation of the property is required to be made afresh after allowing proper opportunity of hearing to assessee by the DVO. Therefore, the order of the Commissioner (Appeals) is set aside and the matter is restored to the file of the Assessing Officer for passing afresh order after obtaining fresh report from the DVO after hearing assessee. [Para 9] |
CASE REVIEW
ACC Ltd. v. DVO [2012] 21 taxmann.com 488/208 Taxman 397 (Delhi) (para 6) followed.
CASES REFERRED TO
Hiaben Jayantilal Shah v. ITO [2009] 181 Taxman 191 (Guj.) (para 3), Smt. Sarla N. Sakraney v. ITO [2011] 130 ITD 167/10 taxmann.com 99 (Mum.) (para 3), CIT v. Daulal Mohta HUF [IT Appeal No. 1031 of 2008, dated 22-9-2008] (para 3), ACC Ltd. v. DVO [2012] 21 taxmann.com 488/208 Taxman 397 (Delhi) (para 4), Dy. CIT v. Chaturbhuj Valabhdass HUF [2011] 130 ITD 230/9 taxmann.com 96 (Mum.) (para 4), Municipal Corpn. of Delhi v. Gurnam Kaur AIR 1989 SC 38 (para 4), Indian Oil Corpn. Ltd. v. State of Bihar [1987] 167 ITR 897 (SC) (para 4) and Pooran Mal v. Director of Inspection [1974] 93 ITR 505 (SC) (para 7).
O.P. Meena for the Appellant. Lalchand Choudhary for the Respondent.
ORDER
Rajendra Singh, Accountant Member - This appeal by the assessee is directed against the order dated 10.10.2010 of CIT (A) for the assessment year 2007-08. The disputes raised by assessee in this appeal is regarding assessment of long term capital gain on the basis of valuation report and lack of adequate opportunity by the valuation officer. The assessee has also raised an additional ground in which it has been submitted that in the absence of mandatory recording of satisfaction by the AO, there was no justification for making reference under section 55A and, therefore, the reference made was bad in law and illegal.
2. The facts in brief are that the assessee during the relevant year had sold a plot for a sum of Rs.. 1.50 crore. Since the plot had been acquired prior to 1.4.1981, the assessee had adopted the cost of acquisition as the market value of the property as on 1.4.1981. The market value as on 1.4.1981 has been taken by assessee at Rs. 7,61,475/- on the basis of report of registered valuer. The assessee computed the long term capital gain at Rs. 99,13,154/- and, thereafter, after claiming deduction under section 54 of the IT Act, the taxable long term capital gain was declared at Rs. 6,37,172/-. The AO during the assessment proceedings had referred the valuation of property as on 1.4.1981 to the District Valuation Officer (DVO). As per AO, the DVO had valued the property at Rs. 2,72,447/- as on 1.4.1981. The AO, therefore, computed the long term capital gain adopting the cost of acquisition as on 1.4.1981 of Rs. 2,72,447/- at Rs. 1,24,51,210/-. Thereafter, after allowing deduction under section 54 of the IT Act, the taxable long term capital gain was computed by AO at Rs.. 47,94,019/-
2.1 The assessee disputed the decision of AO and submitted before CIT (A), that both AO and DVO had not given adequate opportunity of hearing to assessee. It was pointed out that assessee had been prevented by the sufficient cause to file objections against the valuation report. The assessee also submitted that the report of the DVO valuing the property as on 1.4.1981 had no justification. It was pointed out that as per report in the " accommodation times", the rates for residential premises prevailing in Santacruz (w) as on 1.4.1981 were in the range of Rs.. 400/- sq. ft. to 1100 sq. ft. The rate adopted by the Government approved valuer was Rs.. 706/- per sq. ft. whereas the rate adopted by the DVO was Rs.. 310/- per sq. ft. It was further pointed out that the DVO had not considered the value of the terrace while arriving at value of the house as on 1.4.1981. CIT (A) however was not satisfied with the contentions raised. It was observed by him that the DVO had quoted three instances of the property having comparable rates and, thereafter, adopted the rate of Rs.. 310 per sq. ft. for valuing the property. Therefore, the valuation made by DVO could not be faulted with. The AO had computed the capital gain on the basis of report of the DVO and, therefore, CIT (A) held that there was no cause for interference in the action taken by AO and accordingly confirmed the order of AO, aggrieved by which the assessee is in appeal before Tribunal.
3. Before us, learned AR for assessee submitted that the AO under section 55A, with a view to ascertaining the fair market value of the capital asset, can refer the valuation of the capital asset to the valuation officer under clause (a) in case the value of the asset claimed by the assessee in accordance with the estimate made by the registered valuer was less than the market value. In any other case, the reference may be made under clause (b) of section 55A having regard to the nature of the asset and other relevant circumstances or in cases where the fair market value exceeded the value of the asset claimed by assessee by more than the prescribed percentage. It was pointed out that in this case, the value as per the registered valuer report was more than the market value considered by the AO and, therefore reference was not justified under section 55A (a). Further since, assessee had filed the report of the registered valuer, the clause (b) of section 55A was not applicable. Therefore, it was submitted that the reference made by AO to the DVO was illegal, invalid and the report submitted by DVO, therefore, could be acted upon. Reliance for the said proposisiton was placed on the judgment of Hon'ble High Court of Gujarat in case of Hiaben Jayantilal Shah v. ITO [2009] 181 Taxman 191. Reliance was also placed on the decision of Mumbai bench of Tribunal in case of Smt. Sarla N. Sakraney v. ITO [2011] 130 ITD 167/10 taxmann.com 99. The learned AR also referred to the judgment of Hon'ble High Court of Mumbai in case of CIT v. Daulal Mohta HUF [ITA no. 1031 of 2008] dated 22nd September 2008], in which the same view had been taken by the Hon'ble High Court.
3.1 It was also submitted that the assessee had also not been given proper opportunity of hearing by the DVO. It was pointed out that the DVO had prepared the draft report on 18.12.2009 and vide notice dated 18.12.2009, the hearing had been fixed on 28.12.2009. It was also pointed out that the notice had been received by the assessee on 26.12.2009 which was Saturday followed by two public holidays i.e. Sunday on 27.12.2009 and Muharram on 28.12.2009. The hearing thus had been fixed on a public holiday. The DVO without giving any further opportunity of hearing had passed the order on 30.12.2009. The learned AR for the assessee further pointed out that the DVO in the report a copy of which has been placed in the paper book, has himself written that on the date of inspection building had been demolished and the new building was under construction. Therefore, it was clear that the DVO could not have inspected the building. It was also pointed out that the property had a terrace of about 600 sq. ft. which had not been considered by the DVO. The learned AR also argued that the AO while making the reference under section 55A is required to record satisfaction regarding the market value of the property which had not been done in this case and, therefore, the reference made was not valid on this ground also for which assessee has raised the additional ground.
4. Learned DR on the other hand strongly defended the orders of authorities below. It was argued that even if the report of the registered valuer had been filed by the assessee, the reference to the DVO could be made by AO under clause (b) of section 55A. He referred to the judgment of Hon'ble High Court of Delhi in case of ACC Ltd. v. DVO [2012] 21 taxmann.com 488/208 Taxman 397 in which it was held that even if the registered valuer report had been submitted by the assessee, the AO could make reference to the DVO under section 55A (b) (ii), if he considers it was necessary to do so, having regard to the nature of asset and other relevant circumstances. Therefore, it was submitted that reference made by AO to DVO was justified. The same view it was pointed out has been taken by the Mumbai bench of Tribunal in case of Dy. CIT v. Chaturbhuj Valabhdass HUF [2011] 130 ITD 230/9 taxmann.com 96. As regards the judgment of Hon'ble High Court of Bombay in case of Daulal Mohta HUF (supra), the learned DR submitted that there was no reason for speaking the order by the Hon'ble High Court on the issue and, therefore, the said case could not be considered as a precedent. He placed reliance on the judgment of Hon'ble Supreme Court in case of Municipal Corpn. of Delhi v. Gurnam Kaur AIR 1989 SC 38 in which it has been held that for application of doctrine of precedents the matter should have been fully argued and decided and that the cases which are sub-silentio and without arguments could not be considered as precedent. The reference was also made to the judgment of Hon'ble Supreme Court in case of Indian Oil Corpn. Ltd. v. State of Bihar [1987] 167 ITR 897 in which it has been held that when the order passed by the court is not a speaking one it is not correct to assume that the court has necessarily decided implicitly all the questions in relation to the merits of the awards.
4.1 As regards the additional ground raised by assessee, the learned DR submitted that full facts relating to the additional ground have not been placed on record and, therefore, the additional ground could not be raised at the level of Tribunal.
5. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding assessment of long term capital gain in respect of sale of plot of land. The dispute is limited to determination of cost of acquisition of the plot. The plot had been acquired prior to 1.4.1981 about which there is no dispute and, therefore, in such a case market value of the plot of the land as on 1.4.1981 will be the cost of acquisition. The assessee had taken the market value as on 1.4.1981 at Rs.. 7,61,475/- on the basis of report of registered valuer. The AO had, however, has made reference to the DVO regarding the market value as on 1.4.1981 and DVO has determined the market value at Rs.. 2,72,447. The registered valuer had valued the land at the rate of Rs. 706 per sq. ft. whereas the DVO has adopted the rate at Rs.. 310 sq. ft. after considering comparable cases. The Learned AR for assessee has raised the legal dispute that assessee having declared the higher value of cost of acquisition than the value adopted by the AO, no reference could be made to the DVO u/s 55A. The said provision is reproduced below as ready reference :
"Section 55A—With a view to ascertaining the fair market value of a capital asset, for the purpose of this chapter the AO may refer the valuation of the capital asset to the valuation officer.
| (a) | In a case where the value of the asset as claimed by assessee is in accordance with the estimate made by a registered valuer, if the AO is of the opinion (i) that the value so claimed is less than its fair market value. | |
| (b) | In any other case, if the AO is of the opinion |
| (i) | that the fair market value of the asset exceeds the value of the asset as claimed by assessee by more than such amount as may be prescribed in this behalf; or | |
| (ii) | that having regard to the nature of the asset and other relevant circumstances, it is necessary to do so." |
6. It has been argued by assessee that in this case assessee had submitted the report of the registered valuer and, therefore the clause (a) of section 55A was applicable. But since, the value declared by assessee was more than the market value taken by AO, no reference could be made under this clause. Further since the registered valuer report had been filed, clause (b) of section 55A was not applicable. Reliance has been placed on the judgment of Hon'ble High Court of Gujarat in case of Hiaben Jayantilal Shah (supra) and also on the decision of Tribunal in case of Smt. Sarla N. Sakraney (supra). The reference has also been made to the judgment of Hon'ble High Court of Bombay dated 28.9.2008 in case of Daulal Mohta HUF (supra) in ITA no. 1031 of 2008. In case of Daulal Mohta HUF (supra) there were two questions raised before the Hon'ble High Court. The question (A) related to the valuation of the property while question raised in (B) was whether the AO was justified in making the reference to DVO u/s 55A. The Hon'ble High Court in para 3 observed that the questions were to be raised were with regard to quantum of valuation which was only a finding of fact and there was absolutely no question of law involved in the above appeal. The appeal was thus dismissed. The legal issue whether reference could be made u/s 55A was thus not decided by the High Court. Therefore, the said judgment of the High Court cannot be considered as precedent. We also find that the issue whether reference to DVO can be made by AO under clause (b) of section 55A even if the report of the registered valuer has been filed by assessee has been decided by the Hon'ble High Court of Gujarat in case of ACC Ltd. (supra), in which it was held that even if the registered valuer report has been filed, the AO can make a reference u/s 55A (b) (ii). We also note that there is nothing in the section 55A which debars AO from making reference under clause (b) even when registered valuer report has been filed. In cases where registered valuer report has been filed reference under clause (a) of section 55A can be made if the AO finds the valuation lower than the market value. In any other case, clause (b) is applicable. Therefore, it is clear that clause (b) applies in situations where either no registered valuer report has been filed or if the registered valuer report has been filed but the valued determined is higher than the market value. Thus in case the AO is of the opinion that the value as per the registered valuer was higher than the market value, he could make reference u/s 55A (b) (ii). Therefore, following the judgment of Hon'ble High Court of Gujarat in case of ACC Ltd. (supra) we hold that the reference made by AO to DVO on the facts of the case is justified and order of CIT (A) on this point is therefore upheld.
7. We may also point out here that even if the reference made by the AO to the DVO was not in accordance with law or illegal the valuation report obtained in pursuance of such a reference will be relevant and admissible evidence which can be used by the revenue authorities in the income tax proceedings. This view is supported by the decision of Hon'ble Supreme Court in case of Pooran Mal v. Director of Inspection [1974] 93 ITR 505 in which it was held that even though the search and seizure had been conducted in contravention of the provisions of section 132 of the IT Act material obtained can be used by the Income Tax authorities. Thus even if the reference made by AO is considered not valid the valuation report can always be used in the income tax proceedings for the purposes of the Act. The same view has been taken by the decision of Tribunal in case of Chaturbhuj Vallabhdas HUF (supra) in which the Tribunal held that the valuation report having already been obtained by AO and used in the assessment proceedings, the issue of validity or illegality of the reference had become purely academic in view of the judgment of Hon'ble Supreme Court in case of Pooran Mal (supra).
8. The learned AR for assessee has also raised an additional ground the first time before the Tribunal in which it has been submitted that reference made by AO was also not valid on the ground that AO had not recorded satisfaction regarding the market value of the property before making the reference. No doubt it is true that the question raised can always be raised by assessee first time before the Tribunal. Provided the facts are already on record. In this case nothing has been placed on record to show that the AO had not recorded the satisfaction nor any finding has been given by the authorities below on this point. Therefore, the facts being not on record and there being no finding of facts by the lower authorities, the question now raised by assessee at this stage cannot be admitted. We, therefore do not admit the additional ground raised by assessee and the same is, therefore, dismissed as not admitted.
9. However we find substance in the ground raised by assessee regarding lack of opportunity being provided by the valuation officer to assessee at the time of preparing the valuation report. The DVO had prepared the draft report on 18.12.2009 and vide notice dated 18.12.2009 had fixed the hearing of the case on 28.12.2009. Assessee has submitted that notice had been received by him on 26.12.2009 which was Saturday followed by two public holidays i.e. Sunday on 27.12.2009 and Muharram on 28.12.2009. It is thus clear that the DVO had fixed the hearing of the appeal on a public holiday. There is nothing on record to show that assessee had been provided any further opportunity by the DVO as the order had been passed on 30th December 2009. The learned AR has submitted that assessee wanted to raise objections about the valuation on the ground that the building which had already been demolished had not been inspected by the DVO. The DVO had also not considered the value of terrace admeasuring about 600 sq. ft. The assessee could also provide further material in support of the higher market value if the opportunity had been provided to it which had been done by the DVO. We also note that AO had completed the assessment only on the basis of draft valuation report as on the date of order the formal valuation report had not been received by AO. Therefore, in our view the valuation of the property is required to be made a fresh after allowing proper opportunity of hearing to assessee by the DVO. We, therefore, set aside the order of CIT (A) and restore the matter to the file of AO for passing a fresh order after obtaining fresh report from the DVO after hearing assessee.
10. In the result appeal of assessee is allowed for statistical purposes.IT : Non-maintainance of separate books of account for convention centre itself could not be a reason for outrightly rejecting claim under section 80-IB
IT : Where assessee did not challenge disallowance of additional depreciation by Commissioner in revision proceedings, assessee could not be allowed to reargue issue before Tribunal
IT: No addition can be made on account of excess stock solely on basis of valuation report submitted to bank
■■■
[2013] 36 taxmann.com 589 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'A'
Leo Meridian Infrastructure Projects & Hotels Ltd.
v.
Deputy Commissioner of Income-tax*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT Appeal Nos. 1254 (Hyd.) of 2011 & 1872 (Hyd.) of 2012
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
MARCH 28, 2013
I. Section 80-IB, read with section 263, of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [Convention centre] - Assessment year 2006-07 - Commissioner in exercise of power under section 263 denied deduction under section 80-IB to assessee in respect of convention centre on ground that assessee was not maintaining separate books of account for convention centre - Whether non-maintenance of separate books of account for convention centre itself could not be a reason for outrightly rejecting claim under section 80-IB - Held, yes - Whether further, since books of account maintained by assessee was accepted and no defect had been pointed out, assessee's claim under section 80-IB could not be denied - Held, yes [Paras 21 & 22][In favour of assessee]
II. Section 32, read with section 263, of the Income-tax Act, 1961 - Depreciation - Additional depreciation [Conditions precedent] - Assessment year 2006-07 - Assessing Officer allowed additional depreciation on plant and machinery to assessee - Commissioner having found that assessee was not engaged in business of manufacture or production of an article or thing held that assessee was not entitled for additional depreciation - Whether since assessee had not challenged this issue before Commissioner rather conceded disallowance, order of Commissioner to be confirmed - Held, yes [Para 20] [In favour of revenue]
III. Section 69, read with section 263, of the Income-tax Act, 1961 - Unexplained investment [Excess stock] - Assessment year 2006-07 - Commissioner in revision proceeding directed Assessing Officer to make addition of difference between value reflected in value of land in valuation report and value mentioned in books of account with reference to closing stock - Whether before making addition on account of excess stock of land, Commissioner had to bring material on record to establish fact that assessee was actually having physical stock as per valuation given to bank - Held, yes - Whether merely relying upon valuation report, it could not be presumed that assessee had made unexplained investment when there was no denying of fact that common practice of inflating stock was followed in business circle for availing of loan from bank - Held, yes - Whether therefore, no addition could be on account of excess stock solely relying upon valuation report submitted before bank - Held, yes [Para 24][In favour of assessee]
FACTS-I
| ■ | The assessee, engaged in development of properties and also running of convention centre, was allowed deduction under section 80-IB(7B) in respect of profits/gains from convention centre. | |
| ■ | The Commissioner in exercise of power under section 263 set aside assessment order on the ground that since the assessee did not maintain separate books of account in respect of convention centre, deduction under section 80-IB was wrongly allowed by the Assessing Officer. | |
| ■ | On appeal : |
HELD-I
| ■ | The assessee had maintained books of account in regular course of business which had been accepted by the department and no defect has been pointed out in the books of account containing the details of income and expenditure which are supported by vouchers and other documents. The method of accounting followed by the assessee has also been accepted by the department. | |
| ■ | Even if separate books of account are not maintained for the convention centre, if the assessee is in a position to show the true and correct profit from the convention centre, the deduction under section 80-IB is to be granted. Non- maintenance of separate books of account for convention centre itself cannot be a reason for outrightly rejecting the claim under section 80-IB. Particularly when books of account maintained by the assessee in the regular course of business had been accepted and no defect has been pointed out either by the Commissioner or by the Assessing Officer. If the assessee otherwise eligible for deduction under section 80-IB, the same is to be granted in the light of the material produced by the assessee by the Assessing Officer. [Para 21] | |
| ■ | Further the assessee has produced the information for availing of deduction under section 80-IB(7B) in Form No. 10CCBB duly certified by the chartered accountant and also there is no allegation that the assessee is not entitled for deduction under this section. Further, the assessee has been granted with this deduction in earlier assessment years which is not disturbed by any process of law and it is continued to be granted in subsequent assessment years. Even if separate books of account are not maintained, in that event also the deduction under section 80-IB(7B) could be granted to the assessee in proportion to the turnover to profit of convention hall and the Tribunal/Courts have consistently held that when it is not possible to accurately determine the deduction under section 80-IB, the profit has to be apportioned on the basis of turnover of each unit. [Para 22] | |
| ■ | Thus, the assessee's claim under section 80-IB(7B) cannot be denied by the Commissioner. [Para 23] |
CASE REVIEW-III
CIT v. Pratapsingh Amrosingh Rajendra Singh & Deepak Kumar [1993] 200 ITR 788/[1992] 64 Taxman 585 (Raj.), ITO v. Sethna Ice & Cold Storage [1980] 9 TTJ (Ahd.) 537, ITO v. Pravinchandra Girdharlal [1993] 63 TTJ (Ahd.) 357 and Asstt. CIT v. Radhey Shyam Bansal [2000] 68 TTJ (Rajkot) 136 (para 25) followed.
CASES REFERRED TO
CIT v. S.P. Jaiswal Estates (P.) Ltd. [1992] 196 ITR 179/[1993] 67 Taxman 465 (Cal.) (para 6), CIT v. Sree Annapoorna Gourishankar Metals (P.) Ltd. [2003] 262 ITR 497/127 Taxman 404 (Mad.) (para 6), CIT v. Sidral Food (P.) Ltd. [2006] 282 ITR 563/154 Taxman 412 (Guj.)(para 6), Dy. CST (Law), Board of Revenue (Taxes) v. Pio Food Packers [1980] 46 STC 63 (SC) (para 6), CIT v. Mehsana District Co-operative Milk Producers Union Ltd. [2003] 263 ITR 645/130 Taxman 235 (Guj.) (para 6), B and A Plantation and Industries Ltd. v. CIT [2007] 290 ITR 395 (Gauhati) (para 9), CIT v. Smt. D. Valliammal [1998] 230 ITR 695 (Mad.) (para 9), Bongaigaon Refinery & Petrochemicals Ltd. v. Union of India [2006] 287 ITR 120 (Gauhati) (para 9), Asher Textile Ltd. v. CIT [1952] 22 ITR 125 (Mad.) (para 15), Chainrup Sampatram v. CST [1953] 24 ITR 481 (SC) (para 16), CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC) (para 16), CIT v. Hindustan Zinc Ltd. [2007] 291 ITR 391/161 Taxman 162 (SC) (para 16), Spectra Shares & Scrips (P.) Ltd. v. CIT [2013] 36 taxmann.com 348 (AP) (para 22), CIT v. Pratapsingh Amrosingh Rajendra Singh & Deepak Kumar [1993] 200 ITR 788/[1992] 64 Taxman 585 (Raj.) (para 25), ITO v. Sethna Ice & Cold Storage [1980] 9 TTJ (Ahd.) 537 (para 25), ITO v. Pravinchandra Girdharlal [1993] 63 TTJ (Ahd.) 357 (para 25), Asstt. CIT v. Radhey Shyam Bansal [2000] 68 TTJ (Rajkot) 136 (para 25), Sree Taraka Jewellers v. ITO [IT Appeal No. 1007 (Hyd.) of 2011, dated 10-5-2012 and J. Venkata Subba Rao [IT Appeal No. 731 (Hyd.) of 2010, dated 18-1-2013] (para 26).
Mohd. Afzal for the Appellant. M. Ravindra Sai for the Respondent.
ORDER
Chandra Poojari, Accountant Member - I.T.A. No. 1254/Hyd/2011 by the assessee is directed against the order of the Commissioner of Income-tax-IV, Hyderabad, dated March 28, 2011 passed under section 263 of the Act and I.T.A. No. 1872/Hyd/2012 by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-V, Hyderabad, dated October 18, 2012 for the assessment year 2006-07 which is emanated from consequential order passed by the Assessing Officer with reference to the Commissioner of Income-tax order under section 263 of the Act.
2. First we will take up the appeal in I.T.A. No. 1254/Hyd/2011. The brief facts of the case are that the assessee filed return of income for the assessment year 2006-07 on November 29, 2006 declaring total income of Rs. 1,90,39,868. Assessment was completed under section 143(3) on December 31, 2008 by the Deputy Commissioner of Income-tax Circle 16(1), Hyderabad, determining the total income at Rs. 1,48,05,890 after adjustment of brought forward loss of Rs. 42,65,821.
3. On examination of records the Commissioner of Income-tax found that there were errors in the assessment order on the following reasons :
| "(a) | The Assessing Officer allowed additional depreciation on plant and machinery at Rs. 71,95,250. According to the Commissioner of Income-tax, the assessee is in the business of land development and resort. It is not engaged in the business of manufacture or production of an article or thing. Being so, the assessee is not entitled for the additional depreciation under section 32(1)(iia) of the Act. On pointing out this to the assessee by the Commissioner of Income-tax (Appeals), the assessee conceded that it has no objection for disallowance of additional depreciation. | |
| (b) | The assessee claimed deduction under section 80-IB(7B) of the Act on the profits and gains of convention centre as the assessee was not maintaining separate books of account for the convention centre, the Commissioner of Income-tax directed the Assessing Officer to withdraw deduction under section 80-IB(7B) at Rs. 1,51,71,548. | |
| (c) | Further the assessee obtained loan from Corporation Bank, State Bank of India, Union Bank of India and Andhra Bank for its housing project by mortgaging lands used for development. The assessee valued the landed property for the purpose of availing loan at Rs. 60.50 crores. By adopting the valuation report furnished to the banks, according to the Commissioner of Income-tax the value of closing stock is to be Rs. 31,83,61,242 as against Rs. 16.77 crores disclosed by the assessee." |
4. As the Assessing Officer omitted to examine these issues, the Commissioner of Income-tax directed the Assessing Officer to redo the assessment after considering the above discrepancies. Aggrieved, the assessee is in appeal before us.
5. The assessee raised the following grounds of appeal :
| (i) | The order of the learned Commissioner of Income-tax is against the law, weight of evidence and probabilities of the case. | |
| (ii) | The learned Commissioner of Income-tax erred in directing the Assessing Officer to withdraw the benefit allowed under section 80-IB amounting to Rs. 1,51,71,545 which was granted by the Assessing Officer after examining the case in detail. | |
| (iii) | The direction of the learned Commissioner of Income-tax in order under section 263 is only a change of opinion basing on surmises and conjectures, whereas, the order of the Assessing Officer is based on verification of books of account and other relevant documents, as such, audit reports, etc. therefore, the order of the Commissioner needs to be struck down. | |
| (iv) | The learned Commissioner of Income-tax erred in determining the closing stock at Rs. 31.84 crores as against the closing stock of Rs. 16.77 crores admitted and further erred in directing the Assessing Officer, to bring to tax the difference between Rs. 31.84 crores and Rs. 16.77 crores, amounting to Rs. 15.06 crores to tax. | |
| (v) | The opinion of the learned Commissioner of Income-tax in respect of valuation of closing stock is against the established principles of the accountancy that "the stock should be valued either at the market value or at cost price, whichever is lower", therefore, erroneous. |
6. The learned authorised representative submitted that the assessee is in the business of development of properties and also running of convention centre. The assessee claimed depreciation and additional depreciation on the assets of convention centre. This convention centre is equipped with modern machineries for producing/processing food items in a quick and hygienic manner. The activity of the assessee of producing food items from the ingredients instantly and hygienically is to be considered as production within the meaning of section 32(1)(iia) of the Income-tax Act. This view is supported by various judicial pronouncements. The hon'ble Calcutta High Court, in the case of CIT v. S.P. Jaiswal Estates (P.) Ltd. [1992] 196 ITR 179/[1993] 67 Taxman 465 (Cal.) held the preparation of food to be a manufacturing activity. The hon'ble Gauhati High Court, chose to follow the more liberal view of the Calcutta High Court. In its view, food prepared in a hotel is essentially a different item than the raw material used and preparation of food is an integral part of hotel business. In the case of CIT v. Sree Annapoorna Gowrishankar Metals (P.) Ltd. [2003] 262 ITR 497/127 Taxman 404 (Mad.), the question was whether the preparation of own food products and selling them in its own hotel would make it a manufacturing activity. The hon'ble court held it to be manufacturing activity. In the case of CIT v. Sri Sidral Food (P.) Ltd. [2006] 282 ITR 563/154 Taxman 412 (Guj), the hon'ble Gujarat High Court considered that the aspect of preparation of bakery products like bread, biscuits etc., would constitute manufacturing activity of the assessee. The court held it to be a manufacturing activity following the decision of hon'ble Supreme Court, in the case of Dy. CST (Law), Board of Revenue (Taxes) v. Pio Food Packers [1980] 46 STC 63 (SC). Considering the rationale of the above judicial pronouncements it cannot be said that allowing of the additional depreciation to the assessee on the assets of convention centre is erroneous and prejudicial to the interests of the Revenue. It is a fact that there are judicial pronouncements also holding that the preparation of food has not been considered as manufacturing activity. The Assessing Officer has taken a view in favour of the assessee out of two possible views supported by various judicial pronouncements. Therefore, the view taken by the Assessing Officer, in favour of the assessee out of two possible views of judicial pronouncements, cannot be considered as erroneous and prejudicial to the interests of Revenue, considering the rationale of the hon'ble Gujarat High Court, in the case of CIT v. Mehsana District Co-operative Milk Producers Union Ltd. [2003] 263 ITR 645/130 Taxman 235. Accordingly, he submitted that the action of the Assessing Officer in allowing additional depreciation on the assets of conventional centre cannot be said erroneous and prejudicial to the interests of the Revenue. The authorised representative submitted that during the course of section 263 proceedings, before the Commissioner, considering the contradictory judicial pronouncements and also to purchase peace with the Department, the assessee agreed for the disallowance of the additional depreciation claimed under section 32(1)(iia) of the Income-tax Act. This action of the assessee does not amount to accepting the view of the Commissioner that the Assessing Officer's order is erroneous and prejudicial to the interests of the Revenue.
7. The authorised representative submitted that the claim of the assessee, being in the business of building, owning and operating conventional centre, in respect of deduction of under section 80-IB(7B) is a valid claim. The assessee has satisfied all the conditions laid down in section 80-IB(7B) read with rule 18DC and form No. 10CCBB was submitted as prescribed. He drew our attention to the relevant provisions of the Act.
8. The authorised representative submitted that the assessee has fulfilled all the conditions laid in 80-IB(7B) of the Income-tax Act including filing of form No. 10CCB duly signed and verified by an accountant as defined in sub-section (2) of section 288, certifying the deduction has been correctly claimed. The convention centre has also satisfied the conditions mentioned in rule 18DC of the Income-tax Rules. After examining all the transactions recorded in the concerned documents with reference to the books of account the Assessing Officer has allowed the claim of section 80-IB(7B) of the Income-tax Act. However, the learned Commissioner in his order under section 263, without alleging that the conditions laid down in section 80-IB(7B)/rule 18DC have not been satisfied, assumed that the assessee has not maintained separate books of account in respect of income of the convention centre, whereas such condition of maintaining of separate books of account for the convention centre does not appears to exist either in the respective section or in the rule, as seen from the section and rule. During the course of section 263 proceedings the learned Commissioner directed the authorised representative for the assessee to produce the books of account and vouchers for verification. It is pertinent to mention here that the assessee has produced books of account and other relevant documents during the course of assessment and the learned Assessing Officer after verifying the same completed the assessment by accepting the claim of deduction under section 80-IB(7B). The learned Commissioner, without any basis assumed that the assessee has not produced books of account and vouchers during the course of assessment proceedings and also assumed that separate books for convention centre and other business are not maintained. The action of the learned Commissioner calling for the books of account and vouchers for verification itself shows that there is no material as per the record to come to a conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.
9. The authorised representative submitted that in the case of B and A Plantation and Industries Ltd. v. CIT [2007] 290 ITR 395 (Gauhati), it was held that where the matter was remanded for verification of accounts, it follows that the Commissioner did not have any such finding before him especially where the rectification of an order on the basis of audit objection was dropped. The hon'ble High Court, therefore, quashed the order of the Commissioner for lack of application of mind independently. In the case of CIT v. Smt. D. Valliammal [1998] 230 ITR 695 (Mad.), it was held that the Commissioner of Income-tax is not vested with the power to re-examine the accounts which were already examined by the Assessing Officer, to determine the income himself at a higher figure. In the case of the assessee the learned Commissioner intended to make roving enquiries by verifying the books of account to create a reason for setting aside the order of the Assessing Officer under section 263. The powers of the Commissioner are very wide in respect of proceedings of section 263 for setting aside the Assessing Officer's order, but, it is respectfully submitted that the powers are not so wide to call for the books of account and vouchers with an intention of making roving enquiries. In the case of Bongaigaon Refinery & Petrochemicals Ltd. v. Union of India [2006] 287 ITR 120 (Gauhati), the order of the Commissioner of Income-tax was held to be bad in law for want of jurisdiction and also against material on record, where the assessment order giving relief under sections 80HH and 80-I was claimed as provided by law and accepted by the Assessing Officer after verifying the conditions of the claim. The authorised representative submitted that the learned Commissioner has no material on record to assume the jurisdiction under section 263 except assuming that the assessee has not maintained separate books of account for the convention centre.
10. The authorised representative submitted that during the course of assessment proceedings before the Assessing Officer, the assessee submitted the details of bank accounts and loans obtained from various banks by giving guarantee to the bankers, including fixed assets of the company including lands, the company has obtained cash credit of Rs. 1.5 crores, term loan of Rs. 20 crores from Andhra Bank by mortgaging the land of 7 acres situated at Survey No. 389 at Bommarasapet village for its resort facilities project and SOD of Rs. 1 crore and Rs. 1.50 crores for its housing division project by mortgaging the land of 42.90 acres situated in Survey No.420/1/2/3 and 706. The land was purchased by the company way back in the year 2001. Out of the total land purchased part of the land was being used for housing development project and included in its inventory as work-in-progress and part is used for the hotel and resort and convention centre. Land shown in the balance-sheet, whose cost is mentioned at Rs.18,38,345 is belonging to only convention centre. The rest of the land belongs to development business. The land which is being used for housing development project and developed open plots for the purpose of selling it to the prospective customers, the unsold plots and further purchased during the year as on the date of balance-sheet are valued at cost plus proportionate development cost and included in its inventory as work-in-progress. As per the applicable accounting standards and accepted practices, the inventory, i.e., land allocated to housing project is to be valued at cost or market price whichever is less as on the date of the balance-sheet. Accordingly, the land pertaining to housing project is valued at historical cost price only. The lands belonging to the convention centre is shown in the balance-sheet under the head fixed assets at Rs. 18,35,345.
11. The authorised representative submitted that the assessee mortgaged with bankers, the lands belonging to the convention centre and also development business. The banks generally sanction the SOD and working capital limits by taking security of any kind of fixed property. The bankers generally value the properties at present market value for the purpose of the security of the loan granted. Accordingly the land valued by the bankers at Rs. 60.50 crores is market value of the land belonging to the company, part of which is considered as fixed asset valued at Rs. 18,35,345 and part of which is belonging to housing project division which is valued at Rs.15,90,84,520 as closing stock of housing project.
12. He drew our attention to the details of closing work-in-progress of the housing project for the assessment year 2006-07 as per schedule No. 11 (Direct cost of Housing Project) as under :
| Particulars | Amount (Rs.) |
| Opening work-in-progress | 9,16,57,435 |
| Cost of land purchased during the year | 3,15,14,701 |
| Development expenses | 15,11,80,393 |
| Total | 27,43,52,529 |
| Less : Cost of sales | 11,52,68,009 |
| Closing work-in-progress | 15,90,84,520 |
13. The closing stock of convention centre and closing work-in-progress aggregating to Rs. 16,41,67,087 (Rs. 15,90,84,520 + Rs. 50,82,567) was shown in the balance-sheet as closing stock. However, after perusing the material on record such as obtaining loan from bank and valuation made by the bankers for granting the loan, the learned Commissioner re-worked the closing stock of the assessee-company by substituting the valuation made by the bankers, which is as under :
| Total value of stock-in-trade | Rs. 60,50,00,000 | |
| Less : Sales | ||
| Income from housing | Rs. 14,89,00,937 | |
| Income from resorts | Rs. 13,77,37,821 | Rs. 28,66,38,758 |
| Closing stock as per bank value | Rs. 31,83,61,242 |
14. The authorised representative submitted that on the basis of the above working the learned Commissioner assumed that the assessee undervalued the closing stock to the extent of Rs. 15,06,23,421 and directed the Assessing Officer to bring this figure to tax. As per the directions of the Commissioner, the learned Assessing Officer made an addition of Rs. 15.06 crores as under valuation of closing stock. In this regard it is respectfully submitted that the valuation of purchase and sale of goods and inventory for purposes of determining the income chargeable under the head business or profession are governed by the provisions of section 145A of the Income-tax Act.
15. The authorised representative submitted that during the course of original assessment proceedings the assessee produced before the Assessing Officer the details of closing stock and work-in-progress and how the same is arrived at and also the statement of details of closing stock. After considering all these statements the learned Assessing Officer accepted the correctness of the closing stock which was arrived at in accordance with the method of accounting regularly employed by the assessee. Without considering the fact that part of the land is in the nature of fixed asset and also a part of land in the form of work-in-progress and also without verifying the records and submissions made to the Assessing Officer during the course of assessment proceedings, the learned Commissioner opined that the closing stock value is not reflected and shown correctly in the balance-sheet. There is no allegation even by the Commissioner and subsequently by the Assessing Officer during the course of reassessment that the assessee has not arrived at the closing stock in accordance with the method of accounting regularly employed by the assessee, as provided in section 145A. Therefore, the addition of Rs. 15.06 crores needs to be cancelled. It is submitted that the lands belonging to the convention centre shown at Rs. 18,38,345 in the balance-sheet under the head fixed asset is to be valued at the same value as the same is not part of stock-in-trade. The balance lands are to be valued at cost or market price, whichever is low as per the principles of valuation provided in section 145A of the Income-tax Act. In support of the claims the relevant para of Accounting Standards 2 which is a guideline issued by the Institute of Chartered Accountants for determining the closing stock and rationale of the some of the judicial pronouncements are reproduced hereunder :
The Institute of Chartered Accountants of India has formulated an accounting standard regarding valuation of the closing stock (AS-2). Para 7 of the said standard reads as under :
"Inventories are held in the expectation of deriving revenue directly or indirectly from their sale or use in order to determine the results of business for a given period it is necessary to carry forward the cost related to inventories until the inventories are sold or consumed. However, if there is no reasonable expectation that net realisable value would cover the cost incurred (as a result, for example of deterioration, obsolescence or change in demand) it is necessary that cost which cannot be recovered should be charged against the revenue of the current period. Therefore, inventories are normally stated at lower of the historical cost and net realisable value."
It is clear from the above that the accounting practice recognizes the method of cost or market price (net realisable value) whichever is lower for valuing the stock-in-trade, taking into account the anticipated loss, if any, due to fall in the market price of the goods on account of deterioration, obsolescence or change in demand.
Further, it was held in Asher Textiles Ltd. v. CIT [1952] 22 ITR 125 (Mad.), that it is a long established principle of accountancy that in order to arrive at true profits of a business the closing stock during that period should be valued either at the market value or at cost price whichever is lower, at the option of the trader. The principle underlying this is to provide a reserve for the loss which he is likely to incur during the period.
By giving the option to adopt the lower of the two valuations the trader is protected from being taxed in respect of profits which he did not actually earn. Profits always represent the surplus of the receipts over the cost price including expenditure. The cost is always taken and understood to be the original cost. The rules of accountancy also construe the cost price as "original cost price" and not a notional cost price and liberty should be given to the assessee to adopt either the original cost or market value.
It is misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary process of determining the trading results of that period, and can in no sense be regarded as the "source" of such profits. Nor can the place, where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a business is dubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business-vide Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC).
16. The authorised representative placed reliance on the rationale of the hon'ble Supreme Court, in respect of valuation of closing stock, decided in the following cases :
| (i) | CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC) ; and | |
| (ii) | CIT v. Hindustan Zinc Ltd. [2007] 291 ITR 391/161 Taxman 162 (SC). |
17. The authorised representative submitted that for the assessment years 2007-08 and 2008-09, the Revenue accepted the method of accounting of the assessee in respect of valuation of closing stock and deduction under section 80-IB(7B) has been allowed. He submitted that for the assessment year 2009-10, assessment was completed under section 143(3) of the Income-tax Act, here also method of valuation of closing stock has been accepted and deduction under section 80-IB(7B) was allowed on the income of the convention centre by disallowing a part of it on estimated basis by the same Assessing Officer, who has completed assessment for the subject assessment year under section 143(3). He drew our attention to the assessment order. According to authorised representative, without examining the satisfaction of the section/rule and material submitted during the course of original assessment, the learned Assessing Officer simply followed the direction of the learned Commissioner for making disallowances in the reassessment proceedings. Therefore, it is respectfully submitted that the reassessment order of the Assessing Officer deserves to be cancelled. He pleaded with the Tribunal to restore the value of the closing stock as admitted in the profit and loss account and the balance-sheet filed along with the return of income.
18. The learned Departmental representative relied on the order of the Commissioner of Income-tax.
19. We have heard both the parties and perused the material on record. Regarding invoking of the provisions of section 263 of the Income-tax Act, 1961, in our opinion, the Commissioner of Income-tax can suo motu invoke the provisions of section 263 of the Act, if the assessment order is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner of Income-tax has to be satisfied of twin conditions, viz., (i) the order sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If one of this is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the interests of the Revenue or if it is not erroneous but is prejudicial to the interests of the Revenue-recourse cannot be had to section 263(1) of the Income-tax Act. There can be no doubt that the provisions cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. However, an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase "prejudicial to the interests of the Revenue" is not an expression of art and it is not defined in the Income-tax Act. It should be understood in ordinary meaning, it is of wide import and is not confined to laws of tax. Applying the scope of section 263 to the facts of the present case, we find that while passing the order, the Assessing Officer has not applied the correct provisions of the Act as they stood during the relevant assessment year under consideration. From the record, we find that the Assessing Officer framed the assessment order under section 143(3) of the Act on December 31, 2008, wherein the assessee's claim under section 32(1)(iia) of the Act with reference to the additional depreciation on plant and machinery was allowed. Similarly, the claim of the assessee under section 80-IB(7B) was allowed though the assessee had not maintained separate books of account for the business of the convention centre. The Assessing Officer not discussed these two issues in his assessment order. He has just accepted what the assessee wanted to be accepted by him. The Assessing Officer has also not discussed the allowability or disallowance of these deductions. The order of the Assessing Officer is a non-speaking one and is silent on these aspects. Thus, it can be said that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. To that extent, we have no hesitation to uphold the Commissioner of Income-tax's action in exercising jurisdiction under section 263 of the Act.
20. Now we will discuss merit of the order of the Commissioner of Income-tax under section 263 of the Act. First of all there is no dispute with reference to disallowance of additional depreciation claimed by the assessee on plant and machinery under section 32(1)(iia) of the Act. The assessee has not challenged this issue before the Commissioner of Income-tax. Now, the assessee cannot reargue the issue before us after conceding before the Commissioner of Income-tax. To that extent the Commissioner of Income-tax's order is confirmed.
21. Now coming to the allowability of deduction under section 80-IB(7B) of the Act with reference to profits and gains of the convention centre, the Commissioner of Income-tax was of the opinion that the assessee has not maintained separate books of account for the convention centre and directed the Assessing Officer to withdraw the deduction already granted to the assessee. In our opinion, in the instant case the assessee had maintained books of account in regular course of business which had been accepted by the Department and no defect has been pointed out in the books of account containing the details of income and expenditure which are supported by vouchers and other documents. The method of accounting followed by the assessee has also been accepted by the Department. The assessee submitted that it has produced books of account and vouchers for verification before the Assessing Officer and after verifying the same the Assessing Officer granted deduction under section 80-IB(7B). Even if separate books of account are not maintained for the convention centre, if the assessee is in a position to show the true and correct profit from the convention centre, the deduction under section 80-IB is to be granted. Non-maintenance of separate books of account for convention centre itself cannot be a reason for outrightly rejecting the claim under section 80-IB of the Act. Particularly when books of account maintained by the assessee in the regular course of business had been accepted and no defect has been pointed out either by the Commissioner of Income-tax or by the Assessing Officer. If the assessee otherwise eligible for deduction under section 80-IB, the same is to be granted in the light of the material produced by the assessee by the Assessing Officer.
22. In the present case it is an admitted fact that the assessee has produced the information for availing of deduction under section 80-IB(7B) in Form No. 10CCBB duly certified by the chartered accountant and also there is no allegation that the assessee is not entitled for deduction under this section. Further, the assessee has been granted with this deduction in earlier assessment years which is not disturbed by any process of law and it is continued to be granted in subsequent assessment years. Even if separate books of account are not maintained, in that event also the deduction under section 80-IB(7B) could be granted to the assessee in proportion to the turnover to profit of convention hall and the Tribunal/Courts have consistently held that when it is not possible to accurately determine the deduction under section 80-IB, the profit has to be apportioned on the basis of turnover of each unit. Further, recently the hon'ble jurisdictional High Court in the case of Spectra Shares & Scrips (P.) Ltd. v. CIT [2013] 36 taxmann.com 348 (AP) held that (page 59) :
"(e) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstance ; that, if this is permitted, litigation would have no end except when legal ingenuity is exhausted.
(f) Whether there was application of mind before allowing the expenditure in question has to be seen ; that if there was an enquiry, even inadequate, that would not by itself give occasion to the Commissioner to pass orders under section 263 merely because he has a different opinion in the matter, that it is only in cases of lack of inquiry that such a course of action would be open ; that an assessment order made by the Income-tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed.
(g) The power of the Commissioner under section 263(1) is not limited only to the material which was available before the Assessing Officer and, in order to protect the interest of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment."
23. Being so, we are inclined to hold that the assessee's claim under section 80-IB(7B) cannot be denied by the Commissioner of Income-tax.
24. The next issue is with regard to addition of Rs. 15.06 crores, the difference between the value reflected in the value of land in the valuation report and value mentioned in the books of account with reference to closing stock. We have heard the rival submissions and perused the material on record. It is the contention of the assessee that it does maintain correct stock account and the valuation report given to the bank is only on estimate basis and was inflated to match the amount of loan availed. The fact that the assessee maintained stock account and the stocks were recorded in the books of account maintained by the assessee is not disputed by the Department. In view of the absence of maintenance of day-to-day stock account of land, acceptance of the same by the Assessing Officer cannot be found fault by the Commissioner of Income-tax. It is further seen that the valuation report given to the bank is for availing the loan from bank. Another important aspect is that the Assessing Officer accepted the profit declared by the assessee on the basis of books of account. Before making addition on account of excess stock of land, the Commissioner of Income-tax has to bring material on record to establish the fact that the assessee was actually having physical stock as per the valuation given to the bank. Merely relying upon the valuation report, it cannot be presumed that the assessee has made unexplained investment when there is no denying of the fact that the common practice of inflating the stock is followed in the business circle for availing of loan from bank. Therefore, no addition can be on account of excess stock solely relying upon the valuation report submitted before the bank.
25. Further, in our opinion, the Assessing Officer is not able to find any defect in the books of account or any other evidence to justify the plea that there is unaccounted investment in the landed property, he is not entitled, referring to some valuation report submitted to the bank for the purpose of availing loan and make any addition on that basis. It was held again and again by various courts that valuation report itself cannot be a basis for addition. For this purpose we rely on the judgment of the Rajasthan High Court in the case of CIT v. Pratapsingh Amrosingh Rajendra Singh & Deepak Kumar [1993] 200 ITR 788/[1992] 64 Taxman 585 (Raj.), ITO v. Sethna Ice & Cold Storage [1980] 9 TTJ (Ahd) 537, ITO v. Pravinchandra Giridharlal [1993] 63 TTJ (Ahd.) 357, Asstt. CIT v. Radhey Shyam Bansal [2000] 68 TTJ (Rajkot) 136.
26. This view of ours is also fortified by the decision of the co-ordinate Bench of this Tribunal in case of Sree Taraka Jewellers v. ITO [I.T.A. No. 1007/Hyd/2011, dated May 10, 2012] and J. Venkata Subba Rao [I.T.A. No. 731/Hyd/2010, dated January 18, 2013].
27. In the result, I.T.A. No. 1254/Hyd/2011 is partly allowed.
28. Coming to I.T.A. No. 1872/Hyd/2012 which emanates from the consequential order passed by the Assessing Officer while giving effect to the order under section 263 of the Act passed by the Commissioner of Income-tax. Since the order under section 263 has been decided upon by us in I.T.A. No. 1254/Hyd/2011 wherein we have confirmed the action of the Commissioner of Income-tax invoking jurisdiction under section 263 of the Act, however, we have modified the order of the Commissioner of Income-tax to certain extent, being so, the consequential order passed against 263 order becomes infructuous. As such the Assessing Officer is now required to pass a fresh order in conformity to our directions in I.T.A. No. 1254/Hyd/ 2011. As a result, I.T.A. No. 1872/Hyd/2011 is dismissed as infructuous.
29. In the result, I.T.A. No. 1254/Hyd/2011 is partly allowed and I.T.A. No. 1872/Hyd/2011 is dismissed.SECTION 66D(l) OF THE FINANCE ACT, 1994 - NEGATIVE LIST OF SERVICES - EDUCATIONAL SERVICES - IN VIEW OF SECTION 66D(L) AND ENTRY 9 OF NOTIFICATION NO. 25/2012-ST, ALL SERVICES RELATING TO EDUCATION VIZ. TRANSPORT, HOSTELS, HOUSEKEEPING, SECURITY SERVICES, CANTEEN, ETC. ARE EXEMPT
CIRCULAR NO. 172/7/2013-ST [F.NO.B1/14/2013-TRU], DATED 19-9-2013
The following representations have been received seeking clarifications regarding the levy of service tax on certain services relating to the education sector:
| 1. | Private Schools Correspondents Confederation, Madurai. | |
| 2. | Tamil Nadu Nursery, Primary, matriculation and Higher Secondary Schools Association, Chennai. | |
| 3. | Punjab Association, Chennai. | |
| 4. | Association of Self financing Universities of Rajasthan | |
| 5. | Unaided Schools' Forum, Mumbai. | |
| 6. | Vedavalli Vidyalaya, Wallajapet. | |
| 7. | Independent Schools Associations, Chandigarh. | |
| 8. | Mother Teresa Public School, New Delhi. | |
| 9. | BVM Global, Chennai. | |
| 10. | Sastra University, Tanjavur. | |
| 11. | HLC International, Chennai. | |
| 12. | Sodexo Food Solutions, Mumbai. | |
| 13. | Federation of Associations of Maharastra, Mumbai. |
2. The matter is covered by two provisions of the Finance Act, 1994. Section 66D of the Finance Act contains a negative list of services and clause (1) thereof reads as under:
"services by way of –
| (i) | pre-school education and education upto higher secondary school or equivalent; | |
| (ii) | education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force; | |
| (iii) | education as a part of an approved vocational education course;". |
Further section 93(1) of the Finance Act, 1994, enables the Government to exempt generally or subject to such conditions taxable service of specified description. By virtue of the said power, Government has issued a notification No.25/2012-ST dated 20th June, 2012, exempting certain services. Sl.no.9 thereof reads as follows:
"Services provided to an educational institution in respect of education exempted from service tax, by way of,-
| (a) | auxiliary educational services; or | |
| (b) | renting of immovable property;" |
As defined in the said notification, "auxiliary educational services" means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge–enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution.
3. By virtue of the entry in the negative list and by virtue of the portion of the exemption notification, it will be clear that all services relating to education are exempt from service tax. There are many services provided to an educational institution. These have been described as "auxiliary educational services" and they have been defined in the exemption notification. Such services provided to an educational institution are exempt from service tax. For example, if a school hires a bus from a transport operator in order to ferry students to and from school, the transport services provided by the transport operator to the school are exempt by virtue of the exemption notification.
4. In addition to the services mentioned in the definition of "auxiliary educational services", other examples would be hostels, housekeeping, security services, canteen, etc.
5. Thus the apprehensions conveyed in the representations submitted by certain educational institutions and organizations have no basis whatsoever. These institutions and organizations are requested not to give credence to rumours or mischievous suggestions. If there is any doubt they are requested to approach the Chief Commissioner concerned.
6. All concerned are requested to acknowledge the receipt of this circular.
■■
EDITOR'S NOTE
| ♦ | Readers may kindly note that STT had already thrown light on these issues vide its special issue on Educational Services (see [2013] 40 STT (Mag) 27, 50, 51 and 52). | |
| ♦ | While the so-called tax experts may carve out certain exceptions to this clarification, the clarification specifically states that assessees are requested not to give credence to rumours or mischievous suggestions and approach the Chief Commissioner concerned in case of doubt (see Para 5). | |
| ♦ | Auxiliary educational services (say, transportation of students) provided by schools to students would not fall under Entry No. 9 above. But, it is a bundled service provided along with education and would, therefore, be taxable as per section 66F(3)(a) based on its essential character. Since essential character is school education, which falls under negative list entry u/s 66D(l), hence, transportation of students would also fall thereunder and would not be liable to service tax. | |
| ♦ | The nutshell is all services provided by educational institution would be exempt, if the principal education is covered in negative list. Therefore, in case of pre-schools, schools upto 12th, colleges and universities, the entire bill would be exempt and not liable to service tax in view of provisions of section 66D(l) and section 66F(3)(a). | |
| ♦ | The use of the expression "all services relating to education are exempt" (para 3 of the Circular) would suggest that even transport of staff by the educational institution would be exempt. |
IT: Where decisions of all three authorities below on rejection of books of account were on facts by giving cogent reasons, same could not be interfered with by High Court
■■■
[2013] 37 taxmann.com 32 (Gujarat)
HIGH COURT OF GUJARAT
Sage Infrastructure (P.) Ltd.
v.
Assistant Commissioner of Income-tax*
M.R. Shah AND MS. SONIA GOKANI, JJ.
Tax Appeal No. 754 of 2012†
JUNE 25, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Rejection of accounts [Non-maintenance of stock registers] - Assessment year 2004-05 - Assessee was a civil contractor - During assessment proceeding, Assessing Officer rejected books of account, considering fact that purchases were not verifiable; closing stock was not verifiable; stock register was not maintained; and muster register was not maintained - Commissioner (Appeals) as well as Tribunal upheld order of Assessing Officer - Whether as decision of Tribunal to reject books of account under section 145(3) was on facts and by giving cogent reasons, said decision could not be interfered with by High Court - Held, yes [Para 5] [In favour of revenue]
FACTS
| ■ | The assessee was a Govt. recognized Civil contractor. | |
| ■ | During assessment proceeding, the Assessing Officer found that assessee failed to maintain books of account and despite various opportunity given, it did not furnish site-wise purchase of consumption of material, site-wise labor muster roll and site-wise income & expenditure. Therefore, the Assessing Officer rejected books of account being incomplete and incorrect and made assessment on higher income estimated on basis of industry average. | |
| ■ | On appeal, the Commissioner (Appeals) as well as the Tribunal upheld the order of the Assessing Officer. | |
| ■ | The assessee filed appeal before the High Court contending that there is no requirement under section 143 that the assessee has to maintain site-wise books of account. |
HELD
| ■ | There are concurrent findings given by all the authorities with respect to rejection of books of account in exercise of powers under section 145. It appears from the impugned order and more particularly assessment order as well as order of the Commissioner (Appeals) that the assessee was asked to give site-wise purchase of consumption of materials and site-wise labour muster oil. The assessee submitted that the same were not maintained and, hence, it was not able to produce the above for the verification of the Assessing Officer. It also appears that the assessee was asked to produce stock register for verification of the purchase and consumption but it expressed its inability to produce the same. It also appears that in view of the labour expenses incurred to the extent of Rs. 31,68,550 and on the query being raised, the assessee explained that the labourers were employed on daily-wage basis at different sites and they were paid in cash on daily or weekly basis depending upon the location of the site. The Assessing Officer asked the assessee whether any muster was maintained site-wise or consolidated one. The assessee stated that no such record was maintained by the assessee. The Assessing Officer also found that as compared to the turnover and number of contracts undertaken by the assessee, the value of the closing stock/work in progress appeared to be low. Thereafter, considering the explanation given by the assessee to the various queries, the Assessing Officer issued show-cause notice upon the assessee to show-cause why books of account be not rejected and thereafter the Assessing Officer rejected the books of account, considering the fact that the purchases were not verifiable; closure stock was not verifiable; stock register was not maintained; and muster register was not maintained and the said order of the Assessing Officer has been confirmed by the Commissioner (Appeals) as well as the Tribunal. [Para 5] | |
| ■ | Decision of all the three authorities below on rejection of books of account is on facts which is not required to be interfered with by the Court as cogent reasons have been given by all the authorities below in rejecting the books of account under section 145(3). [Para 5.01] | |
| ■ | So far as the case on behalf of the assessee that under the law, there is no requirement of maintaining the books of account site wise, is concerned, it is required to be noted that on facts and considering the explanation to the queries raised by the Assessing Officer and after giving an opportunity to the assessee and having found that there are defects in the maintenance of the books of account and the assessee has failed to maintain proper books of account to enable the revenue authorities to determine true and correct income, no error and/or illegality has been committed by the authorities below in rejecting the books of account under section 145(3) on account of the same being incomplete and incorrect. [Para 5.02] | |
| ■ | In view of the above, as the decision to reject the books of account under section 145(3) of the Tribunal is on facts and by giving cogent reasons, there is no reason to interfere with the same, more particularly no question of law much less any substantial question of law arises in the instant appeal. Hence, instant appeal deserves to be dismissed. [Para 6] |
CASE REVIEW
CIT v. Jananamandal Ltd. [2013] 214 Taxman 49/31 taxmann.com 51 (All.) (para 5.4) distinguished.
CASES REFERRED TO
CIT v. Jananamandal Ltd. [2013] 214 Taxman 49/31 taxmann.com 51 (All.) (para 3.2).
Tej Shah for the Appellant.
ORDER
M.R. Shah, J. - Present appeal has been preferred by the appellant-assessee challenging the impugned judgment dtd. 11/3/2012 passed by the Income-tax Appellate Tribunal, Ahmedabad Bench, in ITA No.4442/Ahd/2007 for the A.Y. 2004-05, by which the ITAT1dismissed the said appeal preferred by the assessee confirming the order passed by the CIT(A) as well as Assessing Officer in rejecting the books of account invoking section 145(3) of the Income-tax Act, (hereinafter referred to as "the Act", proposing the following substantial question of law :
"Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in rejecting the books of account of the appellant u/s 145(3) and estimating the Net profit even when N.P. shown by the appellant was higher than the preceding year?"
2. Facts leading to the present appeal in nutshell are as under :
2.1 That the dispute is with respect to A.Y. 2004-05. The assessee filed return declaring total income of Rs. 24,87,520/-. The return of the income was processed under section 143(1) of the Act. That during the year under consideration, the assessee was a Government recognized Civil Contractor. Its case was selected for scrutiny. Accordingly, notice under section 143(2) of the Act was issued on 19/4/2005 and duly served upon the assessee. Subsequently, notice under section 142(1) along with the questionnaire was also issued on 28/7/2006. In response to the notice under section 143(2) and 143(1) of the Act, the authorized person of the assessee appeared before the Assessing Officer. That the assessee produced books of account including bills and vouchers during the assessment proceedings and the same came to be perused by the Assessing Officer. During the assessment proceedings, it was found by the Assessing Officer that the assessee has failed to maintain proper books of account to enable the revenue authorities to determine true and correct income and despite the sufficient opportunities given, the assessee did not furnish site-wise purchase of consumption of material, site-wise labour muster roll and site-wise income and expenditure. Considering the submissions made on behalf of the assessee and explanation for not furnishing the aforesaid details, the Assessing Officer was satisfied that the assessee has failed to maintain proper books of account and therefore, he exercised power under section 145(3) of the Act. The Assessing Officer rejected the books of account being incomplete and incorrect. Consequently and accepting the assessee's plea for estimating profit on industry average; considering the details of gross turnover; net profit and net profit ratio of other assessee engaged in similar activities, the Assessing Officer passed the assessment order considering the total income of the assessee of Rs. 49,22,645/- against the total income declared by the assessee at Rs. 24,87,520/-.
2.2 Being aggrieved by the assessment order passed by the Assessing Officer dtd. 29/12/2006, the assessee preferred appeal before the Commissioner CIT(A) and by order dtd. 16/10/2007, the CIT(A) dismissed the said appeal of the assessee confirming the order of assessment. Being aggrieved by the order passed by the CIT(A), the assessee preferred further appeal before the ITAT, Ahmedabad and by impugned order dtd. 11/5/2012, ITAT has dismissed the said appeal confirming the orders passed by the CIT(A) as well as Assessing Officer.
2.3 Being aggrieved by the impugned order passed by the Tribunal, the assessee has preferred the present appeal along with the aforesaid proposed question of law.
3. Mr. Dipak Shah, learned advocate has appeared on behalf of the appellant. It is submitted by Mr. Shah, learned advocate appearing on behalf of the appellant that ITAT has erred in upholding the action of the AO in rejecting the books of account and adopting industry average on the basis of comparable cited by the Assessing Officer and that too without confronting the same to the appellant. It is further submitted that as such, the Assessing Officer erred in rejecting the books of account of the appellant under section 145(3) of the Act. It is submitted that as such all requirements as provided under section 145 of the Act for rejecting books of account are not satisfied in the present case. It is submitted that as such the assessee was following the mercantile method of accounting. It is submitted that the assessee was a Government recognized Contractor and was having contracts at 35 sites and therefore, it was not possible for the assessee to maintain books of account of site-wise of purchase of consumption of material; site-wise labour muster roll and site-wise income and expenditure. It is submitted that as such the assessee was maintaining the books of account and also submitted audited report with audited accounts. It is submitted that as such there is no requirement under section 143 of the Act that the assessee has to maintain site-wise books of account. It is further submitted by Mr. Shah, learned advocate appearing on behalf of the appellant that the assessee was getting the work done from the labourers on piece rate and therefore, in fact, it was not possible and/or was not required to maintain site-wise labour muster roll. It is submitted that as such the materials purchased by the assessee were verified and kept by the engineer of PWD Department in their custody along with the original purchase invoices and therefore, there was no question to doubt the books of account maintained by the assessee.
3.1 It is further submitted by Mr. Shah, learned advocate appearing on behalf of the appellant that even the reasoning given by the Assessing Officer as well as CIT(A) and even Tribunal that there was fall of gross profit and therefore, there was justification for rejection of books of account cannot be sustained.
3.2 Mr. Shah, learned advocate appearing on behalf of the appellant has heavily relied upon the decision of the Allahabad High Court in the case of CIT v. Jananamandal Ltd. [2013] 214 Taxman 49/31 Taxmann.com 51. It is submitted that as held by Allahabad High Court, in fact, maintenance of the books of account cannot be a ground to reject the books of account. It is further submitted by Mr. Shah, learned advocate appearing on behalf of the appellant that even net profit (NP) has been increased compared to the earlier assessment year. It is submitted that merely because there was decrease in the gross profit (GP) it cannot be a ground to reject the books of account in exercise of the powers under section 145 of the Act. It is submitted that when there was no justification to reject the books of account of the assessee, impugned orders passed by the ITAT confirming the order passed by the CIT(A) as well as the Appeal From Order No. deserve to be quashed and set aside.
By making above submissions and relying upon above citation, it is requested to allow the present appeal.
4. Heard the learned advocates appearing on behalf of the respective parties at length.
5. At the outset, it is required to be noted that in the present case, all the three authorities i.e. Assessing Officer, CIT(A) as well as ITAT have concurrently held against the appellant - assessee and as such, there are concurrent findings given by all the authorities with respect to rejection of books of account in exercise of powers under section 145 of the Act. The assessee is a Government Civil Contractor and the assessee filed its income-tax return of Rs. 24,87,520/- with respect to the assessment year 2004-05. It appears from the impugned order and more particularly assessment order as well as order of CIT(A) that the assessee was asked to give site-wise purchase of consumption of materials and site-wise labour muster roll. The assessee submitted that the same are not maintained and hence they were not able to produce the above for the verification of the Assessing Officer. It also appears that the assessee was asked to produce stock register for verification of the purchase and consumption but the assessee expressed its inability to produce the same. It also appears that in view of the labour expenses incurred to the extent of Rs. 31,68,550/- and on the query being raised, the assessee explained that the labourer were employed on daily-wage basis at different sites and they are paid in cash on daily or weakly basis depending upon the location of the site. The Assessing Officer asked the assessee whether any muster was maintained site-wise or consolidated one, the assessee stated that no such record was maintained by the assessee. The Assessing Officer also found that as compared to the turnover and number of contracts undertaken by the assessee, the value of the closing stock/work in progress appeared to be low. Thereafter, considering the explanation given by the assessee to the various queries raised by the Assessing Officer, the Assessing Officer issued show-cause notice upon the assessee to show cause why books of account be not rejected and thereafter the Assessing Officer has rejected the books of account, considering the fact that the purchase were not verifiable; closure stock was not verifiable; stock register was not maintained; muster register was not maintained and the said order of the Assessing Officer has been confirmed by the CIT(A) as well as ITAT.
5.1 Decision of all the three authorities below on rejection of books of account is on facts which is not required to be interfered with by this Court as cogent reasons have been given by all the authorities below in rejecting the books of accounts under section 145(3) of the Act.
5.2 Now, so far as the case on behalf of the assessee that under the law, there was no requirement of maintaining the books of account site-wise, is concerned, it is required to be noted that as such on facts and considering the explanation to the queries raised by the Assessing Officer and after giving an opportunity to the appellant and having found that there are defects in the maintenance of the books of account and the assessee has failed to maintain proper books of account to enable the revenue authorities to determine true and correct income and therefore, as such no error and/or illegality has been committed by the authorities below in rejecting the books of account under section 145(3) of the Act on account of the same being incomplete and incorrect.
5.3 Now, so far as the contention on behalf of the appellant that the Assessing Officer as well as CIT(A) and even the Tribunal that there was fall of gross profit and therefore, there was justification for rejection of books of account, is erroneous, is concerned, it is required to be noted that as such the books of account are not rejected solely on the aforesaid ground.
5.4 Now, so far as the reliance placed upon the decision of the Allahabad High Court in the case of Jananamandal Ltd. (supra) is concerned, on facts the said decision will not be applicable to the facts of the case on hand. Before the Allahabad High Court it was found that there was no specific evidence to prove any defect in maintenance of books of account by the assessee and to that it was observed by the Allahabad High Court that the Assessing Officer erred in rejecting the books of account under section 145(3) of the Act. In the present case, that is not the so. As stated above, cogent reasons have been given by the Assessing Officer, CIT(A) and the Tribunal in rejecting the books of account under section 145(3) of the Act.
6. In view of the above as the decision to reject the books of account under section 145(3) of the Act of the ITAT is on facts and by giving cogent reasons, we see no reason to interfere with the same, more particularly no question of law much less any substantial question of law arises in the present appeal. Hence, present appeal deserves to be dismissed and is accordingly dismissed.
VARSHA *In favour of revenue.
SECTION 143 OF THE INCOME-TAX ACT, 1961 - ASSESSMENT - GENERAL - PROCEDURE AND CRITERIA FOR SELECTION OF SCRUTINY CASES UNDER COMPULSORY MANUAL SELECTION OF RETURNS DURING FINANCIAL YEAR 2013-14 – AMENDMENT IN INSTRUCTION NO.10/2013, DATED 5-8-2013
INSTRUCTION NO. 13/2013 [F. NO. 225/107/2013/ITA.II], DATED 20-9-2013
I am directed to state that Instruction No. 10 of 2013, dated 5-8-2013 of CBDT on the above captioned subject is partially modified as under:-
2. In Para 3, after clause (i), following clause(s) have been inserted:-
(j) Cases where registration u/s 12AA of the IT Act has not been granted or has been cancelled by the CIT/DIT and the assessee has been found claiming tax-exemption under section 11 of the IT Act. However, the cases where such order of CIT/DIT has been reversed/set-aside in appellate proceedings will not be picked up for scrutiny under this clause.
(k) Cases where order denying the approval u/s 10(23C) of the IT Act or withdrawing the approval already granted has been passed by the Competent-Authority and the assessee has been found claiming tax-exemption under the aforesaid provision of the IT Act.
3. I am further directed to state that the above may be brought to the notice of all officers working under your jurisdiction for necessary compliance.
2013-TIOL-706-HC-ALL-IT
IN THE HIGH COURT OF ALLAHABAD
ITA No.143 of 2005
COMMISSIONER OF INCOME TAX
MEERUT & ANOTHER
MEERUT & ANOTHER
Vs
M/s MODI OLIVETTI LTD
Sunil Ambwani and Surya Prakash Kesarwani, JJ
Dated: August 19, 2013
Appellant Rep by: D Awasthi
Respondent Rep by: None
Respondent Rep by: None
Income tax - Sections 37, 40(a)(i) - Whether the advertisement expenses which were considered by the Revenue as revenue expenditure were rightly disallowed merely because in the books of account the same were considered by the assessee as deferred revenue expenditure - Whether the provision made by the assessee for warranty for after-sales services is to be considered as contingent liability and not allowable as expenditure - Whether when at the relevant time as per law assessee has deducted tax at source but paid the same in subsequent year, no disallowance can be made as out of two conditions as mentioned in section 40(a)(i) 'the tax has not been paid' or 'deducted' one condition 'not deducted' do not exist.
A) Assessee is engaged in the business of manufacturing of Mini Computers / Micro Processor. It claimed expenses towards advertisements. In the books of account the expenses were deferred for three years. However in the computation of income full amount was claimed as revenue expenditure. AO rejected the claim on the ground that that since the assessee has admittedly capatalized amount in the balance sheet and therefore there was no justification for claiming it as a revenue expenditure. CIT (A) confirmed the order of AO. ITAT allowed the claim of assessee following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. wherein it was held that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure. Allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account.
B) Assessee estimated the liability in respect of the warranty on each computer manufactured and sold by it at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. AO disallowed the entire amount on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. CIT (A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. ITAT allowed the appeal observing that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain.
C) AO disallowed and added back royalty as unascertained liability. CIT (A) upheld the addition made by AO. ITAT observed that assessee had made a provision for royalty payable and R & D cess. The tax was deductible on this payment was duly shown as deduction in the books of account. At the time of making payment, tax deductible on this payment was duly deposited to the credit of the Central Government. ITAT came to the conclusion that as per provisions of section 40(a)(i) the tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the AO. The quantification had taken place at a later point of time. Revenue contended that provision of Section 40(a)(i) of the Act had not been complied with by the assessee.
After hearing both the parties, the Hon'ble High Court held that,
A) ++ neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited in the profit and loss account cannot be made a ground to disallow the advertisement expenses. Tribunal has observed that so far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. The assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. There is nothing to indicate that the concerned expenditure has to be of capital nature. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. The authorities below misconstrued the term "deferred expenditure" as capital expenditure. Revenue failed to point out any error of fact or law in the impugned order of the ITAT. AO and CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. Thus there is no error in the order of ITAT in setting aside the addition made by AO;
B) ++ in the case of Bharat Earth Movers Ltd Vs. CIT and Rotork Controls India Pvt Ltd, the Hon'ble Supreme Court held that a provision is a liability which can be measured only by using a substantial degree of estimation. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Provision for warranty is rightly made by the appellantenterprise because it has incurred a present obligation as a result of past events. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Following the principles of law laid down by Hon'ble Supreme Court, the order of ITAT is confirmed;
C) ++ out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. Proviso to section 40(a)(i) provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. Subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available u/s 40(a)(i) as it existed during the relevant assessment year. Since the assessee has deducted the tax during the previous year relevant to the assessment year in question, the conditionality of section 40(a)(i) stands satisfied. Thus there is no error in the order of ITAT.
A) Assessee is engaged in the business of manufacturing of Mini Computers / Micro Processor. It claimed expenses towards advertisements. In the books of account the expenses were deferred for three years. However in the computation of income full amount was claimed as revenue expenditure. AO rejected the claim on the ground that that since the assessee has admittedly capatalized amount in the balance sheet and therefore there was no justification for claiming it as a revenue expenditure. CIT (A) confirmed the order of AO. ITAT allowed the claim of assessee following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. wherein it was held that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure. Allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account.
B) Assessee estimated the liability in respect of the warranty on each computer manufactured and sold by it at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. AO disallowed the entire amount on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. CIT (A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. ITAT allowed the appeal observing that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain.
C) AO disallowed and added back royalty as unascertained liability. CIT (A) upheld the addition made by AO. ITAT observed that assessee had made a provision for royalty payable and R & D cess. The tax was deductible on this payment was duly shown as deduction in the books of account. At the time of making payment, tax deductible on this payment was duly deposited to the credit of the Central Government. ITAT came to the conclusion that as per provisions of section 40(a)(i) the tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the AO. The quantification had taken place at a later point of time. Revenue contended that provision of Section 40(a)(i) of the Act had not been complied with by the assessee.
After hearing both the parties, the Hon'ble High Court held that,
A) ++ neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited in the profit and loss account cannot be made a ground to disallow the advertisement expenses. Tribunal has observed that so far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. The assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. There is nothing to indicate that the concerned expenditure has to be of capital nature. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. The authorities below misconstrued the term "deferred expenditure" as capital expenditure. Revenue failed to point out any error of fact or law in the impugned order of the ITAT. AO and CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. Thus there is no error in the order of ITAT in setting aside the addition made by AO;
B) ++ in the case of Bharat Earth Movers Ltd Vs. CIT and Rotork Controls India Pvt Ltd, the Hon'ble Supreme Court held that a provision is a liability which can be measured only by using a substantial degree of estimation. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Provision for warranty is rightly made by the appellantenterprise because it has incurred a present obligation as a result of past events. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Following the principles of law laid down by Hon'ble Supreme Court, the order of ITAT is confirmed;
C) ++ out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. Proviso to section 40(a)(i) provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. Subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available u/s 40(a)(i) as it existed during the relevant assessment year. Since the assessee has deducted the tax during the previous year relevant to the assessment year in question, the conditionality of section 40(a)(i) stands satisfied. Thus there is no error in the order of ITAT.
Revenue's appeal dismissed
Cases followed:
Empire Jute Co. Ltd. Vs. CIT (2002-TIOL-238-SC-IT)
Kedarnath Jute Manufacturing Co. Ltd. V. CIT (2002-TIOL-238-SC-IT)
Bharat Earth Movers Ltd. Vs. CIT (2002-TIOL-123-SC-IT)
Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai (2009-TIOL-64-SC-IT)
Kedarnath Jute Manufacturing Co. Ltd. V. CIT (2002-TIOL-238-SC-IT)
Bharat Earth Movers Ltd. Vs. CIT (2002-TIOL-123-SC-IT)
Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai (2009-TIOL-64-SC-IT)
JUDGEMENT
Per: Surya Prakash Kesarwani:
1. This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') relating to the assessment year 1991-92. The appeal was admitted vide order dated 24.9.2007 on the following substantial questions of law : -
"(1) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance of Rs.77,16,120/- under the head advertisement expenses, following the judgements of the Hon'ble Apex Court which did not at all apply to the instant case ?(2) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance's of Rs.33,77,573/- under the head provisions for warranties ?(3) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the ddisallowance's of Rs.49,37,042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961 ?(4) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in confirming the order of the CIT (A) in deletion of Rs.82,352/- out of entertainment expenses ?
Question No.1
2. The respondent-assessee is a company engaged in the business of manufacturing of Mini Computers / Micro Processor based systems etc. and filed the return of income for Assessment Year-1991-92 declaring a loss of Rs.4,73,69,920/-. During the previous year the Assessee had spent a sum of Rs.77,16,120/- towards advertisements with respect to launching of a new product. In the books of accounts he had capitalized the entire amount and out of that debited a sum of Rs. 29,51,909/- to the profit and loss account claiming the same as deduction. In the computation of income the assessee added back Rs.29,51,909/- to the profit as per profit and loss account and claimed deduction of the entire sum of Rs.77,16,120/- as advertisement expenses. The Assessing Officer rejected the claim on the ground that since the assessee has admittedly capatalized Rs.77,16,120/- in the balance sheet and therefore there is no justification for claiming it as a revenue expenditure. The Assessee preferred an appeal before the Commissioner of Income Tax(A) contending that expenditure of advertisement was revenue expenditure and was to be allowed as a deduction. It was submitted that under the Income Tax Act, there is no concept of deferred revenue expenditure and what is contemplated is that an expenditure is either capital or revenue expenditure, and that even the Assessing Officer accepted that this expenditure was a deferred revenue expenditure. The CIT(A) upheld disallowance of Rs.77,16,120/- and further held that Rs. 29,51,909/- is also not allowable as deduction as it has been voluntarily offered for taxation in the computation of income by the Assessee. Aggrieved with the order of the Commissioner of Income Tax(A), the Assessee preferred an appeal before the Income Tax Appellate Tribunal Delhi Bench 'E', New Delhi which allowed the appeal recording the finding of fact that the advertisement expenses incurred by the Assessee is revenue expenditure. The Income Tax Appellate Tribunal held as under :
"The Honourable Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 = (2002-TIOL-238-SC-IT) has observed as under:' There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.'From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act.As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT [1971] 82 ITR 363 = (2002-TIOL-383-SC-IT), the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account, which are not decisive or conclusive in this regard.The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs.77,16,120/- made to the total income. Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4."
3. We have heard Sri Dhanajnay Awasthi, learned counsel for the appellant. No one appear for the respondent-assessee despite notices sent by registered post. We have perused the office report dated 18.1.2013 and 22.3.2013, and find the service of notice on the respondent to be sufficient.
4. Sri Dhanajnay Awasthi reiterates the findings recorded by the Assessing Officer and the Commissioner of Income Tax(A). He submits advertisement expenditure as dealt by the appellant in the accounts i.e., showing Rs.29,51,909/- as revenue expenses and Rs.77,16,120/- as deferred revenue expenses, was fully justified and since Rs.77,16,120/- was capatilized by the assessee, the same was not allowable as expenditure for assessment year in question.
5. We find that neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses of Rs.77,16,120/-. There is no dispute that such expenses is allowable expenditure. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited Rs.29,51,909/- in the profit and loss account cannot be made a ground to disallow the advertisement expenses of Rs.77,16,120/- when indisputably in the computation of income, the assessee has claimed the entire sum of Rs.77,16,120/- after adding back Rs.29,51,909/- to the profit as per profit and loss account. While considering this issue the Tribunal has recorded the following findings in paragraph Nos. 10, 11, 12, 13 and 14 of the impugned order : -
"10. We have considered the rival submissions. A copy of the computation of the total income for the A.Y.91-92 is placed at page 20-21 of Assessee's paper book. Perusal of the same indicates that the Assessee had debited a sum of Rs. 29,51,909/- in its profit and loss account and this sum was added back to the profit as per profit and loss account and the entire sum of Rs.77,16,120/- was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120/- the AO has in effect disallowed a sum of Rs. 29,51,909/- in excess of what has been claimed by the Assessee as deduction. The disallowance at best could have been only Rs.47,64,211/- (Rs.77,16,120/- Less Rs.29,51,909/-) for the reason that even as per the AO the expenditure to the extent of Rs.29,51,909/- was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the Assessee to that extent during the previous year. Be that as it may. We may now consider the concept of deferred revenue expenditure. The reason for making the addition by the revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as "deferred revenue expenditure" in its books of account and according to the Revenue authorities the said expenditure incurred on Advertisement would result in benefits which will accrue to the Assessee over a period of time beyond the previous year. So far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below, however, considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for ascertaining the nature of expenditure, it would be appropriate to find out the meaning and nature of the term "deferred revenue expenditure". The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. The Institute of Cost and Management Accountant has defined the said term in its publication as an expenditure incurred during the accounting period but not fully charged against income in that period, the balance being carried forward and charged in the next or a subsequent period. From the perusal of these definitions, it is abundantly clear that there is nothing to indicate that the concerned expenditure has to be of capital nature for the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. As a matter of fact, the very purpose of categorizing certain expenditure differently under the head "Deferred revenue expenditure" for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period year as the benefit thereof accrues over a period exceeding the accounting year in which the same are incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure", it presupposes that the concerned expenditure, creating benefit in the Revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the term "deferred expenditure" as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure as its allowability of the same under the provisions of the Income -Tax Act.11. "The Honourable Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 = (2002-TIOL-238-SC-IT) has observed as under:' There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.'12. From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act.13. As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT [1971] 82 ITR 363 = (2002-TIOL-383-SC-IT), the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account, which are not decisive or conclusive in this regard.14. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs.77,16,120/- made to the total income. Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4."
6. Learned counsel for the appellant has failed to point out any error of fact or law in the impugned order of the ITAT on the point of allowability of advertisement expenses of Rs.77,16,120/-. We also do not find any error in the aforesaid findings recorded by the ITAT. In the case of CIT Vs. Woodward Governor India Private Limited [(2009) 13 SCC 1 Page 1]= (2009-TIOL-50-SC-IT) vide paragraph no. 24, 25 and 33, the Hon'ble Supreme Court has held that Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of business or profession should be allowed in computing the income chargeable under the head "profits and gains of business". The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of "12 months". In the case ofCommissioner of Income Tax, Mumbai Versus Walfort Share and Stock Brokers Private Limited (2010) 8 SCC 137 para 38 = (2010-TIOL-47-SC-IT), Hon'ble Supreme Court has held that the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowance for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred in business. A deduction for expenditure for loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the incomings of the business in ascertaining the true profits.
7. We find that the Assessing Officer and the CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. The ITAT has also recorded the finding of fact to this effect as quoted above, and as such we are of the view that there is no error in the order of the ITAT in setting aside the addition made by the Assessing Officer on account of advertisement expenses.
8. In result the Question No. 1 is answered in negative i.e. in favour of the assessee and against the revenue.
Question No. 2
9. As per assessee, one year warranty is offered on each computer manufactured and sold by it to purchasers and in terms thereof the assessee provide free maintenance including replacement of parts within one year from the date of sale / installation of computers. It estimated the liability in respect of the warranty for the year in question at a sum of Rs. 42,87,667/-. For the previous year relevant to Assessment Year 1990-91 the assessee had provided for a sum of Rs.9,10,094/- towards estimated liability on account of warranty. There was no actual expenditure incurred in the assessment year 1991-92 in respect of such provision of warranty relevant to Assessment Year 1990-91. The assessee therefore wrote back this liability; debited Rs.9,10,094/- relating to Assessment Year 1990-91 and claimed a net warranty liability in the Assessment Year 1991-92 for Rs.33,77,573/- (Rs.42,87,667.00 - Rs. 9,10,094.00) . The warranty amount was computed at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. The Assessing Officer disallowed the entire amount of Rs.33,77,573/- on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. Aggrieved, the assessee filed an appeal before the CIT (A) who confirmed the addition made by the Assessing Officer. The CIT(A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. Aggrieved with the order of the CIT(A) the assessee preferred an appeal before the ITAT which was allowed by the impugned order holding that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain. To reach to the aforesaid finding, the ITAT applied the principles of law settled by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC) = (2002-TIOL-123-SC-IT) and the judgment of Privy Council in the case of Commissioner of Inland Revenue Vs. Mitsubishi Motors New Zealand Ltd.(222 ITR 697 PC). The ITAT has recorded the following findings in paragraph 22 : -
22. The basis of computation of the warranty for the AY 90-91was 1.5% of the total cost of sales. In the AY 91-92, which is the year in dispute in the present appeal, the provision has been made @ 1.5% of the cost of sales in respect of goods sold with the country and 5% on export sales. The assessee also wrote back the provision made for the AY 90-91, from the estimated liability for AY 91-92 and the difference alone is sought to be claimed as a deduction while determining the income for Assessment Year 91-92. Even for the subsequent A.Y. the provision on account of liability under warranty has been made on a scientific basis. Whatever provision have been made for a particular assessment year in excess the actual expenses incurred in the subsequent A.Y., the difference is again been written back in the subsequent assessment year. In the light of the circumstances a legal obligation to make a payment in future can be said to have accrued. It is not required to wait for the contingency to occur. We can infer that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day. The estimation by the assessee of its liability is reasonably certain. In the circumstances it can be said that the liability is in presenti to be discharged at a future date and not a contingent one. We, therefore, direct the A.O. To allow a sum of Rs.33,77,573/- claimed as deduction by the assessee.
10. Similar controversy has been settled by the Hon'ble Supreme Court in the case of Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai (2009) 13 SCC 283= (2009-TIOL-64-SC-IT) wherein the question of allowability of warranty provision was considered. In the said judgment the Hon'ble Supreme Court, vide paragraph Nos. 4, 21, 22, 23, 33, 40 and 41 has held as under : -
"4. For the assessment year 1991-92, the assessee made a provision for warranty at Rs.10,18,800/- at the rate of 1.5% of the turnover. This provision was made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant and to cover up that expenditure. It may be noted that since the provision made was for Rs.10,18,800/- which exceeded the actual expenditure, the appellant reversed Rs.5,00,246 as Reversal of Excess Provision. Consequently, the assessee claimed deduction in respect of the net provision of Rs.5,18,554/- which was disallowed by the A.O. on the ground that the liability was merely a contingent liability not allowable as a deduction under Section 37 of the Income-tax Act, 1961 (the 1961 Act", for short). This decision was upheld by CIT (A). The matter was carried in appeal to the Tribunal by the appellant.21. We quote hereinbelow the relevant provisions of the Income Tax Act, 1961 as it stood at the material time :37. General-(1) Any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.40A. Expenses or payment not deductible in certain circumstances -(7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.(b) Nothing in Clause (a) shall apply in relation to:(i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year;(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely:(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason;(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and(3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977.Explanation 1.-For the purposes of sub-clause (ii) of clause (b) of this sub-section, "admissible amount" means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and onethird per cent of the salary [as defined in clause (h) of rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.Explanation 2.-For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.22. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.23. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole.33. In our view, on the facts and circumstances of the present case, provision for warranty is rightly made by the appellantenterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case.40. We may add a caveat. As stated above, the principle of estimation of the contingent liability is not the normal rule. As stated above, it would depend on the nature of business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting being adopted by the assessee. It will also depend upon the historical trend. It would also depend upon the number of articles produced. As stated above, if it is a case of single item being produced then the principle of estimation of contingent liability on pro rata basis may not apply.41. However, in the present case, it is not so. In the present case, we have the situation of large number of items being produced. They are sophisticated goods. They are supported by the historical trend, namely, defects being detected in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this Court in Metal Box Co. of India will apply."(emphasis supplied by us)
11. Applying the principles of law laid down by Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra) and Rotork Controls India Pvt. Ltd. (supra), we find that the conclusion reached by the ITAT does not suffer from any infirmity. Accordingly, we answer the question no.2 in negative i.e. in favour of the assessee and against the revenue.
Question No. 3
12. The Assessing Officer disallowed and added back to the income of the assessee Rs.49,37,042/- on account of royalty as unascertained liability. The Assessing Officer rejected the explanation of the assessee. The provision for royalty was made at Rs.47,70,089/- which is exclusive R&D Cess of Rs.1,66,953/-. The aggregate of both the amount is Rs.49,37,042/- is shown in the balance sheet. The CIT(A) upheld the addition made by the Assessing Officer. The ITAT found that in the books of account relevant to the Assessment Year 1991-92, the assessee had made a provision for royalty payable for the period 1.1.1990 to 31.3.1991 at Rs.47,70,089/- and R&D Cess at Rs.1,66,953/-. The tax deductible on this payment amounting to Rs.14,31,028/- was duly shown as deduction in the books of account on 31.3.1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at Rs.44,77,151/- and R&D cess at Rs.1,56,700/-. This amount was paid in the previous year relevant to the A.Y. 1992-93 i.e. in November, 1991. At the time of making payment, tax deductible on this payment namely a sum of Rs. 13,43,145/- was duly deposited to the credit of the Central Government within the time specified under the provisions to Chapter XVII B of the Act. After considering the facts of the case and the provision of Section 40(a)(i) of the Act as it existed at the relevant point of time, the ITAT came to the conclusion that as per provisions of Section 40(a)(i) the Tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the Assessing Officer. The quantification had taken place at a later point of time. While making such provision the assessee also made book entires in respect of tax deductible and thus satisfied the condition of deduction and accordingly allowed the claim of the assessee with regard to royalty.
13. Learned counsel for the appellant submits that the provision of Section 40(a)(i) of the Act has not been complied with by the respondent-assessee and as such the Tribunal has erred in setting aside the addition in respect of royalty as made by the Assessing Officer and upheld by the CIT(A).
14. We have considered the arguments raised by learned counsel for the appellants and find that Section 40(a)(i) of the Act provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of "profits and gains of business or profession" on which tax has not been paid or deducted under Chapter XIII B. From the findings of the fact recorded by the ITAT in paragraph 26 of the order impugned, it is evident that the liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. The aforesaid interpretation is also supported by the proviso to section 40(a)(i) which provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning.
15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-Section (1) of Section 200, then the royalty shall not be deducted in computing the income chargeable under the head "Profits and gains of business of profession". Thus, subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available under Section 40(a)(i) as it existed during the relevant assessment year i.e. Assessment Year 1991-92. For convenience of interpretation the provision of Section 40(a)(i) as existed at the relevant point of time i.e. during the assessment year 1991-92 and as substituted by Finance (No.2) Act , 2004 are reproduced below : -
Section 40(a)(i) as existed during the A.Y. 1991-92:-40. Notwithstanding anything to the contrary in section 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession:",-(a) in the case of any assessee-[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B:Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation : For the purposes of this sub-clause,-(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of Section 9;(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; ]."Section 40(a)(i) as substituted by Finance (No.2) Act, 2004:-"Notwithstanding anything to the contrary in sections 30 to (38), the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, -(A) outside India; or(B) in India to a non-resident, not being a company or to a foreign company,on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200;Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.Explanation.- For the purposes of this sub-clause,-(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section 9."
16. In view of the discussion made above we are of the view that since the assessee has deducted the tax during the previous year relevant to the assessment year in question i.e. A.Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied. The finding of the Assessing Officer that the royalty as claimed by the Assessee- Respondent was unascertained liability, has been found to be incorrect by the ITAT. Under the circumstances, we find no error in the impugned order of the ITAT. In result the Question No. 3 is answered in negative i.e. in favour of the assessee and against the revenue.
Question No.4
17. With regard to the dis-allowance of entertainment expenses, the learned counsel for the appellant has submitted that in view of the Section 37(2A) of the Act and the finding recorded by the Assessing Officer, a sum of Rs.82,352/- was not allowed towards entertainment expenses and the CIT (A) has erred in directing to allow it. In this regard the findings recorded by the ITAT in paragraph 43 of the impugned order is relevant which is reproduced below :-
It is in dispute that identical issue had come up for consideration in assessee's own case in the AY 90-91 in I.T.A. No.7010/Del/95 and this Tribunal was please to hold that 30% of the expenses incurred on entertainment was to be treated on account of employee participation. The decision of the Tribunal is in line with the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Expo Machinery Ltd. 190 ITR 676. Respectfully, following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss the second ground of the appeal of the revenue.
18. We have heard learned counsel for the appellant on this question and perused the records. We find that this issue was decided by the ITAT with respect to Assessment Year 1990-91 and that the ITAT has merely followed its earlier order passed on similar set of facts. Learned counsel for the appellant has failed to point out any material to show that the order of the ITAT in the earlier year on the same question has not been accepted by the department or that an appeal against that order has been filed in this Court or that the facts of the present case are different. We thus find that the department having accepted the order of the Tribunal for preceding assessment year in the case of the assessee itself, cannot be allowed to raise it in the year in question. Accordingly, the Question No.4 is answered in negative i.e. in favour of the assessee and against the revenue.
19. In result all the questions are answered in negative i.e. in favour of the Assessee and against the appellant. The appeal fails and is hereby dismissed. However, there shall be no order as to cost.
2013-TIOL-703-HC-DEL-IT
IN THE HIGH COURT OF DELHI
AT NEW DELHI
AT NEW DELHI
ITA NO. 647/2012
COMMISSIONER OF INCOME TAX - V
Vs
NASA FINELEASE PVT LTD
Sanjiv Khanna, And Sanjeev Sachdeva, JJ
Dated: September 6, 2013
Appellants Rep by: Mr Sanjeev Rajpal, Sr (Standing Counsel)
Respondents Rep by: Mr Nageshwar Rao and Mr Sandeep S Karhail, Advs
Respondents Rep by: Mr Nageshwar Rao and Mr Sandeep S Karhail, Advs
Income Tax Act, 1961 - Sections 18A(6), 43(5) , 43(5)(d), 73 & 260A - Notification No.2/2006 - Whether the assessee is entitled to benefit under a given provision when the Parliament had enacted the provision with effect from the said date, but there was delay in the issue of Rules and notification - Whether such delay implies the nullification of the legislative mandate of the enactment.
The assessee is engaged in the business of dealing in securities and investment and was engaged by Kotak Mahindra Securities to manage their funds and earn income in nature of profits/gains or dividends from dealing with securities. The assessee had received management fee as per contract with Kotak Mahindra Securities.The assessee had shown a loss in derivative transactions.
The AO held that the loss was speculative loss under Section 73 and also the derivative transactions were during the period July, 2005 to September, 2005 and proviso (d) to sub-section 5 to Section 43 was violated and the loss was disallowed.
The CIT (A) held that as section 43(5)(d) was operative in the assessment year 2006-07, but the Rule 6 DDA and Rule DDB were notified on 1st July, 2005 and subsequently the two stock exchanges i.e. NSE and BSE were notified with effect from 25th January, 2006, the derivative transactions between July, 2005 to September, 2005 were not eligible. He also held that explanation to Section 73 was not applicable as assessee was an investment company and accordingly the assessee was not entitled to set off the said loss from derivative transactions.
On appeal, the ITAT held that the assessee were entitled to benefit under Section 43(5) proviso (d), even in respect of transactions carried out with effect from 1st April, 2006. They also held that the Parliament had enacted the provision with effect from the said date, and delay, if any, in the issue of Rules and notification, cannot nullify the legislative mandate of the enactment. Delay was attributable to the CBDT, who had failed to issue necessary notification within time.
On appeal of the Revenue, the High Court held that-
++ notification issued by the CBDT does not specify any particular date and simply notifies the NSE and BSE under proviso (d) to clause (5) to Section 43. The said proviso had become applicable with effect from 1st April, 2006. Issue of notification obviously had to take some time as it involved processing and examination of applications etc. This was a matter relating to procedure and the delay in issue of notification or even framing of the Rules was due to administrative constraints;
++ we agree with the tribunal that the delay occasioned, as procedure and formalities have to be complied with, should not disentitle and deprive an assessee, specially, when the transactions were carried through a notified stock exchange. The aforesaid delay is not attributable to the assessee. The notification, therefore, merits acceptance and should be given retrospective effect. Notification was procedural and necessary adjunct to the Section enforced with effect from 1st April, 2006. The rule and notification issued in the present case effectuate the statutory and the legislative mandate. There is no good ground or reason why the notification in question should not be given effect from 1st April, 2006. No reason or ground is alleged or argued to contend that National Stock Exchange India Ltd. could not and should not have been notified from 1st April, 2006;
++ a similar factual matrix had come up for examination before the Supreme Court in S.A.L. Narayan Row and Another Vs. Ishwarlal Bhagwandas and Another, (1965) 57 ITR 149. It was noticed that the rules were framed subsequently and on this ground it was submitted that the main provision itself should not be applied. The said contention was rejected by the majority decision recording as under:-"The Attorney-General appearing on behalf of the Commissioner contended that to the fifth proviso to section 18A(6) no retrospective operation could effectively be given, because the rules, which alone could render the discretion operative, were from for the first time in December, 1953. We are unable to agree with that view. The legislature has expressly given operation to the fifth proviso to section 18A(6), from April 1, 1952. It is true that the proviso operates only in respect of cases and under circumstances as may be prescribed, but as soon as the rules were framed, which effectuate the purposes for which the proviso was enacted, the proviso and the rules became effective retrospectively from April 1, 1952." ;
++ the tribunal has not decided the other question i.e. applicability of Explanation to Section 73. The said question is answered with an order of remit observing that the said issue should be decided and adjudicated by the tribunal. The parties will appear before the tribunal on 26th September, 2013, when a date of hearing will be fixed.
Case remanded
Case followed:
S.A.L. Narayan Row and Another Vs. Ishwarlal Bhagwandas and Another, (1965) 57 ITR 149
Case distinguished:
Shri Udai Punj Vs. CIT, (2012) 348 ITR 98 (Del.)
JUDGEMENT
Per: Sanjiv Khanna:
Revenue, by this appeal under Section 260A of the Income Tax Act 1961 (Act, for short), has raised a solitary issue relating to interpretation of clause (d) to Section 43(5) of the Act. For the purpose of record, we note that the appeal pertains to assessment year 2006-07.
2. The respondent-assessee is engaged in the business of dealing in securities and investment and was engaged by Kotak Mahindra Securities to manage their funds and earn income in nature of profits/gains or dividends from dealing with securities. The assessee had received management fee as per contract with Kotak Mahindra Securities.
3. The respondent-assessee had shown a loss of Rs.1,90,29,988/- in derivative transactions. The Assessing Officer held that the loss was speculative loss under Section 73 of the Act. Secondly, the derivative transactions were during the period July, 2005 to September, 2005 and proviso (d) to sub-section 5 to Section 43 was violated. The proviso (d) to section 43(5) inserted with effect from 1st April, 2006 stipulates that eligible transactions should have been conducted/carried out only in recognized stock exchange, to be notified. The said insertion was made by Finance Act, 2005. Rule 6 DDA and Rule DDB were subsequently enacted to prescribe conditions and procedure for notification of a recognized stock exchange. National Stock Exchange and Bombay Stock Exchange were notified vide notification dated 25th January, 2006. The transactions in question it is accepted and an admitted position were conducted in the National Stock Exchange.
4. Notification dated 25th January, 2006 does not state or specify the date from which the two stock exchanges were recognized. However, the memorandum stipulated that transactions in respect of trading in derivatives in the aforesaid two stock exchanges with effect from 25th January, 2006 shall not be deemed to be speculative transactions. The Assessing Officer relying upon the explanatory memorandum observed that the transactions undertaken between July, 2005 to September, 2005 were before 25th January, 2006 and, therefore, the derivative loss was not eligible under proviso (d) to Section 43 (5) of the Act. The loss was disallowed.
5. CIT (Appeals) observed that Section 43(5)(d) was operative in the assessment year 2006-07, but the Rule 6 DDA and Rule DDB were notified on 1st July, 2005 and subsequently the two stock exchanges i.e. National Stock Exchange and Bombay Stock Exchange were notified with effect from 25th January, 2006. Hence, the derivative transactions between July, 2005 to September, 2005 were not eligible. He also observed that explanation to Section 73 was not applicable as assessee was an investment company and accordingly the respondent-assessee was not entitled to set off the said loss from derivative transactions.
6. On further appeal before the Income Tax Appellate Tribunal (tribunal, for short), the respondent has succeeded on the first issue and it has been observed that they were entitled to benefit under Section 43(5) proviso (d), even in respect of transactions carried out with effect from 1st April, 2006. Tribunal observed that Parliament had enacted the provision with effect from the said date, and delay, if any, in the issue of Rules and notification, cannot nullify the legislative mandate of the enactment. Delay was attributable to the Central Board of Direct Taxes, who had failed to issue necessary notification within time.
7. The factual position is not in dispute. Notification No.2/2006 dated 25th January, 2006, issued by the Central Board of Direct Taxes does not specify any particular date and simply notifies the National Stock Exchange India Ltd. and Bombay Stock Exchange, Mumbai under proviso (d) to clause (5) to Section 43 of the Act. The said proviso had become applicable with effect from 1st April, 2006. Issue of notification obviously had to take some time as it involved processing and examination of applications etc. This was a matter relating to procedure and the delay in issue of notification or even framing of the Rules was due to administrative constraints. We agree with the tribunal that the delay occasioned, as procedure and formalities have to be complied with, should not disentitle and deprive an assessee, specially, when the transactions were carried through a notified stock exchange. The aforesaid delay is not attributable to the assessee. The notification, therefore, merits acceptance and should be given retrospective effect. Notification was procedural and necessary adjunct to the Section enforced with effect from 1st April, 2006. The rule and notification issued in the present case effectuate the statutory and the legislative mandate. There is no good ground or reason why the notification in question should not be given effect from 1st April, 2006. No reason or ground is alleged or argued to contend that National Stock Exchange India Ltd. could not and should not have been notified from 1st April, 2006.
8. A similar factual matrix had come up for examination before the Supreme Court in S.A.L. Narayan Row and Another Vs. Ishwarlal Bhagwandas and Another, (1965) 57 ITR 149. It was noticed that the rules were framed subsequently and on this ground it was submitted that the main provision itself should not be applied. The said contention was rejected by the majority decision recording as under:-
"The Attorney-General appearing on behalf of the Commissioner contended that to the fifth proviso to section 18A(6) no retrospective operation could effectively be given, because the rules, which alone could render the discretion operative, were from for the first time in December, 1953. We are unable to agree with that view. The legislature has expressly given operation to the fifth proviso to section 18A(6), from April 1, 1952. It is true that the proviso operates only in respect of cases and under circumstances as may be prescribed, but as soon as the rules were framed, which effectuate the purposes for which the proviso was enacted, the proviso and the rules became effective retrospectively from April 1, 1952."
9. Reliance placed upon by the Revenue on Shri Udai Punj Vs. CIT, (2012) 348 ITR 98 (Del.) is not apposite as the factual matrix of the said case is entirely different. In the said case, transfer of shares was complete prior to 6th January, 2006 and the trading in the stock exchange had commenced only from 6th January, 2006. It was held that the transfer was not entitled to exemption under Section 10(38) as shares were not listed securities on the date of transfer. The "lapse" or "failure" was on the part of the company which had to get the shares listed after complying with the formalities and technical requirements. Further, there was no legal bar on sale of shares without listing and the question related to the rate of tax, which was lower on listed securities. The lapse in the present case was on account of delay on the part of the appellant in issuing the necessary notification, no act or cause is attributable to the respondent-assessee.
10. In view of the aforesaid, we do not think that there is any ground or reason to interfere with the findings of the tribunal.
11. However, during the course of hearing before us, learned counsel for the parties have accepted that the tribunal has not decided the other question i.e. applicability of Explanation to Section 73 of the Act. Counsel for the parties agree that this aspect should have been examined and decided by the tribunal. Recording their consent, we frame the following substantial question of law:-
"Whether the Income Tax Appellate Tribunal has erred in not deciding whether or not the loss suffered was speculative loss in view of Explanation to Section 73 of the Income Tax Act, 1961?"
12. The said question is answered with an order of remit observing that the said issue should be decided and adjudicated by the tribunal. The parties will appear before the tribunal on 26th September, 2013, when a date of hearing will be fixed.
2013-TIOL-707-HC-DEL-IT
IN THE HIGH COURT OF DELHI
AT NEW DELHI
AT NEW DELHI
ITA NO. 214/2013
COMMISSIONER OF INCOME TAX
Vs
SAM GLOBAL SECURITIES LTD
Sanjiv Khanna, And Sanjeev Sachdeva, JJ
Dated: September 2, 2013
Appellants Rep by: Mr Sanjeev Rajpal, Sr Standing Counsel
Respondents Rep by: Mr Salil Kapoor and Mr Vikas Jain, Advs
Respondents Rep by: Mr Salil Kapoor and Mr Vikas Jain, Advs
Income Tax- Sections 10(33) & (35), 139(5) - Whether the assessee's claim of deduction u/s 10 (35)(a) and claim of business loss of Rs.85,18,854/- can be denied by the Tribunal on the ground that no revised return was filed u/s 139(5).
The assessee had not claimed the deduction or business loss in the return of income. During the course of the assessment proceedings, the assessee had filed revised computation of income vide letter claiming that dividend of Rs. 80,48,977/- from the units of mutual fund was exempt u/s 10(33) and loss on sale of units amounting to Rs.85,18,583/- was a business loss and not speculative loss. The claims were rejected by the AO on the grounds that the assessee had not filed a revised return within the time allowed u/s139(5) .The CIT (A) dismissed the appeal of the assessee, but on remand the matter was restored to the first appellate authority. The CIT (A) did not allow the appeal on the ground that the assessee had not filed a revised return .The tribunal has reversed the said findings after referring to the factual matrix. The matter was remanded to the AO to consider the case on merits and decide accordingly.
Having heard the parties, the HC held that,
++ in view of the various judicial decisions where the power of the Tribunal in dealing with appeals has been discussed, we are not inclined to interfere with the order passed by the tribunal.
The assessee had not claimed the deduction or business loss in the return of income. During the course of the assessment proceedings, the assessee had filed revised computation of income vide letter claiming that dividend of Rs. 80,48,977/- from the units of mutual fund was exempt u/s 10(33) and loss on sale of units amounting to Rs.85,18,583/- was a business loss and not speculative loss. The claims were rejected by the AO on the grounds that the assessee had not filed a revised return within the time allowed u/s139(5) .The CIT (A) dismissed the appeal of the assessee, but on remand the matter was restored to the first appellate authority. The CIT (A) did not allow the appeal on the ground that the assessee had not filed a revised return .The tribunal has reversed the said findings after referring to the factual matrix. The matter was remanded to the AO to consider the case on merits and decide accordingly.
Having heard the parties, the HC held that,
++ in view of the various judicial decisions where the power of the Tribunal in dealing with appeals has been discussed, we are not inclined to interfere with the order passed by the tribunal.
Revenue's appeal dismissed
Cases followed:
Commissioner of Income Tax Vs. Jai Parabolic Springs Ltd. (2008-TIOL-218-HC-DEL-IT)
Jute Corporation of India Ltd. Vs. CIT, [1991] 187 ITR 688 (SC)
CIT Vs. Natraj Stationery Products (P) Ltd (2008-TIOL-599-HC-DEL-IT)
CIT Vs. Rose Services Apartment India P. Ltd., [2010] 326 ITR 100 (Delhi)
CIT Vs. Jindal Saw Pipes Ltd. (2010-TIOL-642-HC-DEL-IT)
Commissioner of Income Tax Vs. Jai Parabolic Springs Ltd. (2008-TIOL-218-HC-DEL-IT)
Jute Corporation of India Ltd. Vs. CIT, [1991] 187 ITR 688 (SC)
CIT Vs. Natraj Stationery Products (P) Ltd (2008-TIOL-599-HC-DEL-IT)
CIT Vs. Rose Services Apartment India P. Ltd., [2010] 326 ITR 100 (Delhi)
CIT Vs. Jindal Saw Pipes Ltd. (2010-TIOL-642-HC-DEL-IT)
JUDGEMENT
Per: Sanjiv Khanna:
Revenue in this appeal, which pertains to assessment year 2001-02, rely upon judgment of the Supreme Court in Goetze (India) Ltd. Vs. CIT, (2006) 284 ITR 323 (SC) = (2006-TIOL-198-SC-IT). The contention is that the respondent-assessee should be denied deduction under Section 10 (35)(a) of the Income Tax Act, 1961(Act) and claim of business loss of Rs.85,18,854/- should be rejected as no revised return was filed under Section 139(5) of the Act.
2. It is an accepted position that the assessee had not claimed the said deduction or business loss in the return of income filed on 31st October, 2001, declaring taxable income of Rs. 1,72,910/-. Subsequently, notice for scrutiny assessment under Section 143(2)(ii) was issued. During the course of the assessment proceedings, the respondent-assessee had filed revised computation of income vide letter dated 12th January, 2004, claiming that dividend of Rs. 80,48,977/- from the units of mutual fund was exempt under Section 10(33) of the Act and loss on sale of units amounting to Rs.85,18,583/- was a business loss and not speculative loss.
3. The claims were rejected by the Assessing Officer on three grounds that the respondent-assessee had not filed a revised return within the time allowed under Section 139(5) of the Act; dividend was received from Sun F&C Mutual Fund, which was not included in the specified list of mutual funds approved by SEBI; and as the assessee was dealing with shares, income/loss from shares/units was speculative loss and not business loss.
4. CIT (Appeals) dismissed the appeal of the assessee, but on remand the matter was restored to the first appellate authority. Thereupon, vide order dated 16th February, 2009, CIT (Appeals) held that Sun F&C Mutual Fund was duly approved mutual fund under Section 10(23D). He observed that dividend from the units of mutual fund was exempt under Section 10 (35)(a). Similarly with regard to the loss, he observed that units of mutual funds were sold and not shares, and therefore, the adverse effect of Explanation to Section 73 was not applicable. Reliance was placed upon decision of the Supreme Court in Apollo Tyres Ltd. Vs. CIT, (2002) 255 ITR 283 (SC) = (2002-TIOL-185-SC-IT). Inspite of the said observations, the CIT (Appeals) did not allow the appeal on the ground that the assessee had not filed a revised return within the time allowed under Section 139(5) of the Act, but had only filed a revised computation.
5. The tribunal has reversed the said findings after referring to the factual matrix. Reference was made to the decision of the Supreme Court in CIT Vs. Mr. P. Firm, (1965) 56 ITR 67 (SC)and Circular No. 114 XL-35 of 1955 issued by the Central Board of Direct Taxes on 11th April, 1955, that an officer must not take advantage of ignorance of the assessee as to his rights. Judgment of the Supreme Court in Goetze India Ltd. (supra) was distinguished on the ground that the said case was limited to the power of the assessing authority and did not impinge upon the power of the tribunal. The matter was remanded to the Assessing Officer to consider the case on merits and decide accordingly.
6. In Commissioner of Income Tax Vs. Jai Parabolic Springs Ltd., [2008] 306 ITR 42 (Delhi) =(2008-TIOL-218-HC-DEL-IT), a Division Bench of this Court made reference to the following passage from National Thermal Power Co. Ltd. Vs. CIT, [1998] 229 ITR 383(SC) = (2002-TIOL-279-SC-IT):-
"The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the Commissioner of Income Tax (Appeals). Both the assesses as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier."
7. Reference was also made to an earlier decision of the Supreme Court in Jute Corporation of India Ltd. Vs. CIT, [1991] 187 ITR 688 (SC), wherein it has been held as under:-
"An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessed in seeking modification of the order of assessment passed by the Income Tax Officer. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessed to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also."
8. Decision in the case of Goetze (India) Ltd. (supra) was distinguished in Jai Parabolic Springs Ltd. (supra) in the following words:-
"In Goetze (India) Ltd. Vs. CIT [2006] 284 ITR 323 (SC) = (2006-TIOL-198-SC-IT)wherein deduction claimed by way of a letter before the Assessing Officer, was disallowed on the ground that there was no provision under the Act to make amendment in the return without filing a revised return. Appeal to the Supreme Court, as the decision was upheld by the Tribunal and the High Court, was dismissed making clear that the decision was limited to the power of the assessing authority to entertain claim for deduction otherwise than by a revised return, and did not impinge on the power of the Tribunal."
9. In CIT Vs. Natraj Stationery Products (P) Ltd., (2009) 312 ITR 222 = (2008-TIOL-599-HC-DEL-IT)reliance placed on Goetze (India) Ltd. (supra) by the Revenue was rejected, as the assessee had not made any 'new claim' but had asked for re-computation of deduction under Section 80-IB. The said decision may not be squarely applicable but the Courts have taken a pragmatic view and not the technical view as what is required to be determined is the taxable income of the assessee in accordance with the law. In this sense, assessment proceedings are not adversarial in nature.
10. In Commissioner of Income Tax Vs. Rose Services Apartment India P. Ltd., [2010] 326 ITR 100 (Delhi) relying upon the decision of the Supreme Court in National Thermal Power Co. Ltd.(supra ), a Division Bench of this Court rejected the plea of the Revenue that the tribunal could not have entertained the plea, holding that the tribunal was empowered to deal with the issue and was entitled to determine the claim of loss, if at all, under one section/provision or the other.
11. Decision in Goetze (India) Ltd. (supra) was again relied upon by the Revenue in CIT Vs. Jindal Saw Pipes Ltd., [2010] 328 ITR 338 (Delhi) = (2010-TIOL-642-HC-DEL-IT) but the contention was not accepted, observing that the tribunal's jurisdiction is comprehensive and assimilates issues in the appeal from the order of the CIT (Appeals) and the tribunal has the discretion to allow a new ground to be raised.
12. In view of the aforesaid discussion, we are not inclined to interfere with order passed by the tribunal. The appeal is dismissed.
IT/ILT: Export commission, paid to foreign agent for procuring order and pursuing payment from foreign buyer, is not taxable as no services are rendered in India
■■■
[2013] 37 taxmann.com 135 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'A'
Allied Nippon Ltd.
v.
Deputy Commissioner of Income-tax, Circle-1(1), New Delhi*
G.D. AGRAWAL, VICE-PRESIDENT
AND A.D. JAIN, JUDICIAL MEMBER
AND A.D. JAIN, JUDICIAL MEMBER
IT APPEAL NOS. 6497 (DELHI) OF 2012 & 188 (DELHI) OF 2013
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 19, 2013
Section 9, read with sections 195 and 40(a)(i), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India [Export commission to foreign agent] - Assessment year 2008-09 - Whether, export commission paid to foreign agent for procuring order and pursuing payment from foreign buyer did not accrue or arise in India as no services were rendered in India - Held, yes [Para 6] [In favour of assessee]
CASE REVIEW
CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi) (para 6) followed.
CASES REFERRED TO
CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi) (para 4) and AMD Metplast (P.) Ltd. v. Dy. CIT [2012] 341 ITR 563/20 taxmann.com 647 (Delhi) (para 9).
U.N. Marwah for the Appellant. Bhim Singh for the Respondent.
ORDER
G.D. Agrawal, Vice-President - This appeal by the assessee is directed against the order of learned CIT(A)-IV, New Delhi dated 8th October, 2012 for the AY 2008-09.
ITA No.6497/Del/2012 - Assessee's appeal
2. Ground No.1 of the assessee's appeal reads as under:-
"1. On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in law in sustaining the addition of Rs. 3,42,821/- paid as export commission:-
| (a) | Holding that the payment of export commission is subject to tax deduction at source in terms of Section 195; | |
| (b) | Holding that Section 40(a)(i) of the Act, is attracted in respect of said payment; | |
| (c) | Holding that the services rendered by the foreign agent outside India for securing export orders, shall be deemed to accrue or arise in India within the meaning of Section 9 of the Income Tax Act." |
3. Ground No.2 is only argument in support of above ground No.1.
4. At the time of hearing before us, it is submitted by the learned counsel that this issue is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi). He stated that in the case of the assessee also, the export commission is paid to the non-resident who rendered the services outside India for the purpose of procuring the order and pursuing the payment from the foreign buyer. Since no services were rendered in India, the income of the foreign agent to whom the commission was paid did not accrue or arise in India, therefore, the assessee was not liable to deduct tax at source. Consequently, the disallowance under Section 40(a)(i) is not called for.
5. Learned DR, on the other hand, relied upon the orders of authorities below.
6. After careful consideration of arguments of both the sides and the facts of the case, we find that the issue is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of EON Technology (P.) Ltd. (supra), wherein their Lordships held as under:—
"It is apparent from section 5(2) that total income of previous year of a person, who is a non-resident, is chargeable to tax in India if it is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. Explanation 1 to the said section stipulates that income accruing or arising outside India shall not be deemed to be received in India within the meaning of the said section by reason of the fact that it is taken into account in the balance sheet prepared in India. Explanation 1 is a complete answer to the observations of the Assessing Officer that commission income had accrued, arisen or was received by ETUK in India because it was recorded in the books of assessee in India or was paid by the assessee situated in India.
Section 9 postulates and states when income is deemed to arise in India. The Assessing Officer has not mentioned any specific provision of section 9 but it appears that he had invoked section 9(1)(i).
For the said provision to apply, the Assessing Officer was required to examine whether the said commission income is accruing or arising directly or indirectly from any business connection in India. The Assessing Officer has not dealt with or examined the said aspect but has merely recorded that the payment made to ETUK was taxable in India because of its 'business connection'. The Assessing Officer did not elaborate or has not discussed on what basis he had come to the conclusion that 'business connection' as envisaged under section 9(1)(i) existed. On this aspect, the assessee had submitted that ETUK was a non-resident company and did not have any permanent establishment in India. ETUK was not rendering any service or performing any activity in India itself.
According to the revenue, commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the ETUK and the said income towards commission was received in India. The stand of the revenue is contrary to the two circulars issued by the CBDT in which it is clearly held that when a non-resident agent operates outside the country, no part of his income arises in India, and since payment is remitted directly abroad, and merely because an entry in the books of account is made, it does not mean that the non-resident has received any payment in India. This fact alone does not establish business connection. In Circular No.786, dated 7-2-2000, it has been stated that in such cases, the Indian assessee is not liable to deduct TDS under section 195 from the commission and other related charges payable to such a non-resident having rendered service outside India.
The term 'business connection' has been interpreted by the Supreme Court to mean something more than mere business and is not equivalent to carrying on business, but a relationship between the business carried on by a non-resident, which yields profits and gains and some activities in India, which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in India.
The test which is to be applied is to examine the activities in India and whether the said activities have contributed to the business income earned by the non-resident, which has accrued, arisen or received outside India. The business connection must be real and intimate from which the income had arisen directly or indirectly. The question of business connection, therefore, has to be decided on facts found by Assessing Officer (or in the appellate proceedings). In the instant case, facts found by the Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i). There is hardly any factual discussion on the said aspect by the Assessing Officer. He has not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) is applicable. Appellate authorities, on the basis of material on record, have rightly held that 'business connection' is not established.
In view of the aforesaid discussion, there is no error in the findings recorded by the Commissioner (Appeals) which have been upheld in the impugned order by the Tribunal."
7. The facts of the assessee's case are identical. We, therefore, respectfully following the above decision of Hon'ble Jurisdictional High Court, delete the disallowance of Rs. 3,42,821/- made by the Assessing Officer under Section 40(a)(i) of the Act.
ITA No.188/Del/2013 - Revenue's appeal
8. The only ground raised by the Revenue in this appeal reads as under:—
"Whether the ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 30,71,600/- made u/s 36(1)(ii) on account of Bonus/Commission paid to the Directors of the company, ignoring the facts that as per the provisions of Section 36(1)(ii) the Bonus/Commission paid to an employee is not allowable as deduction if it could have been paid as profit or dividend."
9. We have heard both the parties and perused the material placed before us. We find that this issue is also covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of AMD Metplast (P.) Ltd. v. Dy. CIT [2012] 341 ITR 563/20 taxmann.com 647 (Delhi), wherein their Lordships held as under:—
"allowing the appeal, that A was the managing director and in terms of the board resolution was entitled to receive commission for services rendered to the company. It was a term of employment on the basis of which he had rendered service. Accordingly, he was entitled to the amount. Commission was treated as a part and parcel of salary and tax had been deducted at source. A was liable to pay tax on both the salary component and the commission. The payment of dividend was made in terms of the Companies Act, 1956. The dividend had to be paid to all shareholders equally. This position could not be disputed by the Revenue. Dividend was a return on investment and not salary or part thereof."
10. That the ratio of the above decision would be squarely applicable to the facts of the assessee's case. In this case, the assessee has paid commission in addition to salary to two of its directors, viz., Shri Ravi Talwar and Smt. Madhu Talwar. That on page 20 of learned CIT(A)'s order, he has given the complete break-up of the shareholding of the assessee company. For ready reference, the same is being reproduced below:—
| Sl. No | No. of shares | % age |
| (A) Foreign Collaborator | 1,248,000 | 19.82% |
| (B) Foreign Companies | 1,060,721 | 16.85% |
| (C) Non-resident individuals | 695,413 | 11.05% |
| (D) Promoters and relatives | ||
| Ravi Talwar | 3,500 | 0.06% |
| Madhu Talwar | 159,150 | 2.53% |
| Other promoters and relatives | 191,450 | 3.04% |
| | 354,100 | 5.62% |
| (E) Domestic Companies | 2,792476 | 44.36% |
| (F) Resident Individuals | 145,000 | 2.30% |
| Total | 6,295,710 | 100.00% |
11. From the above, it is evident that the shareholding of both the directors taken together is 2.56% only while more than 97% shares are held by others. Around 48% shares are held by foreign collaborators, foreign companies and non-resident individuals. That the payment of commission to above two directors is duly supported by the Board's resolution. Both the directors are working full time for the assessee company and the commission paid to them has been considered as salary in their hands and offered for taxation. The assessee has filed the copy of computation/assessment order of both the directors to whom the commission has been paid. That the payment of commission in the earlier three years i.e. AY 2005-06, 2006-07 & 2007-08 has been allowed by the Revenue. Moreover, it was also stated by the assessee's counsel at the time of hearing that in the subsequent years also, no disallowance out of commission has been made. That the payment of dividend has been made in terms of the Companies Act, 1956 to the shareholders as per their shareholding. On all these facts, the decision of Hon'ble Jurisdictional High Court in the case of AMD Metplast (P.) Ltd. (supra) would be squarely applicable. Respectfully following the same, we uphold the order of learned CIT(A) on this point and dismiss the appeal filed by the Revenue.
12. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
No comments:
Post a Comment